AAFR Chapter 15 19 10 15

CHAPTER 15
SHARE BASED PAYMENTS (IFRS-2)

OBJECTIVE
The objective of this IFRS is to provide accounting treatment for an entity when it
involved in share based payment transactions. This IFRS primarily requires the share
based payments to be recognized in profit and loss account.
SCOPE
An entity shall apply this IFRS in accounting for all share-based transactions whether
or not the goods and services received are identifiable or not, including: -
a) Equity settled share based payment transactions, in which the entity receives
goods or services as consideration for equity instruments of the entity.
b) Cash settled share based payment transactions in which the entity acquires
goods or services by incurring liabilities to the supplier of those goods or
services for amounts that are based on entitys shares or other equity
instruments of the entity, and
c) Through issuance of equity or payments of cash for goods or services
received.
A share based payment may be settled by another group entity on behalf of an
entity receiving or acquiring the goods or services.
Examples of arrangements that come under IFRS 2 are:
Call options that give employees the right to purchase an entitys shares in
exchange for their services;
Share appreciation rights that entitle employees to payments calculated by
reference to the market price of an entitys shares or the shares of another
entity in the same group;
In-kind capital contributions of property, plant or equipment in exchange for
shares or other equity instruments;
Share ownership schemes under which employees are entitled to receive an
entitys shares in exchange for their services; and
Payments for services made to external consultants that are calculated by
reference to the entitys share price.
However, this IFRS will not be applicable in the following circumstances: -
a) A transaction with an employee or other party in his capacity as a holder of
the equity instrument is not a share based payment transaction (Right issue).
b) A transaction involving assets other than non-financial assets. (IFRS-3)
c) Contracts for the purchase of goods that are within the scope of IAS 39, such
as commodity contracts entered into for speculative purposes, i.e., other than
to satisfy the reporting entitys expected purchase or usage requirements.
DEFINITIONS
Cash-settled share-based payment transaction
A share-based payment transaction in which the entity acquires goods or services
by incurring a liability to transfer cash or other assets to the supplier of those goods or
services for amounts that are based on the price (or value) of the entitys shares or
other equity instruments of the entity.
Employees and others providing similar services
Individuals who render personal services to the entity and either (a) the individuals
are regarded as employees for legal to or tax purposes, (b) the individuals work for
the entity under its direction in the same way as individuals who are regarded as
employees for legal or tax purposes, or (c) the services rendered are similar to those
rendered by employees. For example, the term encompasses all management
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personnel, i.e. those persons having authority and responsibility for planning,
directing and controlling the activities of the entity, including non-executive
directors.
Equity instrument
A contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities
Equity instrument granted
The right (conditional or unconditional) to an equity instrument of the entity
conferred by the entity on another party, under a share-based payment
arrangement
Equity-settled share-based payment transaction
A share-based payment transaction in which the entity receives goods or services as
consideration for equity instruments of the entity (including shares or share options)
Grant date
The date at which the entity and another party (including an employee) agree to a
share-based payment arrangement, being when the entity and the counter-party
have a shared understanding of the terms and conditions of the arrangement. At
grant date the entity confers on the counter-party the right to cash, other assets, or
equity instruments of the entity, provided the specified vesting conditions, if any, are
met. If that agreement is subject to an approval process (for example, by
shareholders), grant date is the date when that approval is obtained
Intrinsic value
The difference between the fair value of the shares to which the counter-party has
the right to receive, and the price (if any) the counter-party is (or will be) required to
pay for those shares. For example, a share option with an exercise price of $15, on a
share with a fair value of $20, has an intrinsic value of $5.
Market conditions
A condition upon which the exercise price, vesting or exercise-ability of the an
equity instrument depends that is related to the market price of the entity equity
instruments, such as attaining a specified share price or a specified amount of
intrinsic value of a share option or achieving a specified target that is based on the
market price of the entitys equity instruments relative to an index of market prices of
equity instruments of other entities.
Measurement date
The date at which the fair value of the equity instruments granted is measured for
the purposes of this IFRS. For transactions with employees and others providing similar
services, the measurement date is grant date. For transactions with parties other
than employees (and those providing similar services), the measurement date is the
date the entity obtains the goods or the counter-party renders service.
Reload feature
A feature that provides for an automatic grant of additional share options whenever
the option holder exercises previously granted options using the entitys shares,
rather than cash, to satisfy the exercise price.
Reload option
A new share option granted when a share is used to satisfy the exercise price of a
previous share option.
Share-based payment arrangement
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 entitys shares or other equity instruments of the entity, or to receive
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equity instruments of the entity, provided the specified vesting conditions, if any, are
met.
Share based payment transaction
A transaction in which the entity receives goods or services as consideration for
equity instruments of the entity (including shares or share options) or acquires goods
or services for amounts that are based on the price of the entitys share or other
equity instruments of the entity
Share option
A contract that gives the holder the right, but not the obligation, to subscribe to the
entitys shares at a fixed or determinable price for a specified period of time
Vest
To become an entitlement. Under a share-based payment arrangement, a counter-
partys right to receive cash, other assets or equity instruments of the entity vests
upon satisfaction of any specified vesting conditions.
Vesting conditions
The conditions that determine whether the entity receives the services that entitle
the counterparty to receive cash, other assets or equity instruments of the entity,
under a share based payment arrangement. Vesting conditions are either service or
performance conditions. Service conditions is, which require the other party to
complete a specified period of service and performance conditions which require
specified period and performance targets to be met over a specified period. A
performance condition might include a market condition. (Such as a specified
increase in the entitys profit over a specified period of time)
Vesting period
The period during which all the specified vesting conditions of a share based
payment arrangement is to be satisfied.
RECOGNITION
EQUITY-SETTLED TRANSACTIONS
An example of an equity-settled transaction is the issuance of options to employees
that give them the right to purchase the entitys shares at a discounted price in
exchange for their services.
When should a charge be recognized?
Goods or services acquired in a share-based payment transaction should be
recognized when they are received. It will usually be a question of fact as to
when this occurs, such as when goods are delivered. However, sometimes it is
less obvious as to when the services are received.
The vesting date is not normally relevant to the purchase of goods or services
other than employee services. It is, however, relevant for employee services.
Where equity instruments vest immediately, management should presume
that they represent consideration for employee services already rendered, if
there is no evidence to the contrary. Management should therefore
recognize the employee services received in full on the date on which the
options are granted.
If the options do not vest until the employees or others providing similar
services have completed a specified period of service, management should
presume that services are to be rendered over that period, referred to as the
vesting period. IFRS 2 does not distinguish between vesting periods during
which the employees have to satisfy specific performance conditions and
vesting periods during which there are no particular requirements other than
to remain in the entitys employment.
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An expense (or increase in assets if the criteria for asset recognition are met)
arises out of a share-based payment transaction. The credit side of the entry
will be a liability if the entity has an obligation to settle the transaction in cash.
However, if there is no possibility of settling in cash, and the consideration for
goods and services will therefore be achieved through the issuance of equity
instruments, the credit entry is an increase in equity.
MEASUREMENT
IFRS 2 requires the fair value of the goods or services acquired by an entity to be
determined and used as the value for an equity-settled share-based payment
transaction. However, if the fair value of the goods or services cannot be measured
reliably, the transactions should be measured indirectly by reference to the fair value
of the equity instruments granted. In these circumstances, the fair value of the equity
instruments granted represents a surrogate for the price of the goods and services.
Shares and share options are often granted to employees as part of their
remuneration package, in addition to salary and other employment benefits. IFRS 2
requires an entity to measure the fair value of the employee services received by
reference to the fair value of the equity instruments granted. It presumes that
remuneration components cannot be measured reliably. These requirements are
illustrated below.
If the identifiable goods/services received seem to be less than fair value of equity
instrument granted, the goods/ services should be measured at fair value. The
difference between fair value of equity instrument granted and fair value of goods /
services received will be assumed to be received in shape of un-identified
goods/services.
Measurement date
The fair value of the equity instruments granted, as consideration should be
measured at either:
the grant date in the case of employee services; or
the date on which goods are received or services are rendered, in all other
cases.
Determining fair value of equity instruments
Fair value should be based on market prices, where available. Many shares and
most share options are not traded on an active market, in which case management
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should consider valuation techniques. The objective is to derive an estimate of the
price of the instrument at the relevant measurement date in an arms length
transaction between knowledgeable, willing parties. IFRS 2 does not specify which
pricing models should be used. However, it describes the factors that should be
taken into account when estimating fair value.
Share options are often valued using the Black-Scholes model, the Binomial model or
the Monte- Carlo model.
In the absence of a reliable measure of fair value, IFRS 2 requires an entity to
measure the equity instruments granted at their intrinsic value that is, the difference
between the fair value of the shares and amount that the counterparty is required
to pay for them. The intrinsic value should then be re-measured at each reporting
date until the equity instruments are settled.
Vesting conditions
Many employee share option arrangements contain conditions that must be met
before an employee becomes entitled to shares or options (vesting conditions).
There may be performance conditions that must be satisfied. For example, the
number of options to which employees are entitled under a bonus arrangement
may depend on a certain increase in profit or growth in the companys share price.
The treatment of vesting conditions varies depending on whether or not any of the
conditions relate to the market price of the entitys equity instruments. Such
conditions, defined by IFRS 2 as market conditions, are taken into account when
determining the fair value of the equity instruments granted; they are ignored for the
purposes of estimating the number of equity instruments that will vest.
For conditions other than market conditions, the goods or services recorded during
the vesting period are based on the best available estimate of the number of equity
instruments expected to vest. The estimate is revised when subsequent information
indicates that the number of equity instruments expected to vest differs from
previous estimates; it is revised finally to the actual number of instruments that
vested.
Post-vesting date accounting

