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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://frs102.com/members/premium-toolkit/section-26/” type=”big” color=”red”] Return to Section 26 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Example 1: Shares issued for services rendered
Mr X performed work for Company A upon completion of this work Company A will issue 100 shares in its itself to Mr X.
This transaction comes within the scope of Section 26 as Mr X has received equity shares in return for services rendered.
Example 2: Shares issued in return for stock
Mr X supplied inventory to Company A, and in return for this inventory Company A issued 500 shares in itself to Mr X.
This transaction comes within the scope of Section 26. Note if in this instance, the entity could settle the liability net, i.e. using it as a hedging instrument, it would not come within the scope of Section 26.
Example 3: Share appreciation
Company A entered into an agreement with some of its employees whereby they would pay a cash bonus if the share price increases, the value to be placed on the shares is based on EBITA. In this case it is unlikely this will come within the remit of Section 26 as this formula would not equate to fair value, instead this would be accounted for under Section 28.
Example 4: Share options
Company A provides its employees with the option to purchase shares at a set rate in the future if the employees stay with the company for 3 years. This will be accounted for under Section 26.
Example 5: Shares issued to employees as part of a business combination
Company A acquired Company B and as part of the agreement, Company A issued share options in itself to those employees of Company B if they remain in service for three years.
In this case the options come within the scope of Section 26
Example 6: Shares issued to the previous owner as part of a business combination
Company A acquired Company B and in return for Mr X transferring ownership, Mr X was issued shares in Company A and a right to receive further shares in the future.
This does not come within the remit of Section 26.
Example 7: Issuance of share rights/options in other group companies
Company A entered into an arrangement with its employees whereby they had the option to subscribe for its parent company shares at a set price in the future.
In this case, this comes within the remit of Section 26.
Example 8: Phantom share scheme
Company A enters into an arrangement with employees where if the value per share increases by a certain amount over a period of time, the entity will pay the employee a bonus equivalent to that amount. This would be a cash settled share based payment, and hence would be accounted for under Section 26.
Example 9: Vesting conditions
Company A issued 10 of its employees with share options which vest if the employees remain in employment for 4 years. The fair value of the option for each employee as determined was CU400.
Therefore in this case, the entity at each reporting date must estimate how many of the employees will remain in employment for that period and allocate this over the 4 years.
Therefore if we assume that all 10 will stay for the four years at the end of year 1, the journal required to be posted is:
|
|
CU |
CU |
|
Dr Employee Costs/Share Based Payment Costs |
1,000 |
|
|
Cr Share Based Payment Reserve (in equity) (CU400*10 employees/4years) |
|
1,000 |
If we then assume at the end of year 2, one employee has left and we now anticipate only 9 will remain in employment. In this case the journal required to be posted is:
|
|
CU |
CU |
|
Dr Employee Costs/Share Based Payment Costs |
800 |
|
|
Cr Share Based Payment Reserve (in equity) ((CU400*9 employees/4 years*2yrs gone) less the CU1,000 already recognised in the prior year)) |
|
800 |
If in the above example, the company was required to settle the options in cash as opposed to issuing shares, then they would be accounted for as cash settled and instead of the credit going to the share based payment reserve, it would be posted to provisions.
Example 10: Non-vesting conditions
Company A issues shares to its employees with no vesting conditions. In this case the fair value of the share is recognised as an expense immediately and taken to be issued for service previously given by employees.
Example 11: Service date
Company A engaged, Mr B to provide professional services and in return for these services, Company A issued 1 share per hour worked. The usual hourly rate for Mr B is CU200. Therefore the fair value of the share to be recognised in equity (as it is settled in equity) is the number of hours by the rate per hour. These are recognised in the period the professional services are provided.
Example 12: Grant date
Company A announced to its employees on 1 January that the company was going to provide employees with share options but did not provide any further detail. On 1 March the company finalise the rules of the scheme where board approval was obtained and issue them to the employees. In this case the grant date is 1 March as employees were not able to agree to the full terms until that date. However the vesting period begins on 1 January when the announcement was made with the general rules.
