Share-based payment

Understanding 1
– Liminal
On 1 January 20X8 Liminal purchased a patent. The fair value of the patent was reliably estimated to be $3
million. The consideration transferred was 1 million of Liminal’s own $1 ordinary shares. On the purchase
date, the patent had a remaining useful life of three years. The fair value of one of Liminal’s ordinary shares
was $3.50 on 1 January 20X8 and $3.20 on 30 June 20X8.

Required:
Discuss the correct accounting treatment of the above in the year ended 30 June
20X8.
Answer
The consideration for the patent purchase was 1 million of Liminal’s own shares and so the transaction
should be accounted for in accordance with IFRS 2 Share-based Payment. On the purchase date all, vesting
conditions have been met so the transaction is accounted for in full. The patent is an intangible asset
because, per IAS 38 Intangible Assets, it is a non-monetary asset that has no physical substance.

The fair value of the patent can be reliably measured at $3 million and so an intangible asset should be
recognized for this amount. A corresponding credit for $3 million should be made to equity. Of this $1
million will be recorded in share capital and $2 million in share premium/other components of equity. The
patent should be amortized over its useful economic life of three years. The amortization charge amounts
to $0.5 million (($3m/3 years) × 6/12). This will be charged to profit or loss and will reduce the carrying
amount of the patent to $2.5 million.

Understanding 2
Equity-settled share-based payment
An entity has a reporting date of 31 December.

On 1 January 20X1 it grants 100 share options to each of its 500 employees. Each grant is conditional upon
the employee working for the entity until 31 December 20X3. At the grant date the fair value of each share
option is $15.

During 20X1, 20 employees leave and the entity estimates that a total of 20% of the 500 employees will
leave during the three-year period. During 20X2, a further 20 employees leave and the entity now
estimates that only 15% of the original 500 employees will leave during the three-year period.

During 20X3, a further 10 employees leave.

Required:
Calculate the remuneration expense that will be recognized in each of the three years of the
share-based payment scheme.

Answer
The total expense recognized is based on the fair value of the share options granted at the grant date (1
January 20X1). The entity recognizes the remuneration expense as the employees’ services are received
during the three-year vesting period.

Year ended 31 December 20X1

At 31 December 20X1, the entity must estimate the number of options expected to vest by predicting how
many employees will remain in employment until the vesting date. It believes that 80% of the employees
will stay for the full three years and therefore calculates an expense based on this assumption: (500
employees × 80%) × 100 options × $15 FV × 1/3 = $200,000 Therefore, an expense is recognized for
$200,000 together with a corresponding increase in equity.

Year ended 31 December 20X2

The estimate of the number of employees staying for the full three years is revised at each year end. At 31
December 20X2, it is estimated that 85% of the 500 employees will stay for the full three years. The
calculation of the share-based payment expense is therefore as follows:

$
(500 employees × 85%) × 100 options × 425,000
$15 FV × 2/3
Less previously recognized expense (200,000)
Expense in year ended 31 December 225,000
20X2

Equity will be increased by $225,000 to $425,000 ($200,000 + $225,000).

Year ended 31 December 20X3

A total of 50 (20 + 20 + 10) employees left during the vesting period. The expense recognized in the final
year of the scheme is as follows:

$
(500 – 50 employees) × 100 options × 675,000
$15 FV × 3/3
Less previously recognized expense (425,000)
Expense in year ended 31 December 250,000
20X3

The financial statements will include the following amounts:

Statement of 20X1 $ 20X1 $ 20X1 $

profit or loss
Staff costs 200,000 225,000 250,000
 Statement of 20X1 20X1 20X1
$ $ $
financial
position
Other 200,000 425,000 675,000
components of
equity

Understanding 3
Market based conditions
On 1 January 20X1, one hundred employees were given 50 share options each. These will vest if the
employees still work for the entity on 31 December 20X2 and if the share price on that date is more than
$5. On 1 January 20X1, the fair value of the options was $1. The share price on 31 December 20X1 was $3
and it was considered unlikely that the share price would rise to $5 by 31 December 20X2. Ten employees
left during the year ended 31 December 20X1 and a further ten are expected to leave in the following year.

Required:
How should the above transaction be accounted for in the year ended 31 December 20X1?

Answer
The expense recognized is based on the fair value of the options at the grant date. This should be spread
over the vesting period.

There are two types of conditions attached to the share-based payment scheme:

• A service condition (employees must complete a minimum service period)

• A market-based performance condition (the share price must be $5 at 31 December 20X2).

Although it looks unlikely that the share price target will be hit, this condition has already been factored
into the fair value of the options at the grant date. Therefore, this condition can be ignored when
determining the charge to the statement of profit or loss.

