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Case Study 5
Wiley IFRS: Practical Implementation Guide and Workbook
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) .