Example 13: Grant date
Company A advise employees of the terms of a share based payment award over a three year period from 1 January. Board approval was obtained on 1 March however small changes were made to the plan by the board. These changes were not communicated to employees until 1 May. The grant date in this instance is 1 May however the vesting period starts on 1 January.
Example 14: Award with service conditions – no change in assumptions
Company A grants 10 shares to each of its 100 employees. Vesting is conditional on the employees remaining in employment for four years. The fair value of the option is determined to be CU10. At the end of year 1 the entity estimates 90% of employees will remain in service for the vesting period. The expense estimated to be recognised at the end of year 1 for each of the four years is as follows:
Year 1 = 10 shares * CU10 * 100 employees = CU10,000*90% of employees expected to remain in service = CU9,000. Therefore CU9,000 should be recognised over the four year period. Hence CU2,250 (CU9,000/4yrs) should be recognised as an expense for each year based on assumptions at the end of year 1. Assume this 90% estimate is correct, the below expense would be recognised each year:
|
|
Cumulative Expense |
Expense for Year |
|
Year 1 |
CU2,250 |
CU2,250 |
|
Year 2 |
CU4,500 |
CU2,250 |
|
Year 3 |
CU6,750 |
CU2,250 |
|
Year 4 |
CU9,000 |
CU2,250 |
Example 15: Award with service conditions – change in assumptions
If we take example 14 it transpires that in year 2, 20 employees left service and at the end of year two the entity estimates that 75 employees will remain for the whole of the four years. In year 3, a further 6 left service and at the end of that year the company estimated 70 employees will remain in service. In year 4 a further 2 left service and the actual options that vest is CU7,200 (CU10*72 employees that remain at the end of the vesting period*10 options).
At the end of year 1 the journal is:
|
|
CU |
CU |
|
Dr Employee Costs/Share Based Payment Costs |
2,250 |
|
|
Cr Share Based Payment Reserve (in equity) |
|
2,250 |
Therefore at the end of year 2 the following would be required:
|
|
Cumulative Expense |
Expense for Year |
|
Year 1 |
CU2,250 |
CU2,250 (as previously expensed) |
|
Year 2 |
CU3,750* |
CU1,500 (CU3,750-CU2,250) |
*Cumulative expense required at end of year 2 is = 75 employees expected to remain in service*CU10 per share * 10 shares per employee = CU7,500 divide by length of service condition of 4 years * length of years that have elapsed of 2 years = CU3,750.
The journal required would be to:
|
|
CU |
CU |
|
Dr Employee Costs/Share Based Payment Costs |
1,500 |
|
|
Cr Share Based Payment Reserve (in equity) |
|
1,500 |
At the end of year 3 the following would be required:
|
|
Cumulative Expense |
Expense for Year |
|
Year 1 |
CU2,250 |
CU2,250 (as previously expensed) |
|
Year 2 |
CU3,750 |
CU1,500 |
|
Year 3 |
CU5,250* |
CU1,500 (CU5,250-CU3,750) |
*Cumulative expense required at end of year 3 is = 70 employees expected to remain in service*CU10 per share * 10 shares per employee = CU7,000 divide by length of service condition of 4 years * length of years that have elapsed of 3 years = CU5,250.
The journal required would be to:
|
|
CU |
CU |
|
Dr Employee Costs/Share Based Payment Costs |
1,500 |
|
|
Cr Share Based Payment Reserve (in equity) |
|
1,500 |
At the end of year 4 the following would be required:
|
|
Cumulative Expense |
Expense for Year |
|
Year 1 |
CU2,250 |
CU2,250 (as previously expensed) |
|
Year 2 |
CU3,750 |
CU1,500 (CU3,750-CU2,250) |
|
Year 3 |
CU5,250 |
CU1,500 (CU5,250-CU3,750) |
|
Year 4 |
CU7,200* |
CU1,950 (CU7,200-CU5,250) |
*Cumulative expense required at end of year 4 is = 72 employees expected to remain in service*CU10 per share * 10 shares per employee = CU7,200 divide by length of service condition of 4 years * length of years that have elapsed of 4 years= CU7,200.
