SV 3e PPT Chap13-New

5/2/2021
Chapter 13
Share-based
Payment
Copyright © 2016 by McGraw-Hill Education (Asia). All rights reserved. 1
Learning Objectives
1. Understand what a share-based payment transaction is;

2. Know the different types of share-based payment transactions;
3. Understand the general accounting principles for share-based
payment transactions;
4. Understand the accounting treatment for:
a) equity-settled share-based payment transactions;
b) cash-settled share-based payment transactions;
c) share-based payment transactions with a cash alternative;
5. Understand how to account for modifications to share-based
payments;
6. Understand the tax implications of share-based payment transactions;
and
7. Understand the conceptual arguments for the recognition of
remuneration expense in share-based payment transactions for
services rendered by employees. 2
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Content
1. Introduction
2. Equity-settled Share-based Transactions
3. Modifications to Share Option Plans
4. Cash-settled Share-based Transactions
5. Share-based Payment Arrangements with a Cash

Alternative
6. Tax Implications of Share-based Payment Transactions
7. Accounting Issues Relating to Employee Share Options
Content (Appendix)
Appendix 13A: Share-based Payment Transactions Among

Group Entities
Appendix 13B: Using Option Valuation Models to Estimate

the Fair Value of Share Options
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Introduction
• Share-based transaction, or “executive share option plan” (ESOP)

is a common feature in business.
• Examples include:
– Fixed share option plans that are conditional upon the employees
rendering services for stipulated period ( kỳ quy định);
– Restricted ( bị hạn chế) performance share option plans that are subject
to certain conditions being met
– Share appreciation rights that provide for
• Cash payment or
• Issue of equity instruments whose fair value is equal to the increase
in the share price over a specified period
Introduction
• Accounting for ESOPs has been a highly controversial issue
– Recognition of ESOP as expense would affect entity’s affected reported
earnings
• Accounting standards for ESOP

– IFRS 2: Share-based Payments (IASB)
– SFAS 123: Accounting for Stock-based Compensation (FASB)
• Applies to entities that have share-based transactions with employees,

or third-parties which provide goods and services
• Does NOT apply to:

– Shares issued as consideration in business combinations (IFRS 3)
– Financial instrument transactions (IAS 32 & IAS 39)
– Transactions with party in his/her capacity as a shareholder
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Types of Share-based Transactions
Share-based transactions
Equity-settled Cash-settled Equity-or cash-settled
Agreement which
Acquires goods or entities other party to
Receives goods or
services by incurring receive cash or other
services as
a liability at amounts assets based on
payments for equity
based on the value value of equity
instruments of the
of shares or other instruments or to
entity
equity instruments receive equity
instruments
Types of Share-based Transactions
• Include situations where one group company (e.g. parent) settles the
transaction on behalf of another group company (e.g. its subsidiary)
– Refer to Tan, Lim and Kuah (2016) Chapter 13 Appendix 13A for group-
settled share-based transactions
• How to measure the fair value (FV) of the ESOPs equity instruments?
Based on the FV of If FV of goods and services cannot be
the goods and estimated reliably, refer to equity valuation
services received methodology (e.g. option pricing model)
– Rebuttable presumption: FV of employee services is more difficult to

value than the FV of the equity instruments issued.
– Distinguish between employee vs. non-employee transactions
Employees: FV of services provided is usually not reliably determinable
Non-employees: Arm’s-length market prices of goods and services provided
are more readily available (e.g. suppliers).
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General Accounting Principles

General Principal
Expense charged to income statement and corresponding increase in equity
component is recorded when goods or services are provided by counterparties
Recognition of expense
Past services Future services
Amount is recognized as Expense is recognized
expense immediately over vesting period
Fair value of expense
Provided by employee
Based on FV of equity instruments on
grant date and is subsequently not Provided by non-employees
revised.
Based on FV of goods and services
Amount recognized during vesting
rendered at date of receipt
period is best estimate of equity
instruments expected to vest and
subsequently revised
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Content
1. Introduction

Alternative
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Terms Used in Share-based Payment

Transactions
Grant This is the date when the share options or other share- based
Date payment plans are awarded or granted to employees.
This is the date of measurement of the fair value of the share options
Measurement granted. Normally. The measurement date coincides with the grant
Date date.
This is the date when the employee is entitled to the issued equity
intrusments under a share based plan, having satisfied all the
Vesting
necessary conditions. The period from the grant date to the vesting
Date
date is known as the vesting period.
Vesting Condition is a condition that must be meet before the grantee

Vesting is entitled to receive compensation either in the form of cash or equity
Condition instruments of entity. There are two : service conditions and
performance conditions. 11
Terms Used in Share-based Payment

Transactions
Non- Non vesting conditions are neither service conditions nor service
vesting performance conditions but are conditions that must be satisfied for the
Condition counterparty to be entitle to the share – based payments.
This is the number of equity instrument expected to be forfeited due to

Forfeiture non compliance with a vesting condition..
Rate
This is the fair value of the share options or other share – based plans at
FV @ Grant the date of the grant.
Date
This feature in the share option plan automatically grants additional

