CA Inter Advance Accounting Share Based Payments

CA INTER ADVANCED ACCOUNTING SHARE BASED PAYMENTS

What is Share-based payment?

Share-based Payment is the type of payment that requires an entity to represent share-based payment transactions in its financial statements, such as granted shares, share options, or share appreciation rights, including transactions with employees or other parties to be settled in equity instruments of the entity, cash or other assets. Specific requirements include equity-settled and cash-settled share-based payment transactions and also for those where the entity or supplier has a choice of cash or equity instruments.

In other words, we can say a Share-Based Payment is a type of transaction in which the entity receives goods or services either as consideration for its equity instruments or by incurring liabilities for amounts based on the price of the entity’s shares or other equity instruments of the entity. This payment applies when a company acquires or receives goods and services in exchange for an equity-based payment.

In February 2004 IFRS 2 was originally issued and it was first applied to annual periods beginning on or after 1 January 2005. The objective of IFRS 2 is to specify the share based payment transaction undertaken by an entity in its financial reports.

The accounting requirements for the share based payment depend on how the transaction will be settled either by the issuance of equity, or cash or equity and cash both.

The concept of share based payments is wide than employee share options. Items included in the scope of this standard are share appreciation rights, employee share purchase plans, employee share ownership plans, share option plans and plans where the issuance of shares or rights to shares may depend on market/ non-market related conditions.

IFRS 2 shared based payment applies to all entities i.e. there is no exemption for private or smaller entities. Also, subsidiaries using their parent’s or fellow subsidiary’s equity as consideration for goods or services are within the scope of the Standard.

Outside the scope

– Cash or assets provided in terms of a Long Term Incentive which are not based on the fair value of group equity instruments are outside the scope of this standard and they are covered under IAS 19 ‘Other long-term employee benefits’.

– The issuance of shares in a business combination must be covered under IFRS 3 Business Combinations. On the other hand, differentiation must be done between the share-based payments related to the acquisition from those related to continuing employee services.

– Share dividends, the purchase of treasury shares and the issuance of additional shares are also outside the scope of this standard.

Recognition and measurement

The issuance of shares or rights to shares requires a hike in a component of equity. It requires the offsetting of debit entry to be expensed when the payment for goods or services does not represent an asset. The expense must be recognised as the goods or services that are consumed.

For example, the issuance of shares or rights to purchase an inventory will be represented as a hike in inventory and will be expensed only once the inventory is sold or impaired.
The issuance of fully vested shares, or rights to shares, is presumed to be of past services, requiring the full amount of the grant-date fair value to be expensed at the fastest pace. Issuance of shares to employees for a period of three years is related to term duration services. Therefore, the fair value of share-based payments determined on the grant date must be spent during the vesting period.

As a general rule, the total cost associated with equity-settled share-based payments is equal to the total number of vested instruments and the grant-date fair value of those instruments. In short, it tends to reflect what happens during the vesting period. However, if the equity-settled share-based payment has a market-related performance condition, the cost will still be recognized if all other vesting conditions are met.

We can sum up as:

• Recognize the goods or services received or acquired in a share-based payment transaction when the goods are obtained or as the services are received.
• Recognize an increase in equity for an equity settled share-based payment transaction.
• Recognize a liability for a cash-settled share based payment transaction.
• When the goods or services received or acquired do not qualify for recognition as assets, recognize an expense.

Shared Based Payment defines different types of transactions which are as follows:

• Equity-settled share based payment transactions would be based on their fair value at the grant date. Fair value should be based on market price wherever this is possible. IFRS 2 does not set out which pricing model should be used, but describes the factors that should be taken into consideration. For example many shares and share options will not be traded on an active market then in this case valuation techniques, such as the option pricing model, would be used. IFRS 2 says that ‘intrinsic value’ should only be used where the fair value cannot be accurately estimated. Intrinsic value is the difference between the fair value of the shares and the price that is to be paid for the shares by the other party. Equity settled share based payment transaction isin which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options).

• Cash settled share-based payment transactions occur where goods or services are paid for at amounts that are based on the price of the entity’s equity instruments. The expense for cash settled transactions is the cash paid by the entity. The valuation of cash settled share based payment transactions is done on basis of fair value of liability incurred. Cash settlement is in which the entity receives goods or services by incurring a liability to the supplier that is based on the price or fair value of the entity’s shares or other equity instruments of the entity i.e. fair value is measured at each balance sheet date.

• Share appreciation rights enable the employees to cash payments equal to the increase in the share price of a given number of the entity’s shares over a given period. This creates a liability and the recognised cost is based on the fair value of the instrument at the reporting date. The fair value of the liability is re-measured at each reporting date until settlement.

Example: Share appreciation rights
ABC, a public limited company, has granted 200 share appreciation rights to each of its 600 employees on 1 March 2017. The management feels that at year end of ABC Ltd. i.e. on 31 March 2018, 80% of the awards will vest on 31 March 2019. The fair value of each share appreciation right on 31 March 2018 is Rs.20.

What is the fair value of the liability to be recorded in the financial statements for the year ended 31 March 2018?
Answer
200 rights x 600 employees x 80% x Rs.20 x 1 year / 2 years = Rs.960,000.

• Choices of settling transaction are transactions in which the entity has a choice to treat it as equity settled or settle in cash.

Example: Recognition of employee share option grant
A company grants a total of 200 share options to 10 members of its executive team (20 options each) on 01.01.2019. These options vest at the end of a 3 year period. The company has determined that each option has a fair value at the date of grant equal to 30. The company expects that all 100 options will vest and therefore records the following entry at 30.06.2019 – the end of its first six-month interim reporting period.

If all 200 shares vest, the above entry would be made at the end of each 6-month interim reporting period. However, if one member of the executive team leaves during the second half of 2020, therefore forfeiting the entire amount of 20 options, the following entry at 31 December 2020 would be made:

Disclosure

IFRS 2 Shared Based payments require following disclosures requirements to enable the users of financial statements to understand:

– The nature and extent of the share-based payment transactions that existed during the period.

– How the fair value of the goods or services received or how the fair value of the equity instruments granted during the period was determined.

– The effect of expenses, which have arisen from share-based payment transactions on the entity’s profit or loss in the period and on its financial position.

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