The journal required would be to:
|
|
CU |
CU |
|
Dr Employee Costs/Share Based Payment Costs |
1,950 |
|
|
Cr Share Based Payment Reserve (in equity) |
|
1,950 |
Therefore the total expense posted is the CU7,200 which exactly equals the value of shares that vested.
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Example 16: Equity instruments vesting in installments
Company A issues 100 free shares to employees with no conditions other than continuous service. If employees stay for one year, 10 of the shares vest at the end of that year, a further 40 shares vest at the end of year 2 and 50 shares vest at the end of year 3.
The fair value of the shares to be delivered in one year’s time is CU10, in two year’s time is CU7 and in 3 years time is CU5. In this case the following expenses would be charged in each year.
|
|
Cumulative Expense |
Expense for Year |
|
Year 1 |
CU323* |
CU323 |
|
Year 2 |
CU547** |
CU224 (CU547-CU323) |
|
Year 3 |
CU630*** |
CU83 (CU630-CU547) |
* Year 1= (10 shares * CU10) + ((40 shares * CU7)/2 years being the length in which these vest * 1 year which has passed)) + ((50 shares * CU5)/3 years being the length in which these vest * 1 year which has passed) = CU323.
** Year 2= (10 shares * CU10) + ((40 shares * CU7)/2 years being the length in which these vest * 2 year which has passed)) + ((50 shares * CU5)/3 years being the length in which these vest * 2 year which has passed) = CU547.
*** Year 3= (10 shares * CU10) + ((40 shares * CU7)/2 years being the length in which these vest * 2 year which has passed)) + ((50 shares * CU5)/3 years being the length in which these vest * 3 year which has passed) = CU630.
Example 17: Equity instruments – non market vesting conditions
At the start of year 1, Company A grants 100 shares to 100 employees, conditional upon employees remaining in the entity’s employment during the vesting period. The shares will vest as follows:
- At the end of year 1 if the entity’s earnings increase by more than 20%; or
- At the end of year 2 if the entity’s earnings increase by more than 13% per year over the two year period; or
- At the end of year 3 if the entity’s earnings increase by more than an average of 10% per year over the three year period
The fair value per share is CU50. Assume no dividend is paid on the shares. Note PBT is a non-market condition as it does not depend on the market price of the entity’s shares.
By the end of year 1, the entity’s earnings has increased by 17% and 20 employees left.
At the end of year 1 the entity expects that the earnings will continue to increase at a similar rate in year 2 and therefore expects the shares to vest at the end of year 2. They expect a further 10 employees to leave.
By the end of year 2 the earnings have only increased by 10% and therefore the shares do not vest. A further 5 employees left in that year. At the end of year 2 the entity expects a further 6 employees to leave. The entity expects the earnings to be at least 17% therefore by the end of year 3 they should vest.
By the end of year 3 a further 10 employees have left and the entity’s earnings have increased by 6%, resulting in an average increase over the three years above 10%. Therefore 65 (100-20-5-10) employees receive 100 shares at the end of year 3.
The following amount should be recognised during this 3 year period.
|
|
Cumulative Expense |
Expense for Year |
|
Year 1 |
CU175,000* |
CU175,000 |
|
Year 2 |
CU230,000** |
CU55,000 (CU230,000-CU175,000) |
|
Year 3 |
CU325,000*** |
CU95,000 (CU325,000-CU230,000) |
*Year 1= 70 employees (100-20 left-10 expected to leave) * 100 shares * CU50 = CU350,000 / 2 years being the expected time in which these shares would vest based on the entity’s estimate * 1 year which has passed= CU175,000
**Year 2 = 69 employees expected to be still working next year (100-20-5-6) * 100 shares * CU50 = CU345,000 / 3 years being the expected time in which these shares would vest based on the entity’s estimate * 2 year which have passed= CU230,000
***Year 3 = 65 employees in existence * 100 shares * CU50 = CU325,000 / 3 years being the length of time when the shares vested * 3 year which have passed= CU325,000
Example 18: Equity instruments – award with non-market performance vesting conditions and variable number of equity instruments
At the start of year 1 Company A grants a share option to 50 employees whereby the shares will vest at the end of 3 years provided the employees remain in employment and provided
- that the volume of sales increase by an average of 5-10% per year, then 100 shares will be issued to each employee;
- that the volume of sales increase by an average of 10-13% per year, then 200 shares will be issued to each employee; and
- that the volume of sales increase by an average of >13% per year, then 300 shares will be issued to each employee.
