Advanced Financial Accounting I

Chapter Two
Accounting
For Share Based Compensation
/IFRS 2/

Ashenafi Gemechu (MSc in AcFn)

2024 G.C
 Chapter Two
Accounting For Share Based Compensation
/IFRS 2/
Overview of Share Based Compensation
Share Based Compensation /Payment/ IFRS 2 defined as
an agreement between the entity (or another group entity or
any shareholder of any group entity) and another party,
including an employee that entitles the other party to
receive:
A. Cash or other assets of the entity for amounts that are
based on the price (or value) of equity instruments
(including shares or share options) of the entity or
another group entity; or
B. Equity instruments (including shares or share options)
of the entity or another group entity provided that the
specified vesting conditions are met.
 Overview of Share Based Compensation
Cont.
A Share based transaction is a transaction in which the entity:
receives goods or services from the supplier of those goods or
services (including an employee) in a share-based payment
arrangement, or Incurs an obligation to settle the transaction with
the supplier in a share-based payment arrangement when another
group entity receives those goods or services.
Goods received could include inventories, consumables, property,
plant and equipment, intangible assets, and other non- financial
assets . In its scope of IFRS 2, there are three main categories of
share-based payment transactions.
1) Equity-settled
2) Cash-settled
3) Alternatives whether the entity settles the transaction in cash
or by issuing equity instruments.
The following types of transactions are not within the scope of
IFRS 2, and therefore not accounted for as share-based payment
transactions:
 Overview of Share Based Compensation
Cont.
Transactions with counterparties acting as shareholders rather
than as suppliers of goods or services,
For example, if an employee participates in a rights issue to
purchase shares of its employer at a discount to fair value,
Shares issued as consideration to acquire a business
accounted for under IFRS 3 Business Combinations
transactions in which a share-based payment is made in
exchange for control of a business; and share-based payment
transactions in which the entity receives or acquires goods or
services under a contract within the scope of financial
instruments standards acquisition of non-controlling interests
after control is obtained, because IFRS 10 is generally the
specific standard applicable to the transaction.
 Share Based Compensation /Payment/
• Share based Compensation or payment is refers
to payment made by a company based on its share
price.
• Share Based Compensation or payment is
occurs when an entity buys goods or services
from a counterparties & the counterparty could be
any supplier or even an employee.
• It is a transaction in which the entity is obtaining
goods or services in exchange for issuing its share
or paying in cash where the cash payment is
linked to the value of the entities shares.
• Share Based Compensation or payment awards
are common features of employee compensation
for directors, senior executives & their
employees.
 Objectives of IFRS 2
• The objectives of this IFRS is to specify the financial
reporting by an entity when it under takes a share
based payment transactions.

• In particular it requires an entity to reflect in its

profit or loss & financial position the effect of
share based payment transactions including
expenses associated with transactions in which share
options are granted to employees and other.

• IFRS 2 has given two step definition. i.e. it is defined

1. Share based payment arrangement and
2. Share based payment transaction separately.
 Objectives of IFRS 2 Cont.
 Share based payment arrangement:- is an agreement
between
(A) the entity and
(B) another party /including employee/
 this agreement entitles the other party to receive:
 shares /share options of the entity or
Cash /other assets based on the share price or other option
price/ of the entity /subject to satisfaction of vesting
conditions mentioned in the agreement/

 Share based payment transaction:- is a transaction in which

the entity receives goods or services as a consideration for
equity instruments of the entity or by incurring liabilities to the
supplier of those goods or services of amounts that are based on
the price of the equity.
 Basic concepts
• Grant date:- the date on which both parties /the entity &
counterparty/ agreed to share based payment /SBP/
arrangement. employees agree shareholders approve agreement
is signed or approval recorded in the company mints.
• Vesting:- it means becoming entitled. i.e. the counterparties
/employee or any other party/ is entitled to receive cash, other
assets or equity instruments of the entity.
• Vesting period:- refers to the period which all the specified
vesting conditions of the share based payment arrangement are
to be satisfied. A period from the grant date to exercise date
• Vesting condition:- these are the condition mentioned in the
share based payment arrangement which need to be satisfied by
the counterparty to become entitled. a vesting condition is either
service condition or performance condition.
• Share based expense:- is recognized over the vesting period or if
there is no vesting period immediately.
 Basic concepts cont.
• Service Condition:- it is vesting condition that requires the
counterparty to complete a specified period of service. If the
counterparty cease s /stops/ to provide service during the vesting
period it has failed to satisfy the condition. E.g. 3 or 5 year
service.
• Service condition does not require to meet a performance target.
E.g. Earning per share

