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6 Example: Equity-settled share-based payment transaction

6 Example: Equity-settled share-based payment transaction

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Show how this transaction will be reflected in the financial statements for the year ended 31 December



The remuneration expense for the year is based on the fair value of the options granted at the grant date (1

January 20X3). As five of the 200 employees left during the year it is reasonable to assume that 20

employees will leave during the four-year vesting period and that therefore 45,000 options (250  180)

will actually vest.

Therefore, the entity recognises a remuneration expense of $135,000 (45,000  12  ¼) in profit or loss

and a corresponding increase in equity of the same amount.


Share based payment 2

J&B granted 200 options on its $1 ordinary shares to each of its 800 employees on 1 January 20X1. Each

grant is conditional upon the employee being employed by J&B until 31 December 20X3.

J&B estimated at 1 January 20X1 that:


The fair value of each option was $4 (before adjustment for the possibility of forfeiture).


Approximately 50 employees would leave during 20X1, 40 during 20X2 and 30 during 20X3

thereby forfeiting their rights to receive the options. The departures were expected to be evenly

spread within each year.

The exercise price of the options was $1.50 and the market value of a J&B share on 1 January 20X1 was $3.

In the event, only 40 employees left during 20X1 (and the estimate of total departures was revised down to

95 at 31 December 20X1), 20 during 20X2 (and the estimate of total departures was revised to 70 at

31 December 20X2) and none during 20X3, spread evenly during each year.


The directors of J&B have asked you to illustrate how the scheme is accounted for under IFRS 2 Sharebased payment.



Show the double entries for the charge to profit or loss for employee services over the three years

and for the share issue, assuming all employees entitled to benefit from the scheme exercised their

rights and the shares were issued on 31 December 20X3.

Explain how your solution would differ had J&B offered its employees cash based on the share

value rather than share options.




Accounting entries



Profit or loss (Staff costs)

CREDIT Equity reserve ((800 – 95)  200  $4  1/3)



Profit or loss (Staff costs) (W1)

CREDIT Equity reserve



Profit or loss (Staff costs) (W2)

CREDIT Equity reserve

Issue of shares:


Cash (740  200  $1.50)


Equity reserve

CREDIT Share capital (740  200  $1)

CREDIT Share premium (balancing figure)

9: Share-based payment  Part B Accounting standards

















Equity reserve at 31.12.X2

Equity b/d

 P/L charge

Equity c/d ((800 – 70)  200  $4  2/3)





Equity reserve at 31.12.X3

Equity b/d

 P/L charge

Equity c/d ((800 – 40 – 20)  200  $4  3/3)




Cash-settled share-based payment

If J&B had offered cash payments based on the value of the shares at vesting date rather than

options, in each of the three years an accrual would be shown in the statement of financial position

representing the expected amount payable based on the following:

No of


estimated at the

year end to be

entitled to

rights at the

vesting date

Number of

rights each

Fair value of

each right at

year end


proportion of

vesting period


The movement in the accrual would be charged to profit or loss representing further entitlements

received during the year and adjustments to expectations accrued in previous years.

The accrual would continue to be adjusted (resulting in a profit or loss charge) for changes in the

fair value of the right over the period between when the rights become fully vested and are

subsequently exercised. It would then be reduced for cash payments as the rights are exercised.

1.7 Cancellation and reissuance

Where an entity has been through a capital restructuring or there has been a significant downturn in the

equity market through external factors, an alternative to repricing the share options is to cancel them and

issue new options based on revised terms. The end result is essentially the same as an entity modifying

the original options and therefore should be recognised in the same way.

As well as the entity, two other parties may cancel an equity instrument:

Cancellations by the counterparty (eg the employee)

Cancellations by a third party (eg a shareholder)

Cancellations by the employee must be treated in the same way as cancellations by the employer, resulting

in an accelerated charge to profit or loss of the unamortised balance of the options granted.