The fair value of the shares is CU50.
At the end of year 1, 5 employees have left and the entity expects a further 2 employees to leave over the next 2 years. Sales increased by 11% during the year. The entity expects the sales target of 10-13% to be achieved for the 3 year period.
At the end of year 2, 3 more employees left and the entity expects a further 4 employees to leave over the next year. Sales increased by 11% during the year. The entity expects the sales target of >13% to be achieved for the 3 year period.
At the end of year 3, 5 more employees have left and the entity expects a further 4 employees to leave over the next year. Sales decrease in that year such that the target of 10%-13% was achieved and the remaining employees received 200 options.
See below the calculations for each year
|
|
Cumulative Expense |
Expense for Year |
|
Year 1 |
CU143,333* |
CU143,333 |
|
Year 2 |
CU380,000** |
CU236,667 (CU380,000-CU143,333) |
|
Year 3 |
CU370,000*** |
(CU10,000) (CU370,000-CU380,000) |
*Year 1= 43 employees (50-5 left-2 expected to leave) * 200 shares expected to be given at end of 3 years based on expected sales target to be achieved * CU50 = CU430,000 / 3 years being the length of the vesting period * 1 year which has passed= CU143,333
**Year 2= 38 employees (50-8 left-4 expected to leave) * 300 shares expected to be given at end of 3 years based on expected sales target to be achieved * CU50 = CU570,000 / 3 years being the length of the vesting period * 2 years which has passed= CU380,000
***Year 3 = 37 employees (50-13 left) * 200 shares as sales target achieved was from 10% to 13% * CU50 = CU370,000 / 3 years being the length of the vesting period * 3 years which has passed= CU370,000
Example 19: Award of equity with a market condition
Company A issues 100 share options with a three year life to each of its 10 senior employees and the these options will vest after the three year period if the entity’s share price has increased from its current level of CU10 to CU20 by the end of the 3 year period.
The fair value of the grant has been determined at CU6 (which takes into account the fact that the share price will be at least CU20 at the end of the 3 years).
At the grant date in year 1, the company estimated 1 employee will have left before the share price is reached.
At the end of year 2 another one employee has left, and the entity estimates another 2 will leave before the end of the 3 years.
At the end of year 3, 8 employees remained in employment and the share price of CU20 was not reached.
The expense each year is as follows:
|
|
Cumulative Expense |
Expense for Year |
|
Year 1 |
CU1,800* |
CU1,800 |
|
Year 2 |
CU2,800** |
CU1,000 (CU2,800-CU1,800) |
|
Year 3 |
CU4,800*** |
CU2,000 (CU4,800-CU2,800) |
Note where awards are granted on a market based condition, the entity should recognise the services received as an expense regardless of whether the market condition was met as per Section 26.9. Hence the cost here is recognised in full, it is irrelevant that the CU20 target was not met. The reason for this is that the possibility that the share price target might not be achieved is already taken into account when determining the fair value of the grant.
*Year 1= (9 employees (10-1 expected to leave) * 100 shares * CU6) = CU5,400/3 years being the vesting condition * 1 year that has passed) = CU1,800
**Year 2= 7 employees (10-1 left -2 expected to leave) * 100 shares * CU6 = CU4,200/3 years being the vesting condition * 2 year that has passed) = CU2,800
***Year 3= 8 employees (10-2 left) * 100 shares * CU6 = CU4,800/3 years being the vesting condition * 3 year that has passed) = CU4,800
Example 20: Award of equity with a market condition
Company A issues 100 share options with a six year life to each of its 10 senior employees and the these options will vest and become exercisable immediately if and when the entity’s share price increases from its current level of CU10 to CU20 or above provided the employees remain in service during this period.
