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This transaction will be accounted for as an equity-settled share-based payment transaction in the company's financial statements as follows: On June 1, 2010 (date of grant): Inventory 6,000,000 Share capital/Reserves 6,300,000 (Inventory is measured at fair value of goods received) On December 3, 2012 (date of sale): Cash 8,000,000 Inventory 6,000,000 Gain on sale of inventory 2,000,000 (Inventory is derecognized at original cost on date of sale) No expense is recognized in the income statement as this is an equity-settled transaction. The difference between fair value of shares granted and value

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Advanced Financial Accounting I Chapter Three Share-based Compensation
Share-based Compensation 1. Overview of Share-based Payments 2. Share-based Payments Settled with Equity 3. Share-based Payments Settled with Cash 4. Share-based Payments with Cash Alternatives 5. Counterparty Has Choice of Settlement 6. Issuer Has Choice of Settlement 7. Share-based Payment Disclosures
Overview of Share-based Payments  A major objective of the accounting for SHE is the adequate disclosure of the sources from which the capital was derived.  A share-based payment is a transaction in which the entity receives goods or services as consideration for its equity instruments or  Acquires goods or services by incurring liabilities for amounts that are based on the price (or value) of the entity’s shares (or other equity instruments of the entity).
Overview of Share-based Payments • The concept of share-based payments includes not only employee share options but also - share appreciation rights, - employee share ownership plans, - employee share purchase plans, -share option plans and other share arrangements.
What is share-based compensation ?? • In simple words – payment based on shares or shares options. • Share-based compensation also called Stock-based compensation or share-based payments (SBP). • It refers to the rewards given by the company to its employees by way of giving them the equity ownership rights in the company with the motive of aligning the interest of the management, shareholders, and the employees of the company. • A ‘share-based payment’ is either a payment in equity instruments. Or • A paymentin cash or other assets.
What is Share-based Payment (compensation) ? An agreement between the entity and another party (including an employee) that entitles the other party to receive : (a) equity instruments (including shares or share options) of the entity or another group entity, provided the specified vesting conditions, if any, are met. (b) cash or other assets of the entity or by incurring liabilities for amounts that are based on the price (or value) of equity instruments of the entity. 6
What is Share-based Payment (compensation) ? Generally, SBP is • a transaction in which the entity receives goods or services as consideration for its equity instruments or • acquires goods or services by incurring liabilities for amounts that are based on the price (or value) of the entity’s shares (or other equity instruments of the entity). 7
Reasons for granting share-based payments 1. Principal-agent theory: To align the interests of principal and agent, - helps to mitigate the conflict of interest 2. Reward for past services: SBP are also granted for past services – e.g. to acknowledge good services of an employee by giving them a participation in the entity (e.g. freeor discounted shares). 3. Other reasons: to receive goods or services without affecting the entity’s liquidity. -This form of remuneration is often found in high-growth industries e.g. the hi-tech area. It isalso used to preserve cash.
Share-based payment transactions include: Grants to employees and others providing similar services, e.g. non-executive directors. Grants to non-employees, e.g. consultants, suppliers Employee share purchase plans. Certain share-based payments settled by an entity in, or an external shareholder of, the same group. 9
Terminologies related to SBP Employees and others providing similar services-Individuals who render personal services to the entity and meet one of the following additional criteria: a) The individuals are regarded as employees for legal 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.
Terminologies related to SBP Grant date is the date at which the entity and the supplier agree to the SBP arrangement. - It is the date at which employees agree, shareholders approve, agreement is signed or approval recorded in a company minute. Vesting period is the period during which all the specified vesting conditions are to be satisfied.  It is the period during which commitment is required to enable exercise.
Terminologies related to SBP Vest: means to become entitled to. Exercise date: is the date at which option turns into cash or share. • Vesting conditions determine whether the entity receives the services that entitle the supplier to receive the SBP – they are service or performance (including market) conditions. • Vesting condition: term of employment or financial target achieved. • Non-vesting conditions need to be satisfied for the supplier to become entitled to the SBP.
Terminologies related to SBP 13 Vesting condition Vesting condition
Market conditions 14  The share price needs to increase by at least a specified percentage over a specified period of time.  The share price needs to meet a target on at least one day in a specified period.  The share price needs to meet a target for at least five consecutive days in a specified period.  The share price needs to increase by more than a share index over a specified period.  The total shareholder return (change in share price plus dividends) needs to meet a specified percentage increase over a specified period.
