CHAPTER TWO

ACCOUNTING FOR SHARE-

BASED COMPENSATION
 Learning
Learning Objectives
Objectives
1. Understand the what Shared Based payment mean;
2. Apply the recognition requirements of share-based payment
transactions, including the requirements when there are vesting
conditions;
3. Account for equity-settled share-based payment transactions,
including shares and share options;
4. Account for cash-settled share-based payment transactions,
including share-based payment transactions with cash-settled
alternatives; ( (Counterparty Has Choice of Settlement & Issuer Has
Choice of Settlement)
5. Disclose share-based payment in financial statements;
19-2
 Overview of Share-based Payments
 What are share based payments?
 StockBased Compensation/Share-Based Compensation or Equity
Compensation is a way of paying employees, executives, and
directors of a company with equity in the business.
 It is typically used to motivate employees beyond their regular
cash-based compensation (salary and bonus) and to align their
interests with those of the company’s shareholders.
 IFRS® 2, Share-based Payment, applies when a company acquires
or receives goods and services for equity-based payment. some of the
arrangements accounted for under IFRS 2 include call options,
share appreciation rights, share ownership schemes, and payments
for services made to external consultants based on the company’s
equity capital.

6-3
 Advantages of Share-based Payments
 Creates an incentive for employees to stay with the company
(they have to wait for shares to vest)
 Aligns the interests of employees and shareholders – both
want to see the company prosper and the share price rise
 Doesn’t require cash

Disadvantages of Share Based Compensation

 Dilutes the ownership of existing shareholders (by increasing the
number of shares outstanding)
 May not be useful for recruiting or retaining employees if the
share price is decreasing

6-4
 Cont’d
 What are share based payments?
 A payment for goods or service in either
 Share
 Share options
 Cash payments based on share price
 Agreement b/n the entity and another party that entitles the
other party to receive cash/other assets based on the price or
value of company equity instruments.
 Common ways of awarding employee performance

6-5
 Cont’d
 Why share based payment?
 To motivate employees to higher levels of
performance
 To build a sense of shared ownership in the entity.
 To help retain executives and recruit new talent
 To maximize employee’s after-tax benefit
 Types of Share-based Payment
1. Share-based Payments Settled with Equity
2. Share-based Payments Settled with Cash
3. Share-based Payments with Cash Alternatives

6-6
 Cont’d
 Equity-settled share based payment transactions where a
company receives goods or services in exchange for
company equity instruments (e.g. shares/share options).
 Cash-settled share based payment transactions, where a
company receives goods and services in exchange for a
cash amount paid based on its share price.
 It is liability award
 Share-based Payments with Cash Alternatives, where a
either the entity or the counterparty has a choice of the
entity settling the transaction in cash, other assets, or by
issuing equity instruments

6-7
 Basic Terminologies
 Grant date: the date a share-based payment transaction is
entered into.
 Vesting date: is the date when the counter party becomes
entitled to share based payment
 Exercise date: is the date in which employees receive the
share based payments.
 Vesting conditions- refers to the conditions that must be
satisfied for the counter party to become entitled to
receive the payment
• 2 types: service and performance conditions
 Vesting period: refers to the period b/n the grant date and
the vesting date.
 Fair value: refers to the amount at which the asset will be
6-8
 Accounting for share-based payments

 Recognition When?
 If the share options vest immediately, the employee is not required to
complete a specified period of services before unconditionally entitled
to the share options. The entity shall recognize the services received
in full, with a corresponding increase in equity.
 If the share options do not vest immediately until the employee
completes a specified period of services, the entity shall recognize for
those as they are rendered by the counterparty during the vesting
period, with a corresponding increase in equity.

6-9
 Accounting for share-based payments
 Measurement How much?
 It depends on the type of share based payment offered
 If the share based payment is equity settled, the compensation is equal
to the fair value (FV) of the share/ share options on the grant date.
 If the entity cannot estimate reliably the fair value of the goods or
services received, the entity shall measure their value, and the
corresponding increase in equity, indirectly, by reference to the fair
value of the equity instruments granted.
 If the share based payment is cash settled, the compensation is equal to
the fair value of the share at each reporting date.
6-10
1) Equity-settled share based payment
 Illustration : Good Received
 Assume ABC Company issued share options on 1 June 2006 to
pay for the purchase of inventory. The inventory is eventually
sold on 31 December 2008. The value of the inventory on 1 June
2006 was $6m and this value was unchanged up to the date of
sale. The sale proceeds were $8m. The shares issued have a
market value of $6 m.
 How will this transaction be dealt with in the financial
statements?
 IFRS 2 states that the fair value of the goods and services
received should be used to value the share options unless the
fair value of the goods cannot be measured reliably. Thus
equity would be increased by $6m and inventory increased by
$6m. The inventory value will be expensed on sale.
 1) Equity-settled share based payment
 Illustration 1- Service Received (No vesting period)
 On January 1, 2019, share options are granted to employees to purchase
100,000 ordinary shares of $50 par value at $60 per share. On this date, the
fair value of each share option is $20. The options are exercisable immediately.
The employees exercised all the share options on December 31.2019.
 Since the options are exercisable immediately, the compensation is recognized
in full on January 1, 2019 as follow.

