CH.10 - Share based payments

Question 1

Why were IFRS 2 Share-based payments Introduced? and what transactions does it relate to?

Answer 1

Previously there were only IAS 19 disclosures requirements, but with the increase of these types of transactions in recent years, a number of issues have been raised by stakeholders calling for improvements

In particular, the omission of expenses arising from share-based payment transactions with employees was highlighted by investors and other users of financial statements as causing economic distortions and corporate governance concerns.

The problem?

If a company pays for goods or services in cash, an expense is recognised in profit or loss.

If a company ‘pays’ for goods or services in share options, there is no cash outflow and therefore, under traditional accounting, no expense would be recognised.

Share-based transactions.

A share-based payment occurs when an entity buys goods or services from other parties (such as employees or suppliers) and:

- settles the amount payable by issuing shares or share options of the business.

- or incurs a cash liability based on its share price.

Question 2

Define:

Share-based payment transaction:

Share-based payment arrangement:

Equity instrument granted:

Share option:

Fair value:

Grant date:

Vest:

Vesting conditions:

Vesting Period:

Answer 2

TO be completed

Question 3

What are the types of share-based transactions?

Answer 3

1. Equity-settled - Entity pays for goods or services in its own shares.
2. Cash-settled - Entity pays for goods or services based on its share value.
3. Transactions with a choice of settlement - Entity pays for goods or services in which the

Choice of the settlement could be made by the. The entity or the Supplier/Staff

Question 4

10.1.4 Share-based payments among group entities

Answer 4

TO be completed

Question 5

When should a share-based transaction be recognised? and How should they be recognised?

Answer 5

A share-based transaction should be recognised:

- When it obtains the goods or as the services are received.

e.g This could be a single point in time or over a longer period of 3 or 4 years.

Granted Immediately - The full expense is recognised on the grant date.

If the granted equity instruments (share-based transaction) vest immediately, (Goods or services received immediately) - it is presumed that the services have already been received (Need to be expensed)

Vesting conditions - Expense should be spread evenly over the vesting period.

• *How it should be recognised?**
• *Goods or services received** in a share-based payment transaction should be recognised as expenses unless they qualify for recognition as assets.

Equity Settled

Dr - Expense - (e.g, Staff remuneration)

Cr- Equity - (Share-based payment reserve or Retained earnings)^{IFRS 2 Gives<span> </span>No specification}

Cash Settled

Dr - Expense - (e.g, Staff remuneration)

Cr - Liability

Question 6

How do you measure the accounting transactions of share-based payment?

Answer 6

The entity measures the expense using the method that provides the most reliable information: 1 of 2 methods

A) Direct Method - (The S.P of the goods on the grant date.) - Use the Fair Value of goods or services received.

Or if this is not available

B) Indirect Method - F.V of the Equity Instruments

• Equity Settled - F.V of option on grant date.
• Cash Settled - F.V remeasured at each year end.

Any changes in the number of S.O’s or SAR’s expected to vest is a change in accounting estimate and charged to the P/L

Question 7

How are Share Based Payments Transactions with employees treated?

Answer 7

It is very common for entities to reward employees by granting them a share-based payment if they remain in employment for a certain period (the vesting period). In this case:

• The share-based payment expense should be spread over the vesting period _{(over the period the company benifited from the employees services)}
  
  • and
• Measured using the Indirect method.

Question 8

How do you account for transactions with employees with Equity settled payments(Share Options)?

Answer 8

+ : Estimated Number of employees entitled to S.O

x : Number of instruments per employee

x : Fair Value per insrument (F.V @ GRANT DATE OF SHARE OPTIONS)

x : Proportion of Vesting Period Elapsed at year end

= : Share-based Payment Equity Value at Year end ( the C/B of SBP-Reserve in equity acc)

Question 9

How do you Account for cash-settled share-based payment transactions?

Answer 9

+ : Estimated Number of employees remaining with the entitlement to S.A.R’s

x : Number of instruments per employee

x : Fair Value per insrument (F.V OF S.A.R’s @ YEAR END )

x : Proportion of Vesting Period Elapsed at year end

= : Share-based Payment Liability Value at Year end ( the C/B of Liability/Accruals Account)

Question 10

How are Share-based payment with a choice of settlement treated?

