Prepared by:
Jan Hájek
Accounting 2
Share-based Payment
Related standards
IFRS 2
Current GAAP comparisons
Looking ahead
Related Standards
IFRS 2 – Overview
Objective and scope
Recognition
Equity-settled share-based payment
transactions
Cash-settled share-based payment
transactions
Share-based payment transactions with cash
alternatives
IFRS 2 – Objective and Scope
Deals with transactions where equity instruments are used as
consideration
Entities must recognize these types of transactions
If they create liabilities, they must be remeasured after the transaction date
Examples of share-based payment transactions
Remunerative option plans such as employee stock options plans Acquisitions where shares are used as consideration
Situations where services are paid for with equity instruments
Accounting for employee remuneration plans can be complex
These plans often span numerous reporting periods
IFRS 2 – Objective and Scope
IFRS 2 – Objective and Scope
The third category is where there is a choice to settle in cash or equity
Either the entity has the option to determine whether to settle the transaction in cash
or equity, or the counterparty has this option
Share-based payment transactions
Defined as transactions in which the entity receives goods or services as
consideration for equity instruments of the entity (including shares or share options), or
Acquires goods or services by incurring liabilities to the supplier of those goods or
services for amounts that are based on the price of the entity’s shares or other equity instruments of the entity
Situations where the employee is dealing with the entity as a shareholder Not covered by IFRS 2
IFRS 2 – Recognition
In general, the standard requires that the
transaction be recognized when the goods
are received or services rendered
The credit is booked to equity in an
equity-settled transaction and the liability in a
cash-settled transaction
The debit is booked to expense or asset (if
IFRS 2 – Equity-settled Share-based Payment
Transactions
Overview
For equity-settled transactions
Transaction is measured at the fair value of the goods or services received If the fair value cannot be reliably measured, then the fair value of the equity
instrument is used
There is a rebuttable presumption that the fair value of the goods and
services may be reliably measured
In most cases, the fair value of the equity instruments would not be used
An exception to this is where the transaction involves employees rendering
services
Transactions are measured by reference to the fair value of the equity instruments May be too difficult to measure the services if the equity instruments are given to
IFRS 2 – Equity-settled Share-based Payment
Transactions
Transactions in which services are received
Accounting might be affected by the vesting provisions
Share-based transactions such as options have conditions attached to them
Must be met before the counterparty has legal entitlement to them Legal entitlement is referred to as vesting
Vesting
If the equity instruments vest upfront when the contract is entered into
○ The entity assumes that the services have already been provided and recognizes the
full amount of the transaction at that date
If the equity instruments vest over time
IFRS 2 – Equity-settled Share-based Payment
Transactions
Transactions in which services are received (continued)
Options granted conditional upon the employee achieving certain goals
Vesting period must also be conditional upon achieving those goals Entity must estimate the vesting period in order to calculate the amount of expense
to recognize in each period
Estimate may be revised in a subsequent period as a change in estimate
If the condition is a market condition (such as the shares reaching a certain price)
no subsequent revision is allowed
○ Market would have already included expectations about the future share price into the
IFRS 2 – Equity-settled Share-based Payment
Transactions
Transactions measured by reference to the fair value of the equity
instruments granted
Determining the fair value of equity instruments granted
Estimated as at the measurement date based on market conditions and prices
Measurement date
Generally the grant date for transactions with employees
For other transactions, is the date that the goods are received or the services
rendered
Grant date
IFRS 2 – Equity-settled Share-based Payment
Transactions
Determining the fair value of equity instruments granted (continued)
Market values
If the equity instruments are publicly traded shares, they are available If they are stock options, they may or may not be available
Options pricing models
Valuation techniques - often used
E.g., Black-Scholes and binomial models
Model inputs
(a) Exercise price (b) Life of the option
(c) Current price of the shares
IFRS 2 – Equity-settled Share-based Payment
Transactions