No adjustments (other than reclassification within equity) are made after the vesting
date. For example, in the case of share options, no adjustments are made even if
the options are not exercised.
Treatment Reload Option
The reload option will be taken as new option and will not be considered while
assigning fair value at the date of original grant date of share base payments.
Modifications
Modifications should be viewed as incremental instruments in their own right. The
standard requires an entity to ignore a modification if it does not increase the total
fair value of the share-based payment arrangement or is not otherwise beneficial to
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the employee or service provider. However, reductions in the number of options
granted are treated as cancellations. The diagram below illustrates the thought-
process.
If a modification increases the fair value of the equity instruments granted (for
example, by reducing the exercise price of share options), the incremental fair value
should be added to the amount being recognized for the services received. If a
modification increases the number of equity instruments granted, the fair value of
these additional instruments is added to the amount recognized. In each case, this
will be in addition to any amount recognized in respect of the original instrument,
which should continue to be recognized over the remainder of the original vesting
period unless there is a failure to satisfy the original non-market vesting conditions.
If a modification occurs during the vesting period, the incremental fair value should
be recognized over the period from the modification date until the date on which
the modified equity instruments vest. If the modification occurs after the vesting
date, the incremental fair value should be recognized immediately, or over the
revised vesting period if the employee is required to complete an additional period
of service before becoming unconditionally entitled to the modified instruments.
If a modification provides some other benefit to employees, this should be taken into
account in estimating the number of equity instruments that are expected to vest.
For example, a vesting condition might be eliminated.
Cancellations
An entity may cancel and replace a grant of equity instruments. In this case, the
incremental fair value is the difference between the fair value of the replacement
instruments and the fair value of the original instruments. The replacement is treated
as a modification.
Early settlements
An entity may cancel or early settle an award without replacement. On early
settlement, the entity should recognize immediately the balance that would have
been charged over the remaining period.
Any payment made to employees in connection with the cancellation of a grant of
an equity instrument should be deducted from equity, except where the payment
exceeds the fair value of the equity instrument at that date. In this case, the excess is
recognized as an expense.
CASH-SETTLED TRANSACTIONS
Cash-settled share-based payment transactions are where goods or services are
paid for at amounts that are based on the price (or value) of the entitys shares or
other equity instruments (such as share options). An example of a cash-settled
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transaction is share appreciation rights issued to employees. These entitle employees
to cash payments equal to the increase in the share price of a specified number of
the entitys shares.
The principles that apply to cash-settled share-based payment transactions are:
Goods or services should be recognized as they are received by the entity;
Goods or services acquired should be measured at the fair value of the
liability incurred; and
Vesting conditions should be taken into account when estimating the number
of rights to payment that will vest.
The fair value of the liability incurred in respect of a cash-settled transaction is re-
measured at each reporting date until the date of settlement.
Changes that affect the fair value of the awards, as well as those that affect the
number of awards expected to vest, will be updated at each reporting date as part
of the re-measurement process and used to determine the amount to be
recognized.
The payment for settlement of a cash-settled share-based transaction may occur
after the services are rendered. In those situations, the liability is still measured at fair
value at each reporting date.
Any changes in the fair value of the liability are recognized immediately in the
income statement.
ARRANGEMENTS WITH SETTLEMENT ALTERNATIVES
Some share-based payment transactions give either the entity or the counter-party
the choice as to whether to settle in cash or equity instruments. For example, an
employee may have a right to choose between a payment equal to market price
of 100 shares or 150 shares subject to not selling them for at least one year.
IFRS 2 requires an entity to account for such a transaction as cash-settled if, and to
the extent that, it has incurred a liability to settle in cash. The accounting depends
on which party has the choice of settlement method.
If the counter-party chooses the settlement method, the entity is considered to have
issued a compound financial instrument. This means that it has issued an instrument
with a debt component (where the counter-party has a right to demand cash) and
an equity component (where the counter-party has a right to demand settlement in
equity instruments).
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IFRS 2 requires a different method than that required by IAS 32 to determine the
value of the constituent parts of a compound instrument. The liability is measured at
fair value.
For transactions in which the fair value of goods or services is measured directly, the
fair value of the equity component is measured as the difference between the fair
value of the goods or services received and the fair value of the debt component.
For other transactions in which the fair value of goods or services (including
employee services) is measured indirectly by reference to the fair value of the
instruments granted, the fair value of the compound instrument as a whole should
be estimated. The debt and equity components should be valued separately, taking
into account the fact that the counter-party must forfeit its right to receive cash in
order to receive the equity instrument.
Transactions are often structured in such a way that the fair value of each
settlement alternative is the same. The fair value of the equity component will
therefore be nil. However, where the fair value of the equity component is greater
than nil, the components need to be split. The debt component should be
accounted for as a cash-settled share-based payment transaction, the equity
component will be accounted for as an equity-settled share-based payment
transaction.
At the date of settlement, the liability in respect of the debt component should be
re-measured at fair value. The method of settlement chosen by the counter-party
will then determine the final accounting.
Entity chooses the settlement method
If the entity chooses the settlement method, it should determine whether it has
created in substance an obligation to settle in cash. This is the case if, for example:
The choice of settlement in equity instruments has no commercial substance;
The entity has a past practice or stated policy of settling in cash; or
The equity instruments to be issued are redeemable, either mandatorily or at
the counter-partys option.
The entity should account for the transaction as a cash-settled share-based
payment transaction, to the extent that it has incurred a liability.
If the transaction is accounted for as equity-settled, the accounting on settlement
depends on which settlement alternative has the greater fair value, as shown in the
diagram below.
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Entity has
chosen to settle
in cash
Entity has
chosen to settle
in Equity
SHARE BASED PAYMENT TRANSACTIONS AMONG GROUP COMPANIES

