Chapter Two

Share Based Compensation.

2.1 Overview of share –based compensation

Share-based compensation refers to the payment made to employees or other stakeholders in

the form of equity instruments, such as stock options or restricted stock units (RSUs). It is a
payment made by a company based on its share price. Accounting for these transactions is
governed by specific standards, primarily under IFRS 2 (International Financial Reporting
Standards). The IFRS requires an entity to recognize share-based payment transactions in its
financial statements, including transactions with employees or other parties to be settled in cash,
other assets, or equity instruments of the entity.

..Entities often grant shares or share options to employees or other parties. Share plans and share
option plans are a common feature of employee remuneration, for directors, senior executives
and many other employees. Some entities issue shares or share options to pay suppliers, such as
suppliers of professional services.

A ‘share-based payment arrangement’ is an agreement between the entity (or another group
entity or any shareholder of any group entity) and another party, including an employee that
entitles the other party to receive:
A. Cash or other assets of the entity for amounts that are based on the price (or value) of equity
instruments (including shares or share options) of the entity or another group entity; or

B. Equity instruments (including shares or share options) of the entity or another group entity,
provided that the specified vesting conditions are met
A ‘share-based payment transaction’ is a transaction in which the entity:
 Receives goods or services from the supplier of those goods or services including an
employee, in a share-based payment arrangement; or

 incurs an obligation to settle the transaction with the supplier in a share based
payment arrangement when another group entity receives those goods or service

A transaction in which the entity receives goods or services in an arrangement that entitles the
supplier to receive equity instruments of the entity, or cash or other assets of the entity, for
amounts that are based on the price (or value) of equity instruments of the entity.
Basic Concepts
Grant date: the date at which the entity and another party (including an employee) agree to
a share-based payment arrangement, being when the entity and the counterparty have a shared
understanding of the terms and conditions of the arrangement. At grant date the entity confers on
the counterparty the right to cash, other assets, or equity instruments of the entity, provided the
specified vesting conditions, if any, are met. If that agreement is subject to an approval process
(for example, by shareholders), grant date is the date when that approval is obtained.

Vesting: To become an entitlement. Under a share-based payment arrangement, a

counterparty’s right to receive cash, other assets or equity instruments of the entity vests when
the counterparty’s entitlement is no longer conditional on the satisfaction of any vesting
conditions.

Vesting condition: A condition that determines whether the entity receives the services that
entitle the counterparty to receive cash, other assets or equity instruments of the entity, under a
share-based payment arrangement. A vesting condition is either a service condition or a
performance condition

Service condition is a vesting condition that requires the counterparty to complete a specified
period of service during which services are provided to the entity. If the counterparty, regardless
of the reason, ceases to provide service during the vesting period, it has failed to satisfy the
condition. A service condition does not require a performance target to be met.

Performance conditions is a vesting condition that requires the counterparty to complete a

specified period of service (i.e. a service condition); and specified performance target(s) to be
met while the counterparty is rendering the service required in service conditions.

Exercise date: when option turn into cash or shares

2.2 Share based Payments settled with Equity

Equity-settled share-based payments are transactions in which a company grants equity

instruments (such as shares or stock options) to employees or other parties as part of their
compensation. The payment is settled in the company’s own equity instruments rather than
cash.

Key Features/character:

The compensation is tied to the equity of the company.

The expense is recognized over the vesting period (the time an employee must wait before they
can exercise their options or receive shares).
The fair value of the equity instruments granted is determined at the grant date.
Example
XYZ Corp, grants 1,000 stock options to its employee, to purchase shares at an exercise price of
$10 per share as part of her compensation package. An employee must remain with the company
for 4 years to fully vest in her options. At the grant date, the fair value of each option is
estimated to be $5 based on a valuation model.

Accounting Treatment

1. Total Fair Value Calculation:

Total fair value of options = Number of options × Fair value per option

Total fair value = 1,000 options × $5 = $5,000

2. Expense Recognition:

• Since the vesting period is 4 years, the total expense of $5,000 will be recognized evenly over
this period.

