IFRS 2 Share Based Payments 03

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TYPES OF SBPT
Share based payment
transactions

Equity settled SBPT: in Cash settled SBPT: in Choice based SBPT: in

which the entity receives
goods or services in
exchange for equity
instruments of the entity
(e.g. shares and share
options).
which the entity receives which the entity or
goods or services in counterparty has choice as
to whether transaction
exchange for amounts of
would be settled as equity
cash that are based on the settled or cash settled.
price or value of equity
instruments of the entity
(e.g. phantom shares and
share appreciation rights)

Journal entry Journal entry

Dr. Expense / Asset Dr. Expense / Asset
Cr. Equity Cr. Liability

IMPORTANT TERMS & CHARGING THE EXPENSE

IMPORTANT TERMS
SBPT are agreed between an entity and counterparty at the grant date; the counterparty
becomes entitled to the payment/equity instruments at the vesting date.
Grant date The date at which the entity and other party agree to the SBPT arrangement.
At this date the entity agrees to pay cash, other assets or equity instruments to
the other party, provided that specified vesting conditions, if any, are met If
the agreement is subject to shareholder approval, then the approval date
becomes the grant date.
Vesting The date on which all vesting conditions have been met and the employee /
date third party becomes entitled to the share-based payment.
Vesting The conditions that must be satisfied for the other party to become entitled to
conditions receive the share-based payment
Vesting The period during which the vesting conditions are to be satisfied. In some
period cases the grant date and vesting date are the same i.e. where vesting
conditions are met immediately and therefore there is no vesting period.
CHARGING THE EXPENSE
The problem Goods or services acquired in a SBPT should be recognised when they
are received. In the case of goods, this is obviously the date when this
occurs. However, it is often more difficult to determine when services
are received
When there is a The expense should be charged over the vesting period considering the
vesting period probability of meeting the vesting conditions.
When there is no Where vesting conditions are met immediately and therefore there is no
vesting period vesting period, the whole expense should be charged immediately.
 ICMAP S1 AFA&CR

TYPES OF VESTING CONDITIONS

IFRS 2 recognises two types of vesting conditions:
Market- are conditions linked to the market price of the shares in some way. Examples
based include vesting dependent on achieving:
conditions  A minimum increase in the share price of the entity
 A minimum increase in shareholder return
2|  A specified target share price relative to an index of market prices

These conditions are considered while valuing equity instruments and

therefore, should be ignored while estimating the number of equity instruments
to be vested.
Non- These are conditions other than those relating to the market value of the
market entity's shares. Examples include vesting dependent on:
based  The employee completing a minimum period of service (a service
vesting condition)
conditions  Achievement of minimum sales or earnings target (a performance
condition)
 Achievement of a specific increase in profit or EPS (a performance
condition)
 Completion of a particular project (a performance condition)

These conditions must be considered while estimating the equity instruments

to be vested.

MEASUREMENT OF EQUITY SETTLED SBPT

Equity settled SBPT

Employees or other providing similar services Goods and other services

FV of equity instrument at grant date is used

FV of goods / services acquired is NOT reliably FV of goods / services acquired

measureable is reliably measureable
FV of equity instrument at grant date is used FV of goods / services acquired is
used

GUIDANCE ON FAIR VALUE OF EQUITY INSTRUMENTS

SHARES SHARE OPTIONS
The market value of The market value of options should be used and if options are
shares should be used not traded then some valuation techniques may be used e.g.
and if shares are not black scholes model, binomial model, monte carlos simulation
traded then some etc. If it is not possible to apply any valuation technique, then
valuation techniques may intrinsic value may be used.
be used e.g. PE ratio, Intrinsic value of a share option = FV of share – exercise
asset based valuation price
etc.

MEASUREMENT AFTER VESTING DATE

IFRS 2 states that no further adjustments to total equity should be made after vesting date.
This applies even if some of the equity instruments do not vest however, a transfer from
equity to retained earnings may be made.

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 Class Notes

QUESTION 01
An entity grants 100 share options to each of its 500 employees on January 1, 2011. Each
grant is conditional upon the employee working for the entity over the next three years.

The entity estimates that the fair value of each share option is Rs.15. On the basis of a
weighted average probability, the entity estimates that 20 per cent of employees will leave
during the three-year period and therefore forfeit their rights to the share options. |3

During year 2011, 20 employees leave. The entity revises its estimate of total employee
departures over the three-year period from 20 per cent (100 employees) to 15 per cent (75
employees).

During year 2012, a further 22 employees leave. The entity revises its estimate of total
employee departures over the three-year period from 15 per cent to 12 per cent (60
employees).

During year 2013, a further 15 employees leave. Hence, a total of 57 employees forfeited
their rights to the share options during the three-year period, and a total of 44,300 share
options (443 employees × 100 options per employee) vested at the end of year 3.