The fair value of the grant has been determined at CU4. The Company applies the option pricing model which takes into account if share price target will be achieved during the 6 year life of the options and the possibility that the target will not be achieved. At the grant date, the entity believes the share price will be achieved by the end of year 4 and that 7 employees will remain in service up to that date.
At the end of year 1, 1 employee has left.
At the end of year 2, 1 employee left.
At the end of year 4, 8 employees remained in service
At the end of year 5, the share price target is achieved and 1 more employee left during this period.
Section 26 requires that the company recognise the services received over the expected vesting period, as estimated at the grant date, as well as mandating this estimate is not changed. Therefore in this case, the company would recognise the service received from the employees over the four year period. Therefore the transaction amount is CU share options (100 share options by 8 employees that remained in service at the end of year 4). The fact that one employee left in year 5 is irrelevant as that employee had already completed the expected vesting period of 4 years.
|
|
Cumulative expense |
Expense for year |
|
Year 1 |
CU700* |
CU700 |
|
Year 2 |
CU1,400** |
CU700 (CU1,400-CU700) |
|
Year 3 |
CU2,100*** |
CU700 (CU2,100-CU1,400) |
|
Year 4 |
CU3,200**** |
CU1,100 (CU3,200-CU2,100) |
*Year 1 = 7 employees * 100 options * CU4= CU2,800/ 4 years being the expected period in which the target will be achieved * 1 year which has passed= CU700
**Year 2 = 7 employees * 100 options * CU4= CU2,800/ 4 years being the expected period in which the target will be achieved * 2 year which has passed= CU1,400
***Year 3 = 7 employees * 100 options * CU4= CU2,800/ 4 years being the expected period in which the target will be achieved * 3 year which has passed= CU2,100
****Year 4 = 8 employees * 100 options * CU4= CU3,200/ 4 years being the expected period in which the target will be achieved * 4 year which has passed= CU3,200
If in this example the target was met before the 4 year period, at the time it was met the expense should be accelerated.
Example 21: Modification – repricing
In year 1 Company A issued employees with 100 share options per employee with a fair value at that date of CU80 which is exercisable in three years time. In year 1, this would be accounted for in a similar way to the above examples for each of the three years regardless of the modification.
In year 2, Company A modifies the options (by reducing the exercise price). The fair value of the original option at that date was CU70 and the modified repriced option has a fair value of CU75. This is treated as an increase (regardless of the fact that it is less than the fair value when the grant was originally issued) and therefore the CU5 would be recogised over the remaining life of the vesting period (i.e. 2 years assuming the modification occurred at the start of year 2). Therefore, the amount to be posted to the profit and loss as an expense would be CU250 (CU5*100 share options=CU500/2yrs*1yr past= CU250)
If the fair value was CU65, there would be a loss of CU5 which would not be accounted for. No changes would be made.
Example 22: Modification – increase in number of options
Company A issued employees with 100 share options per employee with a fair value at that date of CU80 which is exercisable in three years time. In year 1, this would be accounted for in a similar way to the above examples.
At the start of year 2, the company modified the terms such that an additional 50 options would be provided to employees after 3 years. The fair value of this modification on that date was CU5. Therefore in this case, no change would be made to the accounting for the original grant of 100 shares. Instead an additional expense would be recognised over the remaining life of 2 years for the CU5 fair value (i.e. CU5*50 options= CU250/2yrs* 1yrs past= CU125 as an expense for each employee assuming there is no change in expectation of employees leaving before the 3 year period). This would be accounted for in the same way as any other share option as detailed in the examples above.
Example 23: Cancellation and settlement of a share option during vesting period
At the start of year 1, Company A granted 10 share options to each of its 100 employees on the condition that they stay in employment for four years (i.e. option exercisable after that period).
