You are on page 1of 12

Chapter 18

Accounting for share-based payments


18.1

The Appendix to AASB 2 defines a share-based payment transaction as:


A transaction in which the entity receives goods or services as consideration for equity
instruments of the entity (including shares or share options), or acquires goods or
services by incurring liabilities to the supplier of those goods or services for amounts
that are based on the price of the entitys shares or other equity instruments of the
entity.
Share-based payment transactions can be of a variety of types. An entity shall apply AASB 2
in accounting for all share-based payment transactions including those that are:
(a) equity-settled share-based payment transactions, in which the entity receives goods
or services as consideration for equity instruments of the entity (including shares or share
options);
(b) cash-settled share-based payment transactions, in which the entity acquires goods or
services by incurring liabilities to the supplier of those goods or services for amounts that
are based on the price (or value) of the entitys shares or other equity instruments of the
entity; and
(c) transactions in which the entity receives or acquires goods or services and the terms
of the arrangement provide either the entity or the supplier of those goods or services
with a choice of whether the entity settles the transaction in cash (or other assets) or by
issuing equity instruments.

18.2

See the answer to Question 18.1.

18.3

Refer to Question 18.1 for an overview of the types of share-based payment transactions
addressed by AASB 2. The share-based payment transaction in question is an equity-settled
share-based payment transaction.

18.4

There is a general requirement for a share-based payment transaction to be measured at fair value;
however, whether the transaction is measured at the fair value of the goods or services, or the fair
value of the equity instrument depends upon whether the transactions are with employees or with
other parties, and whether a fair value can be determined reliably for the goods or services, or for
the equity instrument.
AASB 2 divides its specific recognition and measurement requirements into separate sections
according to the type of share-based transaction being considered. That is, separate parts of the
standard are devoted to:

equity-settled share-based payment transactions;

cash-settled share-based payment transactions; and

share-based payment transactions with cash alternatives.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

181

In relation to how equity-settled share-based transactions are to be measured, a general rule is


provided at paragraph 10, as follows:
For equity-settled share-based payment 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.
In relation to the use of fair values, paragraph 13 of AASB 2 states:

To apply the requirements of paragraph 10 to transactions with parties other than


employees, there shall be a rebuttable presumption that the fair value of the goods or
services received can be estimated reliably. That fair value shall be measured at the
date the entity obtains the goods or the counterparty renders service. In rare cases, if
the entity rebuts this presumption because it cannot estimate reliably the fair value of
the goods or services received, the entity shall measure the goods or services received,
and the corresponding increase in equity, indirectly, by reference to the fair value of the
equity instruments granted, measured at the date the entity obtains the goods or the
counterparty renders service.
There is a general assumption that transactions with employees cannot be reliably measured on the
basis of the value of the services being provided. Therefore, transactions with employees are
typically measured at the fair value of the equity instruments being granted. As paragraph 11 of the
standard states:
To apply the requirements of paragraph 10 to transactions with employees and others
providing similar services, the entity shall measure the fair value of the services received by
reference to the fair value of the equity instruments granted, because typically it is not
possible to estimate reliably the fair value of the services received, as explained in
paragraph 12. The fair value of those equity instruments shall be measured at grant date.
With regard to the required accounting treatment for cash-settled share-based transactions,
paragraph 30 of AASB 2 requires the following:
For cash-settled share-based payment transactions, the entity shall measure the goods
or services acquired and the liability incurred at the fair value of the liability. Until the
liability is settled, the entity shall remeasure the fair value of the liability at each
reporting date and at the date of settlement, with any changes in fair value recognised in
profit or loss for the period.
Where the entity or the counterparty are subject to a share-based payment transaction which
provides a choice between receiving equity instruments or cash, paragraph 34 of AASB 2
describes the required accounting treatment as follows:
For share-based payment transactions in which 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, the entity shall
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.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

182

Where the other party to the transaction has the right to demand cash or equity settlement, the
transaction may be considered to give rise to a compound financial instrument with both a
liability and an equity component. The equity component would be measured as the difference
between the fair value of the goods and services received and the fair value of the liability
component as at the date on which the goods and services are provided.
18.5To the extent that a fair value can be determined reliably then the transaction would be measured at
the fair value of the goods being supplied. Paragraph 10 of AASB 2 states:
For equity-settled share-based payment 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.