Reload options ( referred to as the reload option) when the option holder
Feature exercises previously granted options and receives shares rather than
cash.
Intrinsic This is the different between the fair value of the underlying share
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Value and exercise price.
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Illustration 13.1 – ACCOUNTING FOR FIX OPTION PLAN
• Capital Ltd, a listed company . Introduced a share option scheme called the CCL.
Share option Scheme on 1 January 20X1. All the managers accepted the terms of the
share option Scheme on 5 January 20X1. Under the scheme, ten key managers were
granted 100,000 share options each. Each option entitled the grantee to take up one
ordinary share in the company. The options could be exercised at any time after two
years ( during which time the employee must not leave the entity), but not later than the
expiry date, which was 5 January 20X6. The exercise price was $2 per share, which
was the actual market price on the date of the grant.
• Other information:
• (a) At the date of the grant, the estimated fair value of the share option was $0,40 per
option. CCL estimated two out of the ten manager would leave the entity before 5
January 20X3.
• (b) One of the managers left the company in 20X1. At the end of 20X1, CCL increased
its estimate of the number of managers leaving the company from two to three.
• (c) In 20X2, another manager left CCL.( How many)
• (d) On 15 January 20X3, all of the remaining managers excercised their share option
when the market price of CCL’s share was $2.80.
• € CCL’s financial year – end is 31 December.
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• The time line diagram below shows the various relevant dates pertaining to the
share option scheme.
Vesting period
5 Jan 20X1, 5 Jan 20X3, 5 Jan 20X6,
Grant date Vesting date Expiry date
20X1’s remuneration expense
At the end of 20X1 , the estimated number of executives who are expected to remain in the
entity’s employment is seven. Therefore the remuneration expense is based on the numer of
options that is ultimately expected to vest.
= 100,000 option x 7 excutives = 700,000.
Based on the estimated fair value of $ 0,40 per option at the grant date and a two year service
period, the remuneration expense in 20X1 is as follow:
= 700,000 x $0.40 x ½ = $ 140,000 ( 1 year ).
20X2’s remuneration expense
At the end of 20X2 , the actual number of option that vested is 800,000 ( 100,000 x 8 ).
the remuneration expense in 20X2 is as follow:
= 100,000 x 8 x $0.40 …………………………. $ 320,000
Less amount recognized in 20X1…………………(140,000)
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Remuneration expense recognized in 20X2…..$ 180,000
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The journal entries to record the remuneration expense are as follows:
31 December 20X1 Dr Remuneration expense……………………..140,000

Cr Share option reverse equity…………………140,000
Share option expense for the year- ended 31 December 20X1
31 December 20X2 Dr Remuneration expense…………………….. 180,000

Cr Share option reverse equity…………………180,000
Share option expense for the year- ended 31 December 20X2
15 January 20X3 Dr Cash…(800,000 x $2) ……..……………….1,600,000

Dr Share option reverse equity………………….320,000
Cr Share capital …(800,000 x $2,8) ……………1,920,000
Issue of 800,000 ordinary shares at $2 each and transfer of the balance of
share option reverse to share capital.
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PERFORMANCE OR VARIABLE SHARE OPTION PLANS

ILLUSTRATION 13.2 Performance plan with performance conditions
On 1 November 20X0 , Alto Company announced share incentive plan for 100
executives. The terms of the plan as follow:
(a) The number of option each executive would received was given by the
following formula:
50,000 x ( 1+ simple average annual rate of increase in net earnings from 1
January 20X1 to December 20X3). An increase in net earnings is a performance
condition. IFRS allows the performance target to relate to entity as the whole or a
part of the entily, such as a division. A reference to a share index is a non –
vesting condition and not a performance condition.
(b) The excersice price was $3.60per share, which was the same as the market
price on grant date.
( c) The options were not transferable, they were exercisable three years from the
grant date. The options expired at the end of five years from the grant date.
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PERFORMANCE OR VARIABLE SHARE OPTION PLANS

ILLUSTRATION 13.2 Performance plan with performance conditions
(d) The options would be forfeited should any manager leave the entity during the
service period of three years.
(e) The estimated fair value of the share option at grant date was $0,50.
The plan was approved by shareholders on 1 January 20X1. At the date of the
grant of the share options, the management of Alto Corporation estimated that the
company net earnings would increase by 10% a year. Management also estimated
a forfeiture rate of 10%, that is, 10% of the executives would be leave the
company by the end of 20X3.
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ILLUSTRATION 13.2
At the end of 20X1, the net earning of Alto increased by 15% over 20X0. Three
executives left the company in 20X1. Management revised the forfeiture rate to 8% by the
end of 20X3, and net earning were revised to grow by an average of 12% for the three years
period.
In 20X2 , two executives left the company and net earning increased by 8% over 20X1.
Management retained its estimate of the forfeiture rate at 8% and estimated net earning to
grow by an average rate of 10% over the three-year period.
In 20X3 , two executives left the company and net earning increased by 12% over
20X2, resulting in a simple average annual increase of 12% for the 20X1 to 20X3 period. On
31 December 20X3, the share price of Alto was $5.00 and all remaining executives exercised
the options granted to them under the performance-based scheme.
Remuneration expense for a period is the difference between the cumulative
Remuneration expense calculated at the end of the current and previous reporting period, as
shown inTable 13.1. The current Remuneration expense includes the effects of changes in
estimates of the earnings growth rate and the forfeiture rate.
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REMUNERATION EXPENSE UNDER A PERFORMANCE- BASED SHARE OPTION PLAN