Non-Market conditions 15  The entity needs to achieve a specified revenue, EBITDA, profit or EPS target, which can be an absolute amount or a percentage increase.  The entity needs to achieve a specified non-financial performance target – e.g. a specified market share.  The entity needs to decrease its error rate in a certain area.
Non-Vesting conditions 16  A condition other than a vesting condition that determines whether a counterparty receives the share-based payment  e.g. counterparty’s choice of participation in a share purchase program by paying monthly contributions.  A performance condition is a non vesting condition if the performance assessment period extends beyond the service period.
17
Terminologies related to SBP 18 Fair Value : • The amount for which an asset could be exchanged, • a liability settled, or • an equity instrument granted could be exchanged, • between knowledgeable, willing parties in an arm’s length transaction.
Terminologies related to SBP 19 Intrinsic value • The difference between the fair value of the shares to which the counterparty has the (conditional or unconditional) right to subscribe or which it has the right to receive, and the price (if any) the counterparty is (or will be) required to pay for those shares. For example, a share option with an exercise price of Rs. 15, on a share with a fair value of Rs. 20, has an intrinsic value of Rs. 5.
20 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/unconditional) to an equity instrument of the entity conferred by the entity on another party, under a share-based payment arrangement. Share appreciation rights • an award which provides the holder with the ability to profit from the appreciation in value of a set number of shares of company stock over a set period of time. Terminologies related to SBP
Measurement Date The date at which the fair value of the equity instruments granted is measured for the purposes of accounting. For transactions with employees and others providing similar services For transactions with parties other than employees Is the grant Date with reference to FV of equity instrument the date, the goods or services are received or acquired, with reference to FV of goods or services indirectly directly
Three Types of Share based payment 22 Share-based payments –(SBP) Equity- settled share-based payments Cash-settled share-based payments Share-based payments with cash alternatives Entity receives goods/services as consideration for equity instruments. Entity receives goods/services by incurring a liability to transfer cash or other assets to the supplier for amounts that are based on the price (or value) of the entity’s shares. Either entity or the counterparty has a choice to settle in equity instruments or in cash or other assets. Equity Liability Equity or Liability
1. 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.
Example 1: Provision of goods by a supplier in exchange for equity instruments 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
Example 1: Provision of goods by a supplier in exchange for equity instruments Solution 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: Inventory 140, 000 Share capital 140, 000
Example 2 Share options for goods. A company issues share options in order to pay for the purchase of inventory. The share options were issued on June, 1, 2010. The inventory was eventually sold on December, 3, 2012. The value of the inventory on June,1, 2010 was Br. 6 million and this value was unchanged up to the date of sale. The sale proceeds were Br. 8 million. The shares issued have a market value of Br. 6.3 million. Requirement: How will this transaction be dealt with in the financial statements?
Example 2 Share options for goods. 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 Br. 6 million and inventory increased by Br. 6 million. Inventory 6,000,000 Share Capital 6,000,000 The inventory value will be expensed on sale. Account Receivable 8,000,000 Cost of sales 6,000,000 Sales Revenue 8,000,000 Inventory 6,000,000
Example 3 Share options for Services. On 1 January Year 1, Company D enters into an agreement with Legal firm L under which L provides 200 hours of legal services each year over a three-year period. As compensation, L receives 8,000 shares of D at the end of each year. The fair value for the type of legal services provided by L is available: according to L’s list of billing rates, generally applicable to all clients, the price for such a service is 400 per hour in Year 1 and Year 2. In Year 3, L increases its price to 450 per hour. Required- Make a necessary journal entries for the given events
Example 3 Share options for Services. Year 1 Legal Consultation Expense (200 x 400) ……80,000 Equity…………………80,000 • This entry Is similar in year 2 • In year 3 the amount will differ b/c of change in price per consultation hour Legal Consultation Expense (200 x 450) ……90,000 Equity…………………90,000
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 • Typically, share options are granted to employees as part of their remuneration package • Usually, it is not possible to measure directly the services received for particular components of the employee’s 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.
Example: 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 six-month interim reporting period). Salaries ……… €250 Equity …………250 [(100 x €15) / 6 periods = €250 per period]
Accounting for employee services received Overview of conditions 32 ♦Conditions −Vesting conditions are service related, i.e. they determine whether the entity receives the services that entitle the counterparty to the share-based payment. − Service conditions; with or without … − Performance conditions » Market performance conditions or non-market performance conditions » Performance conditions by definition always require a service condition −Non-vesting conditions are not service related, i.e. they do not determine whether the entity receives the services that entitle the counterparty to the share-based payment
