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Cash-settled share-based payment transactions (and cash alternatives)
Extract from FRS102: Section 26.14-26.15B
26.14 For cash-settled share-based payment transactions, an entity shall measure the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the entity shall remeasure 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.
Share-based payment transactions with cash alternatives
26.15 Some share-based payment transactions give either the entity or the counterparty a choice of settling the transaction in cash (or other assets) or by the transfer of equity instruments.
26.15A When the entity has a choice of settlement of the transaction in cash (or other assets) or by the transfer of equity instruments, the entity shall account for the transaction as a wholly equity-settled share-based payment transaction in accordance with paragraphs 26.7 to 26.13 unless:
(a) the choice of settlement in equity instruments has no commercial substance (eg because the entity is legally prohibited from issuing shares); or
(b) the 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 entity shall account for the transaction as a wholly cash-settled transaction in accordance with paragraph 26.14.
26.15B When the counterparty has a choice of settlement of the transaction in cash (or other assets) or by the transfer of equity instruments, the entity shall account for the transaction as a wholly cash-settled share-based payment transaction in accordance with paragraph 26.14 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 transaction as a wholly equity-settled transaction in accordance with paragraphs 26.7 to 26.13.
OmniPro comment
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. Fair value would be measured under the option pricing model as discussed above.
See illustration of Section 26.14 in the example below:
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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