Date Cummulative remuneration expense Current year’s remuneration
expense
31 Dec. 20X1 50,000 options x1.12 x 92 x $0.50 x $ 858,667
1/3 = $ 858,667
31 Dec. 20X2 50,000 options x1.1 x 92 x $0.50 x 2/3 $ 1,686,667 - $ 858,667= $828,000
= $ 1,686,667
31 Dec. 20X3 50,000 options x1.12 x 93 x $0.50 = $ $ 2,604.000 - $ 1,686,667 =

2,604.000 $917,333
31 Dec. 20X1 Dr Remuneration expense $ 858,667

Cr Share options reverse (equity)
Remuneration expense for the year ended 31 Dec.
31 Dec. 20X2 20X1
Dr Remuneration expense $ 828,000
20X2
REMUNERATION EXPENSE UNDER A PERFORMANCE- BASED SHARE OPTION PLAN
31 Dec. 20X3 Dr Remuneration expense $ 917,333

20X3
Dr Cash………………………………………..18,748,800
Dr Share options reverse
(equity)……………………………………2,604,000 21,352,800
Cr Issued share capital………………………….
Issue of share for cash (50,000 x 1.12 x 93 x $3.60 =
18,748,800 and transfer of the balance in the share
options reverse to issued share capital
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Equity-settled Share-based Transactions

Determination of fair value of share-based transactions
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Impact of Conditions on FV at Grant Date
• Estimation of the fair value of equity instruments issued by a entity in a

share-based transaction takes into account market performance vesting
conditions
• Conditions that are not market conditions are not factored in

determining the fair value of options granted
– Conditions are taken into account during the measurement period by
adjusting the number of equity instruments that are likely to eventually vest
• Non-vesting conditions, similar to market performance vesting

conditions, are taken into account.
• Fair value of options will also not take into account the effects of any
reload feature
– Reload options granted are accounted for as new options granted
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Impact of Conditions on FV at Grant Date
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What if Share Options are Not

Exercised after the Vesting Date?
• IFRS 2:23 does not permit reversal of remuneration expense
recognized during vesting period even if share options are not
exercised
• Essentially, goods and services have been received and the

expense recognized reflect consumption of the benefits of
these goods and services
• However, IFRS 2 does not prohibit the entity from transferring

from one component of equity to another
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Content
1. Introduction

Alternative
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Modification to Share Option Plans
Modification to share option plans may

include one or more of the following
Change in Change in Inclusion of Early

Cancellation
exercise price vesting cash settlement of
of grant
(Repricing) condition alternative grant
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Repricing
Decrease or increase in the exercise price is effectively a repricing of the

equity instruments
Increase fair value of Recognize effect of

equity instrument modification
Change in
exercise
price
(Repricing)
Reduce fair value of Ignore effect of
equity instrument modification*
*Entity continues to recognize the amount of remuneration expense based on the

fair value of equity at the grant date
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Modifications that Increase the Total Fair

Value of the Share-based Arrangement
Determine reason for increase of fair value
Reduction of Increase in number of

exercise price equity instruments
Incremental value Incremental value

(FV revised option – FV of additional
FV of original option) equity instruments
Incremental value added to original amount
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Modifications that Increase the Total Fair

Modification date
During vesting period After vesting period
1. Original amount
allocated over
vesting period Incremental fair
2. Incremental fair value recognized
value allocated immediately
over remaining
vesting period
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Modifications that Reduce the Total Fair

• In a situation where the modification does not benefit the employee
or the total FV of the arrangement is reduced, we ignore the
decrease in the total FV (as if never occurred).
– E.g. vesting period is prolonged; additional performance condition (other
than a market condition) is included
• Exception: Cancellation of some or all of the equity instrument.

– Treated as a cancellation in accordance with para 28 of IRFS 2
– Para B44(b): A modification that reduces the number of equity
instruments is granted to the employee to be accounted for as a
cancellation of that portion of the share grant.
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Cancellations and Settlements of Share-

based Arrangements
• Conditions to arise
– Entities or employees cancel and settle a grant, or fail to meet non-
vesting condition during the vesting period on their own will (treated as
cancellation).
• Treated as an acceleration of vesting. All awards outstanding at the

date of cancellation that would have been recognized for services
over the remaining vesting period are immediately recognized.
– Example
Entity X has an equity-settled share-based payment arrangement with 200
employees. Immediately prior to cancellation, Entity X estimates that 90%
of the employees will meet a service condition
The expense that is immediately recognized upon cancellation is 90%
multiplied by the fair value of awards for 200 employees.
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Cancellations and Settlements of Share-

based Arrangements
• The payment made to the employee for the cancellation or
settlement is treated as a repurchase of an equity interest.
– The amount paid is deducted against equity
– If the payment exceeds the FV of equity instruments granted (re-
determined on the repurchase date), the excess will be accounted for as
an expense in the profit or loss.
• If the entity grants new equity instruments to the employees on the

cancellation or settlement of the share grant, the accounting
treatment depends on whether these new equity instruments are
identified as replacement for the cancelled equity instrument.
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When New Grants are Identified as