Accounting for employee services received (continued) Overview of conditions 33 Vesting conditions Performance conditions Service conditions •Employee has to stay employed for example , for 3 three years after grant date Requirement to complete a specified period of service Market conditions •Share price must increase by 15% •TSR (total shareholder return) must increase by 10% Service condition + condition that is related to the market price of the equity instrument •Revenue must increase by 10% •Percentage increase in market share Non-market conditions Service condition + condition that is a performance condition, but not market price related
Accounting for employee services received (continued) Overview of conditions 34 Non-vesting conditions Conditions that neither the entity nor the counterparty can choose to meet •Inflation must not be higher than 5% •Price of gold must increase by more than 3 % Conditions that the counterparty can choose to meet • Holding participation shares over the holding period. • Paying monthly contributions to a share purchase plan. •Continuation of the plan by the entity Conditions that the entity can choose to meet Basically Not related to Services
Example : Share options with vesting conditions A company grants 2,000 share options to each of its three directors on Jan, 1, 2012 subject to the directors being employed on Dec, 31, 2014. The options vest on Dec,31, 2014. The FV of each option on Jan,1, 2012 is €10 and it is anticipated that all of the share options will vest on Dec,31 2014.The options will only vest if the company’s share price reaches €14 per share. The price at Dec,31, 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 Dec,31, 2014. Requirement How will the share options be treated in the financial statements for the year ended Dec,31, 2012?
Example : Share options with vesting conditions 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 1/3 years = €13,333. Equity will be increased by this amount and an expense for the year ended Dec,31, 2012.
Equity-settled share-based payments with non-employees  Measured directly at the fair value of goods and services received If the fair value of goods and services cannot be estimated reliably, measure the fair value of equity instrument. If the fair value of the equity instrument granted cannot be estimated reliably (only in very rare cases), equity instruments are measured at their intrinsic value. 37
Equity-settled share-based payments with non-employees Measured at the date the goods or services are obtained As opposed to grant date – in case of employees Means “daily” if services are rendered Simplification method: “regular intervals”  Expense immediately (means no vesting conditions) unless Goods or services qualify for capitalisation as asset (e.g. inventory); or Vesting conditions exist  Expense when services are rendered over the vesting period 38
2. Cash-settled share-based payment transactions 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 entity’s shares or other equity instruments of the entity.
2. Cash-settled share-based payment transactions The expense is the cash paid by the company. • Goods and services acquired and liability incurred should be measured at the FV of the liability. • 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. • The services received, and the liability incurred, should be recognised as the services are rendered.
Example 1 Red plc. granted 300 share appreciation rights to each of its 500 employees on Aug,1, 2012. Management believe that as at July, 31, 2013, Red plc’s year end, 80% of the awards will vest on July, 31 2014. The fair value of each share appreciation right on July, 31, 2013 is €15. Requirement. What is the fair value of the liability to be recorded in the financial statements for the year ended July, 31, 2013? Solution 300 rights x 500 employees x 80% x €15 x 1year/2year = €900,000.
Example 2: • On 1 July 2012 Coogee Ltd provides its managing director with a share-based incentive according to which she is offered a bonus that is calculated as 200, 000 times the increase in the fair value of the entity’s 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 departure that is, the benefit will not be forfeited.
Example 2:continued Other information • The share price at 30 June 2013 is $3.00, at 30 June 2014 is $2.90, at 30 June 2015 is $4.10 and 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.
Solution Year end Calculation Remuneration expense for period 30 June 2013 200, 000 × ($3.00 – $2.50) $100 000 30 June 2014 200, 000 × ($2.90 – $2.50) – $100 000 ($20 000) 30 June 2015 200, 000 × ($4.10 – $2.50) – $80 000 $240 000 30 June 2013 Employee benefits expense …….100 000 Accrued salaries payable ……….100 000 30 June 2014 Accrued salaries payable …………….20 000 Employee benefits expense……….20 000 recouped (revenue) 30 June 2015 Employee benefits expense ……….240 000 Accrued salaries payable …….240 000 1 July 2015 Accrued salaries payable …….320 000 Cash …. …………….320 000
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.
Cont’d… • 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 share-based payment transaction if, and to the extent that, no such liability has been incurred.
The counterparty has a choice of settlement • Paragraphs IFRS 2.35-40 cover share-based payment transactions with cash alternatives in which the terms of the arrangement provide the counterparty with a choice of settlement. • Such transactions are quite common in share-based payment arrangements with employees. • Entities need to recognize separate debt and equity components in such transactions in accordance with requirements for cash settled and equity settled share-based payment transactions, respectively.
