SHARE-BASED COMPENSATION
Share appreciation right
Cash settled transaction
A cash settled transaction is a share-based payment transaction whereby an entity incurs a
liability for services received and the liability is based on the entity's equity instruments.
Accounting Treatment:
Measure at fair value of liability at each reporting date.
Remeasure until settlement date.
The best example of a cash settled share-based compensation is the grant of share appreciation
right to employees.
SHARE APPRECIATION RIGHT
A share appreciation right entitles an employee to receive cash which is equal to the excess of the
market value of the entity's share over a predetermined price for a stated number of shares.
In other words, a share appreciation right entitles the employee to a cash payment equal to the
increase in the price of a given number of shares over a given period.
Like a share option, a share appreciation right is viewed as compensation for services rendered.
Unlike in a share option, the entity shall recognize a liability because a share appreciation right
is actually an obligation on the part of the entity to pay cash in the future on exercise date.
Simply stated, a share appreciation right creates a liability.
MEASUREMENT OF COMPENSATION
Measure at fair value of liability at each reporting date.
Remeasure until settlement date.
Accordingly, during the vesting period from the date of grant to the exercise date, if there are
increases or decreases in the market value of the shares, the liability for the compensation shall
be adjusted.rs,
The fair value of liability is equal to the "excess of the market value of share over a
predetermined price for a given number of shares over a definite vesting period."
Basically, the compensation in a share appreciation right is the cash paid by the entity. This
amount becomes known only on exercise date, not on the date of grant.
RECOGNITION OF COMPENSATION
If the share appreciation right vests immediately, the compensation is recognized
immediately on the date of grant.
If the share appreciation right does not vest until the employee completes a definite
vesting period, the compensation is recognized over the service or vesting period.
ILLUSTRATION
An entity granted a share appreciation right to the general manager on January 1, 2014.
After a four-year service period, the employee is entitled to receive cash equal to the
appreciation in share price over the market value on January 1, 2014.
Note: The market value on January 1, 2014 is the predetermined price for purposes of
determining the compensation.
The share appreciation right had the following terms:
a. Service period - January 1, 2014 to December 31, 2017
b. Number of shares 20,000 shares
c. Exercise date - January 1, 2018
The quoted prices of the entity's share are:
January 1, 2014 200
December 31, 2014 210
December 31, 2015 220
December 31, 2016 240
December 31, 2017 250
2014
Dec. 31
Salaries 50,000
Accrued salaries payable 50,000
Market value on December 31, 2014 210
Predetermined price on January 1, 2014 200
Excess 10
Multiply by number of shares 20,000
Total compensation 200,000
Compensation for 2014 (200,000/4 years) 50,000
2015
Dec. 31
Salaries 150,000
Accrued salaries payable 150,000
Market value on December 31, 2015 220
Predetermined price on January 1, 2014 200
Excess 20
Multiply by number of shares 20,000
Cumulative compensation 400,000
Accrued Compensation for 2014 (50,000)
Compensation for 2015 150,000
2016
Salaries 400,000
Accrued salaries payable 400,000
Market value on December 31, 2016 240
Predetermined price on January 1, 2014 200
Excess 40
Multiply by number of shares 20,000
Cumulative compensation 600,000
Accrued Compensation (200,000)
Compensation for 2016 150,000
2017
Dec. 31
Salaries 400,000
Accrued salaries payable 400,000
Market value on December 31, 2016 250
Predetermined price on January 1, 2014 200
Excess 50
Multiply by number of shares 20,000
Cumulative compensation 1,000,000
Accrued Compensation (600,000)
Compensation for 2017 400,000
2018
Jan. 1
To settle the share appreciation right:
Accrued salaries payable 1,00,000
Cash 1,00,000
QUERY
Suppose in the preceding illustration, the market value of the share unfortunately drops to
P200.00 on December 31, 2017
Since the predetermined price is also P200, the entity has no obligation because there is no
appreciation or increase in market value on exercise date.
In this case, the accrued compensation on December 31, 2016 of P600,000 shall be reversed on
December 31, 2017 as follows:
Accrued salaries payable 600,000
Gain on reversal of share appreciation right 600,000
Cash and share alternative
Some share-based payment transactions allow the employee the choice as to whether to settle the
transaction in cash, or by issuing equity shares. An employee may have the right to choose
between:
a. Cash alternative-cash payment equal to the market value of a certain number of shares
subject to certain conditions.
b. Share alternative-equity shares given to the employee.
The accounting for this type of instrument depends on “which party has the choice of
settlement”.
If the entity has the choice of settlement, there is no accounting problem. The entity shall account
for the instrument initially either as liability or equity, but not both.
In other words, if the entity has the choice of settlement, the instrument is not a compound
financial instrument.
However, if the employee has the right to choose the settlement, the entity is deemed to have
issued a compound financial instrument.
Thus, the compound financial instrument is accounted for as partly liability which is the cash
alternative and partly equity which is the share alternative.
