IFRS 2- SHARE BASED PAYMENTS

Share based payments are arrangements between an entity and third party (usually an
employee) that entitles the third party to receive equity instruments (e.g. shares or share
options) or cash payments at an amount that is based on the value of equity instruments of the
entity in exchange for goods or services rendered by the third party.

Types of share based payments

There are main 2 types

i. Equity settled share base payments transaction

In this type an entity receives goods or services in exchange for an equity instrument e.g. share
or Share options.

ii. Cash settled share based payment transaction

In this type an entity receives goods or services in exchange for cash but the cash will be
measured in reference to an equity instrument value. E.g. share price of an entity.

Accounting for Equity settled share based payments

If the goods or services are received by the entity as a result of an equity settled shares based
transaction, an entity shall recognize an expense as well as equity e.g. share option.

 if the third party supply service

DR: Expenses XXX (No. of options X Fair value)

CR: Equity XXX

 If the third party supply goods

DR: Asset/Inventory XXX

CR: Equity XXX

Measurement of an Equity settled share based payment transaction

 If the third party of an arrangement is an employee (as is usually the case) the
transaction should be measured based on the Fair value of the Equity Instrument
granted (i.e. the market price/value of options at grant date)

 Otherwise the transaction should be measured based on the fair value of goods or
services supplied

Vesting period

Normally share options are granted to employees with conditions. One of the condition is that
an employee should remain in the employment for specified period of time e.g. 5 years, hence
that period is referred to vesting period.

Allocating the amount over the vesting period

As the arrangement under equity settled share based payment is for more than a year, the
amount recognized as the value of the transaction should be spread over the servicing/vesting
period.

The amount to be recognized at each year end

= Cumulative charge at end of the year - Cumulative charge at Start of the year

Cumulative charge

= (No. of options granted per employee) X (No. of employees expected to vest) X (Fair value
of each option at grant date) X (Expired portion of vesting period)

Example 01

Jamila Ltd has offered share options of 200 shares to each of its 1000 employees. The vesting
condition is that the employees need to remain in continuous employment for the next five
years. The estimated fair value of each share option is TZS 3,000. The entity estimates that 25%
of the employees will leave the organization during the five-year period.
Required: Based on the explanation given above show how the amounts are to be recognized
in the financial statements

Solution 01

Amount to be recognized in the Financial statement over 5 years

Year Computations Equity (Cumulative Expenses to P/L

charge to SFP)

1 200 X 75% X 1000 X 3000 X 1/5 90M 90 – 0 = 90M

2 200 X 75% X 1000 X 3000 X 2/5 180M 180 – 90 = 90M

3 200 X 75% X 1000 X 3000 X 3/5 270M 270 – 180 = 90M

4 200 X 75% X 1000 X 3000 X 4/5 360M 360 – 270 = 90M

5 200 X 75% X 1000 X 3000 X 5/5 450M 450 – 360 = 90M

Extract - Statement of P/L

Year 1 2 3 4 5

Expenses (90M) (90M) (90M) (90M) (90M)

Extract - Statement of Financial Position

Year 1 2 3 4 5

Equity

Share options 90M 180M 270M 360 450

(Special reserve)
Example 02

Binamu Ltd offers 200 shares to each of its 1000 staff if they stay with them for 3 years. The fair
value of the shares as on that date is TZS 3,000. At the end of the first year, 15 employees leave
and an entity estimates that 25% will have left at the end of the vesting period, during the
second year further 15 employees leave and the entity estimate that 27% will have left at the
end of vesting period. During the third year a further 15 employees leave the entity.

Required: Determine the amounts to be recognized in the statement of profit or loss

Solution 02

Amounts to be recognized to P/L = Cumulative change at end - Cumulative charge at start

Year Computation Expenses

1 (200 X 75% X 1000X 3000 X 1/3) - 0 150M

2 (200 X 73% X 1000 X 3000 X 2/3) – 150M 142M

3 (200 X (1000 – 15 -15 – 15) X 3000 X 3/3) – 150 - 281M

142

Extract - Statement of P/L

Year 1 2 3

Expenses 152M 142M 281M

Example 03

Entity A prepares it financial statements om 31st December each year. On 1 January 2020 A
granted 300 options to 400 employees. The options vest on 31 December 2022 provided the
relevant employees remain in employment with A throughout the three-year period.

On1 January 2020 the fair value of each share option was TZS 2.4 The fair value increased to
TZS 2.5 by 31 December 2020, to 2.7 on 31 December 2021, and was TZS 2.75 on 31 December
2022. On 1 January 2020 the directors of entity A estimated that 340 employees would remain
in employment throughout the three-year period ending on 31 December 2021. This estimate
was recomputed to 350 employees on 31 December 2020 and 360 employees on 31 December
2021. The actual number of employees who remained over the three-year period was 365
employees.