• Annual expense = Total fair value / Vesting period

• Annual expense = $5,000 / 4 = $1,250

3. Journal Entries:

• At the end of each year during the vesting period, XYZ Corp would make the following
journal entry:

Share-Based Payment Expense ……………….. $1,250

Equity ………………………….. …………$1,250

2.3. Share based payment-settled with Cash

Cash-settled share-based payments are transactions in which a company provides cash payments
to employees or other parties based on the value of the company's equity instruments (such as
shares) rather than issuing equity instruments themselves. This means that the payment is settled
in cash, often linked to the market price of the company’s shares.

Cash-settled share-based payments allow companies to provide incentives linked to their equity
performance without diluting ownership through stock issuance. The accounting treatment
involves recognizing an expense based on changes in fair value over time and settling in cash at
the end of the vesting period.

Key Features/Characteristics:

• The compensation is tied to the performance of the company's equity but settled in cash.
• The liability is measured at fair value at each reporting date until the settlement date.

• The expense is recognized over the vesting period, similar to equity-settled payments.

Example

On January 1, 2023, ABC Inc., grants $50,000 a cash-settled share-based payment to its
employee based on the value of 1,000 shares at a market price of $50 per share. An employee
must remain with the company for 3 years to receive the cash payment.

Accounting Treatment

1. Initial Recognition:

• At the grant date, ABC Inc. does not recognize any expense but notes the future liability.

2. Fair Value Calculation:

• At each reporting date, ABC Inc. must measure the fair value of the liability based on the
current market price of the shares.

• For example, if at the end of Year 1 (December 31, 2023), the market price is $60 per share,
the liability would be calculated as:

• Liability = Number of shares × Current market price

• Liability = 1,000 shares × $60 = $60,000

3. Expense Recognition:

• The expense recognized in Year 1 would be based on the change in fair value from the
previous measurement date.

• If the fair value increased from $50,000 to $60,000:

• Expense for Year 1 = $60,000 - $50,000 = $10,000

4. Journal Entries:

• At the end of Year 1, ABC Inc. would make the following journal entry:

Share-Based Payment Expense…………… $10,000

Liability for Cash-Settled Share-Based Payment …………$10,000

5. Settlement:

• At the end of the vesting period (January 1, 2026), if the market price is $70 per share, ABC
Inc. would settle the cash payment based on the final value:

• Final liability = 1,000 shares × $70 = $70,000

• The company would then pay an employee $70,000 in cash.

