C. REPORTING THE FINANCIAL PERFORMANCE OF A RANGE OF ENTITIES - SHARE BASED PAYMENTS

Question 1

A share-based payment transaction:

Answer 1

A share-based payment transaction: a transaction in which an 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.

Question 2

3 types of share-based payment transactions.

Answer 2

IFRS 2 applies to all share-based payment transactions. There are three types:
 Equity-settled share-based payment - entity receives goods or services as consideration for equity instruments of the entity (including shares or share options)
 Cash-settled share-based payment – the entity 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.
 Transactions with a choice of settlement - the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier with a choice of whether the entity settles the transaction in cash or by issuing equity instruments.

Question 3

Share-based payments among group entities.

Answer 3

Share-based payments among group entities. Payment for goods or services by a subsidiary company may be made by granting equity instruments of its parent company or of another group company. These transactions are within the scope of IFRS 2.

Question 4

Recognition of share based payment transactions

Answer 4

Recognition. An entity should recognise goods or services received or acquired in a share-based payment transaction when it obtains the goods or as the services are received. Goods or services received or acquired in a share-based payment transaction should be recognized as expense (unless they qualify for recognition as assets). The corresponding entry in the accounting records depends on whether the transaction is equity-settled or cash-settled.

If equity-settled, recognize a corresponding increase in equity
DEBIT Expense X
CREDIT Equity X
If cash-settled, recognize a corresponding liability

DEBIT Expense X
CREDIT Liability X

Transactions with services received. If the granted equity instruments vest immediately, it is presumed that the services have already been received and the full expense is recognized on the grant date. If, however, there are vesting conditions attached to the equity instruments granted, the expense should be spread over the vesting period.

Question 5

Vest:

Answer 5

Vest: to become an entitlement. Under a share-based payment arrangement, a counterparty’s right to receive cash, other assets, or equity instruments of the entity vests upon satisfaction of any specified vesting conditions.

Question 6

Vesting conditions

Answer 6

Vesting conditions: the conditions that must be satisfied for the counterparty to become entitled to receive cash, other assets or equity instruments of the entity, under a share-based agreement.

Question 7

Vesting period:

Answer 7

Vesting period: the period during which all the specified vesting conditions of a share-based payment arrangement are to be satisfied.

Question 8

Grant date:

Answer 8

Grant date: the date at which the entity and another party (including an employee) agree to a share-based payment arrangement. At grant date the entity confers on the other party (the counterparty) the right to cash, other assets, or equity instruments of the entity, provided the specified vesting conditions, if any, are met.

Question 9

Equity instrument granted:

Answer 9

Equity instrument granted: the right (conditional or unconditional) to an equity instrument of the entity conferred by the entity on another party, under a share-based payment arrangement.

Question 10

Measurement share based payment transactions

Answer 10

Measurement. The entity measures the expense using the method that provides the most reliable information:
 Direct method use the fair value of goods or services received
 Indirect method by reference to the fair value of the equity instruments (eg share options) granted
o Equity-settled  use the fair value at grant date and do not update for subsequent changes in fair value
o Cash-settled update the fair value at each year end with changes recognised in profit or loss
The fair value of equity instruments should be based on market prices, taking into account the terms and conditions upon which the equity instruments were granted. Any changes in estimates of the expected number of employees being entitled to receive share-based payment are treated as a change in accounting estimate and recognized in the period of the change.

Question 11

Accounting for equity-settled share-based payment transactions.

Answer 11

Accounting for equity-settled share-based payment transactions. Examples include shares or share options issued to employees as part of their remuneration. If entity rewards employees by granting a share-based payment which is conditional on them remaining in employment for a certain period, the share-based payment expense should be spread over the vesting period and measured using the indirect method. In the first year of the share-based payment, the expense is equal to the liability balance at the year-end:
Share-based payment equity or liability value at year end =
Estimated number of employees entitled to benefits (remove expected leavers over whole vesting period)
X Number of instruments per employee
X Fair value per instrument (equity-grant date, cash-year end)
X Proportion of vesting period elapsed at year end
For subsequent years, the expense is calculated as the movement in the equity or liability balance:
Equity/liability
Balance b/d X
Cash paid (cash-settled only) (X)
Expense (balancing figure) X
Balance c/d X

Question 12

Accounting for cash-settled share-based payment transactions.

Answer 12

Accounting for cash-settled share-based payment transactions. Examples of this type of transactions include:
 Share appreciation rights granted to employees: the employees become entitled to a future cash payment based on the increase in the entity’s share price from a specified level over a specified period of time.
 A right to shares that are redeemable. An entity might grant to its employees a right to receive a future cash payment by granting to them a right to shares that are redeemable.
Calculations is the same apart that the fair value of liability is remeasured at each year-end. The fair value at the grant date is irrelevant and the intrinsic value (difference between the fair value and the exercise price) at the date of exercise is the amount of cash actually paid.

Question 13

Share-based payment with a choice of settlement.

