Adv. FA,I chapter Two (1) (1).pptx 2024

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1. CHAPTER TWO ACCOUNTING FOR SHARE-BASED COMPENSATION 7/1/2024 1

2. 2.1. Overview of Share-based Payments A share-based payment is a transaction in which the entity receives goods or services as consideration for its equity instruments or acquires goods or services by incurring liabilities for amounts that are based on the price (or value) of the entity’s shares (or other equity instruments of the entity). The concept of share-based payments is broad and includes E mployee share options S hare appreciation rights E mployee share ownership plans E mployee share purchase plans S hare option plans and O ther share arrangements. 7/1/2024 2

3. Cont… The accounting approach for the share-based payment depends on whether the transaction is settled by the issuance of: 1 . Equity instruments ; 2. Cash; or 3. Equity and cash . 7/1/2024 3

4. The general principle All share-based payment transactions should be recognized in the financial statements at fair value, with asset or expense recognized when the goods or services are received. Depending on the type of share-based payment, fair value may be determined based on the value of goods or services received, or by the value of the shares or rights to shares given up. 7/1/2024 4

5. Cont… In accordance with IFRS, the following rules should be followed: If the equity-settled share-based payment is for goods or services (other than from employees and others providing similar services), the equity-settled share-based payment should be measured by reference to the fair value of goods and services received; If the equity-settled share-based payment is to employees (or those similar to employees), the transaction should be measured by reference to the fair value of the equity instruments granted at the date of grant; 7/1/2024 5

6. Cont… For cash-settled share-based payments, the fair value should be determined at each reporting date ; and If the share-based payment can be settled in cash or in equity, then the equity component should be measured at the grant date only, but the cash component is measured at each reporting date. 7/1/2024 6

7. Recognition and measurement The entity recognizes the goods or services received or acquired in a share-based payment transaction when: O wnership of the goods passes, or T he services have been rendered. A corresponding increase in equity is recognized: If the goods or services were received in a transaction that was settled through the issuance of shares, or A s an increase in liabilities if the goods or services were acquired in a cash-settled share-based payment transaction. If the goods or services acquired do not meet the qualification criteria for recognition as an asset, the transaction should be recognized as an expense 7/1/2024 7

8. Cont… Example A contractor has been appointed to complete alterations to buildings owned by Midrok . The contract price is fixed at Br. 2,200,000. After completion of specific milestones, the work is certified by independent controllers. On receipt of a certificate, 50% of the amount certified is payable in cash, and the balance by issuing shares at their market value to settle the remaining 50% balance. The shares have a nominal value of Br. 5. On March 31, 2022, Midrok received a certificate of Br. 2,200,000 when the fair value of the shares was Br. 40. The number of shares to be issued is 27,500 shares [(Br. 2,200,000 × 50%)/Br. 40]. 7/1/2024 8

9. Cont… Journal entry on March 31, 2022 Building under construction..…. Br. 2,200,000 Bank (SFP)…………………………… Br. 1,100,000 Share capital (Equity) ……………………….137,500 Share premium (Equity) …………………….962,500 Recognition of payments in respect of the expansion of the building. …27,500 X Br. 5† and …27,500 X Br. 35† 7/1/2024 9

10. 2.2. Share-based Payments Settled with Equity Goods and Services An entity is required to measure the goods or services received (debit) and the corresponding increase in equity (credit) based on the fair value of the goods or services received In some instances, the fair value of the goods or services received cannot be estimated reliably, and in such a situation the entity should measure the value of the goods or services and the related increase in equity based on the fair value of the equity instruments granted. Fair value is determined as of the date when the entity obtains the goods or the service is rendered . 7/1/2024 10

11. Cont… Employees In respect of transactions with employees and other providers of similar services, the entity should determine the fair value of the services based on the fair value of the instruments issued . The value of the instruments is determined at the grant date of such instruments. All market conditions and non-vesting conditions must be considered when the fair value of the instrument is calculated on the grant date with no subsequent adjustment for a different outcome. Service and non-market performance conditions must be considered when the number of shares that is expected to vest is estimated. 7/1/2024 11

12. Cont… Service Conditions When a grant of shares or share options to an employee is conditional on the employee remaining in the entity’s employment for a specified period of time. Service conditions are considered in determining the fair value of the shares or share options at the grant date. At each measurement date, the estimate of the number of equity instruments should be revised to equal the amount that will actually be issued to the employees or other parties . 7/1/2024 12

13. Cont… Example On January 1, 2021, Lisbon grants 20 share options to each of its 100 employees. Each grant is subject to the condition that the employees must work for another two years. Lisbon estimates that 80% of the employees will fulfill the condition to stay for two years. During 2021, 10 employees left, and Lisbon still estimated that 20% of the original employees will leave over the two-year period. During 2022, another 15 employees left before the maturity date. The fair value of each option is estimated to be Br. 10 at the grant date 7/1/2024 13

