Syllabus C. Reporting The Financial Performance Of A Range Of Entities C8. Share Based Payments

C8a. SBP with a Choice of Settlement 4 / 8

Syllabus C8a)

Discuss and apply the recognition and measurement of share-based payment transactions.

Share-based payment with a choice of settlement

Entity has the choice

Is there a present obligation to settle in cash?

  1. Yes

    Treat as cash-settled

  2. No

    Treat as equity-settled

Counter-party has the choice

The transaction is a compound financial instrument which needs splitting into debt and equity

  • Debt Portion

    This must be calculated first..the FV of the cash option at grant date

    Then it is treated just like a normal cash-settled SBP

  • Equity Portion

    This is the FV of the option less the debt portion calculated above at grant date

Illustration 1

An entity grants an employee a right to receive either 8,000 shares or cash to the value, on that date, of 7,000 shares. She has to remain in employment for 3 years.

The market price of the entity's shares is $21 at grant date, $27 at the end of year 1, $33 at the end of year 2 and $42 at the end of the vesting period, at which time the employee elects to receive the shares. 

The entity estimates the fair value of the share route to be $19.

Show the accounting treatment.


The fair value of the cash route at grant date is: 7,000 × $21 = $147,000

The fair value of the share route is: 8,000 × $19 = $152,000 - 147,000 = $5,000

We then treat them as cash and equity settled SBPs as appropriate:

Year Cash Equity I/S
1 7,000 x $27 x 1/3 = 63,000 5,000 x 1/3 = 1,667 64,667
2 7,000 x $33 x 2/3 = 154,000 5,000 x 1/3 = 1,667 92,667
3 7,000 x $42 x 3/3 = 294,000 5,000 x 1/3 = 1,667 141,667

Entity has the choice of issuing shares or cash

  1. Option 1 - Obligated to pay cash

    The entity is prohibited from issuing shares or where it has a stated policy, or past practice, of issuing cash rather than shares. 

    Treat as a cash-settled SBP

  2. Option 2 - Not obligated to pay cash

    Treat as if it was purely an equity-settled transaction. 

    If on settlement, cash was actually paid, the cash should be treated as if it was a repurchase of the equity instrument by a deduction against equity.