The expense to be recognized should therefore be based on how many employees are expected to satisfy
the service condition only.

The calculation is as follows: (100 employees – 10 – 10) × 50 options × $1 FV × 1/2 = $2,000.

The entry to recognize this is:

Dr Profit or loss $2,000

Cr Equity $2,000
Understanding 4
On 1 January 20X4 an entity, Blueberry, granted share options to each of its 200 employees, subject to a
three-year vesting period, provided that the volume of sales increases by a minimum of 5% per annum
throughout the vesting period. A maximum of 300 share options per employee will vest, dependent upon
the increase in the volume of sales throughout each year of the vesting period as follows:

• If the volume of sales increases by an average of between 5% and 10% per year, each eligible employee
will receive 100 share options.

• If the volume of sales increases by an average of between 10% and 15% per year, each eligible employee
will receive 200 share options.

• If the volume of sales increases by an average of over 15% per year, each eligible employee will receive
300 share options.

At the grant date, Blueberry estimated that the fair value of each option was $10 and that the increase in
the volume of sales each year would be between 10% and 15%. It was also estimated that a total of 22% of
employees would leave prior to the end of the vesting period. At each reporting date within the vesting
period, the situation was as follows:

Reporting Employees Further Annual Expected Average

date leaving in leavers increase in sales volume annual
year expected sales volume increase over increase in
prior to remaining sales volume
vesting date vesting to date
period
31 Dec X4 8 18 14% 14% 14%
31 Dec X5 6 4 18% 16% 16%
31 Dec X6 2 16% 16%

Required:
Calculate the impact of the above share-based payment scheme on Blueberry's financial statements in each
reporting period.

Answer
Rep. date Calculation of Equity $000 Expense$000 Note
equity
31/12/X4 (174 × 200 × $10) 116 116 1
× 1/3
31/12/X5 (182 × 300 × $10) 364 248 2
× 2/3
31/12/X6 (184 × 300 × $10) 552 188 3
× 3/3
Notes:

1 At 31/12/X4 a total of 26 employees (8 + 18) are expected to leave by the vesting date meaning that
174 are expected to remain. Blueberry estimates that average annual growth in sales volume will be 14%.
Consequently, it is estimated that eligible employees would each receive 200 share options at the vesting
date.

2 At 31/12/X5, a total of 18 employees (8 + 6 + 4) are expected to leave by the vesting date meaning that
182 are expected to remain. Blueberry estimates that the average growth in sales volume will be 16%.
Consequently, it is estimated that eligible employees will each receive 300 share options at the vesting
date.

3 A t 31/12/X6, it is known that total of 16 employees (8 + 6 + 2) have left at some point during the vesting
period, leaving 184 eligible employees. As average annual growth in sales volume over the vesting period
was 16%, eligible employees are entitled to 300 share options each.

Understanding 5 – Beginner
Beginner offered directors an option scheme conditional on a three-year period of service. The number of
options granted to each of the ten directors at the inception of the scheme was 1 million. The options were
exercisable shortly after the end of the third year. Upon exercise of the share options, those directors
eligible would be required to pay $2 for each share of $1 nominal value.

The fair value of the options and the estimates of the number of options expected to vest at various points
in time were as follows:

Year Rights expected to Fair value of the

vest option
Start of Year One 8m 0.30
End of Year One 7m 0.33
End of Year Two 8m 0.37

At the end of year three, 9 million rights actually vested.

Required:
(a) Show how the option scheme will affect the financial statements for each of the three years of
the vesting period.
(b) Show the accounting treatment at the vesting date for each of the following situations:
(i) The fair value of a share was $5 and all eligible directors exercised their share options
immediately.
 (ii) The fair value of a share was $1.50 and all eligible directors allowed their share options to
lapse.
Answer
Years Equity $000 Expense $000
Year 1 (7m × $0.3 × 700 700
1/3)
Year2 (8m × $0.3 × 1,600 900
2/3)
Year3 (9m × $0.3) 2,700 1,100

(i) All eligible directors exercised their options:

The entity will post the following entry:
Dr Cash (9m × $2) $18.0m
Dr Equity reserve $2.7m
Cr Share capital (9m × $1) $9.0m
Cr Share premium (bal. fig.) $11.7m

(ii) No options are exercised

The amount recognized in equity ($2.7m) remains. The entity can choose to transfer this to
retained earnings.

Understanding 6 – Modifications
An entity grants 100 share options to each of its 500 employees, provided that they remain in service over
the next three years. The fair value of each option is $20. During year one, 50 employees leave. The entity
estimates that a further 60 employees will leave during years two and three.