14. Cont… January 1, 2021 Employment cost (P/L) …………………8,000 Equity reserve (Equity)…………………. 8,000 Accounting for the 2021 share-based payment employment cost. (20 options × 100 employees × 80% (estimated) × Br.10 × ½ years) December 31, 2022 Employment cost (P/L) ………………………7,000 Equity reserve (Equity)………………………. 7,000 Accounting for the 2022 share-based payment employment cost. [(20 options × 75 employees (actual) × Br. 10)=15,000-8000=7000 7/1/2024 14

15. Market and Non-Market Performance Conditions Market and non-market performance conditions may be included in the share-based transaction. An example of a market performance condition is a specified increase in the entity’s credit rating. Market conditions are included in the estimation of the fair value on the grant date. Example: At January 1, 2022, Boston grants a senior executive 1,000 share options with no service conditions. The share options are exercisable on December 31, 2022. The share options may only be exercised on December 31, 2022 . 7/1/2024 15

16. Cont… Boston applied a binomial option pricing model to estimate the fair value of the options at the grant date to be Br. 20.000 The credit rating condition is a market condition and is considered in the valuation on the grant date. Since no further vesting conditions are included, the share-based transaction is recognized at the grant date. January 1, 2022 Employment cost (P/L) ………………….20,000 Equity reserve (Equity) …………………..20,000 7/1/2024 16

17. Cont… A non-market performance condition is, for example, an entity achieving a specified growth in revenue. Non-market conditions are taken into account in determining the quantity of the instruments that will be issued and not in the fair value of the instrument on the grant date. 7/1/2024 17

18. Measurement of Fair Value If the fair value of the goods or services received cannot be measured reliably, the fair value of the shares, share options or equity-settled share appreciation rights must be determined using the three-tier measurement hierarchy . Observable market price of the equity instruments granted is only used if such a price is available. This is unlikely to be applicable where an entity is not listed on a stock exchange. In the absence of observable market prices, observable market data may be used, such as: A recent transaction in the entity’s shares. A recent independent fair valuation of the entity or its principal assets 7/1/2024 18

19. Cont… 7/1/2024 19

20. Cont… If the value of shares cannot be measured by an observable market price, or reliable measurement under level two is impractical, the shares are measured indirectly by using a valuation method. A valuation method uses, to the greatest practicable extent possible, market data that can be externally verified to arrive at a position that the equity instruments under consideration would be exchanged at the grant date between knowledgeable willing parties . 7/1/2024 20

21. Cont… Similarly, share options and share appreciation rights are valued under level three of the hierarchy by using an option pricing model . This would, in effect, be a directors’ valuation , and as such the directors should apply their judgment in determining the amount. The valuation method should, however, comply with generally accepted methodologies for valuing equity instruments . 7/1/2024 21

22. Modifications and Cancellations to the Terms and Conditions The entity may modify the vesting conditions in a manner that is beneficial to the employee (for example, by R educing the exercise price of an option, or R educing the vesting period , or by modifying or E liminating a performance condition ). Modification to vesting conditions is only considered if it is beneficial to the employers. Such changes should be taken into account in accounting for the share-based payment transaction 7/1/2024 22

23. Cont… 7/1/2024 23

24. Cont… If the Modification Increases the Fair Value The entity should account for the incremental total fair value equity instruments granted as a share-based payment expense. The incremental fair value is the difference between the fair value of the modified equity instrument and the original equity instrument on the date of the modification. The balance of the original equity instrument granted is recognized over the remainder of the original vesting period 7/1/2024 24

25. Cont… Example The 10 directors of Brno received options on January 1, 2021, to take up 100 shares in Brno for a purchase consideration of Br. 20 per share after the completion of a two-year service period. Brno obtained the services of a valuation expert who calculated the fair value of the share options provided to the directors to be Br. 11 on January 1, 2021. The amount recognized as a share-based expense during 2021 amounted to: … 100 options x 10 employees x Br. 11 x 1/2 years† Br. 5,500 7/1/2024 25

26. Cont… On January 1, 2022,the share price of Brno shares decreased to Br. 18.The directors expressed concern that their options carried no value, and requested that the entity decrease the consideration price to be paid to Br. 15. The entity decreased the purchase consideration from Br. 20 to Br. 15; a valuation expert calculated the fair value of the Br. 20 share option to be Br. 2 and a Br. 15 share option to be Br. 8 as at January 1, 2022. All the directors exercised their options on December 31, 2022 7/1/2024 26

27. Cont… Calculation Original issue Total benefit (10 directors × 100 options each × Br. 11) =11,000 Previously recognized =5,500 Amount still to be recognized =5,500 Modification Since the incremental fair value is positive (Br. 8-Br. 2) the value of the modification based on the incremental fair value is included in the share-based payment expense. The value is Br. 6,000 [10 directors × 100 options each × (Br. 8-Br.2 ) incremental fair value of options at modification date × 1/1 completed service period] 7/1/2024 27

28. Cont… Current year expense Br. 11,000 (original issue)+ Br. 6,000 ( modification)- Br . 5,500=Br. 11,500 December 31, 2022 Employment cost (P/L)…………… 11,500 Equity reserve (Equity) …………….11,500 Accounting for the 2022 employment cost 7/1/2024 28