18.6

There is a general assumption that transactions with employees cannot be reliably measured on the
basis of the value of the services being provided. Therefore, transactions with employees are
typically measured at the fair value of the equity instruments being granted. As paragraph 11 of the
standard states:
To apply the requirements of paragraph 10 to transactions with employees and others
providing similar services, the entity shall measure the fair value of the services
received by reference to the fair value of the equity instruments granted, because
typically it is not possible to estimate reliably the fair value of the services received, as
explained in paragraph 12. The fair value of those equity instruments shall be
measured at grant date.

18.7

Should the equity instruments not vest at grant date, or where equity instruments are granted
subject to vesting conditions, for example the employee is required to complete a predetermined
period of service, paragraph 15 of AASB 2 creates a presumption that they are a payment for
services to be received during the vesting period. As paragraphs 14 and 15 of AASB 2 state:
14 If the equity instruments granted vest immediately, the counterparty is not required to
complete a specified period of service before becoming unconditionally entitled to those
equity instruments. In the absence of evidence to the contrary, the entity shall presume
that services rendered by the counterparty as consideration for the equity instruments
have been received. In this case, on grant date the entity shall recognise the services
received in full, with a corresponding increase in equity.
15 If the equity instruments granted do not vest until the counterparty completes a specified
period of service, the entity shall presume that the services to be rendered by the
counterparty as consideration for those equity instruments will be received in the future,
during the vesting period. The entity shall account for those services as they are
rendered by the counterparty during the vesting period, with a corresponding increase in
equity. For example:
(a)

if an employee is granted share options conditional upon completing three years


service, then the entity shall presume that the services to be rendered by the
employee as consideration for the share options will be received in the future, over
that three-year vesting period; or

(b)

if an employee is granted share options conditional upon the achievement of a


performance condition and remaining in the entitys employ until that performance

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

183

condition is satisfied, and the length of the vesting period varies depending on
when that performance condition is satisfied, the entity shall presume that the
services to be rendered by the employee as consideration for the share options will
be received in the future, over the expected vesting period. The entity shall estimate
the length of the expected vesting period at grant date, based on the most likely
outcome of the performance condition. If the performance condition is a market
condition, the estimate of the length of the expected vesting period shall be
consistent with the assumptions used in estimating the fair value of the options
granted, and shall not be subsequently revised. If the performance condition is not
a market condition, the entity shall revise its estimate of the length of the vesting
period, if necessary, if subsequent information indicates that the length of the
vesting period differs from previous estimates.

18.8

A cash-settled share-based payment transaction is defined in AASB 2 as:


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 entitys shares or other
equity instruments of the entity.
With regard to the required accounting treatment, paragraph 30 of AASB 2 requires the following:
For cash-settled share-based payment transactions, the entity shall measure the goods
or services acquired and the liability incurred at the fair value of the liability. Until the
liability is settled, the entity shall remeasure the fair value of the liability at each
reporting date and at the date of settlement, with any changes in fair value recognised in
profit or loss for the period.
In contrast with cash-settled share-based transactions, for equity-settled share-based
transactions remeasurement of the granted equity instruments does not occur at subsequent
reporting dates. That is, with equity-settled share-based transactions any subsequent change in
value of the equity instruments is ignored, whereas with cash-settled share-based transactions the
related liabilities are adjusted to fair value at the end of each reporting period, with a resultant
impact on reported profit or loss.

18.9

Guidance to answer this question is provided at paragraph 15 of AASB 2. It states:


If the equity instruments granted do not vest until the counterparty completes a specified
period of service, the entity shall presume that the services to be rendered by the
counterparty as consideration for those equity instruments will be received in the future,
during the vesting period. The entity shall account for those services as they are rendered
by the counterparty during the vesting period, with a corresponding increase in equity. For
example:
(a) if an employee is granted share options conditional upon completing three years
service, then the entity shall presume that the services to be rendered by the employee
as consideration for the share options will be received in the future, over that threeyear vesting period; or
(b) if an employee is granted share options conditional upon the achievement of a
performance condition and remaining in the entitys employ until that performance
condition is satisfied, and the length of the vesting period varies depending on when
that performance condition is satisfied, the entity shall presume that the services to be
rendered by the employee as consideration for the share options will be received in the

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

184

future, over the expected vesting period. The entity shall estimate the length of the
expected vesting period at grant date, based on the most likely outcome of the
performance condition. If the performance condition is a market condition, the
estimate of the length of the expected vesting period shall be consistent with the
assumptions used in estimating the fair value of the options granted, and shall not be
subsequently revised. If the performance condition is not a market condition, the entity
shall revise its estimate of the length of the vesting period, if necessary, if subsequent
information indicates that the length of the vesting period differs from previous
estimates.