Replacement Equity Instrument
• Accounted for as a modification of the original grant
FV of the Net FV of the
Incremental
replacement cancelled equity
FV
equity instrument instrument
– FVs are calculated when the replacement equity instruments are granted
– Net FV of the cancelled equity instruments = FV immediately before
cancellation – any amounts paid to the employees on cancellation
• The incremental FV will be included in the amount recognized for

services received from the date of replacement to its vesting date.
– This is in addition to the amount recognized at the date of replacement,
which was based on the grant date FV of the original cancelled equity.
– If no additional period of service is required, we recognize the
incremental FV immediately.
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When New Grants are NOT Identified as

Replacement Equity Instrument
• Accounted for as a new grant of equity
– The FV at grant date will be estimated for the new grant
– Share-based payment expense will be recognized over the vesting
period
• The cancelled equity instruments will be accounted for as a

cancellation
– Any outstanding amounts that would otherwise have been recognized
for services received over the remaining vesting period are recognized
immediately.
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Equity Instruments Whose Fair Value

cannot be Estimated Reliably
• IFRS 2:24 allows the use of intrinsic method to calculate
remuneration expense
Intrinsic method
Subsequent
Date of receipt reporting date Settlement date
• Equity instrument measured at intrinsic value, and changes are

recognized in P&L
• Transaction amount recognized based on number of equity
instruments expected to vest and estimate is revised to number of
ultimately vested instruments
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Content
1. Introduction

Alternative
36
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Cash-settled Share-based Transactions
• Share-based plans that pay cash to employees instead of issuing

new equity instruments
• Example is share appreciation rights

– Employees entitled to cash payment based on intrinsic value of equity
instruments at the date of payment
• Entity incurs liability for the services received from the employees
– Measured initially and remeasured at each reporting date to settlement
date
– Fair value estimated using option valuation model
– Changes in fair value goes to profit and loss
37
ILLUSTRATION 13.4 – Share appreciation rights
On 1 January 20X1, ABC Company entered into arrangement to grant 1,000

SARs to each of its 100 employees. The vesting period ended on 31 December
20X3. The exercise price was $30 per share. Each SAR entitled the employee to a
cash payment that was equal to the increase in share price over the exercise price of
$30 at settlement date. The excess of share price over the exercise price at the date
of exercise was essentially the intrinsic value of the SAR. For simplicity, the
illustration assumes that exercise was made at the end of the year. Additional
information is as following:
20X1 20X2 20X3 20X4

Number of employees who left the entity 3 4 2
during the year.
End- of- year estimate of the number of 8 10 9
employees leaving during the vesting period
Number of employees who exercised SARs on 40 51
31 December of that year
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Date Share price Fair value Intrinsic value

31 December 20X1 $12
31 December 20X2 15
31 December 20X3 $45 18 $45 - $30 = $15
31 December 20X4 $49 22 $49 - $30 = $19
20X1
At the end of 20X1, 92,000 SARs were expected to vest to 92 ( 100 – 8)employees
who were expected to be employment on 31 December, 20X3. Therefore, the
remuneration expense recognized in 20X1 was $368,000 ( 92,000 x $12 x 1/3) .
Dr Remuneration expense ……………….368,000
Cr Remuneration Payable………………..368,000
Remuneration expense for the year ended 31 December 20X1
39
20X2
At the end of 20X2, the number of SARs expected to vest was revised to 90,000
since 10% of the employees were expected to leave.
Estimated fair value of SARs at 31 December 20X2
(90,000 x $15 x 2/3) $900,000
Less Estimated fair value of SARs at 31 December 20X1 (368,000)
Remuneration expense recognized in 20X2 $532,000
Dr Remuneration expense……………..532,000
Cr Remuneration payable………………532,000
Tan, Lim and Kuah

©2016 40
Chapter 13
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20X3
At the end of 20X3, 40 employees out of the remaining 91 employees exercised
their SARs.
Estimated fair value of unexercised SARs at 31 December 20X3
[(91 – 40) x 1,000 x $18 ) $918,000
Less Estimated fair value of unexercised SARs at 31 December (900,000)
20X2
Change in fair value $18,000
Add intrinsic value of SARs exercised in 20X3(40 x 1,000 x $15) 600,000
Dr Remuneration payable……………..600,000
Cr Cash…………………………………600,000
Cash paid out during the year ended 31 December 20X3 41
20X4
At the end of 20X4, all SARs had been exercised.
Estimated fair value of unexercised SARs at 31 December 20X4 $0
Less Estimated fair value of unexercised SARs at 31 December 918,000
20X3
Change in fair value $(918,000)
Add intrinsic value of SARs exercised in 20X4(51 x 1,000 x $19) 969,000
Dr Remuneration payable……………..969,000
Cr Cash…………………………………969,000
Cash paid out during the year ended 31 December 20X4
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Summary Remuneration expenses