• Performance Condition:- it is vesting condition that requires

(a) counterparty to complete a specified period of service E.g. 3 or 5
year service. /that is a service condition/ precisely
communicated. and
(b) Specified performance target should be met while the
counterparty rendering the service as per pointed the above.
E.g. Achieving sales, target profit, target market price
 Basic concepts Cont…
Performance Condition:- is further classified in to two categories
1. Market related condition and
2. Non-market related condition

Market related condition is include a performance target with reference to

price of equity instrument /share price/ share option price/ of the entity or
its group entity.

Non-market related condition is include a performance target with reference

to the entity with own operation or activities or its group entity. For
instance like achieving specific percentage growth in profit /EPS,
completion of research project etc.

Non vesting condition:- it can be understood that these condition do not have
any impact on eligibility /entitle/ to have share based payment. These are
neither service nor performance condition.

The five basic principles as per IFRS 2

1. Classification 2. Recognition 3. measurement
4. Vesting condition 5. Changes
 Classification
There are three basic types of share based payment transactions:-
1. Equity-settled share based payment transactions:-
where a company received goods or services in exchange
for equity instrument.
E.g. share or share option
2. Cash-settled share based payment transactions:-
where a company received goods or services in exchange
for a cash amount paid based on its share price.
E.g. share price appreciation
3. Share based payment transactions with cash
alternative /choice of settlement/:-
It can be settled either by giving cash or other assets or
issuing equity instrument.
 Recognition
• Recognition is a time when goods are
obtained and services are received.
• Equity settled Dr. Expense /asset if qualified/
Cr. Equity

• Cash settled Dr. Expense /asset if qualified/

Cr. Liability
 Measurement
Measures the expense using the method that provide the most
reliable (trustworthy) information.

Direct method :- fair value of goods or services received.

/as a company received/

Indirect method :- fair value of the equity instrument

granted. /as a company delivered/

A. Equity settled:-fair value at grant date and do not

update for subsequent changes in fair value.

B. Cash settled:- fair value at grant date and update fair

value at year end with change on profit and loss statement.
 Vesting Condition & Changes
• Vesting condition:- is a condition that whether
any entity receives the services that entitles the
counterparty to receive the share based award.