At the end of year one the entity reprices its share options because the share price has fallen. The other
vesting conditions remain unchanged. At the date of repricing, the fair value of each of the original share
options granted (before taking the repricing into account) was $10. The fair value of each repriced share
option is $15. During year two, a further 30 employees leave. The entity estimates that a further 30
employees will leave during year three. During year three, a further 30 employees leave.

Required: Calculate the amounts to be recognized in the financial statements for each of the three years
of the scheme.

Answer
The repricing means that the total fair value of the arrangement has increased. The entity must account for
an increased remuneration expense. The increased cost is based upon the difference in the fair value of the
option, immediately before and after the repricing. Under the original arrangement, the fair value of the
option at the date of repricing was $10, which increased to $15 following the repricing of the options, for
each share estimated to vest. The additional cost is recognized over the remainder of the vesting period
(years two and three).

The amounts recognized in the financial statements for each of the three years are as follows:

Years Equity $ Expense $

Year one original 260,000 260,000
(500 – 50 – 60) × 100 × $20 × 1/3
Year two original 520,000 260,000
(500 – 50 – 30 – 30) × 100 × $20
× 2/3
Incremental 97,500 97,500
(500 – 50 – 30 – 30) × 100 × $5 ×
1/2
617,500 357,500
Year three original 780,000 260,000
(500 – 50 – 30 – 30) × 100 × $20
Incremental 195,000 97,500
(500 – 50 – 30 – 30) × 100 × $5
975,000 357,500

understanding 7 – Cancellations and settlements

An entity introduced an equity-settled share-based payment scheme on 1 January 20X0 for its 5 directors.
Under the terms of the scheme, the entity will grant 1,000 options to each director if they remain in
employment for the next three years. All five directors are expected to stay for the full three years. The fair
value of each option at the grant date was $8. On 30 June 20X1, the entity decided to base its share-based
payment schemes on profit targets instead. It therefore cancelled the existing scheme. On 30 June 20X1, it
paid compensation of $10 per option to each of the 5 directors. The fair value of the options at 30 June
20X1 was $9.

Required:
Explain, with calculations, how the cancellation and settlement of the share-based payment scheme
should be accounted for in the year ended 31 December 20X1.

Answer
The share option scheme has been cancelled. This means that all the expense not yet charged through
profit or loss must now be recognized in the year ended 31 December 20X1:

Total expense 40,000

(5 directors × 1,000 options × $8)

Less expense recognized in year ended 31 (13,333)
December 20X0
(5 directors × 1,000 options × $8 × 1/3)
Expense to be recognized 26,667
To recognize the remaining expense, the following entry must be posted:

Dr Profit or loss $26,667

Cr Equity $26,667

Any payment made in compensation for the cancellation that is up to the fair value of the options is
recognized as a deduction to equity. Any payment in excess of the fair value is recognized as an expense.
The compensation paid to the director for each option exceeded the fair value by $1 ($10 – $9). Therefore,
an expense of $1 per option should be recognized in profit or loss.

The following accounting entry is required:

Dr Equity (5 directors × 1,000 options × $9) $45,000

Dr Profit or loss (5 directors × 1,000 options × $1) $5,000

Cr Cash (5 directors × 1,000 options × $10) $50,000

understanding 8 – Growler
On 1 January 20X4 Growler granted 200 share appreciation rights (SARs) to each of its 500 employees on
the condition that they continue to work for the entity for two years. At 1 January 20X4, the entity expects
that 25 of those employees will leave each year. During 20X4, 20 employees leave Growler. The entity
expects that the same number will leave in the second year. During 20X5, 24 employees leave. The SARs
vest on 31 December 20X5 and can be exercised during 20X6 and 20X7. On 31 December 20X6, 257 of the
eligible employees exercised their SARs in full. The remaining eligible employees exercised their SARs in full
on 31 December 20X7.

The fair value and intrinsic value of each SAR was as follows:

Reporting date FV per SAR Intrinsic value

$ per SAR $
31 December 20X4 5

31 December 20X5 7

31 December 20X6 8 07
 31 December 20X7 10 10

Required:
(a) Calculate the amount to be recognized as a remuneration expense in the statement of profit or loss,
together with the liability to be recognized in the statement of financial position, for each of the two years
to the vesting date.

(b) Calculate the amount to be recognized as a remuneration expense and reported as a liability in the
financial statements for each of the two years ended 31 December 20X6 and 20X7.

