Chap 13

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
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
3
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
4
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;
– Restricted 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
5
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
6
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
services as receive cash or other
a liability at amounts assets based on
payments for equity based on the value
instruments of the value of equity
of shares or other instruments or to
entity equity instruments receive equity
instruments
7
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).
8
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
9
Content
1. Introduction

Alternative
10
Terms Used in Share-based Payment
Transactions
Grant
Date
Measureme
nt Date
Vesting
Date
Non-
vesting Vesting
Condition Reload
Condition Feature
Forfeiture FV @ Intrinsic
Rate Grant Value
Date
11
Equity-settled Share-based Transactions
Determination of fair value of share-based transactions
12
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
13
Impact of Conditions on FV at Grant Date
14
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
15
Content
1. Introduction

Alternative
16
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
17
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
18
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 equity
FV of original option) instruments
Incremental value added to original amount
19
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
20
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.
21
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.
22
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.
23
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.
24
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.
25
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
26
Content
1. Introduction

Alternative
27
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
28
Content
1. Introduction
5. Share-based Payment Arrangements with a Cash Alternative
29
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
30
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”
31
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
32
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
33
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
34
Content
1. Introduction

Alternative
35
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
36
Content
1. Introduction

Alternative
37
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”
38
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?
39
Content

Group Entities

40
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
41
• 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
42
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
43
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
44
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
45
Content

Group Entities

46
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
47
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
48

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Chapter 13

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) is

• Accounting standards for ESOP

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

• Does NOT apply to:

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

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

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

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

• Non-vesting conditions, similar to market performance vesting conditions,

• Essentially, goods and services have been received and the

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 may

Change in Change in Inclusion of Early

Decrease or increase in the exercise price is effectively a repricing of the

Increase fair value of Recognize effect of

*Entity continues to recognize the amount of remuneration expense based on the

Determine reason for increase of fair value

Reduction of Increase in number of

Incremental value Incremental value

Incremental value added to original amount

During vesting period After vesting period

• Exception: Cancellation of some or all of the equity instrument.

• Treated as an acceleration of vesting. All awards outstanding at the

• If the entity grants new equity instruments to the employees on the

• The incremental FV will be included in the amount recognized for

• The cancelled equity instruments will be accounted for as a

• Equity instrument measured at intrinsic value, and changes are

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

• Share-based plans that pay cash to employees instead of issuing

• Example is share appreciation rights

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

• Accounting treatment depends on which party has the right to