A dvanced F inanc ial A ccounting

I
Chapter Two

Share-based
Compensation
Share-based Compensation

Overview of Share-based Payments

1.

2. Share-based Payments Settled with Equity

3.

4.
Share-based
Share-based Payments
Payments Settled withAlternatives
with Cash Cash
5. Counterparty Has Choice of Settlement

Issuer Has Choice of Settlement

6.

7. Share-based Payment Disclosures

 Overview of Share-based Payments
 A major objective of the accounting for shareholders’
equity 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 payment in cash or other assets.

 What is Share-based Payment (compensati on) ?

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 opti ons ) of

the entity or another group entity, provided the specified
vesti ng conditi ons , 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 (compensati on) ?

Generally, S B P is
• a transaction in which the enti ty 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: S B P 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. free or discounted shares).
[Link] 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 is also 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

G ra n t date is the date at which the entity and the supplier agree to the S B P
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 S B P
– 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
Vesting condition

Vesting
condition
 Market conditions
➢ 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
 Non Market conditions

✓ 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

➢ A condition other than a vesting condition that determines

whether a counterparty receives the share-based payment

[Link] omun bet yr ppaaytrni y’gs mchoonitchel yo cfo
pnarttbi icuipitaotniosn. in a share purchase

➢ A performance condition is a non vesting condition if the

performance assessment period extends beyond the service

period.
 17

Terminologies related to SBP

Fair Value :
• The amount w hich an asset could be
for

exchanged,
• a liability settled, or
•
an equity instrument granted could be exchanged,
• betw een know led geable, w illing parties in
an
arm’s length transaction.
 18

Terminologies related to SBP

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.

 19

Terminologies related to SBP

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.
 20

Measurement Date

mThea sduarted a tf owr hht iceh p tuhrepfoasiers v oafl uaec ofu

tnhteinegtransacti
For [Link] instruments
ons granted
with is For transacti ons
with
other than

pemropvliodyineegs similaarn sde rvicesothers eppemarptileosyees

the date, the goods or services

Is the grant Date with reference are received or acquired, with
to FV of equity instrument reference to FV of goods or

services
indirectly directly
 Three Types of Share based payment
Share-based
payments
–(SBP)

E qui ty - Share-
settled C ash-settl ed based
share-based
share-based payments payments
payments with cash
al ternati v es
Entity Entity receives Either entity or the
receives goods/services by counterparty has
goods/ services a
consideration incurring a liability to choice to settle in equity
instruments or in cash
as
for transfer cash or
or other assets.
equi ty i nstruments. other assets to the
Equity amounts that are based on
supplier for
the price (or value) of the Equity or
Liability
entity’s shares
.
 2
Liability 2

1. Equity-settled share-based p a y m en t 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

sisnhvaeer nst oni ry R, eRpeoptroni rtgin Egn tEtinyt iLtydt Ltd provides Supplier
X with 10,000
 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 isentry

The accounting deemed to be:
would be the value of the shares being issued.

Inventory 140, 000

Share capital 140, 000
 E x am p le 2 S h a r e 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?
 Exam p le 2 S h a r e 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
Account Receivable 8,000,000
The inventory value will be expensed on sale.
Cost of sales 6,000,000
Sales Revenue 8,000,000
Inventory 6,000,000
 E x am p le 3 S h a r e options for Services.

fOfri nm 1 LaJ unnudaeyr r Ywehaicrh1 ,L C pormovpiadneys D20 e0n theosr u risn

toof alne gaaglr esemrveicnetsw eiaht c hL yegearl 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

 E x am p le 3 S h a r e options for Services.

