Share-based payment

Share-based payment

 

Introduction

 

Share-based payment has become increasingly common. Share-based payment occurs when an entity buys goods or services from other parties (such as employees or suppliers) and:

 

  • settles the amounts payable by issuing shares or share options, or

 

  • incurs liabilities for cash payments based on its share price.

 

The problem

 

If a company pays for goods or services in cash, an expense is recognised in profit or loss. If a company ‘pays’ for goods or services in share options, there is no cash outflow and therefore, under traditional accounting, no expense would be recognised.

 

If a company issues shares to employees, a transaction has occurred. The employees have provided a valuable service to the entity, in exchange for the shares/options. It is inconsistent not to recognise this transaction in the financial statements.

 

IFRS 2 Share-based Payment was issued to deal with this accounting anomaly. IFRS 2 requires that all share-based payment transactions must be recognised in the financial statements when the transaction takes place.

 

Arguments against recognising share-based payments

 

There are a number of arguments against recognising share-based payments. IFRS 2 rejects them all.

 

No cost therefore no charge

 

A charge for shares or options should not be recognised because the entity does not have to sacrifice cash or other assets. There is no cost to the entity.

 

This argument ignores the fact that a transaction has occurred. The employees have provided valuable services to the entity in return for valuable shares or options. If this argument were accepted, the financial statements would fail to reflect the economic transactions that had occurred.

 

Earnings per share would be hit twice

 

The charge to profit for the employee services consumed reduces the entity’s earnings. At the same time there is an increase in the number of shares issued.

 

However, the double impact on earnings per share simply reflects the two economic events that have occurred: the entity has issued shares, thus increasing the denominator of the EPS calculation, and it has also consumed the resources it received for those shares, thus reducing the numerator. Issuing shares to employees, instead of paying them in cash, requires a greater increase in the entity’s earnings in order to maintain its earnings per share. Recognising the transaction ensures that its economic consequences are reported.

 

Adverse economic consequences

 

Recognition of employee share-based payment might discourage entities from introducing or continuing employee share plans.

 

However, accounting for share-based payments avoids the economic distortion created when entities consume resources without having to account for such transactions.

 

Types of transaction

 

IFRS 2 applies to all share-based payment transactions. There are two main types.

 

  • Equity-settled share-based payments: the entity acquires goods or services in exchange for equity instruments of the entity (e.g. shares or share options)

 

  • Cash-settled share-based payments: the entity acquires goods or services in exchange for amounts of cash measured by reference to the entity’s share price.

 

The most common type of share-based payment transaction is where share options are granted to employees or directors as part of their remuneration.

 

2 Equity-settled share-based payment transactions

 

 

Accounting treatment

 

When an entity receives goods or services as a result of an equity-settled share-based payment transaction, it posts the following double entry:

 

Dr Expense/asset

 

Cr Equity

 

The entry to equity is normally reported in ‘other components of equity’. Share capital is not affected until the share-based payment has ‘vested’ (covered later in the chapter).

 

Measurement

 

The basic principle is that all transactions are measured at fair value.

 

How fair value is determined:

The grant date is the date at which the entity and another party agree to the arrangement.

 

Determining fair value

 

Where a share-based payment transaction is with parties other than employees, it is assumed that the fair value of the goods and services received can be measured reliably, at their cash price for example.

 

Where shares or share options are granted to employees as part of their remuneration, it is not usually possible to arrive at a reliable value for the services received in return. For this reason, the entity measures the transaction by reference to the fair value of the equity instruments granted.

 

The fair value of equity instruments is market value, if this is available. Where no market price is available (for example, if the instruments are unquoted), a valuation technique or model is used.

 

The fair value of share options is harder to determine. In rare cases there may be publicly quoted traded options with similar terms, whose market value can be used as the fair value of the options we are considering.

 

Otherwise, the fair value of options must be estimated using a recognised option-pricing model. IFRS 2 does not require any specific model to be used. The most commonly used is the Black-Scholes model.