18.10 Paragraph 17 of AASB 2 is relevant. It states:


If market prices are not available, the entity shall estimate the fair value of the equity
instruments granted using a valuation technique to estimate what the price of those equity
instruments would have been on the measurement date in an arms length transaction
between knowledgeable, willing parties. The valuation technique shall be consistent with
generally accepted valuation methodologies for pricing financial instruments, and shall
incorporate all factors and assumptions that knowledgeable, willing market participants
would consider in setting the price.
While our text does not to go into the details of calculating the fair value of share options for example, by
applying the Black-Scholes Option Pricing Model (various courses in finance do this), it is worth noting
the issues that should be considered when determining the fair value of equity instruments such as share
options. Appendix B to AASB 2 provides guidance. Paragraphs B4 to B8 include some useful discussion,
and they are reproduced in what follows.
B4 For share options granted to employees, in many cases market prices are not available,
because the options granted are subject to terms and conditions that do not apply to
traded options. If traded options with similar terms and conditions do not exist, the fair
value of the options granted shall be estimated by applying an option pricing model.
B5 The entity shall consider factors that knowledgeable, willing market participants would
consider in selecting the option pricing model to apply. For example, many employee
options have long lives, are usually exercisable during the period between vesting date
and the end of the options life, and are often exercised early. These factors should be
considered when estimating the grant date fair value of the options. For many entities,
this might preclude the use of the Black-Scholes-Merton formula, which does not allow
for the possibility of exercise before the end of the options life and may not adequately
reflect the effects of expected early exercise. It also does not allow for the possibility
that expected volatility and other model inputs might vary over the options life.
However, for share options with relatively short contractual lives, or that must be
exercised within a short period of time after vesting date, the factors identified above
may not apply. In these instances, the Black-Scholes-Merton formula may produce a
value that is substantially the same as a more flexible option pricing model.
B6 All option pricing models take into account, as a minimum, the following factors:
(a) the exercise price of the option;
(b) the life of the option;
(c) the current price of the underlying shares;
(d) the expected volatility of the share price;

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

185

(e) the dividends expected on the shares (if appropriate); and


(f) the risk-free interest rate for the life of the option.
B7 Other factors that knowledgeable, willing market participants would consider in setting
the price shall also be taken into account.
B8 A share option granted to an employee typically cannot be exercised during specified
periods (e.g. during the vesting period or during periods specified by securities
regulators). This factor shall be taken into account if the option pricing model applied
would otherwise assume that the option could be exercised at any time during its life.
However, if an entity uses an option pricing model that values options that can be
exercised only at the end of the options life, no adjustment is required for the inability
to exercise them during the vesting period (or other periods during the options life),
because the model assumes that the options cannot be exercised during those periods.

18.11 If it is not considered possible to determine the fair value of equity instruments, even by using
various valuation techniques such as share option pricing models (and this is deemed by the
standard to happen only on rare occasions), the equity instruments may be valued at their
intrinsic value. Intrinsic value is defined in AASB 2 as:
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 CU15, on a share with a fair value of CU20, has an
intrinsic value of CU5.
According to paragraph 24 of AASB 2:
The requirements in paragraphs 16-23 apply when the entity is required to measure a sharebased payment transaction by reference to the fair value of the equity instruments granted.
In rare cases, the entity may be unable to estimate reliably the fair value of the equity
instruments granted at the measurement date, in accordance with the requirements in
paragraphs 16-22. In these rare cases only, the entity shall instead:
(a) measure the equity instruments at their intrinsic value, initially at the date the entity
obtains the goods or the counterparty renders service and subsequently at each
reporting date and at the date of final settlement, with any change in intrinsic value
recognised in profit or loss. For a grant of share options, the share-based payment
arrangement is finally settled when the options are exercised, are forfeited (e.g. upon
cessation of employment) or lapse (e.g. at the end of the options life); and
(b) recognise the goods or services received based on the number of equity instruments
that ultimately vest or (where applicable) are ultimately exercised. To apply this
requirement to share options, for example, the entity shall recognise the goods or
services received during the vesting period, if any, in accordance with paragraphs 14
and 15, except that the requirements in paragraph 15(b) concerning a market condition
do not apply. The amount recognised for goods or services received during the vesting
period shall be based on the number of share options expected to vest. The entity shall
revise that estimate, if necessary, if subsequent information indicates that the number of
share options expected to vest differs from previous estimates. On vesting date, the
entity shall revise the estimate to equal the number of equity instruments that ultimately
vested. After vesting date, the entity shall reverse the amount recognised for goods or
services received if the share options are later forfeited, or lapse at the end of the share
options life.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