20X1…………………………..$368,000
20X2…………………………..$532,000
20X3…………………………..$618,000
20X1…………………………..$ 51,000
Total…………………………..$1,569,000
Check
Remuneration = No of employees x No of SARs x Actual cash paid

expense per employee (intrinstic value)
40 employees x 1,000 SARs x $15 $600,000

51 employees x 1,000 SARs x $19 $969,000
$1,569,000
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Remuneration expense can also be worked out as a residual from the t- account of
the liability under SARs or the remuneration payable account as shown below:
Remuneration payable
20X1 20X1
Balance, 31 December…………..368,000 Expense (residual)..…………..368,000
20X2
20X2
Balance, 31 December…………..900,000
Balance, 1 January.……………368,000
20X3 Expense (residual)..…………..532,000
Cash paid…………….…………..600,000 900,000
Balance, 31 December………….918,000 20X3
1,518,000 Balance, 1 January.……………900,000
Expense (residual)..…………..618,000
20X4
20X 1,518,000
Cash paid……………………….$969,000
Balance, 1 January.……………918,000
Balance, 31 December…………………. 0
Expense (residual)..…………..51,000
969,000
969,000
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The following journal entries are recorded over the vesting period
31 Dec. 20X1 Dr Remuneration expense 368,000

Cr Remuneration payable 368,000
Remuneration expense for the year ended 31
Dec. 20X1

Dec. 20X2

Dec. 20X3 45
31 Dec. 20X3 Dr Remuneration payable 600,000

Cr Cash 600,000
Cash paid out during the year ended 31 Dec.
20X3

Dec. 20X4
31 Dec. 20X4 Dr Remuneration payable 969,000

Cr Cash 969,000
Cash paid out during the year ended 31 Dec.
20X4 46
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Content
1. Introduction
5. Share-based Payment Arrangements with a Cash Alternative
47
Share-based Payment Arrangements

with a Cash Alternative
• Share-based arrangement contains provisions in which either the
employees or the entity can elect to receive or pay either cash or an
equity instrument
• Accounting treatment depends on which party has the right to

choose the settlement method
• Cash alternative may be in the form of:

– “Phantom” shares which gives the holder the right to a cash receipt
– SARs that grant the holder the right to a cash amount that is the excess
of the fair value on settlement date over the exercise price
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Choice of the Settlement Method

Rests with the Entity
Indications of obligations to settle in cash
Choice of
History of
settlement has Past practices of Stated policy of
settling in cash
“no commercial settling in cash settling in cash
when requested
substance”
49

Rests with the Entity
Account as cash-settled
Yes
share-based transaction
Cash settlement Equity settlement

has higher value has higher value
Obligation to
settle in cash Repurchase
of equity Repurchase of
Settle in cash (cash paid - equity interest
FV of equity)
No
Excess of FV of
Issue equity No further
equity over cash
instruments accounting
in expense
50
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TABLE 13.2 Entity has a choice of the settlement method with no

obligation to settle in cash
Prior to settlement
Account as equity – settled share- based transaction, if there is no present
Dr Remuneration Expense
Cr Equity
Entity has a choice to settle its employee options in cash $110,000 or shares.
there is no present obligation and no past practice to settle in cash. On grant date,
the equity value is $100,000. The options are vested over aservice period of two
years. At the end of year 1, the journal entry is :
Dr Remuneration Expense: $100,000 x ½ = 50,000
Cr Equity……………………………….50,000
Tan, Lim and Kuah

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Chapter 13
TABLE 13.2 Entity has a choice of the settlement method with no obligation to
settle in cash
At settlement Cash settlement has a higher fair value Equity settlement has a higher fair value
date
Entity chooses Cash payment is accounted for as a Cash payment is accounted for as a
to settle in repurchase of an equity interest. repurchase of an equity interest.
cash
Dr Equity: fair value of the equity Dr Equity: fair value of the equity
Cr Cash: intrusment Cr Cash: intrusment
At settlement Cash settlement has a higher fair value Equity settlement has a higher fair value
date
Entity chooses An additional expense that is equal to the Cash payment is accounted for as a
to settle in difference between the cash paid and the fair repurchase of an equity interest.
cash value of equity.
Dr Remuneration Expense: Dr Equity:
Cr Equity: Cr Cash:
Alternative composite entry:
Dr Remuneration Expense:
Dr Equity
Cr Cash:
Entity chooses No further accounting is required. The excess of the fair value of the equity
to settle However the share option reserve may be instrutment over the amount of cash->An
through equity transferred to another component of equity. additional expense at settlement date.
issue Dr Remuneration Expense: 52
Cr Equity:
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Scenario 1: Settlement in cash, cash settlement has higher value than shares
At the end of year 2, Entity Z chooses to settle in cash $110,000, which has higher value than
share value of $100,000). Journal entries are
Dr Remuneration Expense…………………………….50,000
Cr Equity……..……………………………………….. 50,000
Dr Equity………………..…………………………$100,000
Dr Remuneration Expense………………………….10,000
Cr Cash…………………………………………….. 110,000
Scenario 3: Settlement in cash, cash settlement has lower value than shares
Entity Z has achoice to settle its employee option in cash $90,000 or shares. There is
no present obligation and no past practice to settle in cash. On grant date, the equity
value is $100,000.
At the end of year 2, entity Z chooses to settle in cash. Journal entries are:
Cr Equity……..……………………………………….. 50,000
Dr Equity………………..…………………………$ 90,000
53
Cr Cash…………………………………………….. 90,000

