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Section 26 – Introduction
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Section 26 Analysis
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- Section 1
- Section 2
- Section 3
- Section 4
- Section 5
- Section 6
- Section 7
- Section 8
- Section 9
- Section 10
- Section 11
- Section 12
- Section 13
- Section 14
- Section 15
- Section 16
- Section 17
- Section 18
- Section 19
- Section 20
- Section 21
- Section 22
- Section 23
- Section 24
- Section 25
- Section 26
- Section 27
- Section 28
- Section 29
- Section 30
- Section 31
- Section 32
- Section 33
- Section 34
- Section 35
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- Section 1
- Section 2
- Section 3
- Section 4
- Section 5
- Section 6
- Section 7
- Section 8
- Section 9
- Section 10
- Section 11
- Section 12
- Section 13
- Section 14
- Section 15
- Section 16
- Section 17
- Section 18
- Section 19
- Section 20
- Section 21
- Section 22
- Section 23
- Section 24
- Section 25
- Section 26
- Section 27
- Section 28
- Section 29
- Section 30
- Section 31
- Section 32
- Section 33
- Section 34
- Section 35
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Section Downloads
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Contents
26.1.1 Extract from FRS102: Section 26.1 – 26.2.
26.1.2.1.1 What is meant by goods?
26.1.2.1.2 What are share appreciation rights?
26.1.2.1.3 Examples of arrangements that do or do not come within the remit of Section 26.
26.2 Recognition with or without vesting conditions.
26.2.1 Extract from FRS102: Section 26.3 – 26.6.
26.2.2.1.2 Journal required where equity settled.
26.2.2.1.3 Journal required where cash settled.
26.2.2.1.4 Example of vesting conditions.
26.3 Measurement of equity-settled share-based payment transactions.
26.3.1 Extract from FRS102: Section 26.7 – 26.9.
26.3.2.1 Overview – Equity settled share -based payment transactions.
26.3.2.1.1 Equity settled share-based payment transactions – Defined.
26.3.2.1.3 Grant date defined.
26.3.2.2.1 Service date and fair valuing a non-employee service.
26.3.2.2.2 Determining the grant date.
26.3.2.3 Service conditions – defined.
26.3.2.4 Performance conditions – vesting and non-vesting market conditions.
26.3.2.4.2 Market conditions – defined.
26.3.2.4.2.1 Examples of market vesting conditions (section 26.9 of FRS 102 refers).
26.3.2.4.2.2 Examples of non-market vesting conditions (section 26.9 of FRS 102 refers).
26.3.2.4.2.3 Non-vesting conditions.
26.3.2.5 Accounting for market and non-market vesting conditions – Fair valuing rules.
26.3.2.5.1 All market vesting and non-vesting market conditions incorporated into fair values.
26.3.2.5.1.1 Once fair value determined – it cannot change subsequently.
26.3.2.6 Examples – Accounting for equity settled share based payments.
26.3.2.6.1 Award with service conditions – no change in assumptions (Section 26.9 of FRS 102).
26.3.2.6.2 Award with service conditions – change in assumptions (Section 26.9 of FRS 102).
26.3.2.6.4 Equity instruments – non market vesting conditions.
26.3.2.6.6 Award of equity with a market condition.
26.4 Valuation of shares, Share options and equity-settled share appreciation rights.
26.4.1 Extract from FRS102: Section 26.10 to 26.11.
26.4.2.2 Fair valuing shares, share options and equity-settled share appreciation rights.
26.4.2.4 Examples of option pricing model and how they work.
26.5 Modifications to the terms and conditions on which equity instruments were granted.
26.5.1 Extract from FRS102: Section 26.12.
26.5.2.1.1 Modification increases value to the employee.
26.5.2.1.1.1 What is meant by incremental value.
26.5.2.1.2 Modification decreases value to the employee.
26.5.2.2 Examples of modifications.
26.5.2.2.1 Worked examples of modifications – repricing/increase in number of options.
26.6 Cancellations and settlements.
26.6.1 Extract from FRS102: Section 26.13.
26.6.2.1 Overview and application.
26.6.2.2 Examples of cancellation and settlement – accounting.
26.6.2.3.1 What is a forfeiture?
26.6.2.3.2 Accounting for forfeitures.
26.7 Cash-settled share-based payment transactions (and cash alternatives).
26.7.1 Extract from FRS102: Section 26.14-26.15B.
26.7.2.1.1 Entity has choice to settle in cash or by issuance of equity.
26.7.2.1.2 Counterparty has choice to settle in cash or by issuance of equity.
26.7.2.2 Examples of cash settled share based payment transactions.
26.7.2.3 Accounting examples of cash settled share based payments.
28.8.1 Extract from FRS102: Section 26.16.
26.8.2.1 Share based payments where shares issued in parent in return for service in Subsidiary.
26.8.2.1.1 Accounting for the SBC in the subsidiary.
26.8.2.1.1.1 Recharge of costs by parent subsequently.
26.8.2.1.2 Accounting for the SBC in the parent.
26.8.2.1.2.1 Recharge of costs by parent subsequently.
26.8.2.2 Allocation of share based payment charge within a group.
26.8.2.3 Share based payment accounting in Groups.
26.9 Deferred tax.
26.10 Disclosures.
26.10.1 Extract from FRS102: Section 26.18 – 26.23.
26.10.2.2 Accounting policy notes.
26.10.2.3 Extract from the notes to the financial statements.
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Section 26: Share based payements
Summary
Section 26 deals with the accounting for all share based payment transactions settled directly by the entity or another group entity on behalf of the entity including required disclosures.