• Changes :-

Modification= original instrument + additional instrument

Cancelation = an acceleration of vesting.
Settlement = Repurchase of instruments granted.
Replacement= a modification of original grant.
 Share based payment transactions.
• The accounting treatments for share based
transactions differs depends on the classification.
• Equity settled payment is occurs when the
transactions are using an entity equity
instruments.
Typical example is stock option.
• Cash settled payment is occurs when the
transactions are settled in cash the amount of
which is based on the value of the equipments.
Typical example is share appreciation.
 Example:-service condition only
E.g. 1 Company xyz grants 100 share options to each of its 500 employees
which can be exercised at any time over 3 years subject to a 2 year
service condition. The fair value of each option is determined to be Br.
20 at the grant date. An estimated 75 % of the 500 employees will
complete the service condition required for receiving the option.
Require
A. Recognize employee benefit expense for each year &
B. prepare journal entries.
C. How much is total employees benefit Expense?
Given
 100 share options.
 500 employees.
 3 years subject to a 2 year service condition.
 The fair value of each option is Br. 20 at the grant date.
 75 % of the 500 employees will complete the service condition.
 Example1 Solution
A.
End of first Year
=100 share option* (500 employee* 75 % )*Br. 20*1/2 Year
= 100 share option*375 employee *Br. 20*1/2 Year =375,000
End of second Year
=100 share option*(500 employee* 75 %) *Br. 20*2/2 Year-375,000
= (100 share option*375 employee*Br. 20*1)-375,000 =375,000
Grant date Year 1 Year 2
S0 375,000 375,000
 Example 1:-service condition only cont.
B. Journal Entries for employee benefit expense of 2 years.
Dr. Cr.
Grant date
Employee benefit Exp. 0.00
Equity 0.00
End of year 1
Employee benefit Exp. 375,000
Equity 375,000
End of year 2
Employee benefit Exp. 375,000
Equity 375,000
C. Total Employee benefit expense for two years is br. 750,000
 Example 2:-service & market performance condition
E.g. Company xyz grants 100 share options to each of its
500 employees which can be exercised at any time over 3
years subject to
1. A three year service condition.
2. A Company xyz stocks price must be at least 25% higher
after the three years period compared to at the grant date.
• 90% of employee are estimated to meet the service
condition.
• The fair value of each option is determined to be Br. 20 at
the grant date.
Require
A. Recognize employee benefit expense for each year.
B. prepare journal entries.
C. Calculate total employee benefit Expense for three years.
 Example 2 Solution
Given
100 share options.
 500 employees.
3 years subject to a 3 year service condition.
The fair value of each option is Br. 20 at the
grant date.
90 % of the 500 employees will complete the
service condition.
Example 2:-service & market performance condition
A.
Solution
End of first Year
=100 share option* (500 employee* 90 % )*Br. 20*1/3 Year
= 100 share option*450 employee *Br. 20*1/3 Year =300,000
Grant date Year 1 Year 2
S0 300,000
 Example 2:-continued.
• service & market performance condition.
Based on Example 2 At the end of year 2 the price of
the company xyz stock has fallen and is 5% lower
than at the Grant date.
Fewer employee left the company than expected and
the revised estimated of employees that will met the
service condition is 95%. The fair value of the stock
options has br. 15.
Require
A. Recognize employee benefit expense for each year.
B. prepare journal entries for each year.
C. Calculate total employee benefit expense.
 Example 2:-continued.
B.
solution
End of second Year
=100 share option*(500 employee* 95 %) *Br. 20*2/3 Year-300,000
= (100 share option*475 employee*Br. 20*2/3 Year) - 300,000
= 333,333.33
Grant date Year 1 Year 2 Year 3
S0 333,333.33
 Example 2:-continued.
• service & market performance condition.
Based on Example 2 At the end of year 3 the price of the company
xyz stock has raised and is 25% higher than at the Grant date.
 The fair value of the stock option has raisin to br. 30 .
 Also 480 employees are met the service condition .
C.
solution
End of Third Year
=(100 share option*480 employee *Br. 20*3/3 Year)- 633,333.33
= 326,666.67
Grant date Year 1 Year 2 Year 3
S0 326,666.67

