Guidelines to Share Based Payment Transactions (SBPT)

1. Scope:

 Applies when payment for GOODS/ SERVICES (G/S) received or to be received is in the form of
shares or cash depending on the value of shares.
 In case of group entities where one entity receives goods/ services and the other entity settles
transaction; this IFRS applies to both such entities
 This IFRS does not apply if anything other than (G/S) is received by the entity.

2. Types:

 Equity settled (settlement of G/S in shares of the entity)

 Cash settled (settlement in cash depending on shares of the entity)
 Settlement alternative (option to entity or counter party to choose any of the two above methods
for settlement)

TIP 1: In any of the above types, debit of double entry will always be expense if G/S received are
consumables, and if G/S are of capitalized natured then debit shall be asset. Credit depends on type of
SBPT.

3. Vesting Condition and vesting period:

Condition on which right to settlement of any of the above 3 types vests to the counter party is
vesting condition.
The period within which the vesting condition should be fulfilled is vesting period.
 Types of vesting conditions:
No condition (expense to be booked immediately)
Service condition (expense to be booked throughout vesting period on straight line basis)
Performance condition (expense to be booked through out vesting period based on best
available estimate)
o Market condition (estimate shall not be revised regarding fulfillment or non fulfillment
of market condition)
o Non market condition (estimate may be revised on the basis of best available
information regarding fulfillment or non fulfillment of non market condition)

4. Equity Settled SBPT (Credit of double entry will always be equity/ reserves)
 Measurement of transaction:
FV of G/S at the grant date, if FV of G/S not available or not measurable then
At FV of equity instrument at grant date, if FV cannot be measured reliably then
At intrinsic value of equity instrument revised every year end.
o Intrinsic value (IV) = Share price (SP) – Exercise price (EP) (If EP > SP; IV = 0)

From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co. Page 1
 Comparison of valuation types for their accounting treatment

Description At FV of G/S At FV of equity At Intrinsic

instrument value
Accounting ends At the end of At the end of At settlement
vesting period vesting period date
Reversal of entries after vesting period No No Yes
ends, if option not exercised or lapsed
Revision of valuation Estimate FV not to be FV not to be revised Revised every
revised year end till
settlement

 Modification in transaction
Modification may be:
o Beneficial for employees (e.g. decrease in vesting period, increased number of shares,
lower exercise price or decrease in market or non market condition)
o Non beneficial for employees (e.g. increase in vesting period, decrease in number of
shares, higher exercise price or increased market or non market condition)
Accounting for modification that is ‘non beneficial for employees’:
o Continue the accounting as if there has been no modification. (ignore such modification)
Accounting for modification that is ‘beneficial for employees’:
o Continue the on-going accounting in normal manner throughout the original vesting
period.
o In addition, incremental FV shall be expensed in the following manner:
 If modification occurs before vesting period ends and the vesting period
remains same, then incremental FV shall be charged throughout the remaining
vesting period.
 If modification occurs before vesting period ends but vesting period changes,
then incremental FV shall be charged throughout the new vesting period.
 If modification occurs after vesting period ends and without any further
condition, then incremental FV shall be charged immediately
 If modification occurs after vesting period ends but with new conditions, then
incremental FV shall be charged throughout the new vesting period.
o If modification occurs before vesting period ends that reduces the vesting period, then
original expense that would have been charged throughout the remaining original
vesting period will be charged throughout the new vesting period.

Incremental FV = FV of new equity instrument – FV of original equity instrument at the time of

modification

Tip 2: If FV of new equity instruments is lower, then do nothing as it is non-beneficial modification for
employee in which case original terms shall continue as if there is no modification.

From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co. Page 2
 Cancellation of options during vesting period (not being cancelled due to non-fulfillment of
vesting condition):
At the time of cancellation, Immediately recognize the remaining expense that would have been
recognized through out the remaining vesting period
If any amount is paid to the employee at the time of cancellation, then equity reserve shall be
debited to the extent of reserve created. Any payment in excess of FV at the time of cancellation
shall be expensed out.
E.g.
If cash payment is lower than reserve created and also FV at the time of cancellation:
Reserves created = 200,000 ; cash payment = 150,000
FV at the time of cancellation = 270,000
Debit: Equity (reserve) 150,000
Credit: Cash/ Bank 150,000
Optional Entry:
Debit: Reserves 50,000
Credit: Retained earnings 50,000

If cash payment exceeds reserve created but is lower than FV at the time of cancellation:
Reserves created = 200,000 ; cash payment = 250,000
FV at the time of cancellation = 270,000
Debit: Equity (reserve) 200,000
Debit: Retained earnings 50,000
Credit: Cash/ Bank 250,000

If cash payment exceeds reserve created and also FV at the time of cancellation:
Reserves created = 200,000 ; cash payment = 250,000
FV at the time of cancellation = 230,000
Debit: Equity (reserve) 200,000
Debit: Retained earnings 30,000
Debit: Expense 20,000
Credit: Cash/ Bank 250,000

If cancellation is made in case of cash settled SBP, liability component shall be re-measured
at the time of cancellation in the normal manner and then liability to be debited equaling
the amount of cash payment.

 Cancellation of original equity instruments and Issuance of new equity instrument:

If new equity instrument issued is a replacement of original equity then same rules as of
modification to be followed.
In this case, Incremental FV = FV of new equity instrument – net FV
And, Net FV = FV of original equity instrument at the time of replacement – any cash paid to
employee

From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co. Page 3
 If new equity instrument do not replace the original equity instrument then cancelled equity
instrument shall be treated as cancelled and new equity instrument shall be treated as new
equity instrument.

5. Cash Settled SBPT (Credit of double entry will always be liability)

 Measurement of transaction
FV of Liability shall be re-measured at each reporting period end. Increase in FV, if any, shall
result in increase in liability and expense and vice versa.
Accounting continues till settlement date

6. Settlement alternative

 Split the compound equity instrument into:

Liability component
Equity component

 Liability component
It is the FV at grant date of amount payable at the settlement date
At grant date, liability component = compound equity instrument only if number of shares in
case equity settlement are same as number of shares in cash settlement.
o E.g. equity alternative = 1,000 shares or
cash alternative = cash equal to the FV of 1,000 shares (liability component)
FV of 1 share = Rs. 5
Liability component = 5 x 1,000 = 5,000.
Liability component shall be re-measured at each period end

 Equity component
If FV of goods/ services is known then:
o Equity component = FV of goods/ services – liability component
If FV of goods/ services not known then:
o Equity instrument = FV of compound equity instrument – liability component
Equity component > 0 only if number of shares in equity alternative > number of shares in
cash alternative
o E.g. equity alternative = 1,200 shares
Cash alternative = cash equal to FV of 1,000 shares (liability component)
FV of 1 share at grant date = Rs. 5
Liability component = 5 x 1,000 = 5,000
FV of compound equity instrument = 1,200 x 5 = 6,000
Equity component = 6,000 – 5,000 = 1,000
Accounting of equity component ends at the end of vesting period

From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co. Page 4
 Settlement entries
In cash
o Debit: liability
Credit: Cash / bank
o Optional entry:
Debit: reserves (created for equity component)
Credit: retained earnings

In equity
o Debit: Liability
Credit: Share capital
Credit: Share premium
o Optional entry:
Debit: Reserves
Credit: Retained earnings

From the register of Uzair Aziz Abro| Senior Audit Incharge| Nasir Mahmood & Co. Page 5