The fair value of the option is determined to be CU10. At the end of year 1 the entity estimates 90% of employees will remain in service for the vesting period. The expense estimated to be recognised at year 1 is as follows:
Year 1 = 10 shares * CU10 * 100 employees = CU10,000*90% of employees expected to remain in service = CU9,000. Therefore CU9,000 should be recognised over the four year period. Hence CU2,250 (CU9,000/4yrs) should be recognised as an expense for each year based on assumptions at the end of year 1.
At the end of year 2, the company encountered very tough trading conditions and as a result there was a significant fall in the company’s value. Company A decided to cancel the share options which had a fair value of CU5 at that date and in return provide a payment to employees of CU7. The number of employees still employed by the company at that time was 80.
|
|
Cumulative Expense |
Expense for Year |
|
Year 1 |
CU2,250 |
CU2,250 |
|
Year 2 |
CU8,000* |
CU5,750 (CU8,000-CU2,250) |
* Year 2= under Section 26.13 the full amount has to be recognised immediately. 80 employees *10 share options per employee * CU10= CU8,000
The journal required in year 2 is:
|
|
CU |
CU |
|
Dr Employee Costs |
8,000 |
|
|
Cr Shares Based Payment Reserve |
|
8,000 |
The payment of the CU7 per share option on cancellation should be accounted for as follows:
|
|
CU |
CU |
|
Dr Share Based Payment Reserve (CU5 being the fair value of the original grant at the date of cancellation*80 employees *10 share options) |
4,000 |
|
|
Dr Employee Costs (CU7 being the amount paid-CU5 being the fair value of the original grant at the date of cancellation * 80 employees * 10 share options) |
1,600 |
|
|
Cr Bank (CU7*80 employees*10 share options per employee) |
|
5,600 |
Example 24: Forfeiture
At the start of year 1, Company A granted 10 share options to an employee on the condition that they stay in employment for four years (i.e. option exercisable after that period).
The fair value of the option is determined to be CU15. At the end of year 1 the entity estimates the employee will remain in service for the vesting period. The expense estimated to be recognised for year 1 is as follows:
|
|
CU |
CU |
|
Dr Employee Cost (10 Share Options*CU15) |
150 |
|
|
Cr Share Based Payment inequality |
|
150 |
At the end of year 2, the company’s performance decreased and the company had to lay off this employee. In this instance as the employee was made redundant for genuine reasons, the expense recognised to date for that employee is reversed similar to the way in which a change in estimate occurs. i.e. the journal will be to:
|
|
CU |
CU |
|
Dr Share based Payment Reserve |
150 |
|
|
Cr Employee Cost |
|
150 |
Example 25: Cash settled share based payment
Company A issued 100 share appreciation rights to each of its 20 key employees on the condition that they remain in employment for 6 years. The SARs can be exercised at the end of year 3, 4 and 5. At the grant date the fair value of the SAR is estimated at CU10.
During year 1, 2 employees leave and the company estimates another 3 will leave before the end of year 3 (i.e. before the SARs can be exercised).
During year 2, a further 4 employees leave and the company estimate another 2 will leave during year 3 (i.e. the date the awards can vest).
During year 3, another 1 employee leaves, therefore leaving 13 employees to vest the awards. At the end of year 3, 5 exercise the SARs.