 

Allocating the expense to reporting periods

 

Some equity instruments vest immediately. In other words, the holder is unconditionally entitled to the instruments. In this case, the transaction should be accounted for in full on the grant date.

 

However, when share options are granted to employees, there are normally conditions attached. For example, a service condition may exist that requires employees to complete a specified period of service.

 

IFRS 2 states that an entity should account for services as they are rendered during the vesting period (the period between the grant date and the vesting date).

 

The vesting date is the date on which the counterparty (e.g. the employee) becomes entitled to receive the cash or equity instruments under the arrangement.

 

The expense recognised at each reporting date should be based on the best estimate of the number of equity instruments expected to vest.

 

On the vesting date, the entity shall revise the estimate to equal the number of equity instruments that ultimately vest.

 

Illustration 1 – When to recognise the transaction

Test your understanding 1 – Equity-settled share-based

 

An entity has a reporting date of 31 December.

 

On 1 January 20X1 it grants 100 share options to each of its 500 employees. Each grant is conditional upon the employee working for the entity until 31 December 20X3. At the grant date the fair value of each share option is $15.

 

During 20X1, 20 employees leave and the entity estimates that a total of 20% of the 500 employees will leave during the three-year period.

 

During 20X2, a further 20 employees leave and the entity now estimates that only 15% of the original 500 employees will leave during the three-year period.

 

During 20X3, a further 10 employees leave.

 

Required:

 

Calculate the remuneration expense that will be recognised in each of the three years of the share-based payment scheme.

 

 

 

Performance conditions

 

In addition to service conditions, some share based payment schemes have performance conditions that must be satisfied before they vest, such as:

 

  • achieving a specified increase in the entity’s profit

 

  • the completion of a research project

 

  • achieving a specified increase in the entity’s share price.

 

Performance conditions can be classified as either market conditions or non-market conditions.

 

  • A market condition is defined by IFRS 2 as one that is related to the market price of the entity’s equity instruments. An example of a market condition is that the entity must attain a minimum share price by the vesting date for scheme members to be eligible to participate in the share-based payment scheme.

 

  • Non-market performance conditions are not related to the market price of the entity’s equity instruments. Examples of non-market performance conditions include EPS or profit targets.

 

 

Conditions attaching to share-based payment transactions: a summary

The impact of performance conditions

 

  • Market based conditions have already been factored into the fair value of the equity instrument at the grant date. Therefore, an expense is recognised irrespective of whether market conditions are satisfied.

 

  • Non-market based conditions must be taken into account in determining whether an expense should be recognised in a reporting period.

Test your understanding 2 – Market based conditions

 

On 1 January 20X1, one hundred employees were given 50 share options each. These will vest if the employees still work for the entity on 31 December 20X2 and if the share price on that date is more than $5.

 

On 1 January 20X1, the fair value of the options was $1. The share price on 31 December 20X1 was $3 and it was considered unlikely that the share price would rise to $5 by 31 December 20X2. Ten employees left during the year ended 31 December 20X1 and a further ten are expected to leave in the following year.

 

Required:

 

How should the above transaction be accounted for in the year ended 31 December 20X1?

 

 

 

Test your understanding 3 – Blueberry

 

On 1 January 20X4 an entity, Blueberry, granted share options to each of its 200 employees, subject to a three-year vesting period, provided that the volume of sales increases by a minimum of 5% per annum throughout the vesting period. A maximum of 300 share options per employee will vest, dependent upon the increase in the volume of sales throughout each year of the vesting period as follows:

 

  • If the volume of sales increases by an average of between 5% and 10% per year, each eligible employee will receive 100 share options.

 

  • If the volume of sales increases by an average of between 10% and 15% per year, each eligible employee will receive 200 share options.

 

  • If the volume of sales increases by an average of over 15% per year, each eligible employee will receive 300 share options.