Answer

(a)
The liability is remeasured at each reporting date, based upon the current information available relating to
known and expected leavers, together with the fair value of the SAR at each date. The remuneration
expense recognized is the movement in the liability from one reporting date to the next as summarized
below:

Rep. date Workings Liability Expense (P/L)

(SFP) $ $
31/12/X4 (500 – 20 – 20) × 200 × $5 × 1/2 230,000 230,000

31/12/X5 (500 – 20 – 24) × 200 × $7 × 2/2 638,400 408,400

(b) The number of employees eligible for a cash payment is 456 (500 – 20 – 24). Of these, 257 exercise
their SARs at 31/12/X6 and the remaining 199 exercise their SARs at 31/12/X7.

The liability is measured at each reporting date, based upon the current information available at that date,
together with the fair value of each SAR at that date. Any SARs exercised are reflected at their intrinsic
value at the date of exercise.

Year ended 31/12/X6

Liability b/fwd. 638,400 $
Cash payment (257 × 200 × $7) (359,800) $
Profit or loss (bal. fig) 39,800 $
Liability c/fwd. (199 × 200 × $8) 318,400 $

Year ended 31/12/X7

 Liability b/fwd. 318,400
Cash payment (199 × 200 × $10) (398,000)
Profit or loss (bal. fig) 79,600
Liability c/fwd nil

understanding 9 – Choice of settlement

On 1 January 20X4 an entity grants rights to 20 employees. If still employed on 31 December 20X6, the
employees can elect to receive either 800 options or cash to the value, on that date, of 700 shares. The fair
value of the options is $19 at the grant date. The reporting date is 31 December.

The following information is available:

Share price $ Expected vesters

1 January 20X4 21 20
31 December 20X4 27 20
31 December 20X5 33 18
31 December 20X6 42 17

Required: Calculate and explain the impact of the share-based payment on the financial statements for
each of the three years.

Answer

Split accounting
The employees have a choice of settlement – they can take settlement in equity instruments or in cash.
When accounting for the share-based payment, the credit entry must be split between equity and
liabilities.

Equity
The fair value of the equity component is calculated as the fair value of the equity alternative at the grant
date less the fair value of the cash alternative at the grant date. Fair value of the equity alternative at grant
is: 800 × $19 = $15,200 Fair value of the cash alternative at grant is: 700 × $21 = $14,700 Therefore the fair
value of the equity component at grant is $500 per employee ($15,200 – $14,700).

Accounting treatment
The equity component has been valued at the grant date. This will be recognized over the vesting period.
The liability component will be remeasured at each reporting date and the expense recognized over the
vesting period.

Year ended 31/12/X4

Equity component: 20 × $500 × 1/3 = $3,333

Liability component: 20 × 700 × $27 × 1/3 = $126,000

The entry will be:

Dr Profit or loss $129,333

Cr Equity $3,333

Cr Liabilities $126,000

Year ended 31/12/X5

Equity component: 18 × $500 × 2/3 = $6,000

Liability component: 18 × 700 × $33 × 2/3 = $277,200

The entry will be:

Dr Profit or loss $153,867

Cr Equity ($6,000 – $3,333) $2,667

Cr Liabilities ($277,200 – $126,000) $151,200

Year ended 31/12/X6

Equity component: 17 × $500 = $8,500

Liability component: 17 × 700 × $42 = $499,800

The entry will be:

Dr Profit or loss $225,100

Cr Equity ($8,500 – $6,000) $2,500

Cr Liabilities ($499,800 – $277,200) $222,600

Illustration -1 – Cash-settled share-based payment transactions

An entity has a reporting date of 31 December. On 1 January 20X1 the entity grants 100 share appreciation
rights (SARs) to each of its 300 employees, on the condition that they continue to work for the entity until
31 December 20X3. During 20X1, 20 employees leave. The entity estimates that a further 40 will leave
during 20X2 and 20X3. During 20X2, 10 employees leave. The entity estimates that a further 20 will leave
during 20X3. During 20X3, 10 employees leave.

The fair value of a SAR at each reporting date is shown below:

$
20X1 10.0
20X2 12.0
20X3 15.0

Required: Calculate the expense for each of the three years of the scheme, and the liability to be
recognized in the statement of financial position as at 31 December for each of the three years.
Answer
Liability at year-end Expense for year
$000 $000
20X1 ((300 – 20 – 40) × 100 × 80 80
$10 × 1/3)
20X2 ((300 – 20 – 10 – 20) × 100 200 120
× $12 × 2/3)
20X3 ((300 – 20 – 10 – 10) × 100 390 190
× $15)

Note that the fair value of the liability is remeasured at each reporting date. The expense is spread over the
vesting period.