DipIFR Syllabus B. Elements of financial statements - SBP - Equity Settled - Notes ^{2 / 7}

Measurement

• The FV of the product / service acquired (if possible)

• FV of equity instrument issued

FV of Equity Instrument

This is basically MARKET VALUE, taking into account the terms and market related conditions of the offer.

If there is no MV available, then the “Intrinsic Value” option is available. This is basically the share price less the exercise price.

However, if this is chosen then the accounting treatment below is slightly different. It will need to be remeasured to the new intrinsic value each year - this will be very rare.

Accounting Treatment

Dr Expense (or asset)
Cr Equity

The problem is we only do the above double entry once the item has ‘vested’ (i.e. satisfied all conditions to be met to make the share payable)

For example, if shares are issued for the purchase of a building, and the building is available to use immediately, then it has vested immediately and you would Dr PPE Cr Equity with the FV of the asset acquired.

If, however, share options are issued, but only once employees have stayed in the job for say 3 years, then this means they do not fully vest for 3 years. What you do here, is recognise the expense as it vests - over what we call the ‘vesting period’. So, in this example, you would calculate the full cost of the options at grant date and in the first year Dr Expense Cr Equity with 1/3 of that total.

Precise Measurement

You take the best available estimate at the time of the number of equity instruments expected to vest at the end.

The value used for the share options throughout the vesting period remains at the GRANT DATE value (with the exception of “intrinsic value” method above).

Illustration

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

Solution

1. Step 1:

   Decide if this is a cash or equity settled SBP - share options are equity settled (so Dr Expense Cr Equity).

2. Step 2:

   Decide whether to value directly or indirectly - these are for employees so indirectly.

3. Step 3:

   Calculate how many employees (and their share options each) are expected to be issued at the end of the vesting period.

Year 1:  
430 Employees expected to be left at end (500-70) x 100 (share options each) x $10 (FV @ GRANT date) x 1/3 (time through vesting period) = 143,300

Year 2:
 440 x 100 x $10 x 2/3 - 143,300 = 150,000

Year 3:
445 x 100 x $10 x 3/3 - 293,300 = 151,700

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

Year 1: Dr Expense 143,300 Cr Equity 143,300
Year 2: Dr Expense 150,000 Cr Equity 150,000
Year 3: Dr Expense 151,700 Cr Equity 151,700

Notice that if you add these up it comes to 445,000.

This is exactly our final liability (445 x 100 x $10 x 3/3) - it’s just we’ve spread it over the 3 years vesting period.