Transaction with non-employee • In transactions with parties other than employees, where fair value of goods or services is measured directly, the entity measures the equity component as the difference between the fair value of the goods or services received and the fair value of the debt component (i.e. cash alternative), at the date when the goods or services are received.
Transaction With employees • For transactions where fair value of goods or services is measured with reference to instruments issued (most often to employees) entities need to measure fair value of two components. • Such measurement starts with debt component (i.e. cash alternative), then the fair value of the equity component is measured taking into account that the counterparty will not receive cash in order to receive the equity instrument.
• On settlement, the liability needs to be remeasured so that it equals the payment amount. • If the entity issues equity instruments on settlement rather than paying cash, the remeasured liability is transferred directly to equity. • All previously recognized equity components remain within equity (transfers within equity are allowed).
Example: Share-based payment transaction with cash alternative • On 1 January 20X1, Entity A grants 100 shares to each of its 200 employees provided they will remain employed until 31 December 20X3. These shares will then be locked-in for another two years (i.e. employees would not be able to sell them until 31 Dec 20X5). • Employees have also a right to receive cash instead of shares (so called ‘phantom shares’), the payment will be based on the market price of these shares as at 31 Dec 20X3 and payment will be made immediately. However, the cash alternative will be based on 80 shares only.
Example …..cont’d Moreover, at the grant date:  it is estimated that 90% out of 200 employees will meet the service condition  fair value of phantom shares granted is $30 (cash alternative)  fair value of shares granted is $28 (share alternative) • The measurement of such a share-based payment arrangement starts with debt component (i.e. cash alternative), then the fair value of the equity component is measured taking into account that the counterparty will not receive cash in order to receive the equity instrument. • The liability component as of the grant date amounts to $432,000 (200*80*30*90%), whereas the equity component amounts to $72,000 ((200*100*28*90%) - 432,000).
Solution……….. Year 20X1 Entity A starts recognizing the expense relating to both components over the vesting period. Entries for year 20X1 are as follows: Employee benefits expense…168,000 Equity…………..24,000 Liability…………. 144,000 Where, 24,000=72,000/3 yrs. 144,000=432,000/3 yrs.
Year 20X2 Market price of Entity A shares increases. This is reflected only in liability component which increases to $32. Fair value of equity instruments is not subsequently remeasured. Entries recognized for year 20X2 are as follows:
Year 20X2 Market price of Entity A shares increases. This is reflected only in liability component which increases to $32. Fair value of equity instruments is not subsequently remeasured. Entries recognized for year 20X2 are as follows: Employee benefits expense…187,200 Equity…………..24,000 Liability…………. 163,200 24,000 = 72,000/3yrs 163,200 = 200*80*32*90%*2/3yrs - 144,000
Year 20X3 • 85% of employees (170) remained in the workforce as at 31 December 20X3. 120 employees chose the share alternative and 50 employees chose the cash alternative. The market price of shares increased further so that the fair value of the cash alternative is now $35. • First, Entity A recognizes expense for year 3 taking into account the actual number of employees that fulfilled service conditions and the final market price of shares (the latter impacts liability component only). This is recognized for year 20X3 as follows: Employee benefits expense…188,800 Equity…………..20,000 Liability…………. 168,800 20,000 = (72,000*85%/90%) - 24,000 - 24,000 168,800 = (200*80*35*85%) - 163,200 -144,000
• Payment to 50 employees who choose cash alternative is booked as follows: Liability…..140,000 Cash………140,000 (Liability=140,000 = 50*35*80) • Issuance of shares to 120 employees who chose share alternative transfers the remaining liability balance to equity: Liability …..335,200 Equity …………335,200 Liability = 335,200= (144,0001st yr. +163,2002nd yr+168,8003rd yr.) - 140,000
3.2.The entity has a choice of settlement • Paragraphs IFRS 2.41-43 cover share-based payment transactions with cash alternatives in which the terms of the arrangement provide the reporting entity with a choice of settlement. For this type of transactions, the entity needs to determine whether to use general equity settled or cash settled basis of IFRS 2. Such a transaction is accounted for as cash-settled if, for example:  Settlement in equity instruments has no commercial or economic substance,  Settlement in equity instruments is impracticable due to legal or other constraints,  Entity has a past practice or a stated policy of settling in cash whenever it can,  Entity has created a constructive obligation to settle in cash.
………Cont’d • When actual equity instruments are issued, no changes in equity is recognized other than a transfer within equity if needed. • If entity, despite the original choice of approach, settles in cash, the payment is treated as a deduction of equity. • But if the entity, on settlement, chooses the alternative that has a higher fair value at the settlement date, the difference between settlement date fair values is recognized as an additional expense.
Share-based Payment 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.
End of chapter two Thank you !!

