CHAPTER 34

SHARE-BASED PAYMENT

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Introduction

Salary, pension and other benefits often form part of an

executives employment package
A share-based payment is a transaction in which an entity
receives or acquires goods or services either as consideration
for its equity instruments or by incurring liabilities for amounts
based on the price of the entitys shares or other equity
instruments of the entity
IFRS 2 Share-based Payment sets out measurement
principles and specific requirements for three types of sharebased payment transactions:

1. Equity-settled share-based payment transactions

2. Cash-settled share-based payment transactions
3. Share-based payment transactions with cash alternatives
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1. Equity-settled share-based payment transactions

Measure goods or services received, and corresponding

increase in equity (recognised in OCI), at FV of goods and
services received

If FV cannot be estimated reliably, then measure their value

by reference to the FV of the equity instruments granted

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Example 34.4: Share options for goods

A company issues share options in order to pay for the purchase of inventory.
The share options were issued on 1 June 2010. The inventory was eventually
sold on 31 December 2012. The value of the inventory on 1 June 2010 was 6
million and this value was unchanged up to the date of sale. The sale proceeds
were 8 million. The shares issued have a market value of 6.3 million.
Requirement
How will this transaction be dealt with in the financial statements?
Solution
IFRS 2 states that the FV of the goods and services received should be used to
value the share options unless the FV of the goods cannot be measured
reliably. Thus equity would be increased by 6 million and inventory increased
by 6 million. The inventory value will be expensed on sale (DR SPLOCI P/L
and CR Equity).

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Transactions with employees and others providing similar

services

FV of the services received are referred to the FV of the

equity granted, as it is not possible to estimate reliably the
FV of the services received

FV of equity should be measured at the grant date

Usually, it is not possible to measure directly the services

received for particular components of the employees
remuneration package

It might also not be possible to measure the FV of the total

remuneration package independently without measuring
directly the FV of equity instruments granted

Typically, share options are granted to employees as part of

their remuneration package

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Example 34.5: Share options for employee services

A company granted a total of 100 share options to 10 members of its executive
management team (10 options each) on 1 January 2012. These options vest at the
end of a three-year period. The company has determined that each option has a FV
at the date of grant equal to 15. The company expects that all 100 options will vest
and therefore records the following entry at 30 June 2012 (the end of its first sixmonth interim reporting period).
DR
SPLOCI P/L salaries 250
CR
Equity 250
[(100 x 15) / 6 periods = 250 per period]
If all 100 shares vest, the above entry would be made at the end of each 6-month
reporting period. However, if one member of the executive management team leaves
during the second half of 2012, therefore forfeiting the entire amount of 10 options,
the following entry at 31 December 2012 would be made:
DR
SPLOCI P/L salaries
150
CR
Equity 150
[(90 x 15) / 6 periods = 225 per period
(225 x 4) (250 + 250 + 250) = 150]
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Vesting conditions

Equity instruments may contain conditions which must be

met before entitlement to the shares

Conditions related to the market price of shares are

ignored for the purposes of estimating the number of
equity shares that will vest (on the basis these have been
taken into account when fair-valuing the shares)

Because of the difficulty of measuring the FV of the

services received, this is done with reference to the FV of
the equity instrument granted

There is no reversal of amounts previously recognised if

options are forfeited or are not exercised

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Example 34.6: Share options with vesting conditions

A company grants 2,000 share options to each of its three directors on 1 January
2012 subject to the directors being employed on 31 December 2014. The options
vest on 31 December 2014. The FV of each option on 1 January 2012 is 10 and it is
anticipated that all of the share options will vest on 31 December 2014.The options
will only vest if the companys share price reaches 14 per share. The price at 31
December 2012 was 8 and it is not anticipated that it will rise over the next two
years. It is anticipated that there will only be two directors employed on 31 December
2014.
Requirement How will the share options be treated in the financial statements for the
year ended 31 December 2012?
Solution
The market based condition i.e. the increase in the share price can be ignored for the
purpose of the calculation. However the employment condition must be taken into
account. The options will be treated as follows:
2,000 options x 2 directors x 10 x 1year/3 years = 13,333. Equity will be increased
by this amount and an expense shown in the SPLOCI P/L for the year ended 31
December 2012.
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Modification of terms and conditions

Terms of a share-based payment transaction may be

modified

For example, by altering the exercise price, the number of

shares granted or the vesting conditions

Must recognise at least the amount that would have been

recognised had the terms not changes, together with any
incremental cost over the remaining vesting period

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Example 34.7: Modification of terms and conditions