During year 4, 3 exercise the SARs
During year 5, 3 exercise the SARs
During year 6, 2 exercise the SARs
At each year end the company estimates the fair value of the SARs at the end of each year in which a liability exists. The intrinsic values of the SARs at the date of exercise (equal to the cash paid out) at the end of year 3, 4, 5 and 6 are also shown below:
|
Year |
Fair value CU |
Intrinsic value CU |
|
1 |
11 |
– |
|
2 |
9 |
– |
|
3 |
12 |
10 |
|
4 |
13 |
11 |
|
5 |
15 |
13.50 |
|
6 |
17 |
17 |
|
Year
|
Calculation of liability
|
Calculation of cash paid
|
Liability
|
Cash paid
|
Expense for period
|
|
1 |
15 employees (20 employees less 2 that left and 3 more expected to leave by end of year 3)* 100 SARS *CU11 / 3 years being the length from receiving the SARs to when they can be first redeemed * 1 years passed=CU5,500 |
N/a
|
5,500
|
N/a
|
5,500
|
|
2 |
12 employees (20 employees less 6 that left and 2 more expected to leave by end of year 3)* 100 SARS *CU9 / 3 years being the length from receiving the SARs to when they can be first redeemed * 2 years passed=CU7,200 |
N/a
|
7,200
|
N/a
|
7,200-5,500 = CU1,700
|
|
3 |
8 employees (20 employees less 7 that left by end of year 3 less the 5 that exercised at the end of year)* 100 SARS *CU12 / 3 years being the length from receiving the SARs to when they can be first redeemed * 3 years passed=CU9,600 |
5 employees that exercised * 100 SARS *CU10 =CU5,000
|
9,600
|
5,000
|
9,600+ 5,000-7,200 = CU7,400
|
|
4 |
5 employees (20 employees less 7 that left by end of year 3 less the 5 that exercised at the end of year 3 and the 3 that exercised at the end of year 4)* 100 SARS *CU13 / 3 years being the length from receiving the SARs to when they can be first redeemed * 3 years passed=CU6,500 |
3 employees that exercised * 100 SARS *CU11 =CU3,300
|
6,500
|
3,300
|
6,500+ 3,300-9,600 = CU200
|
|
5 |
2 employees (20 employees less 7 that left by end of year 3 less the 5 that exercised at the end of year 3 less the 3 that exercised at the end of year 4 and the 3 that exercised at the end of year 5)* 100 SARS *CU15 / 3 years being the length from receiving the SARs to when they can be first redeemed * 3 years passed=CU3,000 |
3 employees that exercised * 100 SARS *CU13.50 =CU4,050
|
3,000
|
4,050
|
3,000+ 4,050-6,500 = CU550
|
|
6 |
N/a
|
2 employees that exercised * 100 SARS *CU17 =CU3,400 |
–
|
3,400
|
3,400-3,000 = CU550
|
It is evident from the above that the fair value is reviewed at the end of each year which contrasts with equity settled transactions where it is only reviewed at the date of the grant.
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Example 26: SBC and groups
Parent A issues shares/options in itself to the employees of Subsidiary A and B for the services provided to the subsidiaries. The parent does not charge the subsidiaries. In the consolidated financial statements these would be treated as equity settled as they are settled by the issuance of shares. Under Section 26, the parent can recharge subsidiaries A and B on a reasonable basis. In the consolidated financial statements the following journals would be included:
|
|
CU |
CU |
|
Dr Employee Costs – SBC |
XXX |
|
|
Cr Share Based Payment Reserve |
|
XXX |
In the parent entity financial statements the journal would be
|
|
CU |
CU |
|
Dr Investment in Subsidiary with Deemed Capital Contribution |
XXX |
|
|
Cr Share Based Payment Reserve |
|
XXX |
In the books for the subsidiaries the journal would be to:
|
|
CU |
CU |
|
Dr Employee Costs with the Share Based Payment Cost for the Service Provided in Year |
CU |
|
|
Cr Share Based Payment Reserve |
|
CU |
Example 27: SBC and groups
If we take the above example and assume the group does recharge the subsidiary (usually done for tax purposes as the subsidiary will get a tax deduction in the UK, if a UK subsidiary is recharged for the cost by the parent). Then the accounting in the subsidiary company would be to:
|
|
CU |
CU |
|
Dr Share Based Payment Reserve |
XXX |
|
|
Dr Profit and loss with any excess |
XXX |
|
|
Cr Intercompany/Bank |
|
XXX |
In the books of the parent entity the journals would be:
|
|
CU |
CU |
|
Dr Share Based Payment Reserve |
XXX |
|
|
Cr Investment in Subsidiary |
|
XXX |
Example 28: Extract from the accounting policy notes
Share based costs
The company participates in a number of equity-settled, share based compensation plans operated by its parent company, XXXXX Limited. The fair value of the employee services received in exchange for the grant of the options or shares is recognised as an expense. The parent undertaking does not immediately recharge the company for these expenses so they are shown as a capital contribution/share based payment reserves from the parent undertaking within other reserves. Where any subsequent recharge is not, in the opinion of the directors, clearly linked to the share based payment charge, the amount is treated in a manner similar to a management recharge.
