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.