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Section 21-Share-based Payment
Section 21 deals with the accounting for share based payment arrangements which are equity or cash settled.
Scope of this section
Extract of FRS 105 – Section 21.1
21.1 This section specifies the accounting for all share-based payment transactions including:
(a) equity-settled share-based payment transactions;
(b) cash-settled share-based payment transactions; and
(c) transactions in which the micro-entity receives or acquires goods or services and the terms of the arrangement provide either the micro- entity or the supplier of those goods or services with a choice of whether the micro-entity settles the transaction in cash (or other assets) or by issuing equity instruments.
OmniPro comment
Share based payment transactions are classified into three categories as follows:
- Equity settled share based payment transactions;
- Cash settled share based payment transactions; and
- Transactions with settlement alternatives.
Although not made clear above, (IFRS 2) makes it clear that goods (as per 21.1 (c)) include the following:
- Inventories;
- Consumables;
- Property, plant and equipment;
- Intangibles; and
- Other financial assets.
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 21 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 21. 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 21.
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 likely this will come within the remit of Section 21.
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 21.
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 21.
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 21.
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 21.
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 21.
Equity-settled share-based payments transactions
Extract of FRS 105 – Section 21.2
21.2 A micro-entity shall not account for equity-settled share-based payments transactions until shares are issued, at which point the micro- entity shall apply the requirements of Section 17 Liabilities and Equity.
OmniPro comment
Any 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 simplifies the accounting for share based payments. At the date of issue the cost should be recognised as an expense using the guidance on measurement in Section 16-Provisions i.e. using the best estimate of the cost to the entity to satisfy the obligation (i.e. if shares are issued in return for external services being performed and the fee can be determined, then that fee would be the amount to recognise on issue of the shares, if the shares are issued to employees for the services provided, the cost would be measured at the estimated fair value of the shares at the date of issue). See how the shares can be valued in the valuation section below.
Example 9: 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 CU15. By the end of the four years only 50 employees remained and were issued shares. The fair value per share at the date of issuing the shares was CU20.
The accounting for the above share based payment arrangement is:
|
|
CU |
CU |
|
Dr Employee Costs/Share Based Payment Costs (50 ees * 10 shares * CU20) |
10,000 |
|
|
Cr Ordinary share capital/share premium (in equity) |
|
10,000 |
As can be seen the cost is only recognised when the shares are issued.
Example 10: 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. If this work were to be paid for in cash it would cost the Company CU1,000.
Therefore when the shares are issued the journals would be to:
|
|
CU |
CU |
|
Dr contract services |
1,000 |
|
|
Cr Ordinary share capital/share premium (in equity) |
|
1,000 |
Cash-settled share-based payment transactions
Extract of FRS 105 – Section 21.3 – 21.7
21.3 A micro-entity shall recognise the goods or services received or acquired in a cash- settled share-based payment transaction when it obtains the goods or as the services are received and recognise a corresponding liability.
21.4 If the cash-settled share-based payments granted to employees vest immediately, the employee is not required to complete a specified period of service before becoming unconditionally entitled to those cash-settled share-based payments. In the absence of evidence to the contrary, the micro-entity shall presume that services rendered by the employee as consideration for the share-based payments have been received. In this case, on grant date the micro-entity shall recognise the services received in full, with a corresponding liability.
21.5 If the cash-settled share-based payments do not vest until the employee completes a specified period of service, the micro-entity shall presume that the services to be rendered by the employee as consideration for those cash-settled share-based payments will be received in the future, during the vesting period. The micro-entity shall account for those services as they are rendered by the employee during the vesting period, with a corresponding increase in the liability.
21.6 When the goods or services received or acquired in a cash-settled share-based payment transaction do not qualify for recognition as assets, the micro-entity shall recognise them as expenses.
21.7 A micro-entity shall measure the goods and services acquired and the liability incurred in accordance with the measurement requirements for a provision in Section 16 Provisions and Contingencies.
OmniPro comment
A cash-settled share-based payment transactions is one in which the entity acquires goods or services by incurring a liability to transfer cash or other assets to the supplier of those goods or services for amounts that are based on the price (or value) of the entity’s shares or other equity instruments of the entity or another group entity.
Examples of cash settled transactions include the following:
- Mandatory redeemable share granted;
- Redeemable shares at the employees option;
- Share appreciation rights; and
- The grant of phantom options (where employees are entitled to a cash payment equivalent to the gain that would have been made by exercising the options at a notional price over a notional number of shares by notionally selling the shares at an exercise price).
The value of a liability to settle a cash settled share based payment transaction should be remeasured at the fair value of the liability at each reporting date using the rules stated in Section 16-Provisions (i.e. estimate of the present obligation as a result of a past event).
Where share based payments are provided without any vesting conditions then the fair value of the shares issued is recognised as an expense immediately unless they relate to an asset.
Appendix I of FRS 105, defines vesting as under a share based payment arrangement, a counterparty’s right to receive cash, other assets or equity instruments of the entity vests when the counterparty’s entitlement is no longer conditional on the satisfaction of vesting conditions’.
Where the share based payments have vesting conditions, the cost is allocated over the life of the vesting period on a straight line basis.
The journals required where the share based payments are deemed to be cash settled are:
|
|
CU |
CU |
|
Dr Employee Costs/Share Based Payment Costs |
XXX |
|
|
Cr Provisions |
|
XXX |
Example 11: Vesting conditions
Company A issued 10 of its employees with notional share options which vest if the employees remain in employment for 4 years. This is a cash settled share based payment scheme. The best estimate of the option for each employee as determined was CU400 at the end of year 1 and year 2.