29. Cont… Accounting for the 2022 employment cost. Bank (SFP) (10 directors × 100 shares × Br. 15)………………………15,000 Equity reserve (Equity) [Br. 5,500 (2021)+ Br. 11,500 (2022)]…………. ……...17,000 Share capital (Equity) (10 directors × 100 Brno shares) …………………………….1,000 Share premium (Equity) …………………….31,000 7/1/2024 29

30. Cont… If the Modification Decreases the Fair Value The entity is still required to account for the services received as consideration for the equity instruments granted as if that modification had not occurred. No changes are therefore made to the accounting for the share-based payment arrangement. Therefore, in the above example, only the Br. 11,000 expense relating to the original issue will be recognized over the vesting period. 7/1/2024 30

31. Cont … Cancellations and Settlements Where an entity cancels or settles an equity-settled share-based payment award, it accounts for such cancellation or settlement as an acceleration of vesting. The entity, therefore, recognizes immediately in profit or loss the amount that otherwise would have been recognized for services received over the remainder of the vesting period . 7/1/2024 31

32. Cont … Example—Vesting service condition On January 1, 2021, Baghdad grants 30 share options to each of its 200 employees. Each grant is subject to the condition that the employees must work for Baghdad for another three years. The fair value of each option is estimated to be €10 at the grant date. Baghdad estimates that 80% of the employees will fulfill the condition to stay for three years. Based on the estimation, the following was recognized during the 2021 financial period : 7/1/2024 32

33. Con’t … Employment cost (P/L) ………………€16,000 Equity reserve (Equity) …………………..€16,000 (Accounting for the 2021 employment cost. (30 options × 200 employees × 80% (estimated) × €10 × 1/3 years) During 2022 the share-based transaction was cancelled because the options are out of the money. The vesting period is accelerated and any outstanding balance is recognized. 7/1/2024 33

34. Cont … Employment cost (P/L)…………………. €32,000 Equity reserve (Equity)………………….. €32,000 Accounting for the 2022 employment cost. (30 options × 200 employees × 80% × €10)= 48,000- 16,000= 32,00 7/1/2024 34

35. 2.3. Share-based Payments Settled with Cash For cash-settled share-based payment transactions, an entity is required to measure the goods or services acquired and the liability incurred at the fair value of the liability. Thereafter, the liability is re measured to its fair value at each reporting date until such time that it is settled. Any movements in the fair value of the liability are recognized in profit or loss for the period. Example At January 1, 2021, ABC Co. grants a cash-settled share-based payment transaction to 100 employees . 7/1/2024 35

36. Con’t …. In terms of the transaction, each employee is entitled to receive the increase of the independent value of the 10 shares of ABC Co. above Br. 20, in cash, after a vesting period of two years’ service. On January 1, 2021, it was expected that 90% of the employees will still be in service on the vesting date. The actual number of employees in service on December 31, 2022, was 88. The independent expert valued the right attached to one share as follows: December 31, 2021 ………………Br. 6 December 31, 2022 ……………….Br. 9 The full liability was settled on December 31, 2022 7/1/2024 36

37. Con’t … December 31, 2021 Employment cost …………………..2,700 Share-based payment liability ………..2,700 (Accounting for the 2021 share-based payment employment cost. (10 shares × 100 employees × 90% × Br. 6 × ½ years) December 31, 2022 Employment cost ………………… 5,220 Share-based payment liability ………….5,220 Accounting for the 2022 employment cost. [10 shares × 88 employees (actual) × Br. 9] = 7,920 − 2,700 = 5,220 7/1/2024 37

38. 2.4. Share-based Payments with Cash Alternatives The share-based payment agreements entered into may give the parties to the agreement a choice of settling the transaction in cash or through the transfer of equity instruments. Where such a choice exists, the transaction is accounted for as a cash-settled share-based payment transaction unless either of the following criteria is met: There has been a past practice of settling obligations by issuing equity instruments (which can be demonstrated) 7/1/2024 38

39. Con’t … 2. The option has no commercial substance because the cash settlement amount bears no relationship to, and is likely to be lower in value than, the fair value of the equity instrument. As such, the likelihood of the settlement taking place in cash is, at best, very remote. If either of these two criteria is met, then the entity can account for the transaction as an equity-settled share-based payment transaction 7/1/2024 39

40. Con’t … Example On January 1, 2021, Brighton grants 1,000 shares to a senior executive, subject to service condition of two years. Each share has a fair value of Br. 25 at the grant date. The executive can choose to receive the 1,000 shares, or cash equal to the value of 1,000 shares, on the vesting date. The fair value of the shares is: December 31, 2021……………………….Br. 27 December 31, 2022 ………………………..Br. 31 The transaction is recorded as a cash-settled share-based payment because the executive has a choice of settlement. 7/1/2024 40

41. Con’t … January 1, 2021 Employment cost …………………..13,500 Share-based payment liability ……….13,500 (Accounting for the 2021 employment cost. (1,000 shares × Br. 27 × ½ years) ) December 31, 20X2 Employment cost …………………17,500 Share-based payment liability………….17,500 (Accounting for the 2022 employment cost. [(1,000 shares × Br. 31) = 31,000 − 13,500 = 17,500]) 7/1/2024 41