1. For share-based payment transactions among group entities, in its separate or
individual financial statements, the entity receiving the goods or services shall
measure the goods or services received as either an equity-settled or a cash-
settled share-based payment transaction by assessing:
(a) the nature of the awards granted, and
(b) its own rights and obligations.
2. The amount recognized by the entity receiving the goods or services may
differ from the amount recognized by the consolidated group or by another
group entity settling the share-based payment transaction.
3. The entity receiving the goods or services shall measure the goods or services
received as an equity-settled share-based payment transaction when:
(a) the awards granted are its own equity instruments, or
(b) the entity has no obligation to settle the share-based payment
transaction.
4. The entity shall subsequently re-measure such an equity-settled share-based
payment transaction only for changes in non-market vesting conditions in
accordance. In all other circumstances, the entity receiving the goods or
services shall measure the goods or services received as a cash-settled share-
based payment transaction.
5. The entity settling a share-based payment transaction when another entity in
the group receives the goods or services shall recognize the transaction as an
equity-settled share-based payment transaction only if it is settled in the
entitys own equity instruments. Otherwise, the transaction shall be recognized
as a cash-settled share-based payment transaction.
6. Some group transactions involve repayment arrangements that require one
group entity to pay another group entity for the provision of the share-based
payments to the suppliers of goods or services. In such cases, the entity that
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receives the goods or services shall account for the share-based payment
transaction in accordance with paragraph 5 regardless of intra-group
repayment arrangements.
Share based payment awards outstanding at the date of acquisition
Acquirers often exchange share-based payment awards (i.e., replacement
awards) for awards held by employees of the acquired business. Such
exchanges are accounted for as a modification of a plan in accordance
with IFRS 2 Share-based Payments.
If the acquirer is obligated to issue replacement awards in exchange for
acquiree share-based payment awards held by employees of the acquiree,
then all or a portion of the market-based measure of the acquirers
replacement awards should be treated as part of the consideration
transferred by the acquirer. The effect will be to increase goodwill and record
a corresponding amount in equity. The acquirer is considered to have an
obligation if the employees or the acquiree can enforce replacement.
The portion of the replacement award that is treated as consideration