186

18.12 In contrast with cash-settled share-based transactions, for equity-settled share-based


transactions remeasurement of the granted equity instruments does not occur at subsequent
reporting dates. That is, with equity-settled share-based transactions any subsequent change in
value of the equity instruments is ignored, whereas with cash-settled share-based transactions the
related liabilities are adjusted to fair value at the end of each reporting period, with a resultant
impact on reported profit or loss.
18.13 With the release of AASB 2, many organisations that did not previously recognise any expenses in
relation to certain share-based transactions are now required to do so. This will be particularly true
of share-based transactions with employees. While reported expenses will increase (although in
some cases the share-based transaction might initially be recorded as an asset), if the transactions
are classified as cash-settled share-based payment transactions, there will also be an increase in
reported liabilities. Arguably, it would not be unreasonable to contend that these effects on
financial performance and position will have implications for the propensity of Australian
organisations to undertake share-based transactions, particularly those involving employees.
If it is accepted that employee share schemes help to attract, motivate and retain key employees a
reduction in the propensity of organisations to use employee-related share-based transactions will
have adverse implications for many organisations. There is a chance that alternative forms of
remuneration will be used to attract employees and that these other forms might have greater cost
implications than the share-based arrangements of the past. This view is consistent with the
position adopted by the Institute of Chartered Accountants in Australia, which back in 2004 (as
reported in Snapshots, Business Review Weekly, 24 March 2004) expressed the following
reservations:
The Institute of Chartered Accountants in Australia (ICAA) warns that executive
remuneration could rise because of implementation of international financial reporting
standards. The general manager of standards for the ICAA, Bill Palmer, says that under the
new rules, which will be in force for the next reporting season, companies will be required to
expense the cost of share options. This means that, for the first time, companies bottom
lines will bear the brunt of any big share-based remuneration packages. This could result
in businesses excluding options in their executive remuneration packages, and we may see
businesses offering larger salaries in lieu of share options, Palmer says.
There was a deal of criticism of the requirements of AASB 2 in the lead up to its implementation
in 2005. A number of the concerns interested parties had were reflected in a 2003 submission
made to the AASB by the Australian Venture Capital Association Limited (AVCAL) when
Exposure Draft 2 Share-based payments was issued. AVCAL held the view that some
organisations were likely to be worse off as a result of AASB 2 than others. Its submission
included the following:
AVCAL believes that the inclusion of employee share options (ESOs) as an expense is
fundamentally flawed and particularly punitive when applied to unlisted, high growth
companies. AVCAL cannot support the proposed standard, as we believe that it is
inappropriate that ESOs are bundled with share-based transactions for goods and services
with clearly attributable value. Our concerns in this area are set out below.

Paragraph 20 of the November Exposure Draft specifies that the fair value of options
granted shall be either:
1.

measured at the market price of traded options with similar characteristics; or

2.

estimated by applying an options pricing model, such as the Black-Scholes model


or Binomial model.