Required:
Account for above.
QUESTION 02 PE Apr 2012 Q4 (b)
Pak Electronics manufactures electronic items, which has a major domestic market share.
However, during the last few years due to entrance of two new companies manufacturing
similar items there has been a cutthroat competition. In order to maintain its market share
the directors of the company have come up with a new scheme to motivate its sales team.
According to this scheme, each member of the sales team consisting of 50 persons has
been offered 25,000 shares options on January 01, 2012.
In order to avail benefits of the scheme each employee was required to meet his/her annual
sales targets as well as to remain with the company for the next three (03) years. Pak
Electronics prepares its financial statements on December 31. At the grant date the value of
each share option was Rs.5. Assume that following events relating to the scheme will take
place during the next three (03) years:
In 2012: Three (03) sales persons leave the company and another five (05) are
expected to leave during the next two (02) years.
In 2013: Three (03) sales persons leave the company and another four (04) are
expected to leave during the next one (01) year.
In 2014: Two (02) sales persons leave the company.

Required:
Show the effects of the above scheme in the Income Statement and Statement of Financial
Position of the company for the three (03) years. (10)

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 ICMAP S1 AFA&CR

QUESTION 03 PE May 2010 Q4 (b)

Suppose you are the management accountant of U & S Publishing (Pvt.) Ltd. The company
has granted 200 options on its Rs.10 ordinary shares to each of its 250 employees on July 1,
2006. The options are conditional upon the employees being employed by the company until
June 30, 2009.

4| Following information is relevant:

 You estimate that the fair value of each option was Rs.40 on July 1, 2006.
 In 2006-07, 25 employees left and another 25 employees were expected to leave in
2007-08 and 2008-09.
 In 2007-08, 18 employees left and another 12 employees were expected to leave in
2008-09.
 In 2008-09, 15 employees left.

REQUIRED:
How will the scheme be accounted for in the financial statements for the years ended June
30, 2007, 2008 and 2009? (06)

QUESTION 04 IFRS 2 PE Aug 2013 Q4c

During the year, FMCG launched a new product in the market and expected normal growth
as that of existing products. In order to motivate the sales force to achieve the target for
three years, the company granted 225 share options to each member of the sales team of
10 employees. At the grant date, the fair value of each option is Rs.25. The grant was based
on the condition that the employees remain in service over the next three years and the
team sells 80,000 units of product over the three-year period.

During second year, the company increased the sales target to 120,000 units after positive
feedback from customers and widely acceptance of the product in the market.

By the end of third year, only 100,000 units have been sold and the share options do not
vest. All employees remained with the company for three years.

Required:
(i) Explain the accounting treatment of the above transaction under IFRS 2. (02)
(ii) Calculate the amounts to be recognized in the financial statements for each of the
three years of the scheme. (02)

QUESTION 05 IFRS 2 PE Extra 2014 Q3b

Shed Company is engaged in manufacturing and marketing of new-born baby products. The
company is facing issues of employees turnover and unable to maintain its sales growth. In
2011, the company hired a new marketing director having experience of 20 years in the
relevant industry. He proposed following scheme for marketing team consisting of 100 sales
representatives. He was confident that this scheme would help to retain employees and
result in sales growth.

According to this scheme, all employees will be granted share options subject to three-year
vesting period provided that the sales will grow minimum of 15% per annum throughout the
vesting period. Criteria of share options, dependent upon the increase in the sales growth
throughout each year of vesting period is as follows:
Sales growth No. of Share Options per Eligible Employee
15% - 20% 100
Over 20% - 25% 150
Over 25% 200

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 Class Notes

At the grant date, fair value of each share option was Rs. 75 and it was estimated that the
sales growth for each year would be around 20% to 25% and only 10% employees would
leave the company before vesting period. At the reporting date of vesting period the results
were as follows:
Annual Expected
Employees Average
No. of Sales Future Sales
Expected to Sales
Date Employees Growth Growth for |5
Leave before Growth to
Left for the Remaining
Vesting Date Date
Year Vesting Period
31/12/2011 4 6 26% 26% 26.00%
31/12/2012 3 5 21% 24% 23.50%
31/12/2013 2 - 16% - 21.00%

Required:
Identify the annual charge to profit or loss, together with the amounts to be included in the
statement of financial position for each year. (09)

MEASUREMENT OF CASH SETTLED SBPT

The cash settled SBPT are measured at fair value of liability at each year end with change in
liability to be charged to profit or loss as an expense.

QUESTION 06
At the beginning of year 2011, an entity grants 100 cash share appreciation rights (SARs) to
each of its 500 employees, on condition that the employees remain in its employ for the next
three years.

During year 2011, 35 employees leave. The entity estimates that a further 60 will leave
during years 2012 and 2013.

