IFRS 2 - Share Based Payments Flashcards
Definition, Options for PPE, options granted to employees (accounting)
This standard deals with equity settled share based payments (Options)
Transactions where the company receives goods or services and pays for them by issuing options to subscribe to its shares at a fixed price in the future.
share issue - DR cash, CR share share capital and OCE
Options for PPE - DR PPE, CR OCE, The only accounting entries are made when initial transaction is made not when prices increase.
options granted to employees - DR P&L, CR OCE
If option is unfavourable after vesting period this will lapse as it is not in the money
Why issue options to staff
1. Motivation
2. Goal congruence
3. staff retention
4. Cashflow
However issuing too many options dilutes existing shareholders
Equity settled Accounting:
When options are granted to staff as part of remuneration, the accounting is based on
1. F.V of options at the GRANT date
2. number of options expected to vest
3. spread over the qualifying period
F.V of options* current numbers expected to vest*proportion of the qualifying time lapsed = Equity needed on SOFP
Increase in equity is posted as expense
Valuation of option at the grant date, market conditions and non market conditions, modifications
This is a complex valuation that will have been estimated by actuarial pricing systems and is difficult to understand
Vesting conditions -
Market conditions
If the Question says options will only vest when or if a certain share price is reached THEN IGNORE as it has already been taken into account in the value of the option
Non - Market conditions should be taken into account e.g. staff being there (continued employment)
Modifications
If share price falls well below the exercise price, the options ceases to be an incentive
The company can modify the scheme by reducing the exercise price of the options this making the scheme more favourable to employees
This grants another benefit to the employees
The difference between the fair value of the new arrangement and the fair value of the original must recognised as charge to Profit that is spread over the remaining vesting period.
Options issued as part of a business combination that replaces awards - ops, pre and post acquisition split
Accounting after vesting date
Where Sub has previously issued share options to its staff and by acquisition date has not vested.
The parent will have to buy out equity interest as part of its purchase consideration
Where parent issues new options, it needs to be split between pre acquisition interest and post acquisition incentives
Pre- acquisition interest - added to cost of investment
- This shares are issued to employees in their capacity as
shareholders and not in exchange for their services. it will form
part of parents consideration
post acquisition interest - expensed over vesting period
The extra cost of investment increases goodwill -DR goodwill CR OCE
Accounting after vesting date
- No further adjustment is made to total equity
- If options are exercised then there is a receipt of cash DR cash and
CR share capital
- If option is not exercised then balance in OCE no longer relates to option and can be moved to retained earnings
Cash settled share based payments
Share appreciation right granted to staff as part of remuneration, employer issues a bonus based on share price
The measurement is at the reporting date so it changes
DR P&L, credit Liability