Scenario 2: Settlement in equity, cash settlement has higher value than

shares
At the end of year 2, Entity Z chooses to settle in equity (which has lower value than
cash). Journal entries are
Cr Equity……..……………………………………….. 50,000
Scenario 4: Settlement in equity, cash settlement has lower value than
shares
Entity Z has achoice to settle its employee option in cash $90,000 or shares. There is
no present obligation and no past practice to settle in cash. On grant date, the equity
value is $100,000.
At the end of year 2, Entity Z chooses to settle in equity $110,000, which has higher
value than share value of $100,000). Journal entries are
Cr Equity……..……………………………………….. 50,000
54
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Rests with the Employee
• Substance of arrangement is grant of a compound financial
instrument with debt and equity component
– Debt component: employee’s right to demand a cash settlement
– Equity component: employee’s right to demand settlement in equity
instruments (forfeiture of the right to receive cash)
• Relationships between debt and equity component

Fair value of debt component = Fair value of the “cash alternative”
Fair value of equity component = Fair value of the – Fair value of the
“equity alternative” “cash alternative”
Fair value of compound = Fair value of the + Fair value of the
financial instrument debt component equity component
55

Rests with the Employee
Measurement Date Vesting Period Settlement Date
Same as cash-settled
Fair value of the “cash share-based payment Liability re-measured at
Debt alternative” transactions and re- fair value and
measured and reversed.
recognized in P&L
Same as equity-settled
Remains in equity, but
Difference in fair value share-based payment
is transferable from
Equity of “equity alternative” transactions and re-
one component to
and “cash alternative” measured and
another
recognized in equity
56
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ILLUSTRATION 13.5 – Share-based transaction with a cash

alternative
On 1 January 20X3, Delta Company granted its chief executive officer an award of either a
cash payment that was equal to 100,000 shares of Delta company ( the cash alternative), or
400,000 share options an exercise price of $3.00( the equity alternative). The exercise price
was the same as the market price of Delta Company on the date of the grant. The choice lay
with the chief executive officer at the vesting date. The grant, which had avesting period of
three years, would expire five year after the grant date.
The fair value of the share options (( the equity alternative) at January 20X3 was estimated
at $1.20 per option using an option value model. The fair value of the two components of the
compound financial instrument were estimated at measurement date as follows:
Fair value of equity alternative (400,000 x $1.20)………………….. $480,000

Less Fair value of debt component (100,000 shares x $3.00)…….. (300,000)
Fair value of equity component……………………………………….. $180,000
The share prices of Delta Company at the end of 20X3 and 20X4 were $3,30 and
$3,60 respectively. Assume the following share prices at the end of 20X5.
- Situation 1: The share prices of Delta Company at the end of 20X5 was $3.80.
- Situation 1: The share prices of Delta Company at the end of 20X5 was $4.50.
57
ILLUSTRATION 13.5 – Share-based transaction with a cash

alternative
The comparation of the cash alternative with the equity alternativeshows that under
Situation 1, it is in the interest of the chief executive officer the cash alternative, as
this alternative settlement method is economically more beneficial.
Cash alternative (100,000 x $3.80)………………….. $380,000
Share options (intrinsic value)[(400,000 x( $3,80- $3.00)…….. 320,000
Difference in favour of the equity alternative………………….. $60,000
Therefore, the chief executive officer will choose to receive cash on the vesting
date.
Under situation 2, the chief executive officer will choose the share option as this
alternative is economically more beneficial.
Cash alternative (100,000 x $4.50)………………….. $450,000
Share options (intrinsic value)[(400,000 x($4.50- $3.00)…….. 600,000
Difference in favour of the equity alternative………………….. $150,000
The chief executive officer will, therefore, choose the equity
58
alterantive.
29
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Situation 1
At the end of 20X3, the fair value of the liability had to be remeasured in line with cash
settled share based payment transaction (IFRS 2:30). As the share price had increased to
$3.30 at 31 Dec 20X3, the fair value of the debt component increased. the fair value of the
equity component was not remeasured but remained at the fair value as at measurement date.
A time weighting of 1/3 was applied to determine the remuneration expense:
Calculatetion of remuneration expense for 20X3

Debt component (100,000 shares x $3.30 x 1/3)…….. $110,000
Equity component ( $180,000 x 1/3)…………………….. $60,000
59
Situation 1
The debt component was revised upwards to reflect the increase in the share price during
20X4. The change in the fair value of the debt component was recognized as remuneration
expense. A similar analysis was done for 20X5.
Calculation of remuneration expense for 20X4

Debt component (100,000 shares x $3.60 x 2/3)…….. $240,000
Less amount recognized in 20X3…………………….. $110,000
Additional expense recognized in 20X4 $130,000
Equity component ($180,000 x 1/3) 60,000
Total expense recognized in 20X4 190,000

