IFRS 2 Share Based Payment with a Choice of Settlement EXPLAINS that either the the Entity or the Counter-party (including employees) has the right to choose between equity-settled SBP or cash-settled SBP.
Table of Contents
| Counter-party has the choice? | Entity has the choice? |
|---|---|
| IFRS 2 regards the transaction as a ‘Compound Financial Instrument’ that includes both a liability and an equity component. ‘Split Accounting’ will be applied. | [Entity has Present Obligation to Settle in Cash] – Account for the transaction as Cash-Settled SBP. [Entity has No Present Obligation to Settle in Cash] – Account for the transaction as Equity-Settled SBP. |
1. Counter-party has the Choice
| Fair Value of Goods/Services is Reliably Measured |
|---|
| FV of Goods/Services Less: FV of Liability Component Under Cash Alternative = Equity Component/(Expense) |
| Fair Value of Goods/Services is Not Reliably Measured |
|---|
| FV of Compound Instrument as a Whole [ No. of equity instrument in equity alternative ^ FV of equity instrument at the grant date] Less: FV of Liability Component Under Cash Alternative = Equity Component (Residual amount) |
1.1 Subsequent Accounting
[Account for the Two Components separately.]
| Liability Component | Equity Component |
|---|---|
| Apply the requirements for Cash-Settled SBP, the liability is remeasured at each reporting date and on the settlement date to its fair value (FV). | Apply the requirements for Equity-Settled SBP, the value of the equity component is not Re-Measured subsequently. |
1.2 Actual Settlement
| Cash Settlement |
|---|
| If the Counter-Party opts ‘Cash Settlement‘, then it settles the liability. Debit: Liability Credit: Cash Any Equity Component previously RECOGNIZED remains in ‘Equity’. Debit: SBPR Credit: Equity [Note: SBPR (Share-based Payment Reserve)] |
| Equity Settlement |
|---|
| If the Counter-Party opts ‘Equity Settlement‘, then the liability is transferred to equity as consideration for issuing Equity Instruments. Debit: Liability Credit: Share Capital + Share Premium Any Equity Component previously RECOGNIZED remains in ‘Equity’. Debit: SBPR Credit: Equity |
2. Entity has the Choice
Whether the Entity has a present obligation to settle in cash?
| Yes | No |
|---|---|
| Account for the transaction as ‘Cash Settled SBP‘ The liability is Re-Measured at each reporting date and on settlement date to its fair value (FV). | Account for the transaction as ‘Equity Settled SBP‘ The value of Equity Component is NOT Re-Measured subsequently. |
Obligation to SETTLE in cash arise where:
- Entity is prohibited from issuing shares; OR
- Entity has stated policy/past practice of paying cash rather than shares.
2.1 Actual Settlement
| Cash Settlement – Pay cash against the liability. | Cash Settlement – Treat the settlement as Repurchase of Equity Instrument by a deduction against equity. |
| Equity Settlement – Transfer liability to equity as consideration for issuing the ‘Equity Instruments’. | Equity Settlement – Issue shares against SBPR. |
2.2 Repurchase of Equity
| Repurchase Price > FV of Equity Instrument Repurchased on Settlement Date | Repurchase Price < FV of Equity Instrument Repurchased on Settlement Date |
|---|---|
| Payment in excess of FV of ‘Equity Instrument’ on settlement date will be recognized as an expense in P&L (Irrespective of the amount of SBPR). [Any balancing effect will be adjusted in equity.] | No effect will be recognized in P&L. [Balancing effect will be adjusted in equity.] – Irrespective of the amount of SBPR. |
Synopsis
IFRS 2 Share Based Payment with a Choice of Settlement presented by International Financial Reporting Standard (IFRS 2) PUBLISHED in February 2004 requires an entity to recognize SBP transactions (such as granted shares, share options, or share appreciation rights) in its Financial Statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)