2.4 Share-based Payments with Cash Alternative

For share-based payment transactions in which the terms of the arrangement provide either the
entity or the counterparty with the choice of whether the entity settles the transaction in cash (or
other assets) or by issuing equity instruments, the entity shall account for that transaction, or the
components of that transaction, as a cash-settled share-based payment transaction if, and to the
extent that, the entity has incurred a liability to settle in cash or other assets, or as an equity-
settled share-based payment transaction if, and to the extent that, no such liability has been
incurred.
2.5 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, in
which the fair value of the goods or services received is measured directly, 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.
For other transactions, including transactions with employees, the entity shall measure the fair
value of the compound financial instrument at the measurement date, taking into account the
terms and conditions on which the rights to cash or equity instruments were granted.
The entity shall first measure the fair value of the debt component, and then measure the fair
value of the equity component—taking into account that the counterparty must forfeit the right to
receive cash in order to receive the equity instrument. The fair value of the compound financial
instrument is the sum of the fair values of the two components. However, share-based payment
transactions in which the counterparty has the choice of settlement are often structured so that
the fair value of one settlement alternative is the same as the other. For example, the counterparty
might have the choice of receiving share options or cash-settled share appreciation rights. In such
cases, the fair value of the equity component is zero, and hence the fair value of the compound
financial instrument is the same as the fair value of the debt component. Conversely, if the fair
values of the settlement alternatives differ, the fair value of the equity component usually will be
greater than zero, in which case the fair value of the compound financial instrument will be
greater than the fair value of the debt component.
The entity shall account separately for the goods or services received or acquired in respect of
each component of the compound financial instrument. For the debt component, the entity shall
recognize the goods or services acquired, and a liability to pay for those goods or services, as the
counterparty supplies goods or renders service, 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, as the counterparty supplies
goods or renders service, in accordance with the requirements applying to equity-settled share-
based payment transactions.
At the date of settlement, the entity shall re-measure the liability to its fair value. If the entity
issues equity instruments on settlement rather than paying cash, the liability shall be transferred
direct to equity, as the consideration for the equity instruments issued.
If the entity pays in cash on settlement rather than issuing equity instruments, that payment shall
be applied to settle the liability in full. Any equity component previously recognized shall remain
within equity. By electing to receive cash on settlement, the counterparty forfeited the right to
receive equity instruments. However, this requirement does not preclude the entity from
recognizing a transfer within equity, i.e. a transfer from one component of equity to another.
2.6. Issuer Has Choice of Settlement
In accounting for share-based compensation, when an issuer has a choice of settlement (e.g., cash
or equity), the accounting treatment can vary based on the nature of the arrangement and the
issuer's intent. Here are some key points to consider.
The issuer must determine whether the share-based payment is classified as an equity award or a
liability award. If the issuer has the choice to settle in cash or shares, it typically leads to a
liability classification, as the holder has the option to receive cash.
For liability-classified awards, the fair value of the award is remeasured at each reporting date
until the award is settled. This means that any changes in the fair value will affect the expense
recognized in profit or loss.
The expense for share-based compensation is recognized over the vesting period of the award.
For equity-classified awards, this is typically based on the grant date fair value. For liability-
classified awards, the expense is based on the fair value at each reporting date.
If the issuer has a choice of settlement, it should consider its past practices and expectations
regarding settlement. If it is probable that the issuer will settle in cash, then it should account for
the award as a liability.
2.7 Share-based Payment Disclosures
An entity shall disclose information that enables users of the financial statements to understand
the nature and extent of share-based payment arrangements that existed during the period. To
give effect to the principle in the entity shall disclose at least the following:
A. a description of each type of share-based payment arrangement that existed at any time during
the period, including the general terms and conditions of each arrangement, such as vesting
requirements, the maximum term of options granted, and the method of settlement (eg whether in
cash or equity). An entity with substantially similar types of share-based payment arrangements
may aggregate this information, unless separate disclosure of each arrangement is necessary to
satisfy the principle.

B. the number and weighted average exercise prices of share options for each of the following
groups of options:

i. outstanding at the beginning of the period;

ii. granted during the period;

iii. forfeited during the period;

iv. exercised during the period;

v. expired during the period;

vi. outstanding at the end of the period and

vii. Exercisable at the end of the period.

C. For share options exercised during the period, the weighted average share price at the date of
exercise. If options were exercised on a regular basis throughout the period, the entity may
instead disclose the weighted average share price during the period.
D. For share options outstanding at the end of the period, the range of exercise prices and
weighted average remaining contractual life. If the range of exercise prices is wide, the
outstanding options shall be divided into ranges that are meaningful for assessing the number and
timing of additional shares that may be issued and the cash that may be received upon exercise of
those options. An entity shall disclose information that enables users of the financial statements
to understand how the fair value of the goods or services received, or the fair value of the equity
instruments granted, during the period was determined.
If the entity has measured the fair value of goods or services received as consideration for equity
instruments of the entity indirectly, by reference to the fair value of the equity instruments
granted, to give effect to the principle in, the entity shall disclose at least the following:
a. for share options granted during the period, the weighted average fair value of those options at
the measurement date and information on how that fair value was measured,

b. for other equity instruments granted during the period (ie other than share options), the
number and weighted average fair value of those equity instruments at the measurement date,
and information on how that fair value was measured.

c. For share-based payment arrangements that were modified during the period.

An entity shall disclose information that enables users of the financial statements to understand
the effect of share based payment transaction on the entity profit or loss for the period and on its
financial position.
a. The total expense recognized for the period arising from share-based payment transactions in
which the goods or services received did not qualify for recognition as assets and hence were
recognized immediately as an expense, including separate disclosure of that portion of the total
expense that arises from transactions accounted for as equity-settled share-based payment
transactions;
b. for liabilities arising from share-based payment transactions:

i. the total carrying amount at the end of the period; and

ii. the total intrinsic value at the end of the period of liabilities for which the counterparty’s right
to cash or other assets had vested by the end of the period (eg vested share appreciation rights)