Treatment of vesting conditions
There may be certain conditions attached to the transaction that must be met before
the counterparty or employee has legal entitlement (i.e., before the instruments vest)
At the grant date
The transaction is recognized and measured but the vesting conditions are not factored
into the measurement
After the grant date
The transaction is remeasured for the change in the number of equity instruments due
to the conditions being met/not met, but not for the fair value of the equity instrument itself
Subsequent remeasurements are treated as a change in estimate in subsequent
periods
IFRS 2 – Equity-settled Share-based Payment
Transactions
Treatment of non-vesting conditions
Uncertainty might also be introduced with non-vesting conditions
Number of equity instruments to be issued might vary depending on some future event
In these cases, the transaction is recognized and measured at the grant date and the
uncertainty is factored in at that point
No remeasurement after the vesting date
Treatment of a reload feature
Contract may allow the entity to automatically issue new options when an old one is
exercised using shares to satisfy the exercise price
These are treated as new option grants and reload features are not taken into account
IFRS 2 – Equity-settled Share-based Payment
Transactions
After vesting date
After initial recognition upon vesting
Equity-settled transactions are not remeasured even if the equity instruments are
forfeited
Entity may transfer amounts from one category of equity to another
If the fair value of the equity instrument cannot be reliably estimated
Where the entity is required to measure the transaction at fair value, it may use the
intrinsic value
Intrinsic value
Difference between the fair value of the shares to which the counterparty has the right to
subscribe or which it has the right to receive, and the price the counterparty is required to pay for those shares
Transaction continues to be remeasured until the equity instrument is settled/exercised
IFRS 2 – Equity-settled Share-based Payment
Transactions
Modifications to the terms and conditions
If the equity instrument is modified afterwards and the total fair value of the
transaction is increased, then this additional amount is recognized
If the entity cancels or settles the grant of the equity instrument during the vesting
period
Treats this as an acceleration of the vesting period
Recognizes all remaining amounts
Any cash payments are treated as a repurchase of equity (deducted from equity) Only exception is where the payment is greater than the fair value of the equity
instruments granted
Excess is charged to expense
IFRS 2 - Equity-settled Share-based Payment
Transactions -
Example 1
On 1 July 2011, Supplier X provides Reporting Entity
Ltd with some inventory, which has a fair value of $140
000. In exchange for the inventory, Reporting Entity Ltd
provides Supplier X with 10 000 shares in Reporting
Entity Ltd
As it is considered that the fair value of the inventory
can be determined ‘reliably’, this is deemed to be the
value of the shares being issued. The accounting entry
would be:
Dr Inventory
140 000
Employee X provides her services to Reporting Entity Ltd in
exchange for 10 000 options in the entity. All services have been
performed and the options have been granted to Employee X. The
options are considered to have a market value of $1.50 each
In this case, which involves an employee, the reporting entity would
not determine the fair value of the services being provided but
instead would consider the fair value of the options
Dr Employee benefits expense
15 000
Cr Share capital
15 000
If the goods or services were received in an equity-settled
share-based payment transaction, an increase in equity is recognised. If
they were received as part of a cash-settled share-based
transaction, a liability is to be recognised
IFRS 2 – Cash-settled Share-based Payment
Transactions
Where the transaction will eventually be settled in cash
Liability is recognized
Transaction is measured at the fair value of the liability at the measurement date Liability is subsequently remeasured at every reporting date
Additional expenses/income due to the remeasurement are booked to profit and loss
Share appreciation rights (SARs)
For transactions involving options/share appreciation rights the fair value of the liability
is measured at the fair value of the options/SAR
Under this type of contract, an employee is granted a certain number of rights as
remuneration for services
Rights allow the employee to be paid the excess of the market value of a share
IFRS 2 – Cash-settled Share-based Payment
Transactions
Share appreciation rights (SARs) continued
Accounting may be inconsistent with IAS 32
In cases where the SAR may be settled in shares (according to the terms of the SAR)