Required: Calculate the amounts that will be recognized in the financial statements in respect
of the share based payment transaction for each of the three years ended 31 December 2022

Solution 03

Year Computation Equity Expenses

2020 300 X 350 X 2.4 X 1/3 84,000 84,000

2021 300 X 360 X 2.4 X 2/3 172,800 88,800

2022 300 X 365 X 2.4 X 3/3 262,800 90,000

Extract Statement of P/ L

Year 2012 2013 2014

Expenses (84,000) (88,800) (90,000)

Extract - Statement of Financial Position

Year 2012 2013 2014

Equity

Share options 84,000 172,000 262,800

(Special reserve)

Treatment of Performance Conditions for equity settled share based payment

Equity settled share based payment transaction arrangements often contain vesting conditions
that relates to performance rather than merely service Conditions.

Performance conditions would include achieving a certain level of revenue / profit. Such
conditions should be taken into account when estimating the number of options that will vest.

Example 04

Entity B prepares financial statements to 30 November each year. On 1 December 2019 entity B
granted share options to a group of 200 employees. The options will vest on 30 November 2022
provided the employees remain in employment over the three-year period ending 30
November 2022. The number of options that will vest for each eligible employee will depend on
the cumulative growth in revenue for the three-year period ending 30 November 2022

 250 options if the cumulative growth in revenue is more than 20% but not more than
25%.

 300 options if the cumulative growth in revenue is more than 25% but not more than
30%.

 350 options if the cumulative growth in revenue is more than 30%.

The directors of entity B made the following estimates regarding the vesting conditions at
relevant dates:

Date Number of eligible Cumulative growth in

employees revenue in the three-year
period

1 December 2019 180 22%

30 November 2020 183 24%

30 November 2021 185 28%

The fair value of a share option on 1 December 2019 was TZS 3.6

Required: Show the impact of the share-based payment arrangement on the financial
statements for the years ended 30 November 2020 and 2021.

Solution 04

Year Computation Equity Expenses

2020 250 X 183 X 3.6 X 1/3 54,900 54,900

2021 300 X 185 X 3.6 X 2/3 133,200 78,300

Extract- Statement of P/L

Year 2013 2014

Expenses 54,900 78,300

Extract - Statement of Financial Position

Year 2013 2014

Special reserve 54,900 133,200

CASH-SETTLED SHARE BASED PAYMENTS TRANSACTION

This is an arrangement where an entity receive goods or services from the third party (usually
an employee) in exchange for amount of cash that will be measured by reference to entity's
share price. A typical example would be where an entity grants Shares Appreciation Rights
(SARS) to its employees as part of their remuneration package.

Accounting Treatment

Accounting treatment for cash settled share based payment is similar to account treatment for
equity settled share based payment transactions. A particular area of similarity is that the
expected transaction cost is recognized over vesting period taking account vesting conditions.

However, there are 2 important differences;

i. Since the entity will be making a payment of cash, rather than issued shares, the credit
entry to the transaction is to liability rather than equity

Entries

Dr: Expenses XXX

Cr: Liability XXX

ii. Given the need to measure the liability at its expected value, the fair value of SARS,
is updated to fair value at each reporting date rather than at the grant date, as it is
the case for equity settled Share based payment.
Cumulative charge/ Liability to SFP = No. of SARs x No. of employees to vest x Fair value of
each SAR at each reporting date x Expired portion of vesting period

Expense to P or L = Cumulative charge at end - Cumulative change at start

Example 05

On 1 January 2020 an entity grants 100 cash share appreciation rights (SAR) to each of its 300
employees, on condition that they continue to work for the entity until 31 December 2022.
During 2020, 20 employees leave. The entity estimates that further 40 will leave during 2021
and 2022. During 2021, 10 employees leave and the entity estimates that a further 20 will leave
during 2022. During 2022, 10 employees leave. The fair values of one SAR for each year are
shown below

2020 10

2021 12

2022 15

Required: Calculate the amount to be recognized as an expense for each of the three years
ended 31 December 2022 and the liability to be recognized in the statement of financial
position at 31 December for each of the three years.

Solution 05

Year Calculations Liability Expenses

20X1 (100x (300 -20 - 40) x 10 x 1/3 80,000 80,000

20X2 (100x (300 – 20 – 10 -20) x 12 x 200,000 120,000

2/3
 20X3 390,000 190,000
(100x (300 – 20 – 10 – 10) x 15 x
3/3

Class Task

Prepare extracts of SFP and P/L