1.8 Cash-settled share-based payment transactions

Examples of this type of transaction include:


Share appreciation rights granted to employees: the employees become entitled to a future cash

payment (rather than an equity instrument), based on the increase in the entity's share price from a

specified level over a specified period of time, or


An entity might grant to its employees a right to receive a future cash payment by granting to them

a right to shares that are redeemable.

The basic principle is that the entity measures the goods or services acquired and the liability incurred at

the fair value of the liability.

Part B Accounting standards  9: Share-based payment


The entity should remeasure the fair value of the liability at each reporting date until the liability is settled

and at the date of settlement. Any changes in fair value are recognised in profit or loss for the period.

The entity should recognise the services received, and a liability to pay for those services, as the

employees render service. For example, if share appreciation rights do not vest until the employees have

completed a specified period of service, the entity should recognise the services received and the related

liability, over that period.

1.9 Example: Cash-settled share-based payment transaction

On 1 January 20X1 an entity grants 100 cash share appreciation rights (SARS) to each of its 500

employees, on condition that the employees continue to work for the entity until 31 December 20X3.

During 20X1 35 employees leave. The entity estimates that a further 60 will leave during 20X2 and 20X3.

During 20X2 40 employees leave and the entity estimates that a further 25 will leave during 20X3.

During 20X3 22 employees leave.

At 31 December 20X3 150 employees exercise their SARs. Another 140 employees exercise their SARs at

31 December 20X4 and the remaining 113 employees exercise their SARs at the end of 20X5.

The fair values of the SARs for each year in which a liability exists are shown below, together with the

intrinsic values at the dates of exercise.

Fair value

Intrinsic value
















Calculate the amount to be recognised in the profit or loss for each of the five years ended 31 December

20X5 and the liability to be recognised in the statement of financial position at 31 December for each of

the five years.


For the three years to the vesting date of 31 December 20X3 the expense is based on the entity's estimate

of the number of SARs that will actually vest (as for an equity-settled transaction). However, the fair value

of the liability is re-measured at each year-end.

The intrinsic value of the SARs at the date of exercise is the amount of cash actually paid.


at year-end


20X1 Expected to vest (500 – 95):

405  100  14.40  1/3

20X2 Expected to vest (500 – 100):

400  100  15.50  2/3

20X3 Exercised:

150 100  15.00

Not yet exercised (500 – 97 – 150):

253  100  18.20


Expense for












9: Share-based payment  Part B Accounting standards


at year-end

20X4 Exercised:

140  100  20.00

Not yet exercised (253 – 140):

113  100  21.40

Expense for









20X5 Exercised:

113  100  25.00






1.10 Transactions which either the entity or the other party has a choice

of settling in cash or by issuing equity instruments

If the entity has incurred a liability to settle in cash or other assets it should account for the transaction as

a cash-settled share-based payment transaction

If no such liability has been incurred the entity should account for the transaction as an equity-settled

share-based payment transaction.

1.11 ED Classification and measurement of share-based payment

transactions – proposed amendments to IFRS 2

This ED was published in November 2014. It addresses the following three issues.


Accounting for cash-settled share-based payment transactions that include a performance

condition (vesting condition). The ED proposes that the accounting in the case of cash-settled

share-based payments should follow the same approach as used for equity-settled share-based



Classification of share-based payment transactions with net settlement features, for example,

where an employer settles a share based payment transaction by issuing a net number of shares to

the employee and paying cash to the tax authority. An exception would be added to IFRS 2 so that

a share-based payment where the entity settles the share-based payment arrangement net would

be classified as equity-settled in its entirety provided the share-based payment would have

been classified as equity-settled had it not included the net settlement feature.


Accounting for modifications of share-based payment transactions from cash-settled to equitysettled. The ED proposes the following approach.


The original liability recognised in respect of the cash-settled share-based payment should

be derecognised and the equity-settled share-based payment should be recognised at

the modification date fair value to the extent services have been rendered up to the

modification date.


The difference, if any, between the carrying amount of the liability as at the modification

date and the amount recognised in equity at the same date would be recognised in profit or

loss immediately.

Part B Accounting standards  9: Share-based payment


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