Year 1
Legal Consultation Expense (200 x 400) … … 8 0 , 0 0 0
Share C a p i t a l … … … … … … … 8 0 , 0 0 0

• This entry Is similar in year 2

• In year 3 the amount will differ b/c of change in price per
hou
consultation
r
Legal Consultation Expense (200 x 450) … … 9 0 , 0 0 0

…………………90,000
Transactions with employees a n d others providing similar services

•
FggrVantoefd ,t haes ist eirsv nci oet sp oressciebilvee dto aerseti mer afteer redli atbol
yt hthee FV ooff ththe es eerqvuicieyt s 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: S har e 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 … … … € 2 50
Equity … … … … 2 5 0
 Accounting for employee services received
Overview of conditions
♦
Conditi ons

− Vesti ng conditions are service related, i.e. they determine whether

the entity receives the services that entitle the counterparty to the
share-based payment.
− Service cond itions; w ith or w ithout …
− Performance conditions
» Market performance conditions or non-market performance
conditions
» Performance conditions by definition always require a service condition

− Non-vesti ng conditions are not service related, i.e. they do not

determine whether the entity receives the services that entitle the
 32

Accounting for employee services received (continued)

Overview of conditions
Vesti ng conditi ons

Service conditi ons Performance condi ti ons

Market conditi ons N on-mark et condi ti ons

Service condition Service condition

Requirement to complete + +
a
specified period of service condition that is related
to the market price of
condition that is a
performance condition, but
the equity not market price related
•Employee has to stay instrumentprice
•Share •Revenue must increase by
employed for example , must increase by 15%
10%
for 3 three years after •TSR (total shareholder
grant date return) must increase • Percentage increase in
by 10% market share
 3
3

Accounting for employee services received (continued)

Overview of conditions

Non-vesti ng conditi ons

Conditi ons that neither the Conditi ons that the

counterparty can eCnotnitdyi ctiaonn csh
enti ty nor the counterparty choose to meet thooast eht teo
can choose to meet
meet

• Holding participation •Continuation of the

•Inflation must not be higher
than 5% shares over the plan by the entity
holding period.
•Price of gold must increase
• Paying
by more than 3 %
monthly contributions
to a share
 Basically Not related3 4to Services

Example : S har e options with vesting conditions

AJa nc,o 1m, p 2 a0 n 1 y 2 gsruabnjtesc 2t ,t0o0 t0h es hdairre cotopritso bnesi not g
eeamchp lofy etids oht nr eDee cd,i r3e1c,t o2r0s 1o4n. 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

rDreeac,h3e1s 2€01144 pT. erh es hoapreit.o Tnhs ew pirl i coenalty vDeesct ,3if1 ,t
h2e01c2omwpaasn €y8s’ asnhda rite isprnicoet 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 : S har e 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 a t t h e f a i r v a l u e of g o o d s a n d se rv i c es
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 a t t h e d a t e t h e g o o d s o r se rv i c es a r e o b t a i n e d
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
 38

2. Cash-settled share-based p a y m en t 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 enti ty’s shares or other equity instruments of the
entity.
 2. Cash-settled share-based p a y m en t 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 —t hat
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.
 Solutio
n
Year end Calculati on Remunerati on 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 J u n e 2013 30 J u n e 2015

Employee benefits expense …….100 000 Employee benefits expense ……….240 000
Accrued salaries payable ……….100 000 Accrued salaries payable
…….240 000

30 J u n e 2014
Accrued salaries payable …………….20 000 1 J u l y 2016
Employee benefits expense recouped (revenue) Accrued salaries payable …….320 000
……….20 000 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.
 C o n t ’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
 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,
 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 ).
S o l u t i o n … … … . . Ye a r 2 0 X 1

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
L i a b i l i t y … … … … . 144,000

Where, 24,000=72,000/3 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:
Employee benefits expense…187,200
Equity…………..24,000

L i a b i l i t y … … … … . 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
L i a b i l i t y … … … … . 168,800
168,800 = (200*80*35*85%) - 163,200 -144,000

• Payment to 50 employees who choose cash alternative is booked as follows:

Liability … ..175,000
Cash ……… 175,000

( Liability=175,000 = 50*35*100)

• Issuance of shares to 120 employees who chose share alternative transfers the
remaining liability balance to equity:

Liability … ..301,000
Equity … … … … 3 0 1 , 0 0 0
[Link] 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,

 ………Co n t’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 F V of the goods or services
received or the F V 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 !!