IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

386

Wiley IFRS: Practical Implementation Guide and Workbook

Case Study 5

An entity grants one of its employees the right to choose either I million shares or to receive a cash payment equal to 750,000 shares. At the grant date, the value of the market price of the share is $6. The entity estimates that the fair value of the share alternative is $5 per share. Required Explain how this transaction is accounted for. Solution The fair value of the equity alternative will be I million times $5, or $5 million. The value of the cash alternative will be $6 times 750,000 shares, or $4.5 million. Therefore, the fair value of the equity com– ponent of the compound financial instrument is deemed to be the difference between these two values, or $500,000. At the settlement date, the liability element of the debt component should be measured at fair value. The method of settlement chosen by the employee will then determine the final accounting. 6.3 Wh ere the right to equity settlements is more valuable than the right to a cash settlement, the incremental fair valu e is accounted for as an equity-settled transact ion. 6.4 Where the entity chooses the method of settlement, it should decide whether an obligation to settle in cash has been created or not. Normally the tran saction will be treated as a cash-settled tran sacti on if the entity has a past practice or a stated policy of settling in cash or if the choice of settlement in equ ity instruments has no commercial substance or if the equity instruments to be is– sued are redeemable. If none of the other conditions is apparent, the entity acco unts for the tran s– action as an equity-settled transact ion . If the transaction is accounted for as an equity-settled tran s– action, the acco unting when the settlement occ urs depends on whi ch alterna tive has the greater value. Practical Insight Unil ever adopted the US Stand ard on share-based payment in its financia l statements ending December 31 ,2003 . The effect is to reduce the operating profit for the yea r by € 116 million and the prio r yea r by €99 million . Unileve r intends to use IFRS 2 in the future. 6.5 IFRIC 11, IFRS 2, Group and Treasury Share Transactions IFRIC II , which was issued in November 2006 and was made effective for annual periods beginning on or after March I , 2007, deals with the following two issues : I. Whether the follow ing transactions should be acco unted for as equity-se ttled or as cas h– settled under the requ irement s of IFRS 2: a. An entity grants to its employees rights to equity instrument s of the entity, and either chooses or is required to buy equity instruments from another party, to satisfy its obligations to its employee s; and b. An entity's employee s are granted right s to equity instrument s of the entity, either by the entity itself or by its share holders, and the shareholders of the entity provide the equity instruments needed . 2. Share-based payment arra ngements that involve two or more entities within the same group. For instance, when employees of a subs idiary are granted rights to equity instruments of the parent as consideration for the services pro vided to the subsidiary . According to the conse nsus in IFRIC II a. Share-based payment transaction s in which an entity receives services as con sidera– tion for its own equity instruments shall be accounted for as "equity-settled." Thi s will apply regardl ess of whether the entity chooses or is requ ired to buy those equ ity instrument s from another part y to satisfy its obligations to its employees under the share-based payment arrangement whether the instrument is granted or settled by the entity itself or by its shareholders(s) .