IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 34 / Share-Based Payments (IFRS 2)

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b. In case of share-based payment arrangements involving equity instruments of the parents ( I) When the parent grants rights to the empl oyees of the subsidiary and the ar– rangement is accounted as "equity-settled," the subsidiary shall measure the services received by its employees in accordance with the requirements applicable to equity-settled share-based payments transactions, with a corresponding increase recognized in equity as a contribution from the parent. In case the grant of rights is conditional upon completion of service, the subsidiary shall measure the services received from the employee by reference to the fair value of the equity instruments at the date of original grant of the right ; (2) When the subsidiary grants rights to equity instruments of its parents to its employees, the subsidiary shall account for the transaction with its employees as "cash-settled." 7. DEFERRED TAX IMPLICATIONS 7.1 In some jurisdictions, a tax allowance is available for share-based transactions. It is unlikely that the amount of the tax deducti on will equal the amount charged to the income statement under the Standard. 7.2 Quite often, the tax deducti on is based on the option's intrinsic value, which is the difference between the market price and exercise price of the share option . It is likely that a deferred tax asset will arise that represents the difference between a tax base of the employee' s services received to date and the carrying amount, which will effectively normall y be zero. 7.3 A deferred tax asset will be recognized if the entit y has sufficient future taxable profits against which it can be offset. The anticipated future tax benefit should be allocated between the income statement and equity. 7.4 The recognition of the deferred tax asset should be dealt with on this basis: • If the estimated or actual tax deduction is less than or equal to the cumulative recognized ex– pense, the associated tax benefits are recognized in the income statement. • If the estima ted or actual tax deduction exceeds the cumulative recognized compen sation ex– pense, the excess tax benefits are recognized directly in a separate component of equity. An entity operates in a tax jurisdiction that receives a tax deduction equal to the intrinsic value of the share options at the date that they are exercised. The entity grants share options to its employees with a fair value of $1.6 million at the grant date. The tax juri sdiction gives a tax allowance for the intrinsic value of the options, which is $2 million. The tax rate applicable to the entity is 30%, and the share op– tions vest in two years' time. Required Explain how this transaction is accounted for. Solution A deferred tax asset would be recognized of $2 million times the 30% tax rate times one year divided by two years, which equals $300,000. The income statement would be credited with $1.6 million times 30% times 1/2, which is $240,000, and equity would be credited with $0.4 million times 30% times 112, which is $60,000. Because the intrinsic value of $2 million exceeds the expense that will be charged of $1.6 million, part of the deferred tax asset is recorded in equity. If in the future the expense exceed s the intrinsic value, the amount recorded in equity will be taken to income. Obviously the deferred tax will be recognized only if there are sufficient taxable profits predicted for the future against which it can be offset. 7.5 For cash-settled share-based payment transactions, the Standard requires the estimated tax de– duction to be based on the current share price. As a result, all tax benefits received or expected to be received are recognized in the income statement. Case Study 6

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