Share-based Payment with a Choice of Settlement a Concept as per IFRS 2 which STATES that either the Entity or Counter-party (INCLUDING Employees) has the right 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‘ be applied. | [Entity has Present Obligation to Settle in Cash] – Account for as Cash Settled SBP. [Entity has No Present Obligation to Settle in Cash] – Account for 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 x 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 Cash-Settled SBP, the liability is Re-measured at each reporting date and on the settlement date to its fair value (FV). | Apply 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 as ‘Cash Settled SBP‘ The liability is Re-Measured at each reporting date and on settlement date to its fair value (FV). | Account for 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). |
Chartered Accountant – ICAP
Bachelor of Accounting (Honours) – AeU, Malaysia