What is new?
Section 26 allows a directors’ valuation if fair value cannot be determined in certain circumstances.
Section 26 allows an alternative treatment for groups of companies where the share based payment award is granted to employees of one or more members of a group to recognise and measure the share based payment expense on the basis of a reasonable allocation of the group expense.
What is different?
Section 26 does not include a definition of vesting conditions, however, old GAAP (FRS 20) did. This is not likely to be a huge issue as it is likely FRS 20 guidance will be utilised.
Old GAAP mandated the use of the option pricing model where market information was not available, however, it is not mandated by Section 26. However, it is likely that this will be required to be used in order to provide a reliable estimation of the fair value so differences should not occur in practice.
Other standards affecting Section 26 where differences arise:
Section 35 provides an exemption whereby share based payments which were granted prior to the date of transition can continue to be accounted for under old GAAP i.e. FRS 20 but any new shares granted since the date of transition should be accounted for under Section 26. Cash settled transaction settled prior to the date of transition do not have to be accounted for under Section 26.
Section 35 also provides an exemption for entities who have not had to account for share based payments under old GAAP not to account for share grants prior to the date of transition. For any grants after that date Section 26 should be applied.
What are the key points?
An equity-settled share-based payment transaction is one where the entity acquires goods or services as consideration for its equity instruments.
A cash-settled share-based payment transaction is one where the entity acquires goods or services by incurring liabilities to the supplier based on the price or value of its equity instruments.
Cash-settled share-based payments include share appreciation rights.
An arrangement is still classified as a share-based payment when one group entity receives goods or services and another group entity issues equity, or cash based on equity prices, to pay for those goods or services. This classification applies to both of the group companies involved.
As goods or services are received they are recognised with an increase in equity for equity settled transactions and a liability for cash settled transactions. If they are dependent on a specified period of service, the services are accounted for as they are rendered i.e. over the vesting period.
Cancellations are accounted for as an acceleration of vesting and the remaining element is charged to the profit and loss.
For modifications that benefit the employees, the incremental fair value is charged over the remainder of the vesting period while the original value continues to be charged. For modifications that reduces the employee benefit, the original fair value continues to be charged with no downward adjustment made.
The incremental value = fair value of instrument under new terms at the date of modification less fair value of original instrument at the date of modification.
For cash settled transactions, goods or services received and the corresponding liability are measured at the fair value of that liability, which is re-measured at each reporting date, with changes recognised in the profit and loss.
Arrangements where the entity has a choice between settlement in cash or equity are accounted for as equity-settled, unless either the entity:
- has a past practice or stated policy of settling in cash or generally settles in cash when the counterparty asks for cash settlement; or
- the cash alternative has no commercial substance (Section 26.15).
Where the counterparty has a choice of settlement in cash or equity then it should be treated as a cash settled transaction unless the choice has no commercial substance because the cash settled amount bears no relationship to, or is likely to be lower in value, than the fair value of the equity (Section 26.15B).
The fair value is determined in relation to the hierarchy detailed in section 26.10 with the first option being the market price for the equity instrument if there are observable market prices. Non-market vesting conditions should not be taken into account when determining fair value.
If a parent grants options to employees of a subsidiary, the employer has two options:
- Measure and account for the transaction using the same principles as if it were paying the cash or shares itself, that is in accordance with the remainder of section 26; or
- recognise a charge based on a reasonable allocation of the group expense.
What do accountants need to do?
Be aware of the differences between old GAAP and Section 26.
Advise group companies who have share based schemes in operation of the group allocation method so as to reduce workload for clients.
What do Companies need to do?
Be aware of the differences between old GAAP and Section 26 and see whether the group allocation method provides a better option for the entity.
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Examples:
Example 1: Shares issued for services rendered.
Example 2: Shares issued in return for stock.
Example 3: Share appreciation.
Example 5: Shares issued to employees as part of a business combination.
Example 6: Shares issued to the previous owner as part of a business combination.
Example 7: Issuance of share rights/options in other group companies.
Example 8: Phantom share scheme.
Example 9: Vesting conditions.
Example 10: Non-vesting conditions.
Example 14: Award with service conditions – no change in assumptions.
Example 15: Award with service conditions – change in assumptions.
Example 16: Equity instruments vesting in installments (Section 26.7 to 26.9 of FRS 102).
Example 17: Equity instruments – non market vesting conditions.
Example 19: Award of equity with a market condition.
Example 20: Award of equity with a market condition.
Example 21: Modification – repricing.
Example 22: Modification – increase in number of options.
Example 23: Cancellation and settlement of a share option during vesting period.
Example 25: Cash settled share based payment.
Example 28: Extract from the accounting policy notes.
Example 29: Extract from the notes to the financial statements.
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Section 26 – Difference Guide – Share Based Payment
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Section 26 – Disclosure Checklist
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