CAEA 2215

FINANCIAL ACCOUNTING &

REPORTING III
SEMESTER 2 (2013/14)
Accounting Treatment for
Share-Based Payments
Prepared for:
Dr. Ervina binti Alfan

Prepared by :
Shafiah Nasrin Binti Nasser Ali Khan

CEA120119

Kerubashne a/p Paraninathan

CEA120031

Vinothini a/p Karuppiah

CEA120109

Submission Date : 12 May 2014

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CONTENTS

NO

Topic

Page/s

1.

Introduction

2.

Overview of Accounting Treatment for Share-Based

Payments in FRS 2

4-5

3.

Relevance of the Accounting Treatments in FRS 2 for

Share-Based Payments and Conceptual Framework

4.

Controversies Surrounding FRS 2

5.

Discussion

8-9

6.

Conclusion

10

7.

References

11

8.

Appendix

12-21

1.0 INTRODUCTION
Share-based payment is a transaction where a corporation receives good and services
either as factor for its equity instruments or by incurring liabilities for amounts based on the
price of corporation's shares or other equity instruments of the corporation. Accounting
requirements for shared-based payments depend on how the transaction will be settled,
whether by issuance of equity, cash or equity and cash. In entity, if it has a current obligation
to settle cash, the share-based payment is cash settled. Conceptual framework is not
MFRS/FRS. However it is a practical tool to assist IASB when developing and reviewing
IFRSs. Conceptual framework is to improve financial reporting by giving IASB a complete
set of concepts to use when developing or reviews the standards.
On 1 April 2001, the International Accounting Standards Board was established to
replace the International Accounting Standards Committee (IASC). It adopted framework to
serve as guide to the board in developing accounting standards. The International Financial
Reporting Standards (IFRSs) has been developed via the "due process", an international
consultation process which has six stages. through this process, it consults with regulators,
investors and business leaders at every stages of the process. IASB publishes and look for
comments from public on discussion papers and exposure drafts in developing IFRSs. the
interpretations committee follows a transparent, thorough due process in developing
interpretations. When the International Accounting Standards Board(IASB) considers the
comments received on the exposure draft during meetings, the development of an IFRS is
carried out. The IASB do not have authority to impose standards. On 12 December 2013, the
International Accounting Standards Board (IASB) issued two cycles of Annual
Improvements to IFRSs which contains 11 changes to nine standards.

2.0 OVERVIEW OF FRS 2

2.1 Recognition:
An entity must recognize the goods and services received or acquired in a share-based
payment transaction when it obtains the goods or as the services are received. The entity will
recognise a corresponding increase in equity if the goods or services were received in an
equity-settled share-based payment transaction or a liability if the goods or services were
acquired in cash-settled share-based payment transactions. The goods or services received or
acquired in a share-based payment transaction shall be recognised as expenses if they are not
qualified for recognition as assets.
2.2 Main features of the FRS 2:
FRS identifies three types of share-based payment:
1) For equity-settled transactions, FRS requires an entity to measure the goods or services
received and the corresponding increase in equity at their fair value, unless the fair value
cannot be estimated reliably, the entity is required to measure their value, and the
corresponding increase in equity, indirectly, by reference to the fair value of the equity
instruments granted.
For transactions with employees and other providing same services, FRS requires the entity
to measure the fair value of the equity instruments granted, because it is typically not possible
to estimate reliably the fair value of employee services received. The fair value of the equity
instruments granted is measured at grant date. For a non-employee (or similar) transaction,
there should be a rebuttable presumption that the fair value of the goods or services received
can be estimated reliably.
For goods or services measured by reference to their fair value of the equity instruments
granted, FRS specifies that vesting conditions, other than market conditions, are not taken
into account when estimating the fair value of the shares or option at the relevant
measurement date. Instead, vesting conditions are taken into account by adjusting the number
of equity instruments included in the measurement of the transaction amount.

2) For cash-settled share-based transactions, FRS requires an entity to measure the goods or
services acquired and the liability incurred at the fair value of the liability. The ultimate cost
of a cash-settled award is the cash paid to the counterparty, which is the fair value at
settlement date. Until the award is settled, entity is required to present the cash-settled award
as a liability and not as an element of equity. Entity recognises the services received and the
liability for those services as the employees render them. If an employee is not required to
provide any service, as is the case for some share appreciations rights, the entity recognize
the expense and the liability immediately upon grant date.
3) For share-based payment transactions in which the terms of the arrangement provide
either the entity or the supplier of goods or services with a choice of whether the entity settles
the transaction in cash or by issuing equity instruments, the entity is required to account for
that transaction, or the components of that transactions, 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.
2.3 Disclosure
The FRS prescribes various disclosure requirements to enable users of financial statements to
understand the nature and extent of share-based payment arrangements, their effect on the
periods financial statements, and the methodologies used in arriving at the numbers included
in the financial statements.