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In this document
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Overview of share-based compensation, its importance, and types—equity-settled, cash-settled, and disclosures.

Definition of share-based payments, their purpose in aligning interests in an organization, and various forms.

Motivations for granting share-based payments: principal-agent theory, rewards, and liquidity preservation.

Key terms such as grant date, vesting period, exercise date, fair value, intrinsic value, and related concepts.

Three main types: equity-settled, cash-settled, and mixed settlements, along with measurement strategies.

Methods for measuring and recognizing equity-settled share-based payments with examples of transactions.

Framework for accounting employee services received via share-based payments, including vesting conditions.

Definition and accounting treatment for cash-settled transactions, including examples illustrating fair value.

Accounting for transactions offering cash or equity settlement options, including liability and equity components.

Detailed example demonstrating accounting entries for share-based transactions with cash alternatives.

Guidelines on how to account for share-based payments when an entity has a choice of settlement.

Overview of IFRS 2 disclosure requirements to provide transparency on share-based transactions.

Share based payment best presentation for students

  • 1.
    Advanced Financial AccountingI Chapter Three Share-based Compensation
  • 2.
    Share-based Compensation 1. Overviewof Share-based Payments 2. Share-based Payments Settled with Equity 3. Share-based Payments Settled with Cash 4. Share-based Payments with Cash Alternatives 5. Counterparty Has Choice of Settlement 6. Issuer Has Choice of Settlement 7. Share-based Payment Disclosures
  • 3.
    Overview of Share-basedPayments  A major objective of the accounting for SHE is the adequate disclosure of the sources from which the capital was derived.  A share-based payment is a transaction in which the entity receives goods or services as consideration for its equity instruments or  Acquires goods or services by incurring liabilities for amounts that are based on the price (or value) of the entity’s shares (or other equity instruments of the entity).
  • 4.
    Overview of Share-basedPayments • The concept of share-based payments includes not only employee share options but also - share appreciation rights, - employee share ownership plans, - employee share purchase plans, -share option plans and other share arrangements.
  • 5.
    What is share-basedcompensation ?? • In simple words – payment based on shares or shares options. • Share-based compensation also called Stock-based compensation or share-based payments (SBP). • It refers to the rewards given by the company to its employees by way of giving them the equity ownership rights in the company with the motive of aligning the interest of the management, shareholders, and the employees of the company. • A ‘share-based payment’ is either a payment in equity instruments. Or • A paymentin cash or other assets.
  • 6.
    What is Share-basedPayment (compensation) ? An agreement between the entity and another party (including an employee) that entitles the other party to receive : (a) equity instruments (including shares or share options) of the entity or another group entity, provided the specified vesting conditions, if any, are met. (b) cash or other assets of the entity or by incurring liabilities for amounts that are based on the price (or value) of equity instruments of the entity. 6
  • 7.
    What is Share-basedPayment (compensation) ? Generally, SBP is • a transaction in which the entity receives goods or services as consideration for its equity instruments or • acquires goods or services by incurring liabilities for amounts that are based on the price (or value) of the entity’s shares (or other equity instruments of the entity). 7
  • 8.
    Reasons for grantingshare-based payments 1. Principal-agent theory: To align the interests of principal and agent, - helps to mitigate the conflict of interest 2. Reward for past services: SBP are also granted for past services – e.g. to acknowledge good services of an employee by giving them a participation in the entity (e.g. freeor discounted shares). 3. Other reasons: to receive goods or services without affecting the entity’s liquidity. -This form of remuneration is often found in high-growth industries e.g. the hi-tech area. It isalso used to preserve cash.
  • 9.
    Share-based payment transactionsinclude: Grants to employees and others providing similar services, e.g. non-executive directors. Grants to non-employees, e.g. consultants, suppliers Employee share purchase plans. Certain share-based payments settled by an entity in, or an external shareholder of, the same group. 9
  • 10.
    Terminologies related toSBP Employees and others providing similar services-Individuals who render personal services to the entity and meet one of the following additional criteria: a) The individuals are regarded as employees for legal 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.
  • 11.
    Terminologies related toSBP Grant date is the date at which the entity and the supplier agree to the SBP arrangement. - It is the date at which employees agree, shareholders approve, agreement is signed or approval recorded in a company minute. Vesting period is the period during which all the specified vesting conditions are to be satisfied.  It is the period during which commitment is required to enable exercise.
  • 12.
    Terminologies related toSBP Vest: means to become entitled to. Exercise date: is the date at which option turns into cash or share. • Vesting conditions determine whether the entity receives the services that entitle the supplier to receive the SBP – they are service or performance (including market) conditions. • Vesting condition: term of employment or financial target achieved. • Non-vesting conditions need to be satisfied for the supplier to become entitled to the SBP.
  • 13.
    Terminologies related toSBP 13 Vesting condition Vesting condition
  • 14.
