IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Chapter 34/ Share-Based Payments (IFRS 2)

5.2 Thus the cumulative expe nse recogni zed at the rep orting date is the fair va lue on the rep ort ing da te times the amount of the vesting period that has lapsed. An y change in the fair va lue bet ween the ves ting date and the settleme nt date is recogni zed immediately.

Case Study 3

An entity issues share appreciation rights on July I. 20X5, and the entity's year-end is June 30, 20X6. The rights vest on June 30, 20X9. The value of the share appreciation rights was $1 million at the beginning of the year. The fair value on June 30, 20X6, had increased by $600,000. Required What is the expense for share appreciation rights for the year ended June 30, 20X6? Solution The expense for the year would increase to $400,000 from $250,000 per year (250 + 600 / 4), leaving the remaining balance of $1.2 million to be recognized over the remaining three-year period. If the share ap– preciation rights were to be settled in 2X II, any change in the fair value between 20X9 and 2X I I would be shown in the financial statements immediately. 5.3 Unlike equity-settled tran sactions, any redu cti on in the va lue of the award is recognized im– medi atel y, even if the award is not ex e rcised. The payment of a cas h-settled share- based tran sac– tion can occur after the servi ces are rendered. 6. TRANSACTIONS THAT CAN BE SETTLED FOR SHARES OR CASH 6.1 Some sha re-based paym ent tran sact ions allow the ent ity or the employee the choice as to whe ther to settle the tran sacti on in cas h or by issuin g equity ins trume nts. An employee may have the right to choose be tween a payment equal to the market price of the shares o r be g ive n sha res subj ect to certain cond itions-for example, not being able to sell them for a period of time. Th e accounting for this type of instrument depends on which part y has the cho ice of settleme nt meth od and the ex tent to which the enti ty has incu rred a liability. 6.2 If the employee has the right to choose the settleme nt meth od, the entity is deem ed to have issued a compound fin anci al ins trument (i.e., it has issued an instrument with a debt element-the ca sh component-and an equity eleme nt-whe re the employee has the right to receiv e equity instruments). 6.3 If the fair va lue of the goods or services received can be measured directly and easily, the eq– uit y element is determined by taking the fair va lue of the goods or se rvices less the fair value of the debt element of thi s instrument. T he debt eleme nt is ess entially the cash pa yment that will occur. If the fair va lue of the goods or se rvices is measured by referen ce to the fa ir valu e of the equity in– strume nts given, the who le of the compo und instrument sho uld be fai r valued. The equity elemen t becomes the d ifference between the fair va lue of the equity instrumen ts granted less the fair val ue of the debt component. An entity has purchased property. plant, and equipment for $10 million. The supplier can choose how the purchase price can be settled. The choices are the receipt of I million shares of the entity in one year's time or the receipt of a cash payment in six months' time equivalent to the market value of 800,000 of the entity's shares. It is estimated that the fair value of the first alternative would be $ 11 mil– lion and the fair value of the second alternative would be $9 million. Required Explain how this transaction is accounted for. Solution When the entity receives the property, plant, and equipment, it should record a liability of $9 million and an increase in equity of $ 1 million (the difference between the value of the property, plant, and equip– ment and the fair value of the liability). Case Study 4