transferred is the amount attributable to past service that the employee has
provided to the acquiree, based on the market-based measure of the
awards issued by the acquiree (not the market-based measure of the
replacement awards issued by the acquirer). When additional service
conditions are imposed by the acquirer, this affects the total vesting period
and, therefore, the portion of the awards that is considered pre-combination
service.
As a result, the portion of replacement award treated as part of the

consideration transferred (i.e., the portion related to past services) is
determined as follows:
Market-based measure at the acquisition date of the replaced (i.e., acquiree) x award
Complete vesting period Greater of total vesting period and original vesting period
The excess of the market-based measure at the acquisition date of the

replacement (i.e., acquirer) award over the amount treated as consideration
transferred is recognized as compensation cost over the period from the
acquisition date until the end of the vesting period.
DEFERRED TAX IMPLICATIONS
Tax deductions in some jurisdictions are available for share-based payment
transactions. However, the amount of the deduction in the case of equity-settled
transactions does not often correspond to the amount charged to the income
statement in accordance with IFRS 2. For example, a tax deduction in connection
with an employee share option scheme may be available at the time the options
are exercised, measured on the basis of the options intrinsic value (the difference
between market price and exercise price) at that date.
IAS 12 provides guidance where an item has a tax base (the amount the tax
authorities will permit as a deduction in future periods in respect of goods or services
consumed to date), but the item is not recognized as an asset or liability in the
entitys balance sheet. In the above example, employee services are expensed and
their carrying amount is therefore nil, but an estimate of the value of the tax base at
the end of each reporting period is determined by multiplying the options intrinsic
value at year-end by the proportion of the vesting period that has elapsed.
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The difference between the tax base of the employee services received to date
(the amount the tax authorities will permit as a deduction in future periods in respect
of those services) and the carrying amount of nil is a deductible temporary
difference that results in a deferred tax asset, if the entity has sufficient future taxable
profits against which the deferred tax asset can be utilized.
Measurement of the deferred tax asset
The deferred tax asset should be measured at each reporting date based on an
estimate of the future tax deduction. The calculation of the future tax deduction
depends on the specific tax jurisdiction; it is often based on the intrinsic value of
options that are actually exercised. When this is the case, in order to estimate the
future tax deductions, management should multiply the intrinsic value determined at
the balance sheet date by the number of options expected ultimately to vest. The
determined amount of the future tax deduction is spread over the vesting period.
The estimate of the tax deduction should be based on the current share price if the
deduction is based on the intrinsic value.
Recognition of the tax benefit
The expected future tax benefit should be allocated between the income
statement and equity. The excess of the total tax benefit over the tax effect of the
related cumulative remuneration expense is recognized in equity. The accounting is
illustrated below.
DISCLOSURES
IFRS 2 requires extensive disclosure under three main headings:
Information that enables users of the financial statements to understand the
nature and extent of share-based payment arrangements that existed during
the period;
Information that enables users of the financial statements to understand how
the fair value of the goods or services received, or the fair value of the equity
instruments granted, during the period was determined; and
Information that enables users of the financial statements to understand the
effect of expenses arising from share-based payment transactions on the
entitys profit or loss for the period.
Approach to solve Examination Questions
A four-step approach has been taken in the analysis of the IFRS 2 transactions:
Step A: Obtain the key data needed to perform the calculations;
Step B: Make an initial estimate of the total amounts to be recorded;
Step C: Determine the expense for each year and the corresponding journal
entries; and
Step D: Determine tax adjustments.
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PRACTICE QUESTIONS
Question # 1 Share options granted to key executives
Wayne Holdings grants 100 share options to each of its 10 key executives at 1
January 2005, with the following conditions: (1) they must complete three years of
service, and (2) there must be an 18% increase in share price by the end of 2007.
Wayne Holdings estimates that its 10 executives will complete the three-year service
period. The fair value of one option at grant date is $5. The market condition of an
18% increase in the share price has been included in the fair value of $5. The
exercise price of each option is $3. The options have a contractual life of 10 years,
and Wayne Holdings has estimated their value using a Monte-Carlo model.
At grant date, Wayne Holdings expected that none of the key executives would
leave the company during the vesting period. No employees left Wayne Holdings
during 2005, but two employees unexpectedly left the company during 2006. Wayne
Holdings therefore revised its total compensation expense down to $4,000 (8 x $500).
The increase in share price exceeded the increase in the share price threshold by
the end of 2007. As a result, eight employees vested their options at the end of 2007.
These options are exercised on 5 January 2008, and Wayne Holdings issues shares
with a par value of $1 to its employees.
The tax legislation applicable to Wayne Holdings provides that the tax deduction
relating to an equity-settled share-based payment transaction involving share
options is based on the difference between the share price and the exercise price
of an option at exercise date, which represents the intrinsic value for tax purposes.
The share prices were as under: -
1-1-05 31-12-05 31-12-06 31-12-07 5-1-08
Share price 7 9 15 22 23
Required: -
a) Determine the expense for each year and pass appropriate Journal entries;
and
b) Record deferred tax implication in each year and pass necessary journal
entries assuming tax rate of 40%.
Question 2 Performance conditions an increase in earnings
Wayne Holdings grants 100 shares to each of its 500 management-level employees
at 1 January 2005, conditional upon the employees remaining in Wayne Holdings
employment during the vesting period. The shares will vest at the end of year one if
the companys earnings increase by more than 10%; at the end of year two if the
companys earnings increase by more than 15 % over the two-year period; and at
the end of year three if the entitys earnings increase by more than 36% over the
three-year period. The fair value of one share at grant date is $7.
Wayne Holdings earnings have increased by 8% by the end of 2005, and 30
employees have left. The company expects that earnings will continue to increase
at a similar rate in 2006 and therefore expects that the shares will vest at the end of
2006. Wayne Holdings also expects that an additional 30 employees will leave in
2006, and that 440 employees will receive their shares at the end 2006.
By the end of 2006, Wayne Holdings earnings in fact increase by 12% and the shares
do not therefore vest. Additionally, only 28 employees leave during 2006, rather than
30 originally estimated by Wayne Holdings. Wayne Holdings believes that an
additional 25 employees will leave in 2007 and earnings will increase so that the
performance target will be achieved in 2007.
By the end of 2007, only 23 employees have left, compared with Wayne Holdings
original estimation of 25, and the performance target has been met.
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relating to this equity-settled share-based payment transaction is based on the share
price at the vesting date. The share prices were as under: -
31-12-05 31-12-06 31-12-07
Share price 9 15 22
Required: -
and
Question 3 Share options re-pricing
Wayne Holdings granted 100 share options to each of its 600 management-level
employees at 1 January 2002, conditional upon the employees remaining employed
by Wayne Holdings over a five-year period. The share price at grant date was $20.
The exercise price is $25.
Wayne Holdings decides to re-price the options at 2 January 2005, at an exercise
price of $10. At the re-pricing date, Wayne Holdings estimates that the fair value of
the original award (before taking into account the re-pricing) is $1.50, and the fair
value of the re-priced award is $3.
The incremental value is therefore $1.50. The re-priced options will vest at the end of
2006. Wayne Holdings has 500 employees left at the date of re-pricing and estimates
that 440 employees will receive their share options at the end 2006. It estimates that
30 employees will leave in 2005, and that another 30 will leave in 2006. The actual
number of leavers was 30 for 2005, and 28 for 2006.
Compensation expense under the old arrangement (from 2002 through 2006):
Wayne Holdings is not required to apply IFRS 2 to the original grant, as the
instruments were granted prior to 7 November 2002. However, it is required to apply