Answer 10

There are number of questions that must be asked first:

Q1. Who has the choice of how the instrument will be settled?

• The Entity has the choice:
  
  • Q2. ​is there a Present Obligation to settle in cash?
    
    • YES - Treat as a CASH SETTLED share based payment
    • NO - Treat as EQUITY SETTLED share based payment
• ​​The Counterparty has the choice- (Means the company has issued a compound instrument)
  
  • Split out the DEBT component and Equity Component.
    
    • DEBT - CASH settled method
    • EQUITY-
      
      • ​F.V of Shares Options choice on the grant date
      • Less F.V of Cash Payable choice on the grant date
      • = Equity Component

Question 11

What are vesting conditions and what are the 3 main types?

Answer 11

Vesting conditions ore the conditions that must be satisfied for the counterparty to become unconditionally entitled to receive payment under a share-based payment agreement

There are three main types of conditions:

• Service conditions - (Meet a specfic time period)
• Performance conditions (Non-market based conditions)
• Market conditions (Market value of shares)

Question 12

How do service conditions affect share based payments?

Answer 12

Service conditions are where the counterparty is required to complete a specified period of service. for the SBP to be vested.

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

Question 13

What are Performance conditions (other than market conditions) and how do they affect S.B.P’s?

Answer 13

There may be performance conditions that must be satisfied before share-based payment vests.

e,g specific growth in profit or earnings per share.

This may ultimatly mean there could be a change of:

• No. of employees
• No of share granted
• Period the shares are granted

So the measurement of the S.B.P will change. so it must be accounted for by using the best available estimate of equity instruments expected to vest, over the period it is most likely to vest all of which must be revised at each year end.

This is a change in accounting estimates (no accounting policy)

Question 14

How do Market conditions affect share based payments?

Answer 14

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 have already been taken into consideration when estimating the f.v of the share option the on the grant date. or at the year end if cash settled.

Question 15

10.5 Modifications, cancellations and settlements

Answer 15

TO be completed

Question 16

Why might there be modifications to a share based payment transaction?

Answer 16

The entity may modify SBP agreement in cases of when the share price drops, and the share options are no longer profitable meaning staff are less likely to be motivated to excercise there right or be motivated by them.

Another reason might be because the they would like to change there terms of an agreement so that it is more in line with the company goals.

In these situations a company may:

• • Modify share options or share appreciation rights
• • Cancel and/or make settlement payment for the options.
• • Replace a completly different agreement.

Question 17

What is the general rule on how to deal with modifications to a S.B.P?

Answer 17

Company must recognise the services already recieved at F.V at the grant date as a minimum.

If there is a increase in the total fair value, the increase is then treat as a addition which the cost is then spread over ther remaining period.

F.V of modified equity instrument at the date of modication

Less the F.V of the original instrument at the date of modification

= Increase in F.V of the eqity instrument is the additional amount.

Question 18

How do you account for modifications when it goes from a cash-settled to equity-settled?

Answer 18

- Original liability already accounted for is derecognised.

- The equity share based payment is recognised at the F.V at the modification date for the services already rendered.

Question 19

How are Cancellation’s or a settlement accounted for during the vesting period?

Answer 19

Cancellation of agreement - The transaction is accelerated as if the modified date is now the vested date.

Settlement payment -

• - It is treated as deduction for a Equity settled payment (A repurchase of shares)
  
  • - Any Payment in excess of the Equity amount is treated as a expense.
• - The liability is first remeasured to fair value at the date of cancellation/settlement, and any payment made is a extinguishment of liability (paying off the debt)

Question 20

How do share based payments account for Replacement of the share options with another agreement?

Answer 20

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.

Account for the normal f.v of the original grant

- less f.v of cancelled instruments.

= new increment treated as a additions to the orginal f.v,

Question 21

10.6 Deferred tax implications

Answer 21

TO be completed

Question 22

10.6.1 Issue

Answer 22

TO be completed