On 1 January 2010, Twentitle Limited granted 100 share options to each of its 250 employees,
with each of the share options being conditional upon the employee working for Twentitle
Limited until 31 December 2012. At the grant date, the FV of each share option was 12.00.
During 2010, 10 employees left Twentitle Limited and the companys directors estimated that a
total of 10% of the 250 employees would leave during the three-year period 2010-12.
At the beginning of 2011, Twentitle Limited modified the terms and conditions of the share
option by reducing the exercise price. This had the effect of increasing the FV of a share option
at the beginning of 2011 by 7.00.
During 2011, a further six employees left the company and the directors revised their estimate
of the total number of the 250 employees to 8% that would leave the company during the
three-year period 2010-12.
During 2012, a further five employees left the company.
Requirement
Calculate the remuneration expense that should be recognised in Twentitle Limiteds financial
statements in respect of the share-based payment agreement for each of the three years
2010-12.

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Example 34.7: Modification of terms and conditions

Solution
2010:
It is estimated that 25 employees would leave the company
(10% x 250). Therefore 225 employees will be eligible under
the scheme.
225 employees x 12 = 2,700 / 3 years = 900
DR
CR

SPLOCI P/L
Equity Share Options Reserve

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900
900

Example 34.7: Modification of terms and conditions

Solution
2011:
It is estimated that 20 employees would leave the company (8%
x 250). Therefore 230 employees will be eligible under the
scheme.

230 employees x 12 = 2,760 / 3 x 2 years 1,840

230 employees x 7 = 1,610 / 2 years
805
Less charged in 2010 in SPLOCI P/L (900)
1,745
DR
CR

SPLOCI P/L
1,745
Equity Share Options Reserve 1,745

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Example 34.7: Modification of terms and conditions

Solution
2012:
In total over the three years, 21 employees left the company (10
+ 6 + 5). Therefore 229 employees are eligible under the
scheme.

229 employees x 12
2,748
229 employees x 7
1,603
Less charged in 2010 and 2011 in SPLOCI P/L
(900 + 1,745)
(2,645)
1,706
DR
CR

SPLOCI P/L
1,706
Equity Share Options Reserve 1,706

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Cancellation or settlement

If equity-settled share-based transactions are cancelled or

settled, then the entity must immediately recognise any
amount that would otherwise have been recognised over a
vesting period

Any payments up to the FV of the equity instruments

granted at cancellation or at settlement is a repurchase of
an equity interest (i.e. DR Equity)

Any payment in excess of the FV of equity instrument

granted at cancellation or at settlement is recognised as
an expense in arriving at profit or loss in the SPLOCI P/L

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2. Cash-settled share-based payment transactions

Where goods and services are paid for at amounts based

upon the price of a companys equity instruments (e.g. share
appreciation rights)

The expense is the cash paid by the company

Until the liability is settled, the entity should re-measure the

fair value of the liability at each reporting date and at the
date of settlement, with any changes in fair value recognised
in SPLOCI P/L

The services received, and the liability, should be recognised

as the services are rendered

Goods and services acquired and liability incurred should be

measured at the FV of the liability

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Red plc granted 300 share appreciation rights to each of its

500 employees on 1 August 2012. Management believe that
as at 31 July 2013, Red plcs year end, 80% of the awards will
vest on 31 July 2014. The fair value of each share appreciation
right on 31 July 2013 is 15.
Requirement
What is the fair value of the liability to be recorded in the
financial statements for the year ended 31 July 2013?
Solution
300 rights x 500 employees x 80% x 15 x 1year/2year =
900,000 (DR SPLOCI P/L and CR SFP liability)
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3. Share-based payment transactions with cash alternatives

Where the terms of the arrangement provide either the

entity or the counterparty with the choice of whether the
entity settles the transaction in cash (or other assets) or by
issuing equity instruments, the entity should account for
that transaction, or the components of that transaction, as
a cash-settled share-based payment transaction if, and
to the extent that, the entity has incurred a liability to settle
in cash or other assets, or as an equity-settled sharebased payment transaction if, and to the extent that, no
such liability has been incurred.

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Disclosures
IFRS 2 requires extensive disclosure requirements under three
main headings:
1.Information that enables users of financial statements to
understand the nature and extent of the share based payment
transactions that existed during the period
2.Information that allows users to understand how the FV of the
goods or services received or the FV of the equity instruments
which have been granted during the period was determined
3.Information that allows users of financial statements to
understand the affect of expenses which have arisen from
share based payment transactions on the entities income
statement in the period

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