During year 2012, 40 employees leave and the entity estimates that a further 25 will leave
during year 2013.

During year 2013, 22 employees leave.

At the end of year 2013, 150 employees exercise their SARs, another 140 employees
exercise their SARs at the end of year 2014 and the remaining 113 employees exercise their
SARs at the end of year 2015.

The entity estimates the fair value of the SARs at the end of each year in which a liability
exists as shown below. At the end of year 2013, all SARs held by the remaining employees
vest. The intrinsic values of the SARs at the date of exercise (which equal the cash paid out)
at the end of years 2013, 2014 and 2015 are also shown below.
Year Fair value Intrinsic value
2011 Rs.14.40
2012 Rs.15.50
2013 Rs.18.20 Rs.15.00
2014 Rs.21.40 Rs.20.00
2015 Rs.25.00

Required:
How to account for the above?

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 ICMAP S1 AFA&CR

QUESTION 07 PE Feb 2013 Q4 (a)

Management of Star Company is worried about excessive turnover of employees. The HR
Director has suggested to grant 250 cash share appreciation rights (SARs) to each of its 400
employees subject to condition that the employees continue to work for the entity for three
years. The board approved the proposal from July 1, 2009. The management expects that
20 employees will leave each year. During three years, following employees left the
6| company:
Years No. of employees
2009-2010 20
2010-2011 24
2011-2012 30

On June 30, 2012, 125 employees exercised their rights. The fair value of the share
appreciation rights for the year in which liability exists are shown below, together with the
intrinsic value at the date of exercise:
Year end Fair value (Rs.) Intrinsic value (Rs.)
2009-2010 12.50 11.50
2010-2011 14.00 14.50
2011-2012 16.50 17.00

Required:
Calculate the amount to be presented in the statement of financial position and statement of
comprehensive income for three years from 2010 to 2012. (08)

QUESTION 08 PE Dec 2010 Q4 (b)

For the last many years, M/s. ABC Limited has been facing the problem of turnover of staff.
In order to overcome this situation, management of the company has introduced many plans
to win the loyalty of the staff. On January 01, 2010, the company granted 200 cash share
appreciation rights (SAR) to each of its 500 employees provided that they would remain with
the company until December 31, 2012. Following is the relevant data as regards this
scheme:

Assume that:
 During 2010, 30 employees leave. The entity estimates that a further 50 employees
would leave during 2011 and 2012.
 During 2011, 15 employees leave. The entity estimates that a further 45 employees
would leave during 2012.
 During 2012, 50 employees leave.

The fair value of one SAR for each year is shown below:
Year Fair value (Rs.)
2010 10.00
2011 12.00
2012 15.00

Required:
Calculate the amount to be recognized as an expense in the Income Statement for each of
the three years ended to December 31, 2012 and the liability to be recognized in the
Statement of Financial Position at December 31, for each of the three years. (06)

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 Class Notes

MODIFICATION, CANCELLATION & SETTLEMENTS

MODIFICATIONS AND RE-PRICING
The issue Equity instruments may be modified before they vest e.g. a downturn
in the equity market may mean that the original option exercise price
set is no longer attractive. Therefore the exercise price is reduced (the
option is 're-priced’) to make it valuable again. |7
Such modifications will often affect the fair value of the instrument and
therefore the amount recognised in profit or loss.
Accounting The accounting treatment of modifications and re-pricing is:
treatment  Continue to recognise the original fair value of the instrument
in the normal way (even where the modification has reduced
the fair value).
 Recognise any increase in fair value at the modification date
(or any increase in the number of instruments granted as a
result of modification) spread over the period between the
modification date and vesting date.

QUESTION 09
An entity granted 1,000 share options at an exercise price of $50 to each of its 30 key
management personnel on 1 January 2004. The options only vest if the managers were still
employed on 31 December 2007. The fair value of the share options was estimated at $20
and the entity estimated that the options would vest with 20 managers. This estimate was
confirmed on 31 December 2004.

The entity's share price collapsed early in 2005. On 1 July 2005 the entity modified the share
options scheme by reducing the exercise price to $15. It estimated that the fair value of an
option was $2 immediately before the price reduction and $11 immediately after. It retained
its estimate that options would vest with 20 managers.

Required:
How should the modification be recognised?

DISCLOSURES
Required disclosures include:
 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 payment transactions on the entity's profit or loss for the
period and on its financial position.

RECENT DEVELOPMENTS
There is no recent development in IFRS 2, the last update was on 20th June 2016 in which
the IASB issued clarification regarding:
 the accounting for cash-settled share-based payment transactions that include a
performance condition;
 the classification of share-based payment transactions with net settlement features;
and
 the accounting for modifications of share-based payment transactions from cash-
settled to equity-settled.

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