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

C8a. SBP - Cash Settled

Syllabus C8a)

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

They are often called “Share Appreciation Rights (SARs)”

These are when a company promises to pay for goods or services for cash, however the cash price is linked to the share price

The double entry is:

  • Dr Expense

    Cr Cash or Liability

If the payment is for a service stretching over a number of years (vesting period) then the expense is recognised over the number of years and the liability is calculated by taking into account the change in the share price

Illustration 1

1 Jan Year 1 - 100 share appreciation rights (SARs) given to each of the company’s 1000 employees. 

FV of these at grant date was £5. 

The employees had to be in service for 3 years to take the SAR

End of year 1 - 100 employees had left and 140 more expected to leave by the end of year 3. FV of SAR now £6

End of year 2 -  40 employees left in the year and another 50 expected to leave in year 3. FV of SAR now £8

End of year 3 -  60 employees left and the FV of SAR is now £7

Solution

Year 1 - 760 (1,000 - 100 -140) x 100 x £6 x 1/3 = 152,000 (Dr Expense Cr Liability)

Year 2 - 810 (1,000 - 100 - 40 - 50) x 100 x £8 x 2/3 = 432,000 - 152,000 = 280,000 (Dr Expense Cr Liability)

Year 3 - 800 (1,000 - 100 - 40 - 60) x 100 x £7 x 3/3 = 560,000 - 432,000 = 128,000 (Dr Expense Cr Liability)

Finally the 560,000 is paid

Dr Liability 560,000
Cr Cash 560,000

Illustration 2

An entity grants 100 share options on its $1 shares to each of its 500 employees on 1 January Year 1. 

Each grant is conditional upon the employee working for the entity over the next three years. 

The fair value of each share option as at 1 January Year 1 is $10.

On the basis of a weighted average probability, the entity estimates on 1 January that 100 employees will leave during the three-year period and therefore forfeit their rights to share options.

The following actually occurs:
– 20 employees leave during Year 1 and the estimate of total employee departures over the three-year period is revised to 70 employees
– 25 employees leave during Year 2 and the estimate of total employee departures over the three-year period is revised to 60 employees
– 10 employees leave during Year 3

Information of share price at the end of each year:

Year 1 10

Year 2 12

Year 3 14

Solution

As this is cash settled then the double entry becomes Dr Expense Cr Liability and we do not keep the value of the option @ grant date but change it as we pass through the vesting period.

  • Y1: 430 x 100 x 10 x 1/3 = 143,300
    
Y2: 440 x 100 x 12 x 2/3 - 143,300 = 208,700

    Y3: 445 x 100 x 14 x 3/3 - 623,000 x 3/3 - 352,000 = 271,000

  • So you can see that the “costs” and so the entries into the accounts would be:

    Year 1: Dr Expense 143,300 Cr Liability 143,300

    Year 2: Dr Expense 208,700 Cr Liability 208,700

    Year 3: Dr Expense 271,000 Cr Liability 271,000

    Notice that if you add these up it comes to 623,000.

  • This is exactly our final liability (445 x 100 x $14 x 3/3) - it’s just we’ve spread it over the 3 years vesting period.