c3 - frs 2 share based payments

8/17/2019 C3 - FRS 2 Share Based Payments

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FRS 2Share-based Payments


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What is Share-based Payments

Share-based payment simply means that payment for goods andservices are made by either issuing equity instruments of the entity (or

that of members in a group), or making cash payment based on the

share price.

The standard distinguishes share-based payments made to:

Third parties for goods and services! and

"mployees

There are specific dates or time periods that are relevant forrecognition and measurement of share-based payments for services.They are:

#rant date,

$esting period and

"%ercise date (for options).


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Grant Date

#rant date is the date &hen

the entity and counterpartyagree to the share-based

payment and the entity

confers on the counterparty

the right to the equity

instruments of the entity, cash

or other asset provided the

vesting conditions are met.

Vesting Period

$esting period is the period during

&hich the specified vesting

conditions are satisfied. 't can bea specific time such as &hen the

employee has fulfilled the terms

stipulated, such as period of

service or performance level.

Vesting Conditions

$esting conditions are the

conditions that the counterparty

has to fulfill in order to receive the

share-based payment. Theseinclude completing a specified

period of service or achieved a

specified performance level.


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3 Types

The standard recognises three types of share-based payment

transactions. They are:

Choice of equity-settled or cash-

settled

The supplier of goods and servicesor the entity receiving those goods

or services may choose &hether

the entity settles in cash or by

issuing equity instruments

Cash-settled

n entity or another member of the

same group pays cash calculatedby reference to the price of equity

instrument as consideration for

goods and services received.

Equity-settled

n entity issues its o&n equity instruments, or

those of another member of the same group, asconsideration for goods and services received.


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Reconition

#oods or services received in a share-based payment transaction are

recognised &hen they are received.

t the same time, the entity &ill recognise an increase in equity if it is an

equity-settled share-based payment. 'f it is a cash-settled paymenttransaction, then a liability is recognised.


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Equity-Settled Transactions

The accounting treatment for goods and services received from non-

employees and employees is different.

!on-employees

#oods and services received (other than provided by employees) aremeasured at the fair value of the goods and services and equity is

increased correspondingly. 'n situations &here the fair value of the

goods or services cannot be determined reliably, the goods or services

and the increase in the equity are measured at the fair value of the

equity instruments granted.


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Ser"ices Pro"ided by Employees

The entity should measure the fair value of employee service at the fair

value of the equity instruments granted. This is because it is generally

difficult to measure reliably the fair value of the services rendered. The

fair value of equity instruments is measured at rant date. 'f the equity

instruments vest immediately, then the e%pense and equity are

recognised immediately on grant date.


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Vesting Conditions

The treatment of vesting conditions varies depending on &hether

or not any of the conditions relates to the market price of the

entitys equity instrument. 'f the performance condition is a market

condition, no revision is made to the estimates during the vesting

period or amount vested as it &ill be included in determining the

fair value of the option at grant date.

*arket conditions means that the e%ercise price, vesting or

e%ercisability of the equity instrument depends on the market

price of the entitys equity instrument.


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'f the performance condition is not a market condition, then the entity

should revise the estimates in subsequent periods.

E#ample $ % E#ample $ pae &' of te#t boo(

E#ample 2 % E#ample 3 pae &) of te#t boo(

+n ..%, management of " granted an option for /,000 shares to

an employee on condition that he stays in employment of " for three

years and the option cannot be e%ercised till the share price has

increased to 1*20 per share by the end of the third year. The fairvalue of the option on ..% &as 1*3 each and &as estimated to rise

to 1*4.30 each by /.2.%/. The fair value is determined taking into

consideration that the share price &ill rise to more than 1*20 each.

Required*

5alculate the amount recognised as e%penses and amount disclosed

as equity in the statement of financial position.


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ns&er:

The e%penses are recognised and measured irrespective of the market

condition./,000 options % 1*3 % 6/ 7 1*3,000

1 869 1*3,000

51 "quity 1*3,000

or each of three years

*arket conditions are not taken into consideration in recognising the

e%penses. 'f the fair value of the option changes no adustment is made

to the amount of e%penses recognised. +n the other hand if performance

conditions change, then the entity should revise the estimates insubsequent periods.