 

At the grant date, Blueberry estimated that the fair value of each option was $10 and that the increase in the volume of sales each year would be between 10% and 15%. It was also estimated that a total of 22% of employees would leave prior to the end of the vesting period. At each reporting date within the vesting period, the situation was as follows:

 

Reporting Employees Further Annual Expected sales Average
date leaving in leavers increase in volume increase annual
year expected sales over remaining increase in
prior to volume vesting period sales volume
vesting date to date
31 Dec X4 8 18 14% 14% 14%
31 Dec X5 6 4 18% 16% 16%
31 Dec X6 2 16% 16%

 

Required:

 

Calculate the impact of the above share-based payment scheme on Blueberry’s financial statements in each reporting period.

 

 

 

Accounting after the vesting date

 

IFRS 2 states that no further adjustments to total equity should be made after the vesting date. This applies even if some of the equity instruments do not vest (for example, because a market based condition was not met).

 

Entities may, however, transfer any balance from ‘other components of equity’ to retained earnings.

 

Test your understanding 4 – Beginner

 

Beginner offered directors an option scheme conditional on a three-year period of service. The number of options granted to each of the ten directors at the inception of the scheme was 1 million. The options were exercisable shortly after the end of the third year. Upon exercise of the share options, those directors eligible would be required to pay $2 for each share of $1 nominal value.

 

The fair value of the options and the estimates of the number of options expected to vest at various points in time were as follows:

 

Year Rights expected Fair value of
to vest the option
$
Start of Year One 8m 0.30
End of Year One 7m 0.33
End of Year Two 8m 0.37

 

At the end of year three, 9 million rights actually vested.

 

Required:

 

  • Show how the option scheme will affect the financial statements for each of the three years of the vesting period.
  • Show the accounting treatment at the vesting date for each of the following situations:

 

  • The fair value of a share was $5 and all eligible directors exercised their share options immediately.

 

  • The fair value of a share was $1.50 and all eligible directors allowed their share options to lapse.

 

 

 

Modifications to the terms on which equity instruments are granted

 

An entity may alter the terms and conditions of share option schemes during the vesting period. For example:

 

  • it might increase or reduce the exercise price of the options (the price that the holder of the options has to pay for shares when the options are exercised). This makes the scheme less favourable or more favourable to employees.

 

  • it might change the vesting conditions, to make it more likely or less likely that the options will vest.

 

If a modification to an equity-settled share-based payment scheme occurs, the entity must continue to recognise the grant date fair value of the equity instruments in profit or loss, unless the instruments do not vest because of a failure to meet a non-market based vesting condition.

 

If the modification increases the fair value of the equity instruments, then an extra expense must be recognised:

 

  • The difference between the fair value of the new arrangement and the fair value of the original arrangement (the incremental fair value) at the date of the modification must be recognised as a charge to profit or loss. The extra expense is spread over the period from the date of the change to the vesting date.

 

Test your understanding 5 – Modifications

 

An entity grants 100 share options to each of its 500 employees, provided that they remain in service over the next three years. The fair value of each option is $20.

 

During year one, 50 employees leave. The entity estimates that a further 60 employees will leave during years two and three.

 

At the end of year one the entity reprices its share options because the share price has fallen. The other vesting conditions remain unchanged. At the date of repricing, the fair value of each of the original share options granted (before taking the repricing into account) was $10. The fair value of each repriced share option is $15.

 

During year two, a further 30 employees leave. The entity estimates that a further 30 employees will leave during year three.

 

During year three, a further 30 employees leave.

 

Required:

 

Calculate the amounts to be recognised in the financial statements for each of the three years of the scheme.

 

Further illustration on modifications

 

An entity grants 100 share options to each of the 15 employees in its sales team, on condition that they remain in service over the next three years. There is also a performance condition: the team must sell more than 40,000 units of a particular product over the three-year period. At the grant date the fair value of each option is $20.

 

During Year 2, the entity increases the sales target to 70,000 units. By the end of Year 3, only 60,000 units have been sold and the share options do not vest.

 

All 15 employees remain with the entity for the full three years.

 

Required:

 

Calculate the amounts to be recognised in the financial statements for each of the three years of the scheme.

