T2- IFRS 2 – Share base payment – Case 1

A comparison of the cash alternative with the equity alternative shows that under Situation 1, it is in
the interest of the chief executive officer to choose the cash alternative as this alternative settlement
method is economically more beneficial.
Cash alternative (150,000 x $3.50): $525,000
Share options (intrinsic value) [500,000 x ($3.50 – $2.50)] $500,000
Difference in favour of the cash alternative $25,000
Therefore, the chief executive officer will chose to receive cash on the vesting date.
Under Situation 2, the chief executive officer will choose the share options as this alternative is
economically more beneficial.
Cash alternative (150,000 x $4.00) $600,000
Share options (intrinsic value) [500,000 x ($4.00 – $2.50)] $750,000
Difference in favour of the equity alternative $150,000*
*Transaction costs have been excluded.
The chief executive officer will therefore, chose the equity alternative.
Situation 1
At the end of 20x3, the fair value of the liability has to be remeasured in line with cash-settled
sharebased payment transaction (IFRS 2:30). As the share price has increased to $2.80 at 31 December
20x3, the fair value of the debt component increases. The fair value of the equity component is not
remeasured but remains at the fair value as at measurement date. A time weighting of 1/3 is applied to
determine the remuneration expense.
Calculation of remuneration expense for 20x3:
Debt component ($2.50 x 150,000 shares x 1/3) $140,000
Equity component ($125,000 x 1/3) $41,667
Remuneration expense recognized in 20x3 $181,667
The debt component is revised upwards to reflect the increase in the share price during 20x4. The
change in the fair value of the debt component is recognized as remuneration expense. A similar
analysis is done for 20x5.
Calculation of remuneration expense in 20x4:
Debt component ($3.20 x 150,000x 2/3) $320,000
Less amount recognized in 20x3 $(140,000)
Additional expense recognized in 20x4 $180,000
Equity component ($125,000 x 1/3) $41,667
Total expense recognized in 20x4 $221,667
Calculation of remuneration expense in 20x5:
Debt component ($3.50 x 150,000) $525,000
Less amount recognized in prior years $(320,000)
Additional expense recognized in 20x5 $205,000
Equity component ($125,000 x 1/3) $41,667
Total expense recognized in 20x5 $246,666
The journal entries to record the remuneration expense and the debt and equity components are as
follows:
31 December 20x3
Dr Remuneration expense $181,667
Cr Liability $140,000
Cr Share option reserves (Equity) $41,667
(To recognize remuneration expense for the debt and equity components and to record a
liability)
31 December 20x4
Dr Remuneration expense $221,667
Cr Liability $180,000
Cr Share option reserves (Equity) $41,667
(To recognize remuneration expense for the debt and equity components and to record change
in the fair value of the liability)
31 December 20x5
Dr Remuneration expense $246,666
Cr Liability $205,000
Cr Share option reserves (Equity) $41,667
(To recognize remuneration expense for the debt and equity components and to record change
in the fair value of the liability)
1 January 20x6
Dr Liability $525,000
Cr Cash $525,000
(To record payment of cash in full settlement of the liability)
Note the following:
1. Changes in the fair value of the debt component as a result of changes in the share price of
Alpha Corporation are taken into account in the periods during which the changes occurred as
the liability is not settled.
2. The expense relating to the equity component is allocated on a straight-line basis over the
expected derived service period.
3. The equity component is not remeasured because it is not a liability.
4. The share option reserve remains in shareholders’ equity although it can be transferred to
another component of equity.
Situation 2
Assume that the share option is exercised on 1 January 20x6.
Calculation for the remuneration expense in 20x3 and 20x4 are the same as in Situation 1.
Calculation of remuneration expense for 20x5:
Debt component ($4.00 x 150,000) $600,000
Less amount recognized in prior years $(320,000)
Additional expense recognized in 20x5 $280,000
Equity component ($180,000 x 1/3) $41,666
Total expense recognized in 20x5 $321,666
The journal entries to record the remuneration expense and the debt and equity components for 20x3
and 20x4 are the same as in Situation 1. The journal entry as at 31 December 20x5 and 1 January
20x6 are shown below.
31 December 20x5
Dr Remuneration expense $321,666
Cr Liability $280,000
Cr Share option reserve (Equity) $41,666
(To recognize remuneration expense for the debt and equity components and to record the
change in the fair value of the liability)
1 January 20x6
Dr Liability $60,000
Dr Cash $1,250,000
Cr Share capital $1,850,000
(Issue of shares on the exercise of the options and as consideration for the settlement of the
liability in accordance with IFRS 2 paragraph 39)
Note the following:
1. Since the grantee chooses the equity alternative, the liability is settled by an increase in share
capital (IFRS 2:39).
2. The equity of the firm after the exercise of the options is increased by $1,975,000 as shown
below:
Additional share capital $1,850,000
Share option reserves $125,000
$1,975,000
Check:
Total remuneration expense $725,000
Cash received from exercise of options (400,000 x $3.00) $1,250,000
$1,975,000