Share-Based payment (IFRS 2) Flashcards
what is the agency problem?
Agency problem highlights the conflict of interest between the interests of shareholders (principals) and the interests of managers (agents).
This may be exacerbated if manager pay is linked to current year profit/revenue
How did companies try to tackle the agency problem?
Tried to tackle it by introducing compensation benefits linked to longer term growth.
What are the 2 main forms of solution take in tackling agency problem?
Share-based payments
Bonus plans
What are Shared-based payments?
and why might it help with agency problem?
Executive share options, cash bonuses linked to share prices (share appreciation rights), and bonuses ‘paid’ with equity shares.
Managers have the incentive to work hard to increase the company’s share price.
What are Bonus plans?
Linked to the achievement of longer-term targets ‘incentive metrics’.
Can be financial e.g. bonus linked to growth in EPS, or non-financial e.g. metrics to encourage risk management, and reduction in emissions.
Some plans may incorporate ‘clawback’ clauses in case of fraud/mismanagement
What is a share option?
Employees have the right to purchase shares in the specified entity at an agreed price for a period of time.
How is Equity settled treated in IFRS 2?
The Entity received goods or services (here employee’s services) as consideration for its own equity instruments (including shares or share options)
How is Cash settled treated in IFRS 2?
The entity receives goods or services (here employee services) by incurring liabilities to transfer cash or other assets to the supplier for amounts that are based on the price of the shares or other equity instruments of the entity.
What is vesting?
Vesting relates to conditions the counterparty (e.g. employee ) has to meet in order to be entitled to the share-based payment.
e.g. The vesting period is the amount of time an employee needs to work for the entity in order to be entitled to share-based payment.
How is Equity-settled share base payment recognised?
Share-based payment is recognised as an expense in the accounts as goods are received or as services are provided.
Dr Expense
Cr Equity (e.g. share options reserve)
How is Equity settled share-based payment measured?
Measured at FV
Will be given in exams.
What are the implications of an employee’s actions if the exercise price of share options is higher than the market price?
The employee would be unlikely to exercise the options as it is ‘out of the money’.
Why do we still account for the expense across the vesting period if the options are not exercised?
Because options still have value to the entity even if they have no intrinsic value (i.e.are out of money). e.g. entity would still benefit from employment over the vesting period, thus cost is recognised.