 

 

 

Solution

 

IFRS 2 states that when a share option scheme is modified, the entity must recognise, as a minimum, the services received measured at the fair value at the grant date. The employees have not met the modified sales target, but did meet the original target set on grant date.

 

This means that the entity must recognise the expense that it would have incurred had the original scheme continued in force.

 

The total amount recognised in equity is $30,000 (15 × 100 × 20). The entity recognises an expense of $10,000 for each of the three years.

 

 

 

Cancellations and settlements

 

An entity may cancel or settle a share option scheme before the vesting date.

 

  • If the cancellation or settlement occurs during the vesting period, the entity immediately recognises the amount that would otherwise have been recognised for services received over the vesting period (‘an acceleration of vesting’ (IFRS 2, para 28a)).

 

  • Any payment made to employees up to the fair value of the equity instruments granted at cancellation or settlement date is accounted for as a deduction from equity.

 

  • Any payment made to employees in excess of the fair value of the equity instruments granted at the cancellation or settlement date is accounted for as an expense in profit or loss.

 

Test your understanding 6 – Cancellations and settlements

 

An entity introduced an equity-settled share-based payment scheme on 1 January 20X0 for its 5 directors. Under the terms of the scheme, the entity will grant 1,000 options to each director if they remain in employment for the next three years. All five directors are expected to stay for the full three years. The fair value of each option at the grant date was $8.

 

On 30 June 20X1, the entity decided to base its share-based payment schemes on profit targets instead. It therefore cancelled the existing scheme. On 30 June 20X1, it paid compensation of $10 per option to each of the 5 directors. The fair value of the options at 30 June 20X1 was $9.

 

Required:

 

Explain, with calculations, how the cancellation and settlement of the share-based payment scheme should be accounted for in the year ended 31 December 20X1.

 

 

 

3 Cash-settled share-based payment transactions

 

Examples of cash-settled share-based payment transactions include:

 

  • share appreciation rights (SARs), where employees become entitled to a future cash payment based on the increase in the entity’s share price from a specified level over a specified period of time

 

  • the right to shares that are redeemable, thus entitling the holder to a future payment of cash.

 

Accounting treatment

 

The double entry for a cash-settled share-based payment transaction is:

 

Dr Profit or loss/Asset

 

Cr Liabilities

 

Measurement

 

The entity remeasures the fair value of the liability arising under a cash-settled scheme at each reporting date.

 

This is different from accounting for equity-settled share-based payments, where the fair value is fixed at the grant date.

 

 

Allocating the expense to reporting periods

 

Where services are received in exchange for cash-settled share-based payments, the expense is recognised over the period that the services are rendered (the vesting period).

 

This is the same principle as for equity-settled transactions.

 

Illustration 2 – Cash-settled share-based payment transactions

 

An entity has a reporting date of 31 December.

 

On 1 January 20X1 the entity grants 100 share appreciation rights (SARs) to each of its 300 employees, on the condition that they continue to work for the entity until 31 December 20X3.

 

During 20X1, 20 employees leave. The entity estimates that a further 40 will leave during 20X2 and 20X3.

 

During 20X2, 10 employees leave. The entity estimates that a further 20 will leave during 20X3.

 

During 20X3, 10 employees leave.
The fair value of a SAR at each reporting date is shown below:
$
20X1 10.00
20X2 12.00
20X3 15.00

 

Required:

 

Calculate the expense for each of the three years of the scheme, and the liability to be recognised in the statement of financial position as at 31 December for each of the three years.

 

Solution

 

Year Liability at Expense
year-end for year
$000 $000
20X1 ((300 – 20 – 40) × 100 × $10 × 1/3) 80 80
20X2 ((300 – 20 – 10 – 20) × 100 × $12 × 2/3) 200 120
20X3 ((300 – 20 – 10 – 10) × 100 × $15) 390 190

 

Note that the fair value of the liability is remeasured at each reporting date. This is then spread over the vesting period.

 

 

 

The value of share appreciation rights (SARs)

 

SARs may be exercisable over a period of time. The fair value of each SAR comprises the intrinsic value (the cash amount payable based upon the share price at that date) together with its time value (based upon the fact that the share price will vary over time).

