400 / 488
Chapter
34/
Share-Based Payments (IFRS 2)
389
Note, however, that if the share options were
to
be cash settled, the liability would be recorded as a euro–
denominated liability that would have to be remeasured at every balance sheet date. Any changes in the
fair value of this liability would be recognized in profit and loss.
Case Study 8
Facts
Playful has ordered an amount of inventory from a supplier on July I, 20X5 . The supplier has said that
the goods will be shipped and delivered on September I, 20X5 . The goods were actually received on
Septemb er 30, 20X5. The supplier has agreed to accept 2,000 shares in Playfu l as payment for the in–
ventory. Playful has received an invoice for $50,000. This invoice is only for accounting purposes as the
fair value of the goods is difficult to determine because of the highly specia lized nature of the inventory.
The shares vest immediately in the supplier as soon as they are received.
The directors of the entity are unsure as to the effect that a moveme nt in the entity' s share price will have
on equity-settled share-based payments.
Prior
to
the applicable date in IFRS 2, Playful had granted share options to each of its directors. On
January I, 20X6, Playful decided to reprice the options at a new exercise price.
Playful has also granted share appreciation rights to the members of a middle management committee.
The share appreciation rights provide these employees with the right to rece ive cash equal to the appre–
ciation in the entity's share price since the grant date, which was January I, 20X6 . All of the right s vest
on December 31, 20X? , and they can be exerc ised during 20X8.
It
is anticipated that 5% of the midd le
management personnel will leave during the period to December 3 1, 20X?
Required
The entity wishes to know what the implications of the above issuance of shares and share options are
for the financial statements of Playful and its subsidiary. Ignore the deferre d taxat ion effects.
Solution
Under IFRS 2, the date at which the value of the shares is measured will be the date at which Playful
obtains the goods; therefore, this date will be September 30, 20X5 . Because the fair value of the good s
cannot be determined reliably and the invoice value of $50,000 is purely cosmetic, the fair value of the
shares should be used for accounting purposes. The market price of the shares on September 30 times the
shares issued will give the amount that should be expensed and treated as the asse ts' value.
A change in the entity 's share price has no effect on the valuation of equity-settled share-based pay–
ments. Obviously, in the case of the inventory, its value will be determined by the market price of the
share in this instance. Normally the amount recognized as the remunerat ion expen se will be determined
at the grant date and is based on the number of shares that will eventually vest. However, for cash-settled
share-based payment , these liabilities are remeasured at every balance sheet date. Therefore, a change in
the price of the share of an entity can affect the liability that is recog nized.
Playful is not required to apply IFRS 2 to the original grant of share optio ns as the instruments were
granted prior to the applicable date for IFRS 2. However, it is required to apply IFRS 2 to the modifica–
tion as the repricing occurred after January I, 20X5. The total compensation expe nse will be calculated
by initially calculating the incremental value of the repriced award. This is the difference between the
fair value of the repriced award and the fair value of the original award. Thi s incremental value of each
share option will be times the number of share options that are expected to vest and would give a total
compensation expense. This expense will be spread over the vesting period and will also take into ac–
count any revised estimates of directors who may be expected to leave.
At the grant date, Playful will need to estimate the fair value of each share appreciat ion right. A calcu la–
tion of the expense and the liability will be carried out as of December 3 1, 20X6 . This will be the num–
ber of employees who will be eligible for the share appreciation rights times the number of share appre–
ciation rights that they would each receive times the fair value times one year divided by two years, as
the share appreciation rights vest ove r the two-year period. A similar calculation would be carried out in
the year to December 3 1, 20X?, where the expense for 20X? is calculated as the difference betwee n the
fair value of the liability at December 3 I, 20X6, and December 3 1, 20X? If one assumes that all of the
share appreciation rights will be exercised on December 31, 20X8, then the value of the cash payment to
the employees will be recalculated using the fair value of the share appreciation rights at the date on
which they are exercised, that is, Decembe r 3 1, 20X8. Any increase in the anticipated liabilit y at De–
cember 3 1, 20X? , will be expensed also.