In the recent years it’s been very common for the entities to acquire goods and services from third parties by issuing share or granting share options rather than making payments in cash.
Further share based payments are motivational and incentive tools to induce the employees to work better and suppliers by giving them a sense of belonging by making them shareholder/ owners.
This accounting standards speaks about the accounting treatment, where an entity buys goods and services for equity-based payments. (Please note Goods can be anything, like- plant, machinery, equipment, intangibles and other non-financial assets).
An entity shall apply this Standard in accounting for all share- based payment transactions, whether the entity can identify specifically some or all of the goods or services received, including:
(a) equity-settled share-based payment transactions- here the entity issue equity share options / instruments in exchange of goods and services.
(b) cash-settled share-based payment transactions- here the entity pays cash based on the valuation of equity instruments / options against goods and services.
(c) Hybrid option – transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash (or other assets) or by issuing equity instrument.
Recognition of Share based payment
Recognition has been explained in the below table.
|Receipt of Services||Receipt of Inventories||Receipt of assets|
|Equity Settled||Expense Dr. To Equity||Inventory Dr. To Equity||PPE/ Asset Dr. To Equity|
|Cash Settled||Expense Dr. To Liability||Inventory Dr. To Liability||PPE/ Asset Dr. To Liability|
Please note:- Equity Cr will be further divided in to Equity share capital +Securities premium.
Measurement principles of Share based payment
- In relation to goods/ assets / services received (from third party)
- Valuation: Fair value of services billed/ assets or inventory received.
- Timing: Valuation is to be done when services are rendered /assets / inventory received.
- In relation to receive from employees.
- Valuation: Fair value of may not be possible, hence consider the valuation of equity instruments. If the company is listed then consider market value, if not listed then valuation of shares by valuation formula (IAS 102/ IFRS2 doesn’t gives any valuation technique).
- Timing: Valuation is to be done on the grant date.
Equity Settled options (Services from employees)
IFRS 2/ IAS 102’s objective for equity -based transaction with employee is to determine and recognize compensation costs over the period in which the services are rendered. For example if the entity grants to employee share options that vest in three years’ time on the condition that they remain entity’s employee for that period , these steps will be taken.
Step 1: The fair value of the options will be determined at the date on which they were granted.
Step 2: This fair value will be charged to the income statement equally over the three years vesting period with adjustment made at each accounting date to reflect the best estimate of the number of the option that eventually will vest.
Example of Equity Settled options (Services from employees)
Question: on 1/1/2019 an entity grants 100 share options to each of its 400 employees. Each grant is conditional upon the employee working for the entity till 31/12/2021. The fair value of the option is $20. During 2019 only 20 employees leaves the entity and the management estimate that 20% of the employee will leave during the three period. In 2020 a further 25 employees leave the entity and the management estimate that 25% of the employee will leave during the three period. During 2021 a further 10 employees leave.
Requirement : Calculate the remuneration expense which will be recognized in respect of share based payment in three year period.
Solution : As step 1 recommends to recognized the compensation / remuneration expense based on the fair value of the share on the grant date which is $20.
A total of 55 employees left the entity in a three year period and therefore ( 400-55) =345 employees * 100 shares each will be vested.
Calculation is as follows
|Employee Dr. compensation ( PL)||$213,333 (100*400*80%*20*1/3)||$186,667 (400*100*75%*20*2/3)||$290,000 (345*100*20)|
|To Equity ( BS)||$213,333||$186,667||$290,000|
Please note: Equity will be $690,000 on third year.( $213,333+ $186,667+ 290,000)