 

When SARs are exercised, they are accounted for at their intrinsic value at the exercise date. The fair value of a SAR could exceed its intrinsic value at this date. This is because SAR holders who do not exercise their rights at that time have the ability to benefit from future share price rises.

 

At the end of the exercise period, the intrinsic value of a SAR will equal its fair value. The liability will be cleared and any remaining balance taken to profit or loss.

 

Test your understanding 7 – Growler

 

On 1 January 20X4 Growler granted 200 share appreciation rights (SARs) to each of its 500 employees on the condition that they continue to work for the entity for two years. At 1 January 20X4, the entity expects that 25 of those employees will leave each year.

 

During 20X4, 20 employees leave Growler. The entity expects that the same number will leave in the second year.

 

During 20X5, 24 employees leave.

 

The SARs vest on 31 December 20X5 and can be exercised during 20X6 and 20X7. On 31 December 20X6, 257 of the eligible employees exercised their SARs in full. The remaining eligible employees exercised their SARs in full on 31 December 20X7.

 

The fair value and intrinsic value of each SAR was as follows:

 

Reporting date FV per SAR Intrinsic value per SAR
31 December 20X4 $5
31 December 20X5 $7
31 December 20X6 $8 $7
31 December 20X7 $10 $10

 

Required:

 

  • Calculate the amount to be recognised as a remuneration expense in the statement of profit or loss, together with the liability to be recognised in the statement of financial position, for each of the two years to the vesting date.

 

  • Calculate the amount to be recognised as a remuneration expense and reported as a liability in the financial statements for each of the two years ended 31 December 20X6 and 20X7.

 

 

 

Replacing an equity scheme with a cash scheme

 

An entity may modify the terms of an equity-settled share-based payment scheme so that it becomes classified as a cash-settled scheme. If this is the case, IFRS 2 requires the entity to:

 

  • Measure the transaction by reference to the modification fair value of the equity instruments granted

 

  • Derecognise the liability and recognise equity to the extent of the services rendered by the modification date

 

  • Recognise a profit or loss for the difference between the liability derecognised and the equity recognised.

 

Share-based payment

 

 

4 Other issues

 

 

Hybrid transactions

 

If a share-based payment transaction gives the entity a choice over whether to settle in cash or by issuing equity instruments, IFRS 2 states that:

 

  • The scheme should be accounted for as a cash-settled share-based payment transaction if the entity has an obligation to settle in cash.

 

  • If no obligation exists to settle in cash, then the entity accounts for the transaction as an equity-settled share-based payment scheme.

 

Some entities enter into share-based payment transactions that give the counterparty the choice of settling in cash or in equity instruments. In this case, the entity has granted a compound financial instrument that must be split accounted (part is recorded as debt and part is recorded as equity).

 

 

 

Group share-based payment transactions

 

A subsidiary might receive goods or services from employees or suppliers but the parent (or another entity in the group) might issue equity or cash settled share-based payments as consideration.

 

In accordance with IFRS 2, the entity that receives goods or services in a share-based payment arrangement must account for those goods or services irrespective of which entity in the group settles the transaction, or whether the transaction is settled in shares or cash.

 

Disclosures

 

The main disclosures required by IFRS 2 are as follows:

 

  • a description of share-based payment arrangements

 

  • the number of share options granted or exercised during the year, and outstanding at the end of the year.

 

Entities should also disclose information that enables users of the financial statements to understand the effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position, that is:

 

  • the total share-based payment expense

 

  • the total carrying amount of liabilities arising from share-based payment transactions.

 

IFRS 2 requires disclosures that enable users to understand how fair values have been determined.

Test your understanding 1 – Equity-settled share-based

 

The total expense recognised is based on the fair value of the share options granted at the grant date (1 January 20X1). The entity recognises the remuneration expense as the employees’ services are received during the three-year vesting period.