Salaries-share options (100,000 x20) 2000,000

Share options outstanding 2000,000
The exercise of the share options on December 31, 2019 is recorded as follow

Cash ( 100,000 x 60) 6000,000

Share options outstanding 2000,000
Ordinary share (50 x 100,000) 5000,000
Share premium 3,000,000
 Cont’d
 Illustration 2- with vesting period.
 On January 1, 2019, share options are granted to employees to purchase
100,000 ordinary shares of $50 par value at $60 per share. On this date, the
fair value of each share option is $15. The options can be exercised starting
January 1, 2021 and expire one year after. All shares are exercised on
December 31, 2021
 Total compensation or FV of share options (100,000 x 15)= 1500,000
Annual compensation ( 1500,000/2) = 750,000
Dec 31, 2019 Salaries-share options 750,000
Share options outstanding 750,000
 The exercise of the share options on December 31, 2021 is recorded as follow
Cash ( 100,000 x 60) 6000,000
Share options outstanding 1,500,000
Ordinary share (50 x 100,000) 5,000,000
Share premium 2,500,000
 Cont’d
 Illustration 3- some Employees left.
 On January 1, 2019, an entity granted 100 share options each to 500
employees, conditional up on the employees remaining in the
entity's employ during the vesting period. The share options vest at
the end of a three year period. On grant date, each share options has
a fair value of $30.
 By December 31, 2019, 30 employees have left and it is expected
that on the basis of a weighted average probability a further 30
employees will leave during the vesting period.
 By December 31, 2020, 28 employees have left and it is expected
that a further 25 employees will leave during year.
 By December 31, 2021, 22 employees have left and therefore, 420
employees shall receive share options at the end of 2021.
 Con’t
 The compensation expense for each year of the three year vesting
period computed as follow
2019
Number of employees 500
Employees who left in 2019 (30)
Employees expected to leave (30)
Employees entitled to share options 440
Multiply by share options per employees 100
Total share options 44,000
Multiply by FV 30
Total compensation 1,320,000
Compensation expense for 2019 (1,320,000/3) = 440,000
 Cont
 2020
Number of employees 500
Employees who left in 2019 (30)
Employees who left in 2020 (28)
Employees expected to leave (25)
Employees entitled to share options 417
Multiply by share options per employees 100
Total share options 41,700
Multiply by FV 30
Total compensation 1,251,000
Compensation expense for 2020 (1,251,000 x 2/3) = 834,000
Less: Compensation expensed recognized in 2019 440,000
Compensation expense in 2020 394,000
 Cont
 2021
Number of employees 500
Employees who left in 2019 (30)
Employees who left in 2020 (28)
Employees who left in 2021 (22)
Employees entitled to share options 420
Multiply by share options per employees 100
Total share options 42,000
Multiply by FV 30
Total compensation 1,260,000
Less: cumulative Compensation recognized in 2020 = 834,000
Compensation expense in 2021 426,000
Illustration: Home work
 An entity grants 100 shares options to each of its 300
employees. Each grant is conditional that the employees
should be working in the entity for not less than 3 years.
Fair value of each share option is $25(estimated). In
addition the company estimates that 20% of the
employees will leave during the 3 years period. Hence,
there share are forfeited.

Required: Calculate each year expense and Journal entry on

each of the 3 years ended 31 dec 1 to 31 Dec 3.
2) Cash-settled share based payment
 Cash-settled share based payment transaction is where goods or
services are paid at amount, based on the price of the company
equity instruments.
 Cash-settled schemes are often referred to as share-appreciation
rights (SARs).
 There are two key differences between the accounting treatment
of SARs and an equity settled share-based payment scheme:
 Until the settlement date, the expense is valued using the fair
value of the SARs at each the reporting date.
 The accounting entry required is: Dr Profit or loss and Cr
Liabilities (not equity)
Illustration: Cash-settled share based payment
 Illustration 1
 ABC granted 10,000 cash settled share based payments to its 20
directors on January 1, 2015. The options vest on 31 December
2017. it is anticipated that none of the directors will leave over the
next 3 years period. Fair value of options were given below;
 1 January 2015 12
 31 December 2015 13.50
 31 December 2016 13.80
 31 December 2017 14.20
Required: Compute the amount of compensation expense at the
end of each year?
Illustration: Cash-settled share based payment
 Solution
Yea No of employees No share Vesting FV of Current Cumulative
rs expected to awarded proportion the charge
accessible at options
year
end(estimated)

1 20 10,000 1/3 13.5 900,000 900,000

2 20 10,000 2/3 13.8 940,000 1,840,000

3 20 10,000 3/3 14.2 1000,000 2,840,000
Journal entry at the end of each year 1.