IFRS 2 to the modification, as the re-pricing occurred after 1 January 2005.
Compensation expense for the incremental value arising from the re-priced award
(from 2005 through 2006):
relating to this equity-settled share-based payment transaction involving share
options is based on the difference between the share price and the exercise price
of an option at exercise date, which represents the intrinsic value for tax purposes.
The share prices were as under: -
31-12-05 31-12-06
Share price 15 22
Required: -
and
Question 4 Share appreciation rights
Wayne Holdings granted 10 share appreciation rights (SARs) to each member of a
group of 40 management employees on 1 January 2004. The SARs provide the
employees, at the date the rights are exercised, the right to receive cash equal to
the appreciation in the entitys share price since the grant date. All of the rights vest
on 31 December 2005. They can be exercised during 2006 and 2007. The entity
estimates that at grant date, the fair value of each SAR granted is $11, and 10% of
the employees will leave evenly during the two-year period. The fair values and
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intrinsic values are shown below. In 2006, six employees exercise the SARs at 31
December 2006; the remaining 30 employees exercise the SARs in 2007.
Intrinsic value equals fair value at the end of the life of a SAR because there is no
time value.
relating to cash settled share-based payment transaction involving SARs is based on
the intrinsic value for tax purposes.
Required: -
and
entries
Question 5 Transactions with settlement alternatives
At 1 January 2005, Wayne Holdings grants its CEO the right to choose either 1,000
phantom shares (i.e., the right to receive a cash payment equal to the value of
1,000 shares) or 1,500 shares. The grant is conditional upon the completion of two
years of service. If the CEO chooses the share alternative, he must keep the shares
for a period of five years. The share price is as follows:
After taking into account the effects of the post-vesting transfer restrictions, the
entity estimates that the grant date fair value of the share alternative is $6.50 per
share.
The CEO exercises his cash option at the end of 2006.
relating to an arrangement with settlement alternatives is based on the share price
at the date of settlement for the phantom shares.
Required: -
and
entries
Question 6 In-kind capital contributions
Wayne Holdings issued 100,000 shares in exchange for a capital contribution of an
office building. The ownership of the building was transferred to Wayne Holdings on
15 January 2005 when the shares were issued. The fair value of the building on that
date was $5,500,000.
Required: - Pass necessary journal entries to record the share based payment
award?
Question 7 Shares for services
Wayne Holdings is establishing a media business and has hired a marketing agency
to provide consultancy services. The services will be settled by issuing 50,000 shares.
Page 14 of 25
Period over which the service is provided is 1 January to 28 February 2005 and fair
value of the service $400,000. Fair value of the service was determined based on
bids submitted by other marketing agencies to provide the consulting services.
Required: - Pass necessary journal entries to record the share based payment
award?
PAST PAPERS
Q-1 Rahman Limited (RL) is a listed company engaged in the manufacture of
leather goods. Its financial year ends on June 30. In a meeting held on July 1,
2009 its Board of Directors acknowledged the outstanding performance of
the companys Chief Operating Officer (COO) and in recognition thereof,
decided to allow him either of the following options:
Option I Receive a cash payment equal to the current value of 64,000
shares of RL.
Option II Receive 80,000 shares of RL. However, the above offer was
subject to certain conditions. These conditions and other
relevant information are as follows:
i) The right is conditional upon completion of three years service from
the date the right was granted and the decision to select the option
shall also be exercised on the completion of the said period.
ii) The share price of RL on July 1, 2009 is Rs. 125 per share. It is estimated
that the share price at the end of year 2010, 2011 and 2012 will be Rs.
130, Rs. 138 and Rs. 150 respectively.
iii) If the COO chooses option II, he shall have to retain the shares for two
years i.e. up to June 30, 2014 before being eligible to sell them.
However, the fair value of the shares after taking into account the
effects of the post vesting transfer restrictions is estimated at Rs. 110 per
share.
iv) RL does not expect to pay any dividend during the next three years.
Required: Prepare the journal entries:
(a) to record the above transactions in the books of Rahman Limited for the year
ending June 30, 2010, 2011 and 2012.
(b to record the settlement of right on June 30, 2012 under:
Option I
Option II.
Q-2 Engineering Works Limited (EWL) is in the process of finalizing its Financial
Statements for the year ended June 30, 2010. The issue as detailed below is
being deliberated upon by the CFO.
It is the policy of EWL to pay annual bonus of Rs. 10,000 each to all of its 600 workers,
after two months of closure of the financial year. On June 1, 2010 the management
announced a scheme whereby each worker was given the option to purchase
1,000 shares of EWL on a payment of Rs. 8 per share, in lieu of cash bonus for the
year ended June 30, 2010. The face value of the companys shares is Rs. 10 each.
The last date to exercise the option was fixed at July 31, 2010. Other related
information is as follows:
60% employees exercised the option by June 30, 2010.
By July 31, 2010 further 20% employees had accepted this option.
The workers who exercise the option are required to retain the shares up to
June 30, 2012 before being eligible to sell them.
The shares were issued on September 1, 2010.
The market price and fair value of the shares at various dates were as under:
30-Jun-10 31-Jul-10 01-Sep-10
Page 15 of 25
Market price Rs. 32 37 42
Fair value per share (after taking effect of Rs. 30 34 40
post vesting transfer transaction)
Required: - Prepare journal entries for the above transactions and adjustments
during the years June 30, 2010 and 2011.
Q-3 Quail Pakistan Limited (QPL), a listed company, is reviewing the following
transactions which have not yet been accounted for in the financial
statements for the year ended 30 June 2012:
(a) On 1 July 2011, QPL announced a bonus of Rs. 30 million to its employees if
they achieved the annual budgeted targets by 30 June 2012. The bonus
would be paid in the following manner:
25% of the bonus would be paid in cash on 31 December 2012 to all
employees irrespective of whether they are still working for QPL or not.
The balance 75% will be given in share options, to those employees who
are in QPLs employment on 31 December 2012. The exercise date and
number of options will be fixed by the management on the same day.
The budgeted targets were achieved. The management expects that 5%
employees would leave between 30 June 2012 and 31 December 2012. (04)
(b) On 30 June 2012, a plant having a list price of Rs. 50 million was purchased.
QPL has allowed the following options to the supplier, in respect of payment
there against:
To receive cash equivalent to price of 1.5 million shares of the company
after 3 months; or
To receive 1.7 million shares of the company after 6 months.
QPL estimates that price of its shares would be Rs. 35 per share after three
months and Rs. 40 per share after six months. (05)
Required:
Discuss how the above share-based transactions should be accounted for in QPLs
financial statements for the year ended 30 June 2012. Show necessary calculations.
(Journal entries are not required)
Q-4
On 1 January 2015, Mr. Talented was appointed as the President of Meharban Bank
Limited (MBL). According to the terms of the employment contract, MBL granted Mr.
Talented the right to receive either 100,000 shares of the bank or a cash payment
equivalent to the value of 80,000 shares. This grant is conditional to completion of 3
years of service with the bank and can be exercised within 1 year of vesting date. If
he chooses the share alternative he would have to hold the shares for a period of
two years after the vesting date.
The par value of MBLs shares is Rs. 10 each. At the grant date, MBLs share price was
Rs. 145 per share. The share prices on 31 December 2015, 2016, 2017 and 2018 are
estimated at Rs. 150, Rs. 156, Rs. 165 and Rs. 175 respectively. Dividends are not
expected to be announced during the next three years.
After taking into account the effects of the post-vesting transfer restrictions, MBL
estimates that the fair value of the share alternative on the date of appointment of
Mr. Talented was Rs. 135 per share.
Required:
Suggest journal entries to record the above transactions in the books of MBL for the
years ending 31 December 2015, 2016, 2017 and 2018 if Mr. Talented chooses the
share alternative in July 2018. (11)
Page 16 of 25
ANSWERS TO EXAMPLES
E-1
31-12-05 31-12-06 31-12-07
Expenses to date (10x100x5)1/3 (8x100x5)2/3 (8x100x5)x3/3
1,667 2,667 4,000
Expenses for the year 1,667 1,000 1,333
Tax effect on expense to date 1,667x40% 2,667x40% 4,000x40%
667 1,067 1,600
Expense under tax laws [10x(9-3)x100]x1/3 [8x(15-3)x100]x2/3 [10x(22-3)x100]x3/3
2,000 6,400 15,200
Deferred Tax Asset 2,000x40% 6,400x40% 15,200x40%
800 2,560 6,080
Change in deferred tax asset 800 1,760 3,520
Recognition in PL 667 400 533
Recognition in Equity 800-667=133 1,760-400=1,360 3,520-533=2,987
Double entries required
Date Debit Credit