Under IFRS 2
If the SAR is to be settled with shares (i.e., a variable number of shares) it is
accounted for as equity
• Measured at the fair value of the SAR at the grant date • Credited to equity
• Not subsequently remeasured after vesting date
Under IAS 32
If the number of shares is variable, the instrument would be accounted for as a
On 1 July 2012 Coogee Ltd provides its managing director with a
share-based incentive according to which she is offered a bonus that is
calculated as 200 000 times the increase in the fair value of the entity’s
share price above $2.50
When the bonus was offered the share price was $2.25
If the managing director does not leave the organisation the accrued
entitlement will be paid after three years. However, if she leaves the
organisation the accrued entitlement will be paid out upon departure—that
is, the benefit will not be forfeited
Other information
The share price at 30 June 2013 is $3.00
The share price at 30 June 2014 is $2.90
The share price at 30 June 2015 is $4.10
The managing director stays for three years and is paid the bonus on 1
July 2015
REQUIRED
Prepare the journal entries that would appear in the accounting records of
Coogee Ltd to account for the issue of the share appreciation rights
Remuneration
Year end Calculation expense for period
30 June 2013 200 000 × ($3.00 – $2.50) $100 000 30 June 2014 200 000 × ($2.90 – $2.50) – $100 000 ($20 000) 30 June 2015 200 000 × ($4.10 – $2.50) – $80 000 $240 000
30 June 2013
Dr Employee benefits expense 100 000
Cr Accrued salaries payable 100 000
30 June 2014
Dr Accrued salaries payable 20 000
Cr Employee benefits expense recouped (revenue) 20 000
30 June 2015
Dr Employee benefits expense 240 000
Cr Accrued salaries payable 240 000
1 July 2016
Dr Accrued salaries payable 320 000
Cr Bank 320 000
IFRS 2 – Share-based Payment Transactions
with Cash Alternatives
Share-based payment transactions in which the terms of the arrangement
provide the counterparty with a choice of settlement
Where the counterparty has the option to dictate settlement, it is beyond the
control of the entity and a liability may exist
In reality, this is a compound instrument
Part debt (the right to demand payment in cash) Part equity (the right to demand payment in shares)
For transactions other than with employees and where the entire transaction
is measured at fair value of the goods/services
The equity component is the difference between the total transaction value and fair
IFRS 2 – Share-based Payment Transactions
with Cash Alternatives
Share-based payment transactions in which the terms of the arrangement
provide the counterparty with a choice of settlement (continued)
For other transactions, where the equity instrument is used to value the
transaction
• Measure fair value of debt component
• Measure the equity component (considering that the entity must forfeit the right to the shares if the counterparty exercises the option to be paid in cash)
As an added complexity, the entity must split the transaction into two parts
the debt part the equity part
The debit side of the journal entry (the expense) is also split into two parts
The debt part is accounted for as a cash-settled transactionIFRS 2 – Share-based Payment Transactions
with Cash Alternatives
Share-based payment transactions in which the terms of the arrangement
provide the entity with a choice of settlement
Where the entity has the choice of settlement options, the entity determines
whether it has a liability (a present obligation to settle in cash)
Where the choice has no commercial substance
A liability exists The transaction is accounted for as a cash-settled transaction Otherwise, it is accounted for as an equity-settled transaction
If the entity assumes equity settlement and subsequently settles in cash
This is treated as a share buyback or repurchase of an equity interest (debit equity) Unless the settlement alternative is the one with the higher fair value, in which case
IFRS 2 – Disclosures
The entity must disclose sufficient information for the users
To understand the nature and extent of these transactions To understand the impact on the profit or loss statement
Specific disclosures
(a) A description of each type of share-based payment arrangement that existed at any time during the period
(b) The number and weighted average exercise prices of share options for each of the following groups of options
(i) Outstanding at the beginning of the period (ii) Granted during the period
(iii) Forfeited during the period (iv) Exercised during the period (v) Expired during the period
IFRS 2 – Disclosures
(c) For share options exercised during the period, the weighted average share price at the date of exercise.
(d) For share options outstanding at the end of the period, the range of exercise prices and weighted average remaining contractual life.
