2022072908492300015086_Chapter 8 Share-Based Payment audio.pptx

Share based payment

1. ACCT6293 Intermediate Accounting Week 10 Chapter 8 Amelia Limijaya amelia.limijaya @binus.edu

2. Chapter 8 Share-based payment

3. Session Learning Outcomes Upon completion of this session, students are expected to be able to Explain the objective and scope of IFRS 2 Distinguish between cash-settled and equity-settled share-based payment transactions Demonstrate how equity-settled and cash-settled share-based payment transactions are recognised Explain how equity-settled share-based payment transactions are measured Explain the concept of vesting

4. Session Learning Outcomes Upon completion of this session, students are expected to be able to 6. Explain the concept of a share option reload feature 7. Explain how modifications to granted equity instruments are treated 8. Demonstrate how cash-settled share-based payment transactions are measured 9. Describe and apply the disclosure requirements of IFRS 2

5. Introduction Share-based payment refers to the provision of equity instruments (commonly shares or share options) to employees in lieu of cash salary Used as a means of aligning employees interests with those of shareholders Encouraging employee retention IFRS 2 requires share-based payments to be recognised in an entity’s financial statements

6. 8.1 Application and Scope IFRS 2 applies to share-based payment transactions Some exceptions Business combination Financial instruments

7. 8.2 Cash-Settled and Equity-Settled Share-Based Payment Transactions

8. 8.3 Recognition IFRS 2 requires that goods or services received in a share-based payment transaction be recognised when they are received Will usually result in the recognition of an expense (sometimes an asset) with a corresponding increase in: Equity – where the transaction is equity-settled Liability – where the transaction is cash-settled

9. 8.3 Recognition Journal entries: Asset or Expense xx Equity xx (Recognition of an equity-settled share-based payment) Asset or Expense xx Liability xx (Recognition of a cash-settled share-based payment)

10. 8.3 Recognition Significant feature of IFRS 2 Differential accounting treatment between cash and equity-settled Fair value of transactions classified as equity is measured at the date the goods or services are received and subsequent value changes are ignored Fair value of transactions classified as liabilities are adjusted to fair value at the end of each reporting period and the resulting profit/ loss in included in income

11. 8.4 Equity-Settled Share-Based Payment Transactions Goods and services received and the corresponding increase in equity must be measured at fair value IFRS 2 considers that the FV of services received in transactions with employees cannot be measured reliably Therefore measurement is made by reference to the equity instruments granted Where instruments are issued with a vesting period, the transactions must be recognised gradually across the vesting period

12. 8.4.1 Transactions In Which Services Are Received Vested = conditions that entitled counterparty to receive cash/ equity instruments have been satisfied If equity instruments vest immediately On grant date, the services received are recognised in full together with a corresponding increase in equity If equity instruments do not vest until a period of service has been completed Accounted for across the vesting period as the services are rendered

13. 8.4.2 Transactions Measured by Reference to the Fair value of the Equity Instruments Granted If market prices of equity instruments are not available, or if the equity instruments are subject to terms and conditions that do not apply to traded equity instruments, then a valuation technique must be used IFRS 2 discussed the inputs to option-pricing models and the factors taken into account in option-pricing models

14. 8.5.1 Treatment of Vesting Conditions Variables to be considered when calculating the expense to be recognised across each year of the vesting period include: The number of equity instruments that are expected to vest Where a performance condition is linked to earnings Where the exercise price varies Where the grant has a market condition attached

15. 8.5.2 Treatment of Non-Vesting Conditions

16. 8.6 Treatment of a Reload Feature A reload entitles an employee to be automatically granted new options when the previously granted options are exercised using shares rather than cash to satisfy the exercise price A reload feature is not taken into account when estimating the fair value of the options granted at measurement date Accounted for as a new option if and when a reload option is subsequently granted

17. 8.6 Treatment of a Reload Feature After vesting date Prevents an entity from making a subsequent adjustment to total equity after vesting date If the fair value of the equity instruments cannot be estimated reliably Measured at their intrinsic value At date goods are obtained/ services are rendered, end of subsequent reporting period, date of final settlement Change in intrinsic value recognised in profit/ loss

18. 8.7 Modifications to Terms and Conditions on Which Equity Instruments Were Granted An entity may alter the conditions of the options after issue IFRS 2 requires the effects of such modifications to be recognised Examples of modifications include: Repricing the exercise price of granted options Accelerating the vesting of options Removing or altering a performance condition

19. 8.7.1 Repurchases If vested equity instruments are repurchased, payment made to the employee is accounted for as a deduction from equity If payment exceeds the fair value of the equity instruments repurchased, the excess is recognized as an expense

20. 8.8. Cash-Settled Share-Based Payment Transactions A cash-settled transaction is one where the entity acquires goods or services by incurring liabilities based on the value of the entity’s shares or other equity instruments Under such transaction the FV of the liability involved must be remeasured at each reporting date Changes in the FV are recognised in profit/(loss) for the period Examples include: Share appreciation rights = future cash payment (rather than equity instrument) based on increases in the share price Rights granted to redeemable shares, providing employee with a right to receive a future cash payment

21. 8.8.1 Share-Based Payment Transactions with Cash Alternatives Share-based payment transactions where the counterparty has settlement choice Compound financial instrument (debt & equity component) Counterparty Measurement approach Employees Measure fair value (FV) of the debt component then FV of the equity component, at measurement date, taking into account the terms and conditions on which rights to cash or equity were granted Parties other than employees Equity component is the difference between FV of goods or services received and FV of the debt component, at the date the goods or services are received

22. 8.8.1 Share-Based Payment Transactions with Cash Alternatives Share-based payment transactions where the entity has settlement choice If the entity has a present obligation to settle in cash  cash-settled If no present obligation to settle in cash  equity-settled If entity elects to settle in cash on settlement  repurchase of an equity interest (deduction from equity) When there is an equity settlement  no further accounting adjustments are required If, on settlement, the entity selects the settlement alternative with the higher fair value  recognize additional expense for the excess value given

23. 8.9 Disclosure A legacy of the GFC has been criticism regarding the inadequacy of disclosure in regard to performance hurdles and incentives used in share-based payments IFRS 2 paras 44‒52 prescribe various disclosures relating to share-based payments including: The nature and extent of these arrangements How the FV was determined The effect on the entity’s profit or loss for the period