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Section 21 – Overview
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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
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- 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
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Section Downloads
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FRS 105 Detailed Guide: Section 21 Share-based Payment (791 downloads )
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Difference Guide – Provisions and Contingencies
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Section 21: Shared based payments
Summary
Section 21 deals with the accounting for equity settled and cash settled share based payment transactions.
What is new when compared to previous GAAPs – General?
Section 21 simplifies the accounting for equity settled share based payments. Equity settled share based payments are not accounted for at the date of the grant. Instead these are only accounted for at the date the shares are actually issued.
This contrasts with FRS 102/old GAAP (FRS 20) in that equity settled share based payments must be accounted for from the date of the grant. This will result in adjustments on transition where equity settled transaction remain outstanding at the date of transition and since transition. Note there is no difference between FRSSE and FRS 105 here as FRSSE requires the same accounting treatment for equity settled share based payments as FRS 105 does.
Section 21 requires no disclosures whereas the previous GAAP’s required detailed disclosures. ROI does require a disclosure of the accounting policies if applicable.
What is new when compared to FRSSE/old GAAP?
Section 21 does not deal with the accounting for share based payments in groups. However given that equity settled share based payments are not to be accounted for until they are settled, the issue is not likely to arise in practice.
Under FRS 102 and FRS 20 fair value tried to determine a true fair value whereas Section 21 only requires fair value be determined with reference to the rules in Section 16-Provisions. In practice this should not result in an adjustment for cash settled transactions as the fair value under FRS 102 and FRS 20 would be a best estimate of the cost to settle the liability. FRS 102 mandated the use of the option pricing model where market information was not available, however, it was not mandated by Section 26. This is not applicable for FRS 105 as they must be valued based on the guidance in Section 12-Provision.
Section 21 does not provide guidance on how cancellation and modifications are to be accounted for. However if they arise it is likely that they will follow the guidance in Section 26 of FRS 102 which provides specific guidance.
What is different when compared to FRSSE/old GAAP?
Section 21 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.
Other standards affecting Section 21 where differences arise:
Section 28 provides an exemption whereby share based payments which were granted and settled prior to the date of transition can continue to be accounted for under old GAAP (i.e. FRS 20) / FRS 102 but any new shares granted since the date of transition should be accounted for under Section 21. In addition Cash settled transactions settled prior to the date of transition do not have to be accounted for under Section 21.
Section 24 – Income tax – where equity share based payments have not settled pre year end and deferred tax was recognised, the deferred tax will have to be derecognised under FRS 105 as FRS 105 does not permit deferred tax to be recognised (applicable for UK entities).
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, phantom shares etc. etc.
Equity settled share based payments are only accounted for on the issuance of the shares (i.e. on settlement)
As goods or services are received they are recognised with an increase in the liability for cash settled transactions. If they are dependent on a specified period of service, the costs are accounted for as they are rendered i.e. over the vesting period.
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.
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 21.9).
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 21.10).
The value of the share based transaction is valued by reference to the rules in Section 16 provisions (i.e. the best estimate of the cost to settle the liability). This could use the recognised valuation techniques using the most of external data to base the valuation on.
What do accountants need to do?
Be aware of the differences between old GAAP (Section 20)/FRS 102 and Section 21.
Advise clients that have equity share based payment arrangements which have not settled at the date of transition to derecognise the amount included in the share based payment reserve at the date of transition and reverse the equity settled share based payment charge in the comparative year.
What do Companies need to do?
Be aware of the differences between old GAAP (FRS 20)/FRS 102 and Section 21 and assess the impact and profit and loss reserves as a result of the need to derecognise equity share based payment transactions which have not settled at the date of the transition.
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