The decrease in fair value of the stock is does not

impact the expense calculation.
 solution of Example 2:-continued
• Journal Entries for employee benefit expense of 3 years.
Dr. Cr.
Grant date
Employee benefit Exp. 0.00
Equity 0.00
End of year 1
Employee benefit Exp. 300,000
Equity 300,000
End of year 2
Employee benefit Exp. 333,333.33
Equity 333,333.33
End of year 3
Employee benefit Exp. 326,666.67
Equity 326,666.67
Total employee benefit Expense for 3 years is 960,000
 Example 3 Share option with vesting conditions
• A company grants 2,000 share options each of its
three directors on 1 Jan. 2012 subjects to the
directors being employed on Dec. the share option
vest on 31 Dec. 2014.
• The fair value of each option on 1, Jan. 2012 is br.
10. the stock option will only vest if the
company's share price reaches br. 15 per share.
The price at 31 Dec. 2012 was br. 8.
• It is anticipated that there will only be two
directors employed on 31 December.
How will the share options be treated in the
financial statements for the year ended December
31 2012?
 Example 3 Share option with vesting conditions cont.
• Solution
The market based condition i.e. the increase in the share price
can be ignored for the purpose the calculation. How ever the
employment condition must be take into account.
The share options will be treated as follows:-
=2000 share option* 2 directors' *Br. 10*1/3 Year= 13,333.33
The equity will be increased by 13,333.33 and employee
benefit expense shown on profit or loss for the year ended
Dec. 31 2016.
End of year 2012
Employee benefit Exp. 13,333.33
Equity 13,333.33
 Cash settled share based payment trans actions
Example:-1
Red plc granted 300 share appreciation right to
each of its 500 employees on 1 august 2012.
Management believe that as at 31 July 2013,
Red plc year end, 80% of awards will vest on
31 July. The fair value of each share
appreciation right 31, July 2013 is br. 15.
Require
• What is the fair value of the liability to be
recorded on the financial statements for the year
ended 31 July 2013 .
• Prepare journal entries.
 Cash settled share based payment trans actions
Solution for example 1
Given
 300 share appreciation right for the 500 employees.
 80% of awards will vest on 31 July and The fair value of each share
appreciation right 31, July 2013 is br. 15.
Solution
=300 share appreciation right *(500 employee*80%)*Br. 15*1/2 Year
=300 share appreciation right * 400 employees*Br. 15*1/2 Year=br. 900,000
The fair value of the liability is br. 900,000.
Journal entry
Employee benefit Exp. 900,000
Liability 900,000
When we pay the liability the entry will be
liability 900,000
cash 900,000
 Cash settled share based payment trans actions
Example:-2
GM furniture company has granted 700 share appreciation right to each of its
400 employees on 1 January 2016. The right are due to vest on 31 December
2018 with payment being made on 1 January 2019.
During 2016 50 employees leave and it is anticipated that a further 50 employees
will leave during the vesting period.

The fair value of share on 1 Jan. 2016 is ----------- br. 15.00

31 Dec. 2016 is ---------- br. 18.00
31 Dec. 2017 is ----------- br. 20.00
Require
• What will be recorded in the financial statements on 31 Dec. 2016
the share appreciation right?
• prepare journal entries.
Given:-
 700 share appreciation right to each of its 400 employees
 During 2016 50 employees leave and further 50 employees will
leave during the vesting period.
 The fair value of share on 1 Jan. 2016 is br. 15.00,31 Dec. 2016 is br. 18.00 &
31 Dec. 2017 is br. 20.00.
 Cash settled payment share based trans actions
Solution for example 2
=700 share appreciation right *400 -50-50)*Br. 18*1/3 Year
=700 share appreciation right * 300 Employees *Br. 18*1/3 Year
= br. 1,260,000
Journal entry
End of year 2016
Employee benefit Exp. 1,260,000
Liability 1,260,000
When we pay the liability the entry will be
liability 1,260,000
cash 1,260,000
 Equity settled share based payment transactions
Example 3
ABC company has granted 750 share option right to
each of its 6 Directors on 1 May 2017. The option
right vest on 30 April 2019. the fair value of each
option on 1 May 2017 br. 15 and br. 10 per share
price on end of April 2018. it is anticipated that all of
the share option will vest on April 2019.
Require
what is the accounting entry in the financial
statements for the year ended 30 April 2018?
 Solution for example 3
Given:-
750 share option right to each of its 6 Directors.
The fair value of share on 1 May 2017 br. 15 and on
April 2018 br. 10 per share price.
Solution
=750 share option right *6 *Br. 15*1/2 Year
= 33,750
 Example 3 continued
• Based on Question No. 3 how much is Employee
benefit expense by cash settled share based payment
transaction?
Given
 750 share appreciation right to each of its 6 Directors.
 The fair value of share on 1 May 2017 br. 15 and at
the end of April 2018 br. 10 per share price.
Solution
=750 share appreciation right *6 *Br. 10*1/2 Year
= 22,500