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 Provisions (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 7 will remain in employment. In this case the journal required to be posted is:
|
|
CU |
CU |
|
Dr Employee Costs/Share Based Payment Costs |
400 |
|
|
Cr Provisions ((CU400*7 employees/4 years*2yrs gone) less the CU1,000 already recognised in the prior year)) |
|
400 |
Example 12: Non-vesting conditions
Company A issues shares to its employees with no vesting conditions. In this case the best estimate of the value of the share is recognised as an expense immediately and taken to be issued for service previously given by employees.
|
|
CU |
CU |
|
Dr Employee Costs/Share Based Payment Costs |
XXX |
|
|
Cr Bank |
|
XXX |
Example 13: 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 year= 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.
Valuation
When valuing the liability where it relates to shares to be issued in the future (e.g. share appreciation rights), this would usually be valued through market evidence. The starting point would be the market price and work down from there. Where entities are not marketable a discount to the value should be applied. Where the company is a private company rules/guidelines for valuing private companies should be taken into consideration.
Where a valuation method is used it should make use of as much external market data as possible and should use valuations generally used in the business. Any restrictions should also be considered in the valuation exercise.
Share-based payment transactions with cash alternatives
Extract from FRS 105 – Section 21.8 – 21.10
21.8 Some share-based payment transactions give either the micro-entity or the counterparty a choice of settling the transaction in cash (or other assets) or by the transfer of equity instruments.
21.9 When the micro-entity has a choice of settlement of the transaction in cash (or other assets) or by the transfer of equity instruments, the micro-entity shall account for the whole transaction as set out in paragraph 21.2 unless:
(a) (a) the choice of settlement in equity instruments has no commercial substance (e.g. because the micro-entity is legally prohibited from issuing shares); or
(b) the micro-entity has a past practice or a stated policy of settling in cash, or generally settles in cash whenever the counterparty asks for cash settlement.
In circumstances (a) and (b) the micro-entity shall account for the transaction as a wholly cash-settled transaction in accordance with paragraphs 21.3 to 21.7.
21.10 When the counterparty has a choice of settlement of the transaction in cash (or other assets) or by the transfer of equity instruments, the micro-entity shall account for the transaction as a wholly cash-settled share-based payment transaction in accordance with paragraphs 21.3 to 21.7 unless:
(a) the choice of settlement in cash (or other assets) has no commercial substance because the cash settlement amount (or value of the other assets) bears no relationship to, and is likely to be lower in value than, the fair value of the equity instruments.
In circumstance (a) the entity shall account for the whole transaction as set out in paragraph 21.2.
OmniPro
See illustration of the guidance above.
Example 14: Choice of settlement in cash and shares
Company A issues shares to its employees which vest when the employees stays for 3 years at which time the employee can take the shares or take the cash alternative. The company has a past practice of settling in cash or settles in cash when an employee asks for cash settlement.
How should these be accounted for under Section 21?
As there is a choice here we need to look to the guidance in Section 21.9 above. From this guidance as the company has a policy of settling in cash it must account for this as a cash settled share based payment and recognise the estimated liability at each year end as illustrated in Example 12.
If in above example the entity had a policy of only settling in equity then the transaction would only be accounted for at the date of issue of the shares as an equity share based payment arrangement.
Transition exemptions
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.
Principal transition adjustments
1) On transition from FRS 102/old GAAP to FRS 105, where an entity has accounted for equity settled share based payments under FRS 102/FRS 20 and where these arrangements have not settled at the date of transition an adjustment will be required to derecognise the share based payment reserve recognised in equity at the date of transition and derecognise any movement since the date of transition as FRS 105 only permits recognition at the date of issue of the shares. No accounting is required until that date.
The above point also applies where an entity applied FRS 20 under old GAAP as opposed to the FRSSE.
There is no differences between the FRSSE and FRS 105 as FRSSE did not require equity share based payments to be accounted for until the shares were issued. The rules with regard to cash settlement are the same.
Example 15: Derecognition of amounts included in the share based payment reserve on transition to FRS 105 (applicable for entities transitioning from FRS 102 and entities that previously applied FRS 20)
Company A operated an equity settled share based payment arrangement. Assume the date of transition is 1 January 2015 and no tax deduction was obtained for the expense recognised for this share based arrangement. At the date of transition the company had a number of share based payment arrangements open. At 1 January 2015, 31 December 2015 and 31 December 2016 an amount of CU15,000, CU25,000 and CU28,000 was included in the share based payment reserve respectively as was required under previous GAAP accounting rules.
On transition however as FRS 105 does not permit the equity share based payment arrangements to be accounted for until the actual shares are issued an adjustment is required to derecognise any amounts previously recognised under previous GAAP/FRS 102 which have not been settled.
The journals required on transition are therefore:
At 1 January 2015
|
Dr Share based payment reserve (in Equity) |
15,000 |
|
|
Cr Profit and loss Reserve |
|
15,000 |
Being journal to reflect the derecognition of any unsettled equity settled shared based payments at the date of transition.
At 31 December 2015 assuming the above journal was posted to reserves etc.
|
Dr Share based payment reserve (in Equity) (CU25k-CU15k) |
10,000 |
|
|
Cr Employee Costs/Share Based Payment Costs in P&L |
|
10,000 |
Being journal to reflect the derecognition of the movement on the equity settled share based payment expense previously recognised under FRS 102/old GAAP.
At 31 December 2016 assuming the above journal was posted to reserves etc.
|
Dr Share based payment reserve (in Equity) (CU28k-CU25k) |
3,000 |
|
|
Cr Employee Costs/Share Based Payment Costs in P&L |
|
3,000 |
Being journal to reflect the derecognition of the movement on the equity settled share based payment expense previously recognised under FRS 102/old GAAP.
If in the above example the share payment expense was in fact a credit in the 2015 or 2016 year then the journals would be the opposite direction from the above.
2) Another difference is in the way in which fair value is determined. 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.
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