Share Based Payments

Question 1

Executive remuneration

Answer 1

Levels of remuneration should be sufficient
to attract, retain and motivate directors to
run the company successfully, but a
company should avoid paying more than is necessary for this purpose.

Question 2

Forms of remuneration

Answer 2

• Basic salary
• Bonuses
• Shares
• Benefits in kind
• Pensions
• Termination payments

Question 3

Share Based Payments

Answer 3

An agreement between the entity and
another party (including an employee) to
enter into a share-based payment
transaction, which thereby entitles the other party to receive cash or other assets of the entity for amounts that are based on the price of the entity’s shares or other equity instruments of the entity.

Question 4

Benefits of share based payments

Answer 4

Motivation

• Cash flow
• Improve executive retention
• Tax benefits
• Helps solve agency theory

Question 5

Disadvantages of share based payments

Answer 5

• Share price beyond directors control
• Does not differentiate between directors
• Fall in market price can demotivate
• Do not align interests of shareholders and directors

Question 6

What is the regulatory framework?

Answer 6

FRS 20 / IFRS 2 Share based payment

Question 7

Types of transactions

Answer 7

Share based payments include:
* All executives & employees share option
schemes.
* Arrangements such as share appreciation
rights
– A right, usually granted to an employee, to receive a bonus equal to the appreciation in the
company’s stock over a specified period. Like employee stock options, SARs benefit the
holder with an increase in stock price; the difference is that the employee is not required to
pay the exercise price (as with an employee stock option), but rather just receives the
amount of the increase in cash or stock.

• Transactions with suppliers

Question 8

What are the basic rules?

Answer 8

Recognise as expense
* Recognise in period over which goods or
services received
* Normally at fair value of goods or services
received
* If cannot measure at fair value of goods
use fair value of instrument.
* Recognise equity or liability

Question 9

Cash settled share based payments

Answer 9

The employees will become entitled to a future cash
payment based on the increase in the company’s share
price from a specified level over a specified period.
* The entity shall measure the goods or services acquired
and the liability incurred at the fair value of the liability.
* Until the liability is settled, the entity shall re-measure the
fair value of the liability at each reporting date and at the
date of settlement
* Any changes in fair value recognised in profit or loss for
the period

Question 10

Disclosure requirements

Answer 10

The nature and extent of the share based
payment transactions that existed during the
period.
* How the fair value of the goods and services
received or the fair value of the equity
instruments which have been granted during the
period was determined.
* How the expenses which have arisen from share
based payment transactions affect the income
statement for the period

Question 11

accounting issues that arise from the use of shares and share options as a form of remuneration.

Answer 11

accounting issues that arise from the use of
shares and share options as a form of remuneration.

No charge arguments
- no cost to compamy
- does ot meet definiton of expenses in framework
- comes from shareholders not company
- double hit to earnings
- conditions not met = no cost because no shares

Charge arguments
- Understimates rewards and oerstates profits
Increased comparbility with cimpanies who do not use share based payments

Accounting approach
- measured at fair value at issue
- value of transaction charged to income statment over vesting period and recognised in equity

Question 12

Nature of disclosure requirements

Answer 12

• Nature and extent of the share-based payment transactions in the period
• How the fair value of the goods and services received, or the fair value of the equity instruments granted in the period was determined.
• How the expenses which have arisen from share based payment transactions affect the income statement.

Question 13

Why companies do not meet requirements

Answer 13

• Sensitivity of directors’ remuneration
• Extensive requirements – some may be overlooked in error.
• Complex standard may have resulted in mis-interpretation of requirements
• Principal assumptions used in option pricing model should be disclosed – judgement as to what is a principal assumption.
• May have determined disclosures by reference to other companies – but example used may not have been fully compliant.