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Measurement of equity-settled share-based payment transactions
Extract from FRS102: Section 26.7 – 26.9
Measurement principle
26.7 For equity-settled share-based payment transactions, an entity shall measure the goods or services received, and the corresponding increase in equity, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably.
If the entity cannot estimate reliably the fair value of the goods or services received, the entity shall measure their value, and the corresponding increase in equity, by reference to the fair value of the equity instruments granted measured in accordance with paragraphs 26.10 and 26.11. To apply this requirement to transactions with employees and others providing similar services, the entity shall measure the fair value of the services received by reference to the fair value of the equity instruments granted, because typically it is not possible to estimate reliably the fair value of the services received.
26.8 For transactions with employees (including others providing similar services), the fair value of the equity instruments shall be measured at grant date. For transactions with parties other than employees, the measurement date is the date when the entity obtains the goods or the counterparty renders service.
26.9 A grant of equity instruments might be conditional on employees satisfying specified vesting conditions related to service or performance.
An example of a vesting condition relating to service is where a grant of shares or share options is conditional on the employee remaining in the entity’s employment for a specified period of time.
Examples of vesting conditions relating to performance are where a grant of shares or share options is conditional on the entity achieving a specified growth in profit (an example of a non-market condition) or a specified increase in the entity’s share price (an example of a market condition).
All vesting conditions related solely to employee service or to a non-market performance condition shall be taken into account when estimating the number of equity instruments expected to vest.
Subsequently, the entity shall revise that estimate, if necessary, if new information indicates that the number of equity instruments expected to vest differs from previous estimates. On the vesting date, the entity shall revise the estimate to equal the number of equity instruments that ultimately vested.
All market conditions and non-vesting conditions shall be taken into account when estimating the fair value of the shares or share options at the measurement date, with no subsequent adjustment irrespective of the outcome of the market or non-vesting condition, provided that all other vesting conditions are satisfied.
OmniPro comment
In summary:
|
Counterparty |
Measurement basis |
Measurement date |
Recognition date |
|
Employee |
Fair value of equity instruments awarded |
Grant date |
Service date |
|
Non-employees |
Fair value of goods or services received or, if goods or services not reliably measurable, fair value of equity instruments awarded. |
Service date |
Service date |
Appendix I of FRS 102 defines the grant date as ‘the date at which the entity and another party (including an employee) agree to a share based payment arrangement, being when the entity and the counterparty have a shared understanding of the terms and conditions of the arrangement. At grant date the entity confers on the counterparty the right to cash, other assets or equity instruments of the entity, provided the specified vesting conditions, if any are met. If that agreement is subject to an approval process (for example by shareholders), grant date is the date when that approval is obtained’.
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.
Service conditions
A service condition is one that requires employees to complete a specified period of service. An example would include an employee not being able to sell shares/take up options unless they remain in employment for a certain amount of years.
Performance conditions
Performance conditions can be market vesting or non-market vesting.
Examples of market conditions are as follows:
- Achieve a minimum share price by a specified date;
- Outperform a share price index; and
- Achieve a total shareholder return target (for an entity in the group with listed shares).
Appendix I of FRS 102 defines a market condition as ‘a condition upon which the exercise price, vesting or exercisability of an equity instrument depends that is related to the market price of the entity’s equity instruments, such as attaining a specific share price or a specified amount of intrinsic value of a share option, or achieving a specified target that is based on the market price of the entity’s equity instruments relative to an index of market prices of equity instruments of other entities’.
Examples of non-market conditions are as follows:
- Remaining in employment for a specified period of time;
- Complete a particular project;
- Achieve earnings per share or profit targets; and
- Successful IPO.
Non vesting conditions are not defined however it could be any condition which does not fall within the scope of a service condition or a performance condition.
All market vesting and non-vesting conditions are considered when determining the fair value of shares or share options on the grant date/measurement date. When the fair value is determined on that date it is never changed, it remains the same and the market conditions are assumed to have vested regardless whether they have or not.
All non-market vesting and non-vesting conditions (i.e. service conditions and performance conditions at non-market rates) are not incorporated into the fair values. Instead these are considered at each reporting period to determine the numbers that are likely to vest based on a best estimate. The end result is that the amount recognised as an expense over the vesting period is the same as the actual number of equity instruments vested.
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.
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.
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