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Chapter 18

Accounting for ShareBased Payments

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

18-1

Objectives of this lecture

State which share-based payments are covered by AASB 2


Share-based Payment
Understand the reasons that ultimately led to the development
of AASB 2
Understand what is meant by equity-settled share-based
payments and cash-settled share-based payments and be
able to provide the necessary accounting entries for such
transactions
Understand how to measure share-based payment
transactions
Understand the effect of various vesting conditions on the
accounting treatments required for share-based payments
Explain some possible economic implications of the release of
AASB 2
Describe the disclosure requirements of AASB 2

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

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Introduction to share-based payments


The requirement to account for various share-based
payment transactions is relatively new and is included in
AASB 2 Share-Based Payment
In the past, many share-based transactions were not
attributed a cost (e.g. share options provided to
employees) despite the fact that the use of such
instruments as share options in employee reward
structures was widespread
The introduction of AASB 2 was relatively unpopular with
business as it forced them to put a cost on transactions
that were previously often treated as being of no cost
Prior to the accounting standard (effective from 2005),
there was great disparity in treatment of share-based
payment transactions. This made inter-firm comparison
difficult. This led to a perceived need for an accounting
standard

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

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Definition of a 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 by incurring liabilities to
the supplier of those goods or services for amounts
that are based on the price of the entitys shares or
other equity instruments of the entity

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

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Scope of AASB 2
According to AASB 2, par. 2, an entity shall apply AASB 2
in relation to:
(a) equity-settled share-based payment transactions, in which
the entity receives goods or services as consideration for
equity instruments of the entity (including shares or share
options)
(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 the price (or value) of the entitys shares or
other equity instruments of the entity, and
(c) transactions in which the entity receives or acquires goods
or services and the terms of the arrangement provide either
the entity or the supplier of those goods or services with a
choice of whether the entity settles the transaction in cash
(or other assets) or by issuing equity instruments

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

18-5

Accounting for equity-settled share-based


transactions
General rule provided at par. 10 of AASB 2
For equity-settled share-based payment transactions, the entity
shall measure the goods or services received, and the
corresponding increase in equity, directly, at the fair value of the
goods or services received, unless that fair value cannot be
estimated reliably. If the entity cannot estimate reliably the fair
value of the goods or services received, the entity shall
measure their value, and the corresponding increase in equity,
indirectly, by reference to the fair value of the equity
instruments granted

AASB 2 defines fair value as:


The amount for which an asset could be exchanged, a liability
settled, or an equity instrument granted between
knowledgeable, willing parties in an arms length transaction

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

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Accounting for equity-settled share-based


transactions (cont.)
There is a general presumption that transactions with
employees cannot be reliably measured on the basis
of the value of the services provided. Par 11 states:
To apply the requirements of paragraph 10 to transactions with
employees and others providing similar services, the entity
shall measure the fair value of the services received by
reference to the fair value of the equity instruments granted,
because typically it is not possible to estimate reliably the fair
value of the services received, as explained in paragraph 12.
The fair value of those equity instruments shall be measured at
grant date

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

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Which fair values do we use?

Nature of the transaction

Amount at which the expense


(or asset) and equity account
are recognised

Transactions where the fair value


of the goods or services can be
measured reliably

At the fair value of the goods or


services received

Transactions with employees (where


there is a maintained assumption that
the fair value of the services cannot
be measured reliably)

At the fair value of the equity


instruments being granted

In those rare situations where the


fair value of goods and services
provided by non-employees cannot
be measured reliably

At the fair value of the equity


instruments being granted

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

18-8

Accounting for equity-settled share-based


transactions (cont.)

Worked Example 18.1 (p. 588) considers the case in which


the fair value of goods to be received can be measured
reliably
Worked Example 18.2 (p. 588) considers the case in which
the value of services cannot be determined reliably
Paragraph 7 of AASB 2 requires an entity to recognise the goods
or services received or acquired when the goods are obtained or
the services provided
If the goods or services were received in an equity-settled sharebased payment transaction, an increase in equity is recognised
If they were received as part of a cash-settled share-based
transaction, a liability is to be recognised
Consistent with paragraph 8 of AASB 2, if the goods or services
do not meet the AASB Frameworks criteria for the recognition of
an asset, the related expenditure is to be expensed

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

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Worked Example 18.1Provision of goods by a supplier


in exchange for equity instruments of the reporting
entity
On 1 July 2011, Supplier X provides Reporting Entity Ltd with
some inventory, which has a fair value of $140 000. In exchange
for the inventory, Reporting Entity Ltd provides Supplier X with 10
000 shares in Reporting Entity Ltd
As it is considered that the fair value of the inventory can be
determined reliably, this is deemed to be the value of the shares
being issued. The accounting entry would be:
Dr
Cr

Inventory
Share capital

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

140 000
140 000

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Worked Example 18.2Provision of services where the value


of the services cannot be measured reliably
Employee X provides her services to Reporting Entity Ltd in
exchange for 10 000 options in the entity. All services have been
performed and the options have been granted to Employee X. The
options are considered to have a market value of $1.50 each
In this case, which involves an employee, the reporting entity would
not determine the fair value of the services being provided but
instead would consider the fair value of the options
Dr
Cr

Employee benefits expense


Share capital

15 000
15 000

If the goods or services were received in an equity-settled sharebased payment transaction, an increase in equity is recognised. If
they were received as part of a cash-settled share-based
transaction, a liability is to be recognised

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

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Accounting for equity-settled sharebased transactions (cont.)