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

187

When applied to venture-backed unlisted companies the proposed methodology


produces spurious valuations that do not reflect actual costs to the company. It was
never intended that the Black-Scholes and Binomial methods should be applied to the
valuation of options where the underlying securities are not traded on the open market.
Using these models in the context of expensing ESOs in unlisted entities is therefore a
misapplication of the theory underlying both methods that will contribute to accounting
inaccuracies. Early stage businesses face especially difficult contingencies that require
them to attract and retain some of the best and brightest managers that are available.
Often these businesses comprise small teams that are attempting to commercialise
innovative new products and develop new markets. They have uncertain earnings, and
are highly dependent upon the brilliance of individuals to drive the business forwards.
In these circumstances there is a real risk for managers that the company may prove to
be unviable. High calibre individuals will require compensation for accepting this
employer risk.
Options are the currency that empowers innovative start-up companies to attract skilled
managers into high-risk environments. The expensing of options will effectively prevent
start-ups from offering competitive remuneration to executives. This will in turn be
detrimental to innovation, jobs creation and economic growth. This circumstance is
worsened by the proposed methods for valuation. Early stage businesses are
characterised by highly volatile revenue and earnings. This affects the inferred
volatility of the underlying shares. Therefore options granted to employees of early
stage businesses would, under the proposed standard, represent a greater expense than
similar options granted to employees of businesses with stable maintainable earnings.
Similar effects would be observed across industry sectors. The proposed IASB standard
is therefore disproportionately punitive to early stage businesses and should not be
adopted.
18.14 This is an interesting issue. When shares or share options are provided to employees they are
typically used as a substitute for other forms of pay, and as a means of motivating employees
to maximize the value of the organisation. They are also frequently used as an instrument to
retain valuable employees. It is true that the provision of such share-based payments might
not result in direct cash flows, but this in itself does not mean that the payments do not cost
the organisation anything. Clearly the company is giving up something that has value, else it
would not be readily accepted by employees.
Different people might consider that the issue of whether the share-based payment cost the
organisation anything is dependent upon the terms of the issue. For example, if an
organisation provides its employees with options that are out of the money (the exercise price
is more than their current share price), then in the past many organisations said they really
werent providing anything of any value, unless the employees are able to increase the value
of the organisation and hence the value of the shares and related options. Their value was
contingent on future events. However, this is not the approach adopted by the accounting
standard setters. They would argue that to the extent that the payment has a market value
then there is a cost that needs to be recognised. For example, out-of-the-money options
have a value because of their time value. Say BHP Billiton shares had a market value of
$30.00 and they released share options that can be exercised in 5 years at a price of $34.00.
Would they have value? Yes they probably would. We would use an option pricing model to
work out the value, but the market would probably be prepared to buy the options because of
the time value inherent in the instruments. So in a sense, if an organisation offers share
options to employees then it is likely that the same options could also be issued to the
market at a cost to the buyer of the option. In as sense, the standard setters are requiring
Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

188

organisations to capture, as an expense, the opportunity costs associated with shares or


related instruments being issued to employees.
18.15

Dr
Cr

Inventory
Share capital

200,000
200,000

18.16 Employee turnover during the vesting period is calculated as follows:


30 June 2010
Number of employees at
grant date
200
Actual resignations
Year to 30 June 2010
(30)
Year to 30 June 2011
Year to 30 June 2012
Expected future resignations
(20)
150
Actual increase in earnings
Actual average increase
Expected average increase
over vesting period

30 June 2011

30 June 2012

200

200

(30)
(30)
(25)
115

(30)
(30)
(35)
105

13.0%
13.0%

10.0%
11.5%

9.0%
10.67%

13.0%

9.0%

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

189

Year

30 June 2010
30 June 2011
30 June 2012

Expected
number of
employees
to vest
150
115
105

Shares
per
employee

Fair value
of equity
instruments

500
500
500

$14.00
$14.00
$14.00

Expected
portion of
vesting
period
1/2
2/3
3/3

Cumulative
remuneration
expense up to
previous period

Cumulative Remuneration
remuneration
expense for
expense
period
$525 000
$536 667
$735 000

$525 000
$536 667

$525 000
$11 667*
$198 333**

* $11 667 = (115 x 500 x $14 x 2/3) less $525 000


** $198 333 = 105 x 500 x 14 x 3/3) less $536 667
The above calculations are based on the expectations held at the end of each reporting period. For example, at the end of 2010 it
was anticipated that the share entitlement would vest at the end of 2011.

The accounting journal entries for the years ending 30 June 2010, 2011 and 2012
30 June 2010
Dr
Salaries expense
Cr
Share capital

525 000

30 June 2011
Dr
Salaries expense
Cr
Share capital

11 667

30 June 2012
Dr
Salaries expense
Cr
Share capital

198 333

525 000

11 667

198 333

18.17 Employee turnover during the vesting period is calculated as follows:


Number of employees at
grant date
Actual resignations
30 June 2010
30 June 2011
30 June 2012
Expected further resignations
before vesting date
Total expected number of
employees at vesting date

30 June 2010

30 June 2011

30 June 2012

200

200

200

(15)

(15)
(30)

(15)
(30)
(30)

