A share-based payment is one in which the entity receives or requires goods and services in return for equity instruments of the entity or incurs a liability for amounts that are based on the prices of the entity’s shares or other equity instruments of the entity. The accounting for the payments depends on how the transaction is settled. There are three main ways of settling the transaction:
- By issuing equity shares
- By paying cash
- Where the third party has a choice of receiving either equity or cash.
- ARGUMENTS AGAINST ACCOUNTING FOR SHARE BASED PAYMENTS
Traditionally, there are three arguments for not recognising share based payments in the financial statements
No Cost, Therefore No Charge
There may be no cost to the entity, as a charge for shares or options does not result in the entity having to sacrifice cash or other assets.
But, this argument ignores the fact that a transaction has occurred. The entity has received a valuable service from employees, for example, in return for valuable shares and / or options. IFRS 2 states that the financial statements must recognise the economic transactions that have occurred.
Earnings Per Share Would Be Hit Twice
The recognition of the expense would reduce the earnings figure. At the same time there will be an increase in the number of shares issued (or to be issued).
But, this double impact merely reflects the two events that have occurred. Shares have been issued and services have been consumed in return for those shares.
Adverse Economic Consequence
Having to recognise these transactions might discourage entities from introducing or continuing employee share plans.
But, failure to record the transactions would result in an economic distortion, whereby goods and services are received without accounting for them.
ACCOUNTING FOR SHARE-BASED TRANSACTIONS
There are two main types of share based transactions;
- Equity-settled share-based payment transaction
- Cash-settled share-based payment transactions
The most common type of transaction is where the entity grants share options to employees or directors as part of their remuneration.
The grant date is the date at which the entity and another party agree to the transaction.
Equity-Settled Share-Based Payments All transactions are measured at their fair value.
Fair value is the amount for which an asset, a liability settled or an equity instrument granted, could be exchanged between knowledgeable, willing parties in an arm’s length transaction
- If the transaction is with employees (or others providing a similar service), measure the fair value of the equity instruments granted at the grant date.
- If the transaction is in respect of goods and services:
- If the fair value of the goods / services can be measured reliably, measure the fair value of the goods and services at the date they were received.
- If the fair value of the goods / services cannot be measured reliably, measure the fair value of the equity instruments granted at the grant date.Transactions that can be Settled for Shares or Cash (“Hybrids”)
Occasionally, a share-based payment transaction may allow the entity or the employee the choice between settlement in cash or through the issue of equity instruments. For example, a director may have the right to choose between a payment equal to the market price of the shares OR be given shares subject to certain conditions (e.g. not being able to sell them for a period of time).
The accounting for this type of transaction depends on which party has the choice of settlement method and the extent to which the entity has incurred a liability.
If the employee has the right to choose the settlement method, the entity is deemed to have issued a compound instrument. In other words, it has issued an instrument with a debt element (the cash component) and an equity element (where the employee has the right to receive equity instruments).
If the fair value of the goods / services received can be measured directly and easily, the equity element is calculated by measuring the fair value of the goods / services less the fair value of the debt element of this instrument. The debt element is the cash payment that will occur.
If the fair value of the goods / services is measured by reference to the fair value of the equity instruments given, the whole of the compound instrument should be fair valued. Then, the equity element becomes the difference between the fair value of the equity instruments granted less the fair value of the debt component.
The entity should disclose information that allows the users of the financial statements to understand the nature and extent of share-based arrangements that existed during the period. The following should be disclosed, at the least:
- A description of each type of share-based arrangement that existed at any time during the period, outlining the general terms and conditions of the arrangement.
- The number and weighted average exercise prices of share options:
- Outstanding at the beginning of the period
- Granted during the period
- Forfeited during the period
- Expired during the period
- Outstanding at the end of the period
- Exercisable at the end of the period
- For share options exercised during the period, the weighted average share price at the date of exercise
- For share options outstanding at the end of the period, the range of exercise prices and the weighted average remaining contractual life
- How the fair value of goods / services received, or the fair value of equity instruments granted, during the period, was determined.