Recognition of employee benefits Rupees Rupees
31-12-05 Employee benefits expense 1,667
Equity (Other reserves) 1,667
Recognition of employee benefits expenses in 2005
05-01-08 Bank 2,400
Receipt of exercise price (800x3)
05-01-08 Equity (other reserve) 6,400
Share capital 800
Share premium 5,600
Issue of shares at exercise date
Recognition of deferred tax
31-12-05 Deferred tax asset 800
Profit or loss account 667
Equity (other reserves) 133
Recognition of deferred tax at December 31, 2005
31-12-06 Deferred tax asset 1,760
Equity (other reserves) 1,380
Page 17 of 25
05-01-08 Deferred tax expense 1,600
Deferred tax asset 6,080
De-recognition of deferred tax at Jan 05, 2008
05-01-08 Current tax receivable (8x100x20)x40% 6,400
Profit or loss account 1,600
De-recognition of deferred tax at Jan 05, 2008
E-2
31-12-05 31-12-06 31-12-07
Expenses to date (440x7x100)1/2 (417x7x100)2/3 (419x7x100)x3/3
154,000 194,600 293,300
Expenses for the year 1,667 40,600 98,700
Tax effect on expense to date 154,000x40% 194,600x40% 293,300x40%
61,600 77,840 117,320
Expense under tax laws [440x9x100]x1/2 [417x15x100]x2/3 [419x22x100]x3/3
198,000 417,000 921,800
Deferred Tax Asset 198,000x40% 417,000x40% 921,800x40%
79,200 166,800 368,720
Change in deferred tax asset 79,200 87,600 201,920
Recognition in PL 61,600 16,240 39,480
Recognition in Equity 79,200- 87,600- 201,920-
61,600=17,600 16,240=71,360 39,480=162,440
Date Debit Credit