The total amount to be expensed over the vesting period is determined by reference to the fair value of the options, shares or Restricted Stock Units (RSUs) granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options or shares that are expected to vest. At each balance sheet date, the entity revised its estimates of the number of options of shares that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.
Fair value of options is measured using the Black Scholes model.
OR
The fair value of shares awarded under the XXX plan are determined using a Monte Carlo simulation technique. The plan contains inter alia a Total Shareholder Return (TSR) based (and hence market-based) vesting condition and, accordingly, the fair value assigned to the related equity instruments on initial application of Section 26 is adjusted so as to reflect the anticipated likelihood at the grant date of achieving the market-based vesting condition.
OR
The company operates a share appreciation rights scheme whereby senior management are offered share appreciation rights. This scheme provides the employees with the right to receive, at the date the rights are exercised, cash equal to the appreciation in the entity’s share price since the grant date. The rights vest within 3-5 years of being granted. For cash-settled share-based payment transactions, the company measures the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the company remeasures the fair value of the liability at each reporting date and at the date of settlement, with any changes in fair value recognised in profit or loss for the period.
The fair value is measured by reference to the price quoted on the stock exchange OR the fair value is measured by using the Black Scholes model OR an Option pricing model.
The carrying amount of the liability with regard to these share appreciation rights is disclosed in note X to the financial statements.
Example 29: Extract from the notes to the financial statements
Share based payments
The ultimate parent company XXXXXX. provides employees, on a discretionary basis, with share options and restricted stock (the ‘Awards’) that need to be accounted for under Section 26 “Share based payments”.
Awards are granted to directors and selected employees. Awards are conditional on the employee completing a specified period of service (the vesting period) and have a contractual term of five years. The ultimate Parent has no legal or constructive obligation to repurchase or settle the Awards in cash. The exercise price for stock options may not be less than the fair market value of the underlying stock at the date of grant and options generally will expire no later than XXX years after the date on which they are granted.
A summary of the movements in the number of share options outstanding and their related weighted average exercise prices are as follows:
|
|
2015 |
2014 |
||
|
Options |
Number |
Weighted average price |
Number |
Weighted average price |
|
|
|
CU |
|
CU |
|
|
|
|
|
|
|
Outstanding at 1 January |
– |
– |
XXX |
XXX |
|
Granted |
– |
– |
– |
– |
|
Forfeited |
– |
– |
– |
– |
|
Expired |
– |
– |
– |
– |
|
Exercised |
– |
– |
(XXX) |
XXX |
|
Outstanding at 31 December |
– |
– |
– |
– |
|
|
|
|
|
|
|
Exercisable at 31 December |
– |
– |
– |
– |
Restricted stock units
A summary of the movements in the number of restricted stock units outstanding and their related weighted average exercise prices are as follows:
|
|
2015 |
2014 |
||
|
|
Number |
Weighted average fair value |
Number |
Weighted average fair value |
|
|
|
CU |
|
CU |
|
|
|
|
|
|
|
Outstanding at 1 January |
XXX |
XXX |
XXXX |
XXXX |
|
Granted |
XXX |
XXX |
XXXX |
XXXX |
|
Forfeited |
– |
– |
– |
– |
|
Exercised |
(XXX) |
XXX |
(XXXX) |
XXXX |
|
Outstanding at 31 December |
XXX |
XXX |
XXXX |
XXXX |
|
|
|
|
|
|
|
Exercisable at 31 December |
– |
– |
– |
– |
The total charge in the year relating to employee share based payment plans was CUXXXX (2014: CUXXX) all of which related to equity settled share based payment transactions.
IF APPLICABLE INCLUDE THE BELOW
Of the CUXXXX, CUXXX relates to the 2015 Section 26 charge and CUXXX relates to a recharge from group. The CUXXX is not directly attributable to shares and therefore treated as a management recharge in accordance with XXXX Limited accounting policy.
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