Have the entitlements to the equity instruments
vested?
Something vests if it has become an unconditional entitlement
Whether an entitlement has vested will have implications for when
the associated asset or expense will be recognised
If the equity investments vest at grant date the entity will
recognise the whole transaction on that date on the assumption
that the counterparty has rendered services in full in return for the
equity instrument
Conversely, if the equity instruments do not vest at grant date
there is a presumption that they are a payment for services to be
received during the vesting period
Consider Worked Example 18.3Employee costs with a vesting
periodon p. 590

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

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Measuring fair value of equity instruments


Easier if instruments traded on a stock exchange
If not traded, then estimates of fair value must be made
In the absence of market values, fair value might be determined
using valuation techniques, such as option pricing models for
measuring share options. Such models take account of:
(a) the exercise price of the option
(b) the life of the option
(c) the current price of the underlying shares
(d) the expected volatility of the share price
(e) the dividends expected on the shares (if appropriate)
(f) the risk-free interest rate for the life of the option
Where fair value cannot be determined then equity instruments
are to be measured at their intrinsic value

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

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Cash-settled share-based payment


transactions
Defined as:
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

Required accounting treatment (par. 30)


For cash-settled share-based payment transactions, 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 remeasure the fair value of the liability at
each reporting date and at the date of settlement, with any
changes in fair value recognised in profit or loss for the period
Consider Worked Example 18.8 (p. 600)Share appreciation
rights

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

18-14

Worked Example 18.8Accounting for share appreciation rights


On 1 July 2012 Coogee Ltd provides its managing director with a sharebased incentive according to which she is offered a bonus that is
calculated as 200 000 times the increase in the fair value of the entitys
share price above $2.50
When the bonus was offered the share price was $2.25
If the managing director does not leave the organisation the accrued
entitlement will be paid after three years. However, if she leaves the
organisation the accrued entitlement will be paid out upon departurethat
is, the benefit will not be forfeited
Other information
The share price at 30 June 2013 is $3.00
The share price at 30 June 2014 is $2.90
The share price at 30 June 2015 is $4.10
The managing director stays for three years and is paid the bonus on 1
July 2015
REQUIRED
Prepare the journal entries that would appear in the accounting records of
Coogee Ltd to account for the issue of the share appreciation rights

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

18-15

Worked Example 18.8Solution


Year end
30 June 2013
30 June 2014
30 June 2015

Remuneration
Calculation
200 000 ($3.00 $2.50)
200 000 ($2.90 $2.50) $100 000
200 000 ($4.10 $2.50) $80 000

30 June 2013
Dr Employee benefits expense
Cr Accrued salaries payable
30 June 2014
Dr Accrued salaries payable
Cr Employee benefits expense recouped (revenue)

expense for period


$100 000
($20 000)
$240 000

100 000
100 000

20 000
20 000

30 June 2015
Dr Employee benefits expense
Cr Accrued salaries payable

240 000

1 July 2016
Dr Accrued salaries payable
Cr Bank
320 000

320 000

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

240 000

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Share-based payment transactions with


cash alternatives
This is the third category of share-based payment transactions
covered by AASB 2
Defined as transactions in which the entity receives or acquires
goods or services and the terms of the arrangement provide
either the entity or the supplier with the choice of whether the
entity settles in cash or by issuing equity instruments
Where the other party to the transaction has the right to demand
cash or equity settlement, the transaction may be considered to
give rise to a compound financial instrument with both a
liability and an equity component
The equity component would be measured as the difference
between the fair value of the goods and services received and
the fair value of the liability component as at the date on which
the goods and services are provided
Consider Worked Example 18.10 (p. 603)Share-based payment
transaction with a cash alternative

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

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Summary of some of the main elements of


AASB 2
Scope of AASB 2: Applies to share-based transactions involving
both employees and non-employees
Basis of measurement: Fair value
Measurement date: Grant date
When is cost recognised? If involving a period of service the
expense is recognised over the period of the service (vesting
period). If shares or options vest immediately the fair value is
expensed at the grant date

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

18-18

Summary of some of the main


elements of AASB 2 (cont.)
What option pricing model is to be used? If the options are
short term, generally the BlackScholes option pricing model
would be used, otherwise other option pricing models might be
employed. The models need to take into account the exercise
price; current price; expected volatility; expected dividends;
risk-free rate of return; and the life of the options
Cash-settled share-based payment transactionsdebt or
equity? Cash-settled share-based payment transactions are to
be measured at fair value and disclosed as a liability. Fair value
is remeasured at each reporting date and the movement in fair
value is to be treated as part of profit or loss

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

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Possible economic implications of AASB 2


Given that a cost must now be attributed to items
such as share options, do we consider that this will
impact on the propensity of firms to use them?
What economic implications might there be if firms
reduce their usage of incentive schemes based on
share options?
Does the issue of share options actually cost the
firm anything?

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

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Disclosure requirements
AASB 2 requires extensive disclosure under three
main headings. The entity is required to provide
information to enable the users of the financial
statements to understand:
the nature and extent of share-based payment
arrangements that existed during the period
how the fair value of the goods or services received or the
fair value of the equity instruments granted during the year
was determined, and
the effect of expenses arising from share-based
transactions on the entitys profit or loss for the period and
on its financial position

Copyright 2010 McGraw-Hill Australia Pty Ltd


PPTs to accompany Deegan, Australian Financial Accounting 6e

18-21

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