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Study Cases Share-Based Payment

Example 34.4: Share options for goods

A company issues share options in order to pay for the purchase of inventory. The share
options were issued on 1 June The inventory was eventually sold on 31 December The value of
the inventory on 1 June 2010 was €6 million and this value was unchanged up to the date of
sale. The sale proceeds were €8 million. The shares issued have a market value of €6.3 million.
Requirement How will this transaction be dealt with in the financial statements?

Solution IFRS 2 states that the FV of the goods and services received should be used to value
the share options unless the FV of the goods cannot be measured reliably. Thus equity would
be increased by €6 million and inventory increased by €6 million. The inventory value will be
expensed on sale (DR SPLOCI – P/L and CR Equity).

Example 34.5: Share options for employee services

A company granted a total of 100 share options to 10 members of its executive

management team (10 options each) on 1 January These options vest at the end of a three-year
period. The company has determined that each option has a FV at the date of grant equal to
€15. The company expects that all 100 options will vest and therefore records the following
entry at 30 June 2012 (the end of its first six-month interim reporting period). DR SPLOCI – P/L –
salaries €250 CR Equity €250 [(100 x €15) / 6 periods = €250 per period] If all 100 shares vest,
the above entry would be made at the end of each 6-month reporting period. However, if one
member of the executive management team leaves during the second half of 2012, therefore
forfeiting the entire amount of 10 options, the following entry at 31 December 2012 would be
made: DR SPLOCI – P/L – salaries €150 CR Equity €150 [(90 x €15) / 6 periods = €225 per period
(€225 x 4) – (€250 + €250 + €250) = €150]

Vesting conditions Equity instruments may contain conditions which must be met before
entitlement to the sharesConditions related to the market price of shares are ignored for the
purposes of estimating the number of equity shares that will vest (on the basis these have been
taken into account when fair-valuing the shares)Because of the difficulty of measuring the FV of
the services received, this is done with reference to the FV of the equity instrument
grantedThere is no reversal of amounts previously recognised if options are forfeited or are not

Example 34.6: Share options with vesting conditions

A company grants 2,000 share options to each of its three directors on 1 January 2012
subject to the directors being employed on 31 December The options vest on 31 December The
FV of each option on 1 January 2012 is €10 and it is anticipated that all of the share options will
vest on 31 December 2014.The options will only vest if the company’s share price reaches €14
per share. The price at 31 December 2012 was €8 and it is not anticipated that it will rise over
the next two years. It is anticipated that there will only be two directors employed on 31
December Requirement How will the share options be treated in the financial statements for
the year ended 31 December 2012? Solution The market based condition i.e. the increase in the
share price can be ignored for the purpose of the calculation. However the employment
condition must be taken into account. The options will be treated as follows: 2,000 options x 2
directors x €10 x 1year/3 years = €13,333. Equity will be increased by this amount and an
expense shown in the SPLOCI – P/L for the year ended 31 December 2012.

Example 34.7: Modification of terms and conditions

On 1 January 2010, Twentitle Limited granted 100 share options to each of its 250
employees, with each of the share options being conditional upon the employee working for
Twentitle Limited until 31 December At the grant date, the FV of each share option was €
During 2010, 10 employees left Twentitle Limited and the company’s directors estimated that a
total of 10% of the 250 employees would leave during the three-year period At the beginning of
2011, Twentitle Limited modified the terms and conditions of the share option by reducing the
exercise price. This had the effect of increasing the FV of a share option at the beginning of
2011 by €7.00. During 2011, a further six employees left the company and the directors revised
their estimate of the total number of the 250 employees to 8% that would leave the company
during the three-year period During 2012, a further five employees left the company.
Requirement Calculate the remuneration expense that should be recognised in Twentitle
Limited’s financial statements in respect of the share-based payment agreement for each of the
three years

Solution 2010: It is estimated that 25 employees would leave the company (10% x 250).
Therefore 225 employees will be eligible under the scheme. 225 employees x €12 = €2,700 / 3
years = €900 DR SPLOCI – P/L €900 CR Equity – Share Options Reserve €900

Solution 2011: It is estimated that 20 employees would leave the company (8% x 250).
Therefore 230 employees will be eligible under the scheme. € 230 employees x €12 = €2,760 / 3
x 2 years 1, employees x €7 = €1,610 / 2 years 805 Less charged in 2010 in SPLOCI – P/L (900)
1,745 DR SPLOCI – P/L €1,745 CR Equity – Share Options Reserve €1,745

Solution 2012: In total over the three years, 21 employees left the company ( ). Therefore 229
employees are eligible under the scheme. € 229 employees x €12 2, employees x €7 1,603 Less
charged in 2010 and 2011 in SPLOCI – P/L (€900 + €1,745) (2,645) 1,706 DR SPLOCI – P/L €1,706
CR Equisty – Share Options Reserve €1,706