Answer 13

Share-based payment with a choice of settlement. If the entity has the choice of whether to settle the share-based payment in cash or by issuing shares the accounting treatment depends on whether there is a present obligation to settle the transaction in cash.
Is there a present obligation to settle in cash?
 Yes – treat as cash-settled share-based payment transaction
 No – treat as equity-settled share-based payment transaction
A present obligation exists if the entity has a stated policy of settling such transactions in cash or past practice of settling in cash, because this creates an expectation, and so constructive obligation, to settle future such transactions in cash.
If instead the counterparty (eg employee or supplier) has the right to choose whether the share-based payment is settled in cash or shares, the entity has granted a compound financial instrument:
 Debt component – as for cash-settled transaction
 Equity component – measured as the residual fair value at grant date
Fair value of shares alternative at grant date X
Fair value of cash alternative at grant date (X)
Equity component X

Question 14

Vesting conditions include

Answer 14

Vesting conditions include service conditions and performance conditions.
Service conditions are where the counterparty is required to complete a specified period of service. The share-based payment is recognized over the required period of service.
Performance conditions such as achieving a specific growth in profit or earnings per share. The amount recognized as share-based payment is based on the best available estimate of the number of equity instruments expected to vest revised as necessary at each period end. A vesting period may vary in length depending on whether a performance condition is satisfied (different growth targets for different years). In such circumstances, the share-based payment equity figure is accrued over the period based on the most likely outcome of which target will be met, revised at each period end.
Market conditions, such as vesting dependent on achieving a target share price, are not taken into consideration when calculating the number of equity instruments expected to vest. This because market conditions are already taken into consideration when estimating the fair value of the share-based payment (at the grant date if equity-settled and at the year end if cash-settled). Therefore, entity recognizes share-based payment from a counterparty who satisfies all other vesting conditions irrespective of whether a target share price has been achieved.

Question 15

Share based payment transactions entity might

Answer 15

The entity might:
 Modify share options, eg by repricing or by changing from cash-settled to equity-settled; or
 Cancel or settle the options
Repricing of share option might occur, for example, where the share price has fallen. The entity may then reduce the exercise price of the share options, which increases the fair value of those options.

Question 16

Modifications share based payments

Answer 16

Modifications. At the date of the modification, the entity must recognize, as a minimum, the services already received measured at the grant date fair value of the equity instruments granted; ie the normal IFRS 2 approach is followed up to the date of the modification. Any modifications that increase the total fair value of the share-based payment must be recognized over the remaining vesting period (ie as a change in accounting estimate). This increase is recognized in addition to the amount based on the grant date fair value of the original equity instruments (which is recognized over the remainder of the original vesting period.

Question 17

Modification For equity-settled share-based payment, the increase in total fair value is measured as:

Answer 17

For equity-settled share-based payment, the increase in total fair value is measured as:
Fair value of modified equity instruments at the date of modification X
Less fair value of original equity instruments at the date of modification (X)
X
This ensures that only the differential between the original and modified instrument is measured, rather than any increase in the fair value of the original instrument (which would be inconsistent with the principle of measuring equity-settled share-based payment at grant date fair values).

Question 18

If a share-based payment arrangement is modified so that it is now equity-settled rather than cash-settled, the accounting treatment is as follows:

Answer 18

If a share-based payment arrangement is modified so that it is now equity-settled rather than cash-settled, the accounting treatment is as follows:
 The original liability recognized in respect of the cash-settled share-based payment should be derecognized and the equity-settled share-based payment should be recognized as the modification date fair value to the extent services have been rendered up to the modification date.
 The difference, if any, between the carrying amount of the liability as at the modification date and the amount recognized in equity at the same date would be recognized in profit or loss immediately.

Question 19

Cancellation share based payments

Answer 19

Cancellation. Early cancellation, whether by the entity, counterparty (eg employee) or third party (eg shareholder) is treated as an acceleration of vesting, meaning that the full amount that would have been recognized for services received over the remainder of the vesting period is recognized immediately.

Question 20

Settlement share based payments

Answer 20

Settlement. If a payment (ie a settlement) is made to the employee on cancellation, it is treated as a deduction from (repurchase of) equity or extinguishment of a liability (depending on whether the share-based payment was equity- or cash-settled. For equity-settled share-based payment settlements, any excess of the payment over the fair value of equity instruments granted measured at the repurchase date is recognized as an expense. A liability is first remeasured to fair value at the date of cancellation/settlement and any payment made is treated as an extinguishment of the liability.

Question 21

Replacement share based payments

Answer 21

Replacement. If equity instruments are granted to the employee as a replacement for the cancelled instruments (and specifically identified as a replacement) this is treated as a modification of the original grant.
Applying this, the incremental fair value is measured as:
Fair value of replacement instruments X
Less net fair value of cancelled instruments (X)
(Fair value immediately before cancellation less any payments to employees on cancellation) X

Question 22

Deferred tax implications share based payments

Answer 22

Deferred tax implications. An entity may receive a tax deduction that differs from related cumulative remuneration expense which may arise in later accounting period (eg expenses for options recognized but receive tax deduction then options exercised). The deferred tax asset temporary difference is measured as:
Carrying amount of share-based payment expense 0
Less tax base of share-based payment expenses
(estimated amount tax authorities will permit as deduction in future period, based on year end information (X)
Temporary difference (X)
Deferred tax asset at x% X
If the amount of the tax deduction (or estimated future tax deduction) exceeds the amount of the related cumulative remuneration expense, this indicates that the tax deduction relates also to an equity item. The excess is therefore recognized directly in equity (not reported in other comprehensive income).