 

Year ended 31 December 20X1

 

At 31 December 20X1, the entity must estimate the number of options expected to vest by predicting how many employees will remain in employment until the vesting date. It believes that 80% of the employees will stay for the full three years and therefore calculates an expense based on this assumption:

 

(500 employees × 80%) × 100 options × $15 FV × 1/3 = $200,000

 

Therefore, an expense is recognised for $200,000 together with a corresponding increase in equity.

 

Year ended 31 December 20X2

 

The estimate of the number of employees staying for the full three years is revised at each year end. At 31 December 20X2, it is estimated that 85% of the 500 employees will stay for the full three years. The calculation of the share based payment expense is therefore as follows:

 

$
(500 employees × 85%) × 100 options × $15 FV × 2/3 425,000
Less previously recognised expense (200,000)
–––––––
Expense in year ended 31 December 20X2 225,000
–––––––

 

Equity will be increased by $225,000 to $425,000 ($200,000 + $225,000).

 

Share-based payment

 

Year ended 31 December 20X3

 

A total of 50 (20 + 20 + 10) employees left during the vesting period. The expense recognised in the final year of the scheme is as follows:

 

$
(500 – 50 employees) × 100 options × $15 FV × 3/3 675,000
Less previously recognised expense (425,000)
–––––––
Expense in year ended 31 December 20X3 250,000
–––––––
The financial statements will include the following amounts:
Statement of profit or loss 20X1 20X2 20X3
$ $ $
Staff costs 200,000 225,000 250,000
Statement of financial position 20X1 20X2 20X3
$ $ $
Other components of equity 200,000 425,000 675,000

 

 

Test your understanding 2 – Market based conditions

 

The expense recognised is based on the fair value of the options at the grant date. This should be spread over the vesting period.

 

There are two types of conditions attached to the share based payment scheme:

 

  • A service condition (employees must complete a minimum service period)

 

  • A market based performance condition (the share price must be $5 at 31 December 20X2).

 

Although it looks unlikely that the share price target will be hit, this condition has already been factored into the fair value of the options at the grant date. Therefore, this condition can be ignored when determining the charge to the statement of profit or loss.

 

The expense to be recognised should therefore be based on how many employees are expected to satisfy the service condition only. The calculation is as follows:

 

(100 employees – 10 – 10) × 50 options × $1 FV × 1/2 = $2,000.

 

The entry to recognise this is:
Dr Profit or loss $2,000
Cr Equity $2,000

 

 

 

Test your understanding 3 – Blueberry

 

Rep. date   Calculation of equity Equity Expense Note
$000 $000
31/12/X4   (174 × 200 × $10) × 1/3 116 116 1
31/12/X5 (182 × 300 × $10) × 2/3 364 248 2
31/12/X6 (184 × 300 × $10) × 3/3 552 188 3

 

Notes:

 

  • At 31/12/X4 a total of 26 employees (8 + 18) are expected to leave by the vesting date meaning that 174 are expected to remain. Blueberry estimates that average annual growth in sales volume will be 14%. Consequently, it is estimated that eligible employees would each receive 200 share options at the vesting date.

 

  • At 31/12/X5, a total of 18 employees (8 + 6 + 4) are expected to leave by the vesting date meaning that 182 are expected to remain. Blueberry estimates that the average growth in sales volume will be 16%. Consequently, it is estimated that eligible employees will each receive 300 share options at the vesting date.

 

  • A t 31/12/X6, it is known that total of 16 employees (8 + 6 + 2) have left at some point during the vesting period, leaving 184 eligible employees. As average annual growth in sales volume over the vesting period was 16%, eligible employees are entitled to 300 share options each.

 

 

Share-based payment

 

 

Test your understanding 4 – Beginner

 

Year Equity Expense
$000 $000
Year 1 (7m × $0.3 × 1/3) 700 700
Year 2 (8m × $0.3 × 2/3) 1,600 900
Year 3 (9m × $0.3) 2,700 1,100

 

Note: Equity-settled share-based payments are measured using the fair value of the instrument at the grant date (the start of year one).