3.0

SHARE BASED PAYMENTS (FRS2) RELEVENCE TO CONCEPTUAL

FRAMEWORK
Objectives of Financial Reporting by Business Enterprises, states that financial reporting
should provide information that is useful in making business and economic decisions.
Recognizing compensation cost incurred as a result of receiving employee services in
exchange for valuable equity instruments issued by the employer will help achieve that
objective by providing more relevant and reliable information about the costs incurred by the
employer to obtain employee services in the marketplace.
Qualitative Characteristics of Accounting Information, explains that comparability of
financial information is important because information about an entity gains greatly in
usefulness if it can be compared with similar information about other entities. Establishing
the fair-value-based method of accounting as the required method will increase comparability
because similar economic transactions will be accounted for similarly, which will improve
the usefulness of financial information.
Completeness is identified as an essential element of representational faithfulness and
relevance. To faithfully represent the total cost of employee services to the entity, the cost of
services received in exchange for awards of share-based compensation should be recognized
in that entitys financial statements.
Elements of Financial Statements, defines assets as probable future economic benefits
obtained or controlled by a particular entity as a result of past transactions or events.
Employee services received in exchange for awards of share-based compensation qualify as
assets, though only momentarilyas the entity receives and uses themalthough their use
may create or add value to other assets of the entity. This Statement will improve the
accounting for an entitys assets resulting from receipt of employee services in exchange for
an equity award by requiring that the cost of such assets either be charged to expense when
consumed or capitalized as part of another asset of the entity

4.0 CONTROVERSIES SURROUNDING FRS 2

Stock-based compensation expense is a general term. It is stock options granted to

employees. Prior to 2006, the vast majority of the stock options that firms issued would not
have been recognized in firms income in any way, he says. However, since then, revisions to
generally accepted accounting procedures in the United States, or GAAP, have required firms
to recognize stock-based compensation expense. The reason these regulations came down is
the perception of the Securities Exchange Commission that a lot of firms were attempting to
fool investors by reporting these non-GAAP numbers. They were including items that should
have been excluded and excluding items that should have been included. So there was a
significant concern that the only reason that managers were producing these numbers was to
fool investors.
The GAAP revisions are just one of many reforms that came about after accounting
scandals came to light in the early twenty-first century, such as the Enron scandal involving
the accounting firm Arthur Andersen and the Adelphia Communications scandal involving
the accounting firm Deloitte & Touche. Still, the regulation about recognizing stock-based
compensation expense is controversial. Normally, high-level people in government opining
about accounting issues, but this is one issue where senators, representatives, and other
officials were taking strong stands on whether stock-based compensation gives rise to an
expense or doesnt give rise to an expense.
Although the regulation became effective in 2006, many people still do not agree that
including stock-based compensation expense is necessary. In fact, some managers and
analysts continue to exclude stock-based compensation expense when they present measures
of net income in earnings announcements (non-GAAP earnings) and consensus earnings
forecasts (Street earnings).
However, due to the requirements of the SECs Regulation G, when managers present
non-GAAP earnings, they have to reconcile any such numbers with numbers prepared in
compliance with the GAAP standards. In other words, even though managers are required to
include stock-based compensation expense in calculating their income for financial reporting
purposes, such as filing with the SEC, a significant number of them exclude stock-based
compensation expense when reporting alternative numbers.

5.0 DISCUSSION

In recent years, IFRS 2 was one of the most opposed and controversial standards
issued by the IASB. The purpose of IFRS 2 was to provide better comparable, transparent,
high-quality information to annual statement users. Firstly, share-based payments are an
expense according to the conceptual framework of the IASB. Secondly, the payment for
goods and services by share-based payments is no different than paying for these goods and
services by cash. The employee would not accept payment for his services if the share-based
payment had no value. It can be concluded that share-based payments are indeed an expense.