(30)

(20)

155

135

125

Repricing of options
Fair value of original share options (immediately prior to repricing)
Fair value of repriced options
Incremental fair value granted

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

$3.00
$5.00
$2.00

1810

Year

Expected
number of
employees
to vest
155

30 June 2010

30 June 2011
Initial issue
Incremental fair value
granted
Total expense for 2011
30 June 2012
Incremental fair value
granted
Total expense for 2012

Share
options per
employee

Fair value
of equity
instruments
$5.00

Expected
portion of
vesting
period
1/3

Cumulative
remuneration
expense up to
previous period

300

135

Cumulative Remuneration
remuneration
expense for
expense
period

300

$5.00

2/3

$77 500

135

300

$2.00

1/2

125

300

$5.00

3/3

$135 000

$187 500

125

300

$2.00

2/2

$40 500

$75 000

$77 500

$77 500

$135 000

$57 500

$40 500

$40 500
$98 000*
$52 500
$34 500
$87 000**

* $98 000 = [(135 x 300 x $5.00 x 2/3) - $77 500] + (135 x 300 x $2.00 x )
** $87 000 = [(125 x 300 x $5.00 x 3/3) - $135 000] + [(125 x 300 x $2.00 x 2/2) - $40 500]
The above calculations are based on the expectations held at the end of each reporting period. The cost associated with the options
originally issued prior to repricing is shared across the vesting period.

Here the modification increases the fair value of the equity instruments granted, measured immediately
before and after the modification. Coogee Ltd includes the incremental fair value granted in the
measurement of the amount recognised for services received as consideration for the equity instruments
granted.
The accounting entries would be:
30 June 2010
Dr
Salaries expense
Cr
Share capital

77 500

30 June 2011
Dr
Salaries expense
Cr
Share capital

98 000

30 June 2012
Dr
Salaries expense
Cr
Share capital

87 000

18.18
Year end

Calculation

30 June
2010
30 June
2011
30 June
2012

100 000 ($4.00


$5.00)
100 000 ($5.50
$5.00)
100 000 ($6.00
$5.00) $50 000

77 500

98 000

87 000

Remuneration expense
for period
$-

Cumulative
remuneration expense
$-

$50 000

$50 000

$50 000

$100 000

The accounting entries would be:


30 June 2010
no related entry
30 June 2011
Dr
Accrued salaries expense
50 000
Cr
Salaries expense recouped (revenue)

50 000

30 June 2012

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

1811

Dr
Cr

Salaries expense
Accrued salaries expense

1 July 2012
Dr
Accrued salaries expense
Cr
Bank

50 000

50 000

100 000

100 000

18.19 The transaction is a share-based arrangement with a cash alternative at the option of the employee.
Vesting is conditional upon the managing director completing three years service. The transaction
is a compound financial instrument (also discussed in Chapter 15), so the identified debt and
equity components of the financial instrument need to be accounted for separately.
Fair value of debt component
Phantom shares

30 000

Share price at grant date

$19.00

Fair value of cash alternative $570 000

Fair value of compound instrument


Shares

35 000

Grant date fair value of


Share alternative

$15.00 Fair value of equity alternative $525 000

Fair value of equity component

$45 000

A cost based on the following amounts is recognised:


Year
30 June 2010
30 June 2011
30 June 2012
Year
30 June 2010
30 June 2011
30 June 2012

Fair value
of equity components
$45 000
$45 000
$45 000
Phantom
shares
30 000
30 000
30 000

Share price
at balance sheet
date
$16.00
$21.00
$23.00

Vesting
period
1/3
2/3
3/3

Cumulative
expense
$15 000
$30 000
$45 000
Vesting
period

Cumulative
expense

1/3
2/3
3/3

$160 000
$420 000
$690 000

Expense
for year
$15 000
$15 000
$15 000
Expense
for year
$160 000
$260 000
$270 000

Journal entries
30 June 2010
Dr
Salaries expense
175 000
Cr
Liability for employee services
160 000
Cr
Share capital
15 000
(the combined expense is calculated by adding the equity component to the liability component
represented by the phantom shares)
30 June 2011
Dr
Salaries expense
275 000
Cr
Liability for employee services
Cr
Share capital

260 000
15 000

30 June 2012
Dr
Salaries expense
285 000
Cr
Liability for employee expenses
Cr
Share capital

270 000
15 000

Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan

1812