    Market conditions 14  Theshare price needs to increase by at least a specified percentage over a specified period of time.  The share price needs to meet a target on at least one day in a specified period.  The share price needs to meet a target for at least five consecutive days in a specified period.  The share price needs to increase by more than a share index over a specified period.  The total shareholder return (change in share price plus dividends) needs to meet a specified percentage increase over a specified period.
  • 15.
    Non-Market conditions 15  Theentity needs to achieve a specified revenue, EBITDA, profit or EPS target, which can be an absolute amount or a percentage increase.  The entity needs to achieve a specified non-financial performance target – e.g. a specified market share.  The entity needs to decrease its error rate in a certain area.
  • 16.
    Non-Vesting conditions 16  Acondition other than a vesting condition that determines whether a counterparty receives the share-based payment  e.g. counterparty’s choice of participation in a share purchase program by paying monthly contributions.  A performance condition is a non vesting condition if the performance assessment period extends beyond the service period.
  • 17.
  • 18.
    Terminologies related toSBP 18 Fair Value : • The amount for which an asset could be exchanged, • a liability settled, or • an equity instrument granted could be exchanged, • between knowledgeable, willing parties in an arm’s length transaction.
  • 19.
    Terminologies related toSBP 19 Intrinsic value • The difference between the fair value of the shares to which the counterparty has the (conditional or unconditional) right to subscribe or which it has the right to receive, and the price (if any) the counterparty is (or will be) required to pay for those shares. For example, a share option with an exercise price of Rs. 15, on a share with a fair value of Rs. 20, has an intrinsic value of Rs. 5.
  • 20.
    20 Equity instrument • Acontract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instrument granted • The right (conditional/unconditional) to an equity instrument of the entity conferred by the entity on another party, under a share-based payment arrangement. Share appreciation rights • an award which provides the holder with the ability to profit from the appreciation in value of a set number of shares of company stock over a set period of time. Terminologies related to SBP
  • 21.
    Measurement Date The dateat which the fair value of the equity instruments granted is measured for the purposes of accounting. For transactions with employees and others providing similar services For transactions with parties other than employees Is the grant Date with reference to FV of equity instrument the date, the goods or services are received or acquired, with reference to FV of goods or services indirectly directly
  • 22.
    Three Types ofShare based payment 22 Share-based payments –(SBP) Equity- settled share-based payments Cash-settled share-based payments Share-based payments with cash alternatives Entity receives goods/services as consideration for equity instruments. Entity receives goods/services by incurring a liability to transfer cash or other assets to the supplier for amounts that are based on the price (or value) of the entity’s shares. Either entity or the counterparty has a choice to settle in equity instruments or in cash or other assets. Equity Liability Equity or Liability
  • 23.
    1. Equity-settled share-basedpayment 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.
  • 24.
    Example 1: Provisionof goods by a supplier in exchange for equity instruments 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
  • 25.
    Example 1: Provisionof goods by a supplier in exchange for equity instruments Solution 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: Inventory 140, 000 Share capital 140, 000
  • 26.
    Example 2 Shareoptions for goods. A company issues share options in order to pay for the purchase of inventory. The share options were issued on June, 1, 2010. The inventory was eventually sold on December, 3, 2012. The value of the inventory on June,1, 2010 was Br. 6 million and this value was unchanged up to the date of sale. The sale proceeds were Br. 8 million. The shares issued have a market value of Br. 6.3 million. Requirement: How will this transaction be dealt with in the financial statements?
  • 27.
    Example 2 Shareoptions for goods. 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 Br. 6 million and inventory increased by Br. 6 million. Inventory 6,000,000 Share Capital 6,000,000 The inventory value will be expensed on sale. Account Receivable 8,000,000 Cost of sales 6,000,000 Sales Revenue 8,000,000 Inventory 6,000,000
  • 28.
    Example 3 Shareoptions for Services. On 1 January Year 1, Company D enters into an agreement with Legal firm L under which L provides 200 hours of legal services each year over a three-year period. As compensation, L receives 8,000 shares of D at the end of each year. The fair value for the type of legal services provided by L is available: according to L’s list of billing rates, generally applicable to all clients, the price for such a service is 400 per hour in Year 1 and Year 2. In Year 3, L increases its price to 450 per hour. Required- Make a necessary journal entries for the given events
  • 29.
    Example 3 Shareoptions for Services. Year 1 Legal Consultation Expense (200 x 400) ……80,000 Equity…………………80,000 • This entry Is similar in year 2 • In year 3 the amount will differ b/c of change in price per consultation hour Legal Consultation Expense (200 x 450) ……90,000 Equity…………………90,000
  • 30.
    Transactions with employeesand 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 • Typically, share options are granted to employees as part of their remuneration package • Usually, it is not possible to measure directly the services received for particular components of the employee’s 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.
  • 31.
    Example: Share optionsfor 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 six-month interim reporting period). Salaries ……… €250 Equity …………250 [(100 x €15) / 6 periods = €250 per period]