 

  • All eligible directors exercised their options: The entity will post the following entry:

 

Dr Cash (9m × $2) $18.0m
Dr Equity reserve $2.7m
Cr Share capital (9m × $1) $9.0m
Cr Share premium (bal. fig.) $11.7m

 

  • No options are exercised

 

The amount recognised in equity ($2.7m) remains. The entity can choose to transfer this to retained earnings.

 

Test your understanding 5 – Modifications

 

The repricing means that the total fair value of the arrangement has increased and this will benefit the employees. This in turn means that the entity must account for an increased remuneration expense. The increased cost is based upon the difference in the fair value of the option, immediately before and after the repricing. Under the original arrangement, the fair value of the option at the date of repricing was $10, which increased to $15 following the repricing of the options, for each share estimated to vest. The additional cost is recognised over the remainder of the vesting period (years two and three).

 

The amounts recognised in the financial statements for each of the three years are as follows:

 

Equity Expense
Year one original $ $
(500 – 50 – 60) × 100 × $20 × 1/3 260,000 260,000
Year two original ––––––– –––––––
(500 – 50 – 30 – 30) × 100 × $20 × 2/3 520,000 260,000
Incremental
(500–50–30–30)×100×$5×1/2 97,500 97,500
––––––– –––––––
617,500 357,500
Year three original ––––––– –––––––
(500 – 50 – 30 – 30) × 100 × $20 780,000 260,000
Incremental
(500–50–30–30)×100×$5 195,000 97,500
––––––– –––––––
975,000 357,500
––––––– –––––––

 

Test your understanding 6 – Cancellations and settlements

 

The share option scheme has been cancelled. This means that all the expense not yet charged through profit or loss must now be recognised in the year ended 31 December 20X1:

 

$
Total expense 40,000
(5 directors × 1,000 options × $8)
Less expense recognised in year ended 31 December 20X0 (13,333)
(5 directors × 1,000 options × $8 × 1/3) –––––––
Expense to be recognised
26,667
–––––––

 

To recognise the remaining expense, the following entry must be posted:

 

Dr Profit or loss $26,667
Cr Equity $26,667

 

Any payment made in compensation for the cancellation that is up to the fair value of the options is recognised as a deduction to equity. Any payment in excess of the fair value is recognised as an expense.

 

The compensation paid to the director for each option exceeded the fair value by $1 ($10 – $9). Therefore, an expense of $1 per option should be recognised in profit or loss.

 

The following accounting entry is required:
Dr Equity (5 directors × 1,000 options × $9) $45,000
Dr Profit or loss (5 directors × 1,000 options × $1) $5,000
Cr Cash (5 directors × 1,000 options × $10) $50,000

 

Test your understanding 7 – Growler

 

  • The liability is remeasured at each reporting date, based upon the current information available relating to known and expected leavers, together with the fair value of the SAR at each date. The remuneration expense recognised is the movement in the liability from one reporting date to the next as summarised below:

 

Rep. date Workings Liability Expense
(SFP) (P/L)
$ $
31/12/X4 (500 – 20 – 20) × 200 × $5 × 1/2 230,000 230,000
31/12/X5 (500 – 20 – 24) × 200 × $7 × 2/2 638,400 408,400

 

  • The number of employees eligible for a cash payment is 456 (500 – 20 – 24). Of these, 257 exercise their SARs at 31/12/X6 and the remaining 199 exercise their SARs at 31/12/X7.

 

The liability is measured at each reporting date, based upon the current information available at that date, together with the fair value of each SAR at that date. Any SARs exercised are reflected at their intrinsic value at the date of exercise.

 

Year ended 31/12/X6

 

$
Liability b/fwd 638,400
Cash payment (257 × 200 × $7) (359,800)
Profit or loss (bal. fig) 39,800
––––––—
Liability c/fwd (199 × 200 × $8) 318,400
––––––—
Year ended 31/12/X7
$
Liability b/fwd 318,400
Cash payment (199 × 200 × $10) (398,000)
Profit or loss (bal. fig) 79,600
––––––—
Liability c/fwd nil
––––––—

 

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