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

C8a. Vesting Period 5 / 8

Syllabus C8a)

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

Vesting Period

This is normally a set amount of time but sometimes it may be dependent upon a condition to be satisfied.

Vesting Conditions

These are conditions that have to be met before the holder gets the right to the shares or share options

There are 2 types of Vesting Condition:

  1. Non-market based

    Those not relating to the market value of the entity’s shares

  2. Market based

    Those linked to the market price of the entity’s shares in some way

Non-Market Vesting Conditions

Here only the number of shares or share options expected to vest will be accounted for. 

At each period end (including interim periods), the number expected to vest should be revised as necessary.

Illustration 1

An entity granted 10,000 share options to one director. The director had to work there for 3 years, and indeed he did

Also to get the options, the director had to reduce costs by 10% over the vesting period. 

At the end of the first year, costs had reduced by 12%. By the end of the 2nd year, costs had only reduced in total by 7%. 

By the end of yr. 3 though the costs had been reduced by 11%

The FV of the option at grant date was $21

How should the transaction be recognised?

Solution

The cost reduction target is a non-market performance condition which is taken into account in estimating whether the options will vest. The expense recognised in profit or loss in each of the three years is:

Yearly Charge Cumulative
Year 1 (10,000 × £21)/3 years = 70,000 70,000
Year 2 (performance target not expected to be met) -70,000 0
Year 3 (10,000 x $21)  = 210,000 210,000

Market Vesting Conditions

These conditions are taken into account when calculating the fair value of the equity instruments at the grant date. 

They are not taken into account when estimating the number of shares or share options likely to vest at each period end. 

If the shares or share options do not vest, any amount recognised in the financial statements will remain.

Make an estimate of the vesting period at the acquisition date

  1. If vesting period is shorter than original estimate

    Expense all the remainder in the year the vesting condition is complied with

  2. If vesting period is longer than the original estimate

    Expense still using the original estimate of vesting period

Market and non-market based vesting conditions together

Where both market and non-market vesting conditions exist, then as long as the non market conditions are met the company must expense (irrespective of whether market conditions are satisfied)

So, where market and non-market conditions co-exist, it makes no difference whether the market conditions are achieved. 

The possibility that the target share price may not be achieved has already been taken into account when estimating the fair value of the options at grant date. 

Therefore, the amounts recognised as an expense in each year will be the same regardless of what share price has been achieved.

Illustration 2

A company granted 10,000 share options to a director. He must work there for 3 years. He did this.

Also the share price should increase by at 25% over the three-year period. 

During the 1st year the share price rose by 30% and by 26% compound over the first  two years and 24% per annum compound over the whole period

At the date of grant the fair value of each share option was estimated at £18

How should the transaction be recognised?

Solution

The director satisfied the service requirement but the share price growth condition was not met. 

The share price growth is a market condition and is taken into account in estimating the fair value of the options at grant date. 

Therefore, no adjustment should be made if there are changes from that estimated in relation to the market condition. There is no write-back of expenses previously charged, even though the shares do not vest.

The expense recognised in profit or loss in each of the three years is one third of 10,000 x £18 = £60,000.