Page 18 of 25
E-3
31-12-05 31-12-06
Expenses to date (440x1.5x100)1/2 (442x1.5x100)2/2
33,000 66,300
Expenses for the year 33,000 33,300
Tax effect on expense to date 33,000x40% 66,300x40%
13,200 26,520
Expense under tax laws [440x5x100]x1/2 [442x12x100]x2/2
221,000 530,400
Deferred Tax Asset 221,000x40% 530,400x40%
88,400 212,160
Change in deferred tax asset 88,400 123,760
Recognition in profit or loss 13,200 13,320
Recognition in equity 75,200 110,440
Date Debit Credit

E-4
Year Expense Liability Explanation

31-12-04 2,160 2,160 [36x10x12]x1/2
31-12-05 720 2,880 [36x10x8]x2/2-[36x10x12]x1/2
31-12-06 (1,020+600)=1,620 3,900 [30x10x13]-[6x10x10]
31-12-07 (300) -- Cash paid = (30x10x12)
Deferred tax to be recognized

Year Income /expense Asset Explanation
Page 19 of 25
31-12-04 720 720 [36x10x10]x1/2x40%
31-12-05 288 1,008 [36x10x7]x2/2x40%
31-12-06 192 1,200 [30x10x10]x40%
31-12-07 (1,200) -- --
Current tax to be recognized
31-12-06 240 240 [6x10x10]x40%
31-12-07 1,440 1,440 [30x10x12]x40%
Date Debit Credit

Liability 2,160
31-12-05 Employee benefits expense 720
Liability 720
Liability 1,620
31-12-06 Liability 600
Bank 600
To record the cash paid to six employees
31-12-07 Liability 3,900
Bank 3,600
Employee benefits expense 300
31-12-06 Current tax asset 240
Recognition of current tax at December 31, 2006
31-12-06 Profit or loss account 1,200
Page 20 of 25
31-12-07 Current tax asset 1,440
Recognition of current tax at December 31, 2007
E-5
01-01-05 31-12-05 31-12-06

Equity alternative [1,500x6.5] 9,750
Cash alternative [1,000x7] 7,000
Equity option [9,750 7,000] 2,750
Expenses to date-Equity 2,750x1/2=1,375 2,750x2/2=2,750

Expenses to date-Debt [1,000x9]x1/2=4,500 [1,000x15]x2/2=15,000
5,875 17,750
Expenses for the year 5,875 11,875
Tax effect on expense to 4,500x40%=1,800 15,000x40%=6,000
date
Expense under tax laws 4,500x40%=1,800 15,000x40%=6,000
Deferred Tax Asset 1,800 (1,800)
Change in deferred tax 1,800 --

asset
Recognition in profit or loss 1,800 (1,800)
Current tax asset 6,000
Recognition in profit or loss 6,000
Date Debit Credit

Liability 4,500
Equity reserve 1,375
Liability 10,500
31-12-06 Liability 15,000
Bank 15,000
Recognition of liability paid in 2006
31-12-06 Profit or loss account 1,800
Page 21 of 25
31-12-06 Current tax asset 6,000
Recognition of current tax in 2006
E-6
Date Debit Credit

01-01-05 Property, plant and equipment 5,500,000
Share capital 100,000
Share premium 5,400,000
E-7
Date Debit Credit

31-01-05 Operating expenses 200,000
Recognition of service rendered in January
31-02-05 Operating expenses 200,000
Recognition of service rendered in February
31-02-05 Equity reserve 400,000
Share capital 50,000
Share premium 350,000
Recording of issue of shares
Page 22 of 25
ANSWERS TO PAST PAPERS OF IFRS 2
A-1
(a)
Date Description Debit Credit
6/30/2010 Salaries Expense 3,039,999
Liability (Rs. 130 x 64,000 / 3) 2,773,333
Equity (Rs. 0.8m (W-1) / 3) 266,666
Liability (Rs. 64,000 x 138 x 2/3) - Rs. 2,773,333 3,114,667
Equity (Rs. 0.8m / 3) 266,667
Liability [(Rs. 64,000 x 150) - Rs. 2,773,333 - Rs. 3,712,000
3,114,667]
Equity (Rs. 0.8m / 3) 266,667
(b)
Date Description Debit Credit
6/30/2012 If cash alternative is chosen [Para 40 of IFRS-2]
Liability (64,000 x 150) OR (2,773,333 + 3,114,667 + 9,600,000
3,712,000)
Cash / Bank 9,600,000
If share alternative is chosen [Para 39 of IFRS-2]
6/30/2012 Liability (80,000 shares) (2,773,333 + 3,114,667 + 9,600,000
3,712,000)
Equity 9,600,000
W-1: identifying the equity component Rupees

The fair value of shares alternative
(80,000 x 110 ) 8,800,000
The fair value of debt instrument
(64,000 x 125) 8,000,000
Fair value of the equity component in the compound instrument 800,000
A-2
Date Particulars Debit Credit
Rupees
30-Jun- Bonus expenses {600 x 1,000 x (30-8)} 13,200,000

