Chapter 9 Share-Based Payment Flashcards
Types of share-based payment
- Equity-settled share-based payment
The 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 (or value) 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 arrangement provide the entity or the supplier with a choice of whether the entity settles the transaction in cash or by issuing equity instruments.
Recognition
DR: Expense
CR: Equity (if equity settled)
CR: Liability (if cash settled)
Where performance is not immediate, the expense is spread over the period until the counterparty becomes entitled to receive the share-based payment.
Measurement
- Direct method
Use the fair value of goods or services received. - Indirect method
By reference to the fair value of the equity instruments.
Equity settled -> Use fair value at grant date and do not update for subsequent changes.
Cash-settled -> Update the fair value at each year end (changes recognised in profit or loss)
Any changes in estimates of 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.
Share-based payment with a choice of settlement
- Entity has the choice
Is there a present obligation to settle in cash?
Yes - Treat as cash settled transaction
No - Treat as equity-settled transaction - Counterparty has the choice
The entity has issued 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 cash alternative at grant date (X)
—
Equity component X
—
Deferred tax implications
An entity may receive a tax deduction that differs from related cumulative remuneration expense, and may arise in a later accounting period.
Measurement
The deferred tax asset temporary difference is measured as:
Carrying amount of share-based payment expense 0
Less: tax base of share-based payment expense (X)
—
Temporary difference (X)
—
Deferred tax asset at x% X
If the tax deduction exceeds the related cumulative remuneration expense, the tax deduction relates also to an equity item.
The excess is recognised directly in equity (and not in other comprehensive income).
Vesting conditions - Performance conditions
There may be performance conditions that must be satisfied before share-based payment vests, such as achieving a specific growth in profit or earnings per share.
The amount recognised is based on the best available estimate of the number of equity instruments expected to vest and revised at each period end.
A vesting period may vary in length e.g. 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.
The share-based payment equity figure is accrued over the period based on the most likely outcome of which target will be met and revised at each period end.
Vesting conditions - Market conditions
Market conditions are not taken into consideration when calculating the number of equity instruments expected to vest.
This is because the 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.
Modifications, cancellations and settlements
- Modifications
At modification, the entity must recognise as a minimum, the services already measured at the grant date fair value of the equity instruments granted ( 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 recognised over the remaining vesting period (as a change in accounting estimate).
For equity-settled share-based payment, the increase in total fair value is measured as:
Fair value of modified equity instruments at modification date X
Less: Fair value of original equity instruments at modification date (X)
—
X
—
Only the differential between the original and modified instrument is measured rather than any increase in the fair value of the original instruments.
Cancellation or settlement during the vesting period
- Cancellation
Early cancellation whether by the entity, counterparty or third party is treated as an acceleration of vesting, meaning the full amount that would have been recognised for services received over the remainder of the vesting period is recognised immediately. - Settlement
If a payment is made to the employee on cancellation, it is treated as a deduction from (repurchase of) equity or extinguishment of a liability (depending whether the share-based payment was equity or cash-settled).
For equity-settled share-based payment settlements, ant 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 is treated as an extinguishment of the liability.
- 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)
—
X
—