"%amples 3 and 4 pages ;< = ;> of te%t book


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Post-"estin Period

fter vesting date, the entity is not to make any adustments to the

goods or services received or corresponding increase in equity. "ven if

the options are not e%ercised, no adustments are made to total equity.


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+odifications, Cancellations and

Settlements

enefits the employee

n entity may modify the terms and conditions

and hereby increase the fair value of those

options. *odifications are treated as

incremental instruments in their o&n rights.

'f modifications increase the fair value of the

equity instruments granted, such as reduction

of e%ercise price, the incremental fair value

should be added to the amount being

recognised.

8ost-vesting period modifications arerecognised immediately.

'f the modifications occur during the

vesting period, the incremental value &ill

be recognised over the remaining vesting

period (or e%tended period).

.oes not benefit

the employee

*odifications that do

not increase the total

fair value of the share-

based payment or is

not beneficial to the

employee (or service

provider) are ignored.

'f a modification

reduces the benefit tothe employee, the

entity &ill continue to

recognise the amount

of the original equity

instruments granted.


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.eterminin the Fair /alue

of the Equity 0nstruments

Fair "alue can be determined

or many shares and most share options there may not

be an active market, and in &hich case managementshould use valuation techniques. 1S 2 does not indicate

the pricing models to use though it gives the factors that

should be considered in estimating the price. 5ommon

models used are ?lack-Scholes model, the ?inomial

model or the *onte-5arlo model.


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Fair "alue cannot be determined

'n the absence of a reliable measure of fair value, the entity

should: = *easure the fair value of the equity instruments granted

at their intrinsic "alue. 'ntrinsic value is the difference

bet&een the fair value of the shares and &hat the

counterparty (the supplier of goods and services) isrequired to pay. The entity measure the equity

instrument initially at the intrinsic value issues &hen the

goods are received or services rendered. t the end of

each reporting date the intrinsic value is recomputed till

settlement date.

= 5hanges in intrinsic value are taken to the income

statement.

"%ample 2 page 33 of te%t book


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Cash-Settled Transactions

5ash settled transactions requires recognition of liabilities: = The goods and services and liability are measured at fair

value.

= The liability is remeasured at the fair value at the end of

each year.

= 5hanges in fair value are recognised in the income

statement.

n e%ample of cash-settled share-based transaction is share

appreciation rights given to employees. 'n this case, theemployees &ill receive cash payments equal to the increase in the

share price of a specified number of the equity shares.

"%amples / and ; pages 3@ = 3< of te%t book


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Share-ased Payment Transactions

1ith Cash lternati"es

5hoice &ith counter-party 5ompound instrument #oods of goods and services

from third-party:

"quity component7 air value of goods and services = air value of debt component


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The Entity Chooses

the Settlement +ethod

The choice of settlement in equity instrument has no commercial

substance (e.g. "ntity is prohibited from issuing equity),

The entity has a past practice or stated policy to settle in cash,

#enerally settles in cash &hen the counterparty requests for cash

settlement.

Ahere the entity chooses the mode of settlement, it should

determine if it has a present obligation to settle in cash! and account

for the transaction accordingly. 'nstances &hen the entity in

substance has an obligation to settle in cash are:


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Settle in Cash

= The payment is treated as a repurchase of equity. "quitycomponent is deducted. 'f the amount paid is more than the

amount recognised in equity then the entity &ill recognise an

e%pense being the difference bet&een the cash paid and the fair

value of equity that &ould other&ise be issued.

Settle in Equity = Transfer the amount recognised in the equity component to

share capital and share premium.

Ahere the entity has no obligation to settle in cash, it may settle in

equity. Then it &ill account for the transaction as an equity-settled

payment. ccounting treatment differs if the settlement is in cash

or equity.

c3 - frs 2 share based payments

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