2010
Employees share options outstanding 7,920,000
(600 x 1,000 x 0.6 x 22)
Provision for bonus (600 x 1,000 x 0.4 x 22) 5,280,000
(To record acceptance of 60 % share options
and bonus provision.)
31-Jul-2010 Provision for bonus (600 x 1,000 x 0.2 x 22) 2,640,000

(TO record acceptance of further 20% share
option)
Page 23 of 25
31-Jul-2010 Bonus expense (600 x 1,000 x 0.8 x 4) 1,920,000
(To record increase in fair market value per share
form Rs. 30 to Rs. 34)
31-Jul-2010 Provision for bonus

(600 x 1,000 x 0.2 x 22)-(600 x 0.2 x 10,000) 1,440,000
Bonus expense 1,440,000
(Adjustment of bonus provision for 20% workers
not opted for the share option.)
01-Sep- Provision for bonus (600 x 0.2 x 10,000) 1,200,000

2010
Bank 1,200,000
(Cash payment t of bonus)
01-Sep- Bank (600 x 0.8 x 1,000 x 8) 3,840,000

2010
Employees share options outstanding
(600 x 1,000 x 0.8 x 26) 12,480,000
Share capital (1,000 x 600 x 80% x 10) 4,800,000
Share premium {600x80%x1,000x(34- 11,520,000
10)}
(Issue of 488,000shaaes of Rs. 10 0aah at a
premium of
Rs. 24 per share, in exercise of share option)
36,720,000 36,720,000
A-3
a) 25% of the bonus is to be paid in cash, so a liability of Rs. 7.5 million (30x25%)
must be accrued.
The remaining amount of bonus is to be paid in share options. The services
must be recognized when they are received. Therefore, 12 months of the 18
months services period up to the grant date must be recognized.
Hence, Rs. 14.25 million [(30x75%x95%)x12/18] would be provided up to 30
June, 2012.
b) In the given situation, the purchase of plant involves a share based payment
in which the counterparty has a choice of settlement, either in shares or in
cash. Such transactions are treated as cash settled to the extent that the
entity has incurred a liability i.e. Rs. 50 million.
If the value of the liability based on share price, at the time of transaction, is
less than the fair value of the plant i.e. less than Rs. 50 million, the transaction
would give rise to a compound instrument, with a debt and equity
component. The fair value of the equity element would be the difference
between fair value of the plant and the fair value of the debt element of the
instrument.
However, if the value of the liability based on share price at the time of
transaction is more that the fair value of the plant i.e. more than Rs. 50 million,
the difference shall be recognized as an expense.
Page 24 of 25
A-4 Entries in the case of equity alternative
Date Debit Credit
Rupees Rupees
31-Dec-15 Profit or loss account 4,633,333
Liability (W-1) 4,000,000
Equity (W-2) 633,333
Equity (W-2) 633,333
Equity (W-2) 633,333
01-Jul-18 Liability (W-1) 13,200,000
Equity (W-2) 1,900,000
Retained earnings (balancing) 2,400,000
Share capital (100,000x10) 1,000,000
Share premium (100,000x165) 16,500,000
Liability Liability to be recognized at 31-12-15
component [(80,000 x Rs. 150)/3] 4,000,000
Liability to be recognized at 31-12-16
[(80,000 x Rs. 156x2)/3]-4,000,000 4,320,000
Liability to be recognized at 31-12-17
[(80,000 x Rs. 165)/3)-4,000,000-
4,320,00] 4,880,000
13,200,000
Equity Fair value of equity alternative on
component grant date (100,000x135) 13,500,000
Fair value of cash alternative on grant
date (80,000x145) 11,600,000
Equity component 1,900,000
Charged to profit or loss account 633,333
Page 25 of 25

AAFR Chapter 15 19 10 15

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AAFR Chapter 15 19 10 15

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CHAPTER 15

SHARE BASED PAYMENTS (IFRS-2)

Post-vesting date accounting

SHARE BASED PAYMENT TRANSACTIONS AMONG GROUP COMPANIES

The portion of the replacement award that is treated as consideration

As a result, the portion of replacement award treated as part of the

The excess of the market-based measure at the acquisition date of the

Double entries required

Date Debit Credit

Double entries required

Date Debit Credit

Double entries required

Date Debit Credit

Year Expense Liability Explanation

31-12-05 720 2,880 [36x10x8]x2/2-[36x10x12]x1/2

31-12-06 (1,020+600)=1,620 3,900 [30x10x13]-[6x10x10]

31-12-07 (300) -- Cash paid = (30x10x12)

Deferred tax to be recognized

31-12-05 288 1,008 [36x10x7]x2/2x40%

31-12-06 192 1,200 [30x10x10]x40%

Current tax to be recognized

31-12-06 240 240 [6x10x10]x40%

31-12-07 1,440 1,440 [30x10x12]x40%

Double entries required

Date Debit Credit

01-01-05 31-12-05 31-12-06

Expenses to date-Equity 2,750x1/2=1,375 2,750x2/2=2,750

Expense under tax laws 4,500x40%=1,800 15,000x40%=6,000

Deferred Tax Asset 1,800 (1,800)

Change in deferred tax 1,800 --

Double entries required

Date Debit Credit

Date Debit Credit

Date Debit Credit

W-1: identifying the equity component Rupees

30-Jun- Bonus expenses {600 x 1,000 x (30-8)} 13,200,000

31-Jul-2010 Provision for bonus (600 x 1,000 x 0.2 x 22) 2,640,000

31-Jul-2010 Provision for bonus

01-Sep- Provision for bonus (600 x 0.2 x 10,000) 1,200,000

01-Sep- Bank (600 x 0.8 x 1,000 x 8) 3,840,000

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