Debt component (100,000 shares x $3.80)…….. $380,000
Less amount recognized in prior year………………….. (240,000)
60
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Situation 1
The journal entries to record the remuneration expense and the debt and equity component
are as follows:
31 Dec. 20X3
Dr remuneration expense $170,000
Cr Liability………………….. $110,000
Cr Share option reserves (equity) $60,000
To recognized remuneration expense for the debt and equity component
and to record a liability.
31 Dec. 20X4
Cr Liability………………….. $130,000
and to record change in the fair value of the liability. 61
Situation 1
The journal entries to record the remuneration expense and the debt and equity component
are as follows:
31 Dec. 20X5
Cr Liability………………….. $140,000
and to record change in the fair value of the liability.
1 Jan. 20X6
Dr Liability $380,000
Cr Cash………………….. $380,000
To record payment of cash in full settlement of the liability.
62
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Situation 2
Assume that the share options is execised on January 20X6. Calculation for the
remuneration expense in 20X3 and 20X4 are the same in Situation 1

Debt component (100,000 shares x $4.50)…….. $450,000
Less amount recognized in prior years…………………….. $(240,000)
63
Situation 2
The journal entries to record the remuneration expense and the debt and equity component for
20X3 and 20X4 are the same in Situation 1. The journal entry as at 31 Dec 20X5 and January
20X6 are shown below:
31 Dec. 20X5
Cr Liability………………….. $210,000
and to record and the change in the fair value of the liability.
1 Jan. 20X6
Dr Liability $450,000
Dr Cash………………….. $1,200,000
Cr Share capital $1,650,000
Issue of shares on the exercise of the option and as consideration for the
settlement of the liability in accordance with IFRS 2:39 64
32
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Situation 1
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 entity after the exercise of the option is increased by $1,830,000 as
shown below:
Additional share capital $1,650,000

Share option reserves $180,000
Cr Share option reserves (equity) $1,830,000
Check:
Total Remuneration expense $630,000

Cash received from exercise of the option (400,000 x $3.00) $1,200,000
$1,830,000
65
Content
1. Introduction

Alternative
66
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Tax Implications of Share-based Payment

Transactions
• Deferred tax consideration arises when tax regime allows for
deduction of remuneration expenses relating to share-based
payment transaction
• IAS 12:68A - Accounting procedure precedes tax deductibility and a

deductible tax difference results in a deferred tax asset (DTA)
• Carrying value of DTA based on estimated future tax deductions
• Only tax effects relating to remuneration expense are recognized on

income statement
67
Content
1. Introduction

Alternative
68
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Accounting Issues Relating to Employee

Share Options
Issues
ESOP granted to Fair value estimated
Grant of share options
employees comparable reliably given
meet the definition of
with other forms of restrictions on
“expense”?
compensation? transfers?
Other non-comparable Valuation models

Economic value
For
forms legitimately can be adapted to

of ESOPs
recognized value ESOP
Against
ESOP not directly ESOP does not

Restrictions on transfer
comparable to salaries meet definition
leads to inaccurate FV
and bonuses of “expenses”
69
Accounting Issues Relating to Employee

Share Options
Accounting Issues For Against
ESOP granted to
Other non-comparable ESOP not directly
employees comparable
forms legitimately comparable to salaries
with other forms of
recognized and bonuses
compensation?
Grant of share options ESOP does not

Economic value
meet the definition of meet definition
of ESOPs
“expense”? of “expenses”
Fair value estimated

Valuation models
reliably given Restrictions on transfer
can be adapted to
restrictions on leads to inaccurate FV
value ESOP
transfers?
70
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Content

Group Entities

71
Appendix 13A: Share-based Payment

Transactions Among Group Entities
• Possible share-based payment arrangements among group entities:

– Parent issues parent’s equity instruments to employees of its subsidiary
– Subsidiary issues parent’s equity instruments to employees of the
subsidiary
– Subsidiary settles share-based payment with employees of the
subsidiary
– Parent settles share-based payment with employees of the subsidiary
– Other parties (e.g. an investor of the parent) settle share-based
payment with employees of the subsidiary
72
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• IASB provides two overriding principles to guide the accounting for

share-based payment transactions among group entities:
1. Entity that receives the goods and services measures the transaction
as equity-settled share-based payment transaction when:
a) The awards granted are the entity’s own equity instruments; or
b) The entity has no obligation to settle the share-based payment
transaction (IFRS 2:43B)
− In all other circumstances, the entity that receives the goods and
services measures the transaction as a cash-settled share-based
payment.
− Principle is applied from the perspective of the group and the legal
entity that receives the goods and services
− Recipient of the goods and services may be interpreted as the entity
within the group or the group itself
73

2. Entity settling a share-based payment transaction when another entity

receives the goods and services:
a) Measures the transaction as an equity-settled share-based
payment if it is settled in the entity’s own instruments;
b) Otherwise, the entity measures as cash-settled share-based
payment (IFRS 2:43C)
− Principle applied from the perspective of legal entity that settles the
share-based payment transaction on behalf of another entity
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Concept Flow Chart for SBP to Subsidiary’s

