CHAPTER - 14

SHARE BASED PAYMENTS

Share-based payment transaction – a transaction in a share-based payment

arrangement in which the entity:
• Receives goods or services from a supplier (including an employee); or
• Incurs an obligation (to the supplier) when another group entity receives those
goods or services.

There are three types of share-based payment transactions:

1. Equity-settled share-based payment transactions.
2. Cash-settled share-based payment transactions; and
3. Share-based payment transactions with cash alternatives.

Equity - Settled
Share option – a contract that gives the holder the right, but not the obligation, to
subscribe to the entity's shares at a fixed (or determinable) price for a specified period
of time.

Cash - Settled
In a cash-settled share-based payment transaction, the entity promises to pay a cash
amount based on the price (or value) of its equity instruments (or those of another
group entity) in return for the receipt of goods or services.

Cash Alternatives
In some arrangements either the counterparty or the entity may have a choice whether
to settle a share-based payment in equity instruments or cash.
The basic principle is that an entity should recognise goods or services received when
it obtains the goods or when the services are provided:
Dr Expense (e.g. purchases, labour) or an asset
• If settlement is by equity-settled share-based payment, increase equity:

Cr Equity (IFRS 2 does not specify which account in equity should be used).
• If settlement is by cash-settled share-based payment, recognise a liability:
Cr Trade (or other) payables
The key issues are how to measure each type of transaction and when to recognise
it.

Counterparty is Not an Employee

If the counterparty is not an employee, there is a rebuttable presumption that the fair
value of goods/services received can be measured reliably. This is the fair value used
to measure the transaction (the direct method).
Where the fair value of goods/ services received cannot be measured reliably the
indirect method is used.
Transactions with counterparties other than employees (e.g. suppliers) usually vest
immediately (i.e. the counterparty is entitled to the equity shares when the
goods/services are provided). Therefore the transaction is recognised immediately.

Transactions with Employees

Grant date – the date when the parties to the arrangement have a shared
understanding of its terms and conditions.
In a transaction with an employee, the fair value of services received cannot be
measured reliably (because services required in exchange for equity instruments
cannot be distinguished from those received in exchange for a cash salary or bonus).
Therefore the transaction is measured at the fair value of equity instruments issued as
at the grant date (the indirect method). Fair value is based on:
• Market prices, if available; or
• A valuation technique (an option-pricing model).
A valuation technique is usually required because employee share options have
different terms and conditions compared to share options for which market prices can
be determined.
At the grant date, the right to cash, other assets or equity instruments is conferred
(provided any vesting conditions are met).
If an agreement is subject to approval (e.g. by shareholders), the grant date is when
that approval is obtained.

Vesting Conditions and Recognition of Transactions

Vest – to become an entitlement. A party's right to shares of an entity may be free or
at a prearranged exercise price.
Vesting conditions – the conditions that must be satisfied for a person to become
entitled to receive cash, other assets or equity instruments under a share-based
payment arrangement.

Service Conditions
Service condition – a vesting condition requiring the director or employee to complete
a specified period of service. If the director (or employee) ceases to provide service
during the vesting period he fails to satisfy the condition.

Performance Conditions
Performance condition – a vesting condition that requires:
• A service condition; and
• Specified performance targets to be met in rendering that service.
Performance target – refers to the entity's operations or the price of its shares. It may
relate to the performance of the entity as a whole or a component (e.g. a division).
A performance vesting condition also requires specified performance targets to be
met during the specified service period. Performance targets may be:
• Market conditions:
o Relate to the share price of the entity (e.g. Achieving a certain share
price growth).
▪ Reflected in the fair value of equity instruments at grant date
▪ Not considered when measuring the transaction.
 • Non-market conditions.
o Relate to the operating performance of the entity or the employee (e.g.
achieving a certain revenue growth).
▪ Not reflected in the fair value of equity instruments at the grant
date.
▪ Considered when measuring the transaction.

Expected Vesting Period

An employee may be granted share options conditional on the achievement of a
performance condition and remaining in service until that performance condition is
satisfied (i.e. the length of vesting period depends on achieving the performance
condition).
In this case the expected vesting period should be estimated at grant date, based
on the most likely outcome of the performance condition:
• For a market condition, this estimate should be consistent with the assumptions
used in estimating the fair value of the instruments granted. This period is not
subsequently revised.
• For a non-market condition, this estimate is revised if subsequent information
indicates that it is different from that estimated at grant date.

Cash-settled share-based payment transaction – one 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 equity
instruments (including shares or share options) of the entity or another group entity.
A common example of a cash-settled share-based payment transaction is share
appreciation rights (SARs).
These are granted to employees and give the employee an entitlement to a future
cash payment based on the increase in the entity's share price from a determined level
and for a specific period of time.
The liability is remeasured to fair value at each reporting date, with any changes in
value recognised in profit or loss, until it is settled.
When the SAR is exercised, the employee is paid its intrinsic value. This amount is
the difference between:
 • The share price on the exercise date; and
• The exercise price (i.e. The pre-determined "starting point" against which share
price increase is measured).
The intrinsic value is recognised as an expense in profit or loss when it is paid to the
employee.
The treatment of vesting conditions is exactly the same as for equity-settled share-
based payments:
• Service and non-market performance conditions are considered when
estimating the number of awards expected to vest; and
• Market performance conditions are reflected in the fair value of the cash-settled
payment at each reporting date.

Entity has Choice / Cash Alternatives 13.5.2

Where the reporting entity has the choice of settlement the whole transaction is treated
either as cash-settled or as equity-settled depending on whether the entity has an
obligation to settle in cash. An entity has an obligation to settle in cash if:
• it is not allowed to issue shares; or
• it has a stated policy or past practice of issuing cash rather than shares.

Counterparty has Choice

Where the counterparty has the choice of settlement, the transaction is deemed to
result in the issue of a compound instrument (i.e. both liability and equity components
are recognised). Subsequently:
• The liability component is accounted for in the same way as a cash-settled
share-based payment; and
• The equity component is accounted for in the same way as an equity-settled
share-based payment.

Deductible Temporary Difference

IFRS 2 requires that an expense is recognised in profit or loss over the vesting period
in relation to share options. Tax relief is not normally given until the options are
exercised.
The accounting expense is based on the fair value of the options at the grant date
whereas tax relief is usually given on the intrinsic value of the option.
As the intrinsic value of a share option is the difference between the exercise price of
the option and the market price of the share; it will move as the market price of the
share moves.

The temporary difference is calculated as the difference between:

• The carrying amount of the share-based payment (normally zero); and
• Its tax base (i.e. The estimated amount that will be given as a tax deduction in
the future, known as the intrinsic value).

Therefore, the deductible temporary difference is usually equal to the tax base. The
deferred tax asset is calculated by applying the tax rate.

The deferred tax asset is recognised if the company has sufficient future taxable profits
against which it can be offset.
Regardless of this, the amount of deferred tax income recognised in profit or loss in
relation to share options is restricted.
If the intrinsic value exceeds the amount of the cumulative IFRS 2 expense, this
indicates that the tax deduction also relates to an equity item.

Therefore, the cumulative amount that can be credited to profit or loss is set at a
maximum:
Cumulative share option expense × tax rate.
Any additional benefit will be credited direct to equity.

Fair Value Disclosures

• Where fair value has been determined indirectly, the weighted average fair
value of share options granted and the equity instruments, and how these fair
values were measured.
• Where the fair value of goods or services received has been measured directly,
how that fair value was determined (e.g. a market price).
• In rare cases, if the direct measurement presumption is rebutted, that fact is
disclosed and explained.