  • 32.
    Accounting for employeeservices received Overview of conditions 32 ♦Conditions −Vesting conditions are service related, i.e. they determine whether the entity receives the services that entitle the counterparty to the share-based payment. − Service conditions; with or without … − Performance conditions » Market performance conditions or non-market performance conditions » Performance conditions by definition always require a service condition −Non-vesting conditions are not service related, i.e. they do not determine whether the entity receives the services that entitle the counterparty to the share-based payment
  • 33.
    Accounting for employeeservices received (continued) Overview of conditions 33 Vesting conditions Performance conditions Service conditions •Employee has to stay employed for example , for 3 three years after grant date Requirement to complete a specified period of service Market conditions •Share price must increase by 15% •TSR (total shareholder return) must increase by 10% Service condition + condition that is related to the market price of the equity instrument •Revenue must increase by 10% •Percentage increase in market share Non-market conditions Service condition + condition that is a performance condition, but not market price related
  • 34.
    Accounting for employeeservices received (continued) Overview of conditions 34 Non-vesting conditions Conditions that neither the entity nor the counterparty can choose to meet •Inflation must not be higher than 5% •Price of gold must increase by more than 3 % Conditions that the counterparty can choose to meet • Holding participation shares over the holding period. • Paying monthly contributions to a share purchase plan. •Continuation of the plan by the entity Conditions that the entity can choose to meet Basically Not related to Services
  • 35.
    Example : Shareoptions with vesting conditions A company grants 2,000 share options to each of its three directors on Jan, 1, 2012 subject to the directors being employed on Dec, 31, 2014. The options vest on Dec,31, 2014. The FV of each option on Jan,1, 2012 is €10 and it is anticipated that all of the share options will vest on Dec,31 2014.The options will only vest if the company’s share price reaches €14 per share. The price at Dec,31, 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 Dec,31, 2014. Requirement How will the share options be treated in the financial statements for the year ended Dec,31, 2012?
  • 36.
    Example : Shareoptions with vesting conditions 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 1/3 years = €13,333. Equity will be increased by this amount and an expense for the year ended Dec,31, 2012.
  • 37.
    Equity-settled share-based paymentswith non-employees  Measured directly at the fair value of goods and services received If the fair value of goods and services cannot be estimated reliably, measure the fair value of equity instrument. If the fair value of the equity instrument granted cannot be estimated reliably (only in very rare cases), equity instruments are measured at their intrinsic value. 37
  • 38.
    Equity-settled share-based paymentswith non-employees Measured at the date the goods or services are obtained As opposed to grant date – in case of employees Means “daily” if services are rendered Simplification method: “regular intervals”  Expense immediately (means no vesting conditions) unless Goods or services qualify for capitalisation as asset (e.g. inventory); or Vesting conditions exist  Expense when services are rendered over the vesting period 38
  • 39.
    2. Cash-settled share-basedpayment transactions 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 entity’s shares or other equity instruments of the entity.
  • 40.
    2. Cash-settled share-basedpayment transactions The expense is the cash paid by the company. • Goods and services acquired and liability incurred should be measured at the FV of the liability. • 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. • The services received, and the liability incurred, should be recognised as the services are rendered.
  • 41.
    Example 1 Red plc.granted 300 share appreciation rights to each of its 500 employees on Aug,1, 2012. Management believe that as at July, 31, 2013, Red plc’s year end, 80% of the awards will vest on July, 31 2014. The fair value of each share appreciation right on July, 31, 2013 is €15. Requirement. What is the fair value of the liability to be recorded in the financial statements for the year ended July, 31, 2013? Solution 300 rights x 500 employees x 80% x €15 x 1year/2year = €900,000.
  • 42.
    Example 2: • On1 July 2012 Coogee Ltd provides its managing director with a share-based incentive according to which she is offered a bonus that is calculated as 200, 000 times the increase in the fair value of the entity’s 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 departure that is, the benefit will not be forfeited.
  • 43.
    Example 2:continued Other information •The share price at 30 June 2013 is $3.00, at 30 June 2014 is $2.90, at 30 June 2015 is $4.10 and 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.
  • 44.
    Solution Year end CalculationRemuneration expense for period 30 June 2013 200, 000 × ($3.00 – $2.50) $100 000 30 June 2014 200, 000 × ($2.90 – $2.50) – $100 000 ($20 000) 30 June 2015 200, 000 × ($4.10 – $2.50) – $80 000 $240 000 30 June 2013 Employee benefits expense …….100 000 Accrued salaries payable ……….100 000 30 June 2014 Accrued salaries payable …………….20 000 Employee benefits expense……….20 000 recouped (revenue) 30 June 2015 Employee benefits expense ……….240 000 Accrued salaries payable …….240 000 1 July 2015 Accrued salaries payable …….320 000 Cash …. …………….320 000
  • 45.
    3. Share-based paymenttransactions 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.
  • 46.
    Cont’d… • The entityshould 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 share-based payment transaction if, and to the extent that, no such liability has been incurred.
  • 47.
