C8 Share-based payment

Question 1

What is a share-based payment transaction?

Answer 1

A transaction 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.

Question 2

What are the three types of share-based payment transactions?

Answer 2

1. Equity-settled share-based payment: The entity receives goods or services as consideration for equity instruments of the entity (including shares or share options).
2. 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 (or value) of the entity’s shares or other equity instruments.
3. 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

When should an entity recognise goods or services received or acquired in a share-based payment transaction?

Answer 3

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.

Question 4

How should goods or services received or acquired in a share-based payment transaction be recognised?

Answer 4

Goods or services received or acquired in a share-based payment transaction should be recognised as expenses (unless they qualify for recognition as assets).

Question 5

How is a share-based payment transaction recorded?

Answer 5

The corresponding entry in the accounting records depends on whether the transaction is equity-settled or cash-settled.

If equity-settled, recognise a corresponding increase in equity. Debit Expense; Credit Equity.

If cash-settled, recognised a corresponding liability. Debit Expense; Credit Liability.

Question 6

Does IFRS 2 specify where in the equity section the credit should be presented?

Answer 6

No. IFRS 2 does not specify where in the equity section the credit should be presented. Some entities present a separate component of equity (e.g. ‘Share-based payment reserve’); other entities may include the credit in retained earnings.

Question 7

What does it mean to vest?

Answer 7

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 8

What is a share-based payment arrangement?

Answer 8

An agreement between the entity and another party (including an employee) to enter into a share-based payment transaction.

Question 9

What are vesting conditions?

Answer 9

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 payment arrangement.

Vesting conditions include service conditions and performance conditions. Other features, such as requirements for employees to make regular contributions into a savings scheme, are not vesting conditions.

Question 10

What is the vesting period?

Answer 10

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

Question 11

How are transactions in which services are received recognised?

Answer 11

If the granted equity instruments vest immediately, it is presumed that the services have already been received and the full expense is recognised on the grant date.

However, if there are vesting conditions attached to the equity instruments, the expense should be spread over the vesting period.

Question 12

How are share-based payment transactions measured?

Answer 12

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 (e.g. share options) granted.
- equity-settled: use the fair value at grant date and do not update for subsequent changes in fair value
- cash-settled: update the fair value at each year end with changes recognised in profit or loss

Question 13

Which method is usually used to measure employee services?

Answer 13

The indirect method is usually used for employee services as it not normally possible to directly measure the services received.

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 recognised in the period of the change.

Question 14

What is the grant date?

Answer 14

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 15

For share-based payments with employees, how is the expense calculated?

Answer 15

In the first year of the share-based payment, the expense is equal to the equity or liability at the year end.

= estimated no. of employees entitled to benefits
x no. of instruments per employees
x fair value per instrument
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.

Question 16

What are the arguments against recognition of share-based payment in the financial statements?

Answer 16

The IASB has considered and rejected the arguments below:
* No cost therefore no charge
* Earnings per share is hit twice
* Adverse economic consequences

Question 17

What are some examples of cash-settled share-based payment transactions?

Answer 17

• 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.

Question 18

What are some examples of equity-settled share-based payments?

Answer 18

Shares or share options issued to employees as part of their remuneration.

Question 19

What is the accounting treatment for a share-based payment when the entity has the choice of settlement?

Answer 19

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

Question 20

How is it determined is a present obligation exists?

Answer 20

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 a constructive obligation, to settle future such transactions in cash.

Question 21

What is the accounting treatment for a share-based payment when the counterparty has the choice of settlement?

Answer 21

If the counterparty (e.g. 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.
* the debt component is accounted for as a cash-settled transaction
* the equity component is measured as the the residual fair value at grant date

Question 22

What are service conditions?

Answer 22

Service conditions are where the counterparty is required to complete a specified period of service. This is the typical scenario in which an employee is required to complete a specified period of service.

The share-based payment is recognised over the required period of service.

Question 23

What are performance conditions?

Answer 23

There may be performance conditions that must be satisfied before a share-based payment vests, such as achieving a specific growth in performance in profit or earnings per share.

The amount recognised as share-based payment is based on the best available estimate of the number of equity instruments expected to vest (i.e. expectation of whether the profit target will be met), revised as necessary at each period end.

A vesting period may vary in length depending on whether a performance condition is satisfied; for example where different growth targets are set for different years, and if the first target is met, the instruments vest at the end of the first year, and if not the next target for the following year comes into play.

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.

Question 24

Are market considerations taken in consideration when calculating the number of equity instruments expected to vest?

Answer 24

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 is 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 an entity recognises share-based payment from a counterparty who satisfies all other vesting conditions (e.g. employee service period) irrespective of whether a target share price has been achieved.

Question 25

How are modifications of share-based payment transactions treated?

Answer 25

At the date of the modification, the entity must recognise, as a minimum, the services already received measured at the grant date fair value of the equity instruments granted; i.e. the normal IFRS 2 approach is followed up to the date of modification.

Any modifications that increase the total fair value of the share-based payment must be recognised over the remaining vesting period (i.e. as a change in accounting estimate). The increase is recognised in addition to the amount based on the grant date fair value of the original equity instruments (which is recognised over the remainder of the original vesting period).

Question 26

How do you account for modifications of share-based payment transactions from cash-settled to equity settled?

Answer 26

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 recognised in respect of the cash-settled share-based payment should be derecognised and the equity-settled share-based payment should be recognised at 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 recognised in equity at the same date would be recognised in profit or loss immediately.

Question 27

How is a cancellation treated?

Answer 27

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

Question 28

How is a settlement accounted for?

Answer 28

If a payment (i.e. a settlement) is made to the employee on cancellation, it is treated as 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 only, excess of the payment over the fair value of equity instruments granted measured at the repurchase date is recognised 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 29

How are replacements treated?