Employee stock options are defined as a right given to an employee, but not an
obligation, to buy a specific number of shares of stock at a specific price and time, despite
market changes. Prior to IFRS 2 the accounting procedure for Employee stock options was
the intrinsic method, which means the intrinsic method recognizes an ESO expense based
on the intrinsic value. The intrinsic value of a stock option is the difference between market
value on the date the option is granted (grant date) and the exercise price of the option.

The implications of the main findings is that IFRS 2 did not only change the way
Employee Stock Options are accounted in the financial statements but it changed the decision
making behavior of managers. Firms that had to mandatory adopt IFRS 2 chose to reduce the
number of options granted to employees. The economic consequence of IFRS 2 is that the
managers of firms decide to reduce or eliminate the use of Employee Stock Options when the
favorable accounting treatment of ESO disappears. The possible reason for this is that when
the favorable accounting treatment disappears managers will have to reassess the cost of it.
The choice of how employees are remunerated after the introduction of IFRS 2 must then be
made on the economic fundamentals of the compensation method rather than on the biased
accounting rules. After the introduction of IFRS 2 the playing field for equity based
compensation has become equal.

Based on the investigation on the effect of expensing share-based payments on basic

earnings per share of South African listed companies, The introduction of IFRS 2 caused
small but not necessarily immaterial changes to the income prole of companies
(Denice,2013).This is important for analysts and general users of nancial statements who
need to be aware of these changes. It is also important for the companies themselves when
revising the structure of their remuneration packages. It is further more important for
companies to know how other companies have responded to the mandatory expensing of SBP
transactions due to the implementation of IFRS 2.

Second, according to the journal of accountancy, A Road Map for Share-Based

Compensation, in order to find a best strategy for rewarding employees, a company should
understand how judgments and underlying assumptions affect fair value when using a pricing
model or technique. Potential dilutive effect on earnings per share, book value per share and
ownership distribution is also important as well, (Anne, 2007).

Third, the investigation on impact of the most controversial and strongly-opposed

accounting standards of recent years affecting UK companies, IFRS 2.The study investigated
impact of this on selected largest companies listed on London Stock Exchange. According to
that, this implementation of new standard do not give big impact on the companies and it is
immaterial. The results did not identify substantial effect of size or rapid growth, and no
companies reported as loss solely as result of expensing option.(Radha,2010)

6.0 CONCLUSION
These standards determine that the value of a SBP is an expense of the entity and
should therefore be expensed through profit or loss over the vesting period. According to the
basis for conclusions of IFRS 2 one of the reasons behind the change from disclosure to
recognition of SBP transactions is to provide high quality transparent and comparable
information to financial statement users.
The use of SBP, before the implementation of FRS 2, gave managers and owners the
ability to compensate employees at a rate higher than their normal remuneration package,
without diminishing profits and cash flows, in that the SBP transactions were not expensed.
Before the implementation of IFRS 2 companies had the opportunity to examine their equity
incentive schemes to make sure that they have effectively linked the cost of these schemes for
the company with the value perceived by the employees
The introduction of IFRS 2 caused small but not necessarily immaterial changes to the
income profile of companies. This is important for analysts and general users of financial
statements who need to be aware of these changes. It is also important for the companies
themselves when revising the structure of their remuneration packages. It is further more
important for companies to know how other companies have responded to the mandatory
expensing of SBP transactions due to the implementation of IFRS 2.
Thus , it can be concluded that it is not right for the business community to oppose
and did not accept the FRS 2.

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7.0 REFERENCES
Anne L,Raymond A, (2007) Road Map for Share-Based Compensation, Journal of
Accountancy
Denice Pretorius, Charl de Villiers,(2013), The effect of expensing share-based payments on
basic earnings per share of South African listed companies, Journal of Meditari Accounting
Research 21(2),178-190
Holt, G. 2009. IFRS 2, Share-Based Payments. Accounting and Business magazine,
http://www.accaglobal.com/members/publications/accounting_business/CPD/2539654
viewed 17 January
IASB(2004) International Financial Reporting Standard No.2, Share based payments.
London. International Accounting Standard Board
MASB (2007) Financial Reporting Standard 2, Share Based Payment,Malaysia. Malaysian
Accounting Standard Board
MASB (2007) The Conceptual Framework for Financial Reporting,Malaysia. Malaysian
Accounting Standard Board
Radha K.Shiwakoti, Brian A.Rutherford (2010), Expensing of share based payments and its
impact on large UK companies, Journal of The British Accounting Review 42, 269-279

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