Employees
Does S grant
Does Subsidiary (S) Does S have NO
NO Parent’s (P’s) NO
grant own share obligation to share options
options to own settle SBP? to own
employees?
employees?
YES YES
YES
For both S For S and G Cash-settled (S)

and Group (G) Dr Expense
Cr Liabilities
Equity-settled Cash-settled
Dr Expense Dr Expense Equity-settled (G)
Cr Equity Cr Liabilities Dr Expense
Cr Equity
75
Concept Flow Chart for SBP to Subsidiary’s

Employees
Does P grant own NO Does P have

share options to S’ obligation to
employees? settle SBP to
S’ employees?
YES YES
Equity-settled (P) Cash-settled (P)
Dr Investment* Dr Investment*
Cr Equity Cr Liabilities
Equity-settled (S) Equity-settled (S)

Dr Expense Dr Expense
Cr Equity contributions Cr Equity contributions
Equity-settled (G) Cash-settled (G)

Dr Expense Dr Expense
Cr Equity Cr Liabilities *Assuming no repayment
arrangements
76
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Content

Group Entities

77
Appendix 13B: Using Option Valuation Models to

Estimate the Fair Value of Share Options
Inputs for fair value for option
Exercise price
Current price of underlying
Life of option
Expected volatility of underlying
Risk-free interest rate
Expected dividend
78
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Appendix 13B: Using Option Valuation Models to

Estimate the Fair Value of Share Options
Option Valuation Model
Closed-form Model Open-form Model

(Black-Scholes Model) (The Binomial Model)
• Only for an American-
• Multiplicative process
style option
involving a probability
• Constant volatility tree of future share
• Constant risk-free prices
interest rate • Assumes:
• Option cannot be 1. Future share prices
terminated before
2. Probability of movement
expiration
79
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Copyright © 2016 by McGraw-Hill Education (Asia). All rights reserved. 1

1. Understand what a share-based payment transaction is;

2. Equity-settled Share-based Transactions

3. Modifications to Share Option Plans

4. Cash-settled Share-based Transactions

5. Share-based Payment Arrangements with a Cash

6. Tax Implications of Share-based Payment Transactions

7. Accounting Issues Relating to Employee Share Options

Appendix 13A: Share-based Payment Transactions Among

Appendix 13B: Using Option Valuation Models to Estimate

• Share-based transaction, or “executive share option plan” (ESOP)

• Accounting standards for ESOP

• Applies to entities that have share-based transactions with employees,

• Does NOT apply to:

Types of Share-based Transactions

Equity-settled Cash-settled Equity-or cash-settled

Types of Share-based Transactions

– Rebuttable presumption: FV of employee services is more difficult to

General Accounting Principles

2. Equity-settled Share-based Transactions

3. Modifications to Share Option Plans

4. Cash-settled Share-based Transactions

5. Share-based Payment Arrangements with a Cash

6. Tax Implications of Share-based Payment Transactions

7. Accounting Issues Relating to Employee Share Options

Terms Used in Share-based Payment

Vesting Condition is a condition that must be meet before the grantee

Terms Used in Share-based Payment

This is the number of equity instrument expected to be forfeited due to

This feature in the share option plan automatically grants additional

Illustration 13.1 – ACCOUNTING FOR FIX OPTION PLAN

Illustration 13.1 – ACCOUNTING FOR FIX OPTION PLAN

Illustration 13.1 – ACCOUNTING FOR FIX OPTION PLAN

The journal entries to record the remuneration expense are as follows:

31 December 20X1 Dr Remuneration expense……………………..140,000

31 December 20X2 Dr Remuneration expense…………………….. 180,000

15 January 20X3 Dr Cash…(800,000 x $2) ……..……………….1,600,000

PERFORMANCE OR VARIABLE SHARE OPTION PLANS

PERFORMANCE OR VARIABLE SHARE OPTION PLANS

REMUNERATION EXPENSE UNDER A PERFORMANCE- BASED SHARE OPTION PLAN

31 Dec. 20X3 50,000 options x1.12 x 93 x $0.50 = $ $ 2,604.000 - $ 1,686,667 =

31 Dec. 20X1 Dr Remuneration expense $ 858,667

REMUNERATION EXPENSE UNDER A PERFORMANCE- BASED SHARE OPTION PLAN

31 Dec. 20X3 Dr Remuneration expense $ 917,333

Equity-settled Share-based Transactions

Impact of Conditions on FV at Grant Date

• Estimation of the fair value of equity instruments issued by a entity in a

• Conditions that are not market conditions are not factored in

• Non-vesting conditions, similar to market performance vesting

Impact of Conditions on FV at Grant Date

What if Share Options are Not

• Essentially, goods and services have been received and the

• However, IFRS 2 does not prohibit the entity from transferring

2. Equity-settled Share-based Transactions

3. Modifications to Share Option Plans

4. Cash-settled Share-based Transactions

5. Share-based Payment Arrangements with a Cash

6. Tax Implications of Share-based Payment Transactions

7. Accounting Issues Relating to Employee Share Options

Modification to Share Option Plans

Modification to share option plans may

Change in Change in Inclusion of Early