Expense 900,000
Year 1
Liabilities
900,000
Illustration: Cash-settled share based payment
 Illustration 2: Some Employees Left
 An entity grants 200 cash share appreciation rights (SARs) to each
of its 700 employees, on condition that the employees remain in its
employ for the next three years. Cash is payable at the end of 3 rd
years based on the share price of the entity's shares on that date.
 During year 1, 40 employees leave. The entity estimates that a
further 60 will leave. during the year share price is $15.2
 During year 2, 50 employees leave and the entity estimates that a
further 35 will leave. share price at year ended is $18
 During year 3, 15 employees leave. So that the award vest for 595
employees. share price at year ended is $19.70
Illustration: Cash-settled share based payment
Years No of employees No share FV of the Vesting Current Cumulative
expected to awarded options proportion charge
accessible at year
end(estimated)
1 600 200 15.2 1/3 608,000 608,000
(700-40-60)
2 575 200 18 2/3 772,000 1,380,000
(700-40-50-35)
3 595 200 19.7 3/3 964,300 2,344,300
(700-40-50-15)

Journal entry at the end of each year :

Compensation Expense 608,000

Year 1
Liabilities
608,000
 3) Share-based payment transactions with cash
alternatives
Some share-based payment transactions give either the entity or
the counterparty a choice of settling the transaction in cash (or
other assets) or by transfer of equity instruments.

In such a case, the entity shall account for the transaction as a
cash-settled share-based payment transaction

Share-based payment transactions with cash alternatives are often

structured so that the fair value of one settlement alternative is the
same as the other.
 Case I:Counterparty Has Choice of Settlement
 If an entity has granted the counterparty the right to choose
whether a share-based payment transaction is settled in cash or by
issuing equity instruments, the entity has granted a compound
financial instrument, which includes a debt component (i.e. the
counterparty’s right to demand payment in cash) and an equity
component (i.e. the counterparty’s right to demand settlement in
equity instruments rather than in cash).
 For transactions with parties other than employees, the entity
shall measure the equity component of the compound financial
instrument as the difference between the fair value of the goods
or services received and the fair value of the debt component, at
the date when the goods or services are received.
 Case I:Counterparty Has Choice of Settlement
 For other transactions, including transactions with employees, the
entity shall measure the fair value of the compound financial
instrument at the measurement date.
 The entity shall first measure the fair value of the debt
component, and then measure the fair value of the equity
component.
 For the debt component, the entity shall recognize the goods or
services acquired, and a liability to pay for those goods or
services in accordance with the requirements applying to cash-
settled share-based payment transactions.
 For the equity component (if any), the entity shall recognize the
goods or services received, and an increase in equity, in
accordance with the requirements applying to equity-settled
share-based payment transactions.
 Case II: Issuer Has Choice of Settlement
 The entity shall determine whether it has a present obligation to
settle in cash and account for the share-based payment transaction
accordingly.
 The entity has a present obligation to settle in cash if the choice
of settlement in equity instruments has no commercial substance
(e.g because the entity is legally prohibited from issuing shares),
or the entity has a past practice or a stated policy of settling in
cash, or generally settles in cash whenever the counterparty asks
for cash settlement.
 If no such obligation exists, the entity shall account for the
transaction in accordance with the requirements applying to
equity-settled share-based payment transactions.
Examples-share-based payments with cash alternatives
Entity WZ grants to 10 of employees the right to choose either
1,000 ‘phantom shares’ (ie a right to a cash payment equal to the
fair value of 1,000 shares) or 1,000 shares. The grant is
conditional upon the completion of three years’ service. At the
end of Year 3, each employee chooses either the cash alternative
or the equity alternative. At the grant date, the fair value of Entity
WZ’s shares is $50 per share. At the end of Years 1, 2 and 3, the
fair value of Entity WZ’s shares is $52, $55 and $60 per share
respectively. All employees remain in service at the end of year 3.
Solution
Years No of No share FV of Vesting Current Cumulative
employees awarded the proportion charge
options

1 10 1000 52 1/3 173,333 173,333

2 10 1000 55 2/3 194,334 366,667
3 10 1000 60 3/3 233,333 600,000

Journal entry at the end of each year :

Compensation Expense 173,333

Year 1
Liabilities
If an employee173,333
chooses to take shares rather than cash at the end of Year 3
there would no longer be a liability and Entity WZ would transfer the 600,000
out of liabilities (Dr Liabilities 600,000). Entity WZ would be required to
recognise the issue of new shares or, alternatively, the use of ordinary shares (Cr
Equity 600,000).
 Share-based Payment Disclosures

There are certain specific disclosures that IFRS2 required

to be provided with the financial statements:
• The nature and extent of share based payment
arrangements that existed during the period
• How the fair value of the goods or services received or
the fair value of the equity instruments granted during
the period was determined
• The effect of share based payments transactions on the
entity's profit or loss for the period and on its financial
positions.
End of Chapter TWO