    The counterparty hasa choice of settlement • Paragraphs IFRS 2.35-40 cover share-based payment transactions with cash alternatives in which the terms of the arrangement provide the counterparty with a choice of settlement. • Such transactions are quite common in share-based payment arrangements with employees. • Entities need to recognize separate debt and equity components in such transactions in accordance with requirements for cash settled and equity settled share-based payment transactions, respectively.
  • 48.
    Transaction with non-employee •In transactions with parties other than employees, where fair value of goods or services is measured directly, the entity measures the equity component as the difference between the fair value of the goods or services received and the fair value of the debt component (i.e. cash alternative), at the date when the goods or services are received.
  • 49.
    Transaction With employees •For transactions where fair value of goods or services is measured with reference to instruments issued (most often to employees) entities need to measure fair value of two components. • Such measurement starts with debt component (i.e. cash alternative), then the fair value of the equity component is measured taking into account that the counterparty will not receive cash in order to receive the equity instrument.
  • 50.
    • On settlement,the liability needs to be remeasured so that it equals the payment amount. • If the entity issues equity instruments on settlement rather than paying cash, the remeasured liability is transferred directly to equity. • All previously recognized equity components remain within equity (transfers within equity are allowed).
  • 51.
    Example: Share-based paymenttransaction with cash alternative • On 1 January 20X1, Entity A grants 100 shares to each of its 200 employees provided they will remain employed until 31 December 20X3. These shares will then be locked-in for another two years (i.e. employees would not be able to sell them until 31 Dec 20X5). • Employees have also a right to receive cash instead of shares (so called ‘phantom shares’), the payment will be based on the market price of these shares as at 31 Dec 20X3 and payment will be made immediately. However, the cash alternative will be based on 80 shares only.
  • 52.
    Example …..cont’d Moreover, atthe grant date:  it is estimated that 90% out of 200 employees will meet the service condition  fair value of phantom shares granted is $30 (cash alternative)  fair value of shares granted is $28 (share alternative) • The measurement of such a share-based payment arrangement starts with debt component (i.e. cash alternative), then the fair value of the equity component is measured taking into account that the counterparty will not receive cash in order to receive the equity instrument. • The liability component as of the grant date amounts to $432,000 (200*80*30*90%), whereas the equity component amounts to $72,000 ((200*100*28*90%) - 432,000).
  • 53.
    Solution……….. Year 20X1 EntityA starts recognizing the expense relating to both components over the vesting period. Entries for year 20X1 are as follows: Employee benefits expense…168,000 Equity…………..24,000 Liability…………. 144,000 Where, 24,000=72,000/3 yrs. 144,000=432,000/3 yrs.
  • 54.
    Year 20X2 Market priceof Entity A shares increases. This is reflected only in liability component which increases to $32. Fair value of equity instruments is not subsequently remeasured. Entries recognized for year 20X2 are as follows:
  • 55.
    Year 20X2 Market priceof Entity A shares increases. This is reflected only in liability component which increases to $32. Fair value of equity instruments is not subsequently remeasured. Entries recognized for year 20X2 are as follows: Employee benefits expense…187,200 Equity…………..24,000 Liability…………. 163,200 24,000 = 72,000/3yrs 163,200 = 200*80*32*90%*2/3yrs - 144,000
  • 56.
    Year 20X3 • 85%of employees (170) remained in the workforce as at 31 December 20X3. 120 employees chose the share alternative and 50 employees chose the cash alternative. The market price of shares increased further so that the fair value of the cash alternative is now $35. • First, Entity A recognizes expense for year 3 taking into account the actual number of employees that fulfilled service conditions and the final market price of shares (the latter impacts liability component only). This is recognized for year 20X3 as follows: Employee benefits expense…188,800 Equity…………..20,000 Liability…………. 168,800 20,000 = (72,000*85%/90%) - 24,000 - 24,000 168,800 = (200*80*35*85%) - 163,200 -144,000
  • 57.
    • Payment to50 employees who choose cash alternative is booked as follows: Liability…..140,000 Cash………140,000 (Liability=140,000 = 50*35*80) • Issuance of shares to 120 employees who chose share alternative transfers the remaining liability balance to equity: Liability …..335,200 Equity …………335,200 Liability = 335,200= (144,0001st yr. +163,2002nd yr+168,8003rd yr.) - 140,000
  • 58.
    3.2.The entity hasa choice of settlement • Paragraphs IFRS 2.41-43 cover share-based payment transactions with cash alternatives in which the terms of the arrangement provide the reporting entity with a choice of settlement. For this type of transactions, the entity needs to determine whether to use general equity settled or cash settled basis of IFRS 2. Such a transaction is accounted for as cash-settled if, for example:  Settlement in equity instruments has no commercial or economic substance,  Settlement in equity instruments is impracticable due to legal or other constraints,  Entity has a past practice or a stated policy of settling in cash whenever it can,  Entity has created a constructive obligation to settle in cash.
  • 59.
    ………Cont’d • When actualequity instruments are issued, no changes in equity is recognized other than a transfer within equity if needed. • If entity, despite the original choice of approach, settles in cash, the payment is treated as a deduction of equity. • But if the entity, on settlement, chooses the alternative that has a higher fair value at the settlement date, the difference between settlement date fair values is recognized as an additional expense.
  • 60.
    Share-based Payment Disclosures IFRS2 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.
  • 61.
    End of chaptertwo Thank you !!