Companies use employee share plans (or employee stock ownership plans as they are also called in some jurisdictions) to incentivise key staff members and align their objectives with those of the shareholders of the company. These plans must often be accounted for as share-based payments in terms of IFRS 2 Share-based Payment (‘IFRS 2’). In more complex groups, these plans are administered by entities other than the ones that employ the key staff members (for example, an operating subsidiary employs its own managing director, but the awards are issued by the parent company or a share incentive trust). This article briefly considers some aspects of the accounting treatment of share-based payments with employees.
Accounting for share-based payments
In the context of employment, an arrangement is a share-based payment arrangement if there is an agreement between the employer entity, a group entity or the employer’s shareholder and an employee in terms of which that employee receives either
- equity instruments (which include shares and share options) of the employer or a group entity in relation to the employer, or
- cash or another asset that is based on the price or value of these equity instruments.
The employer entity that receives services from the employee (the receiving entity) and the group entity that is liable to settle the arrangement with the employee (the settling entity), which is not always the receiving entity, must both account for this arrangement as a share-based payment arrangement.
Classification of share-based payments
Share-based payment arrangements are classified as equity-settled or cash-settled. The accounting treatment and the impact on profit or loss differ significantly between these categories. An equity-settled transaction is measured at the grant date value of the awards (spread over the vesting period). A cash-settled transaction is also recognised over the vesting period. It is however measured at and re-measured to its fair value in profit or loss at each reporting date until settled.
Single entity arrangements
If the employer entity itself is liable to settle the arrangement with the employee, it accounts for an equity-settled share-based payment if the consideration paid to the employee is in the form of the entity’s own equity instruments (including shares or share options). If the arrangement is settled in cash or some other asset (including shares of another entity), this is likely to be a cash-settled transaction.
A receiving entity that is not liable to settle the arrangement generally accounts for the arrangement as equity-settled in its separate financial statements. The settling entity’s classification of the arrangement is based on the same considerations as those for a single entity arrangement. From a group perspective in the consolidated financial statements, many of these arrangements are single entity arrangements.
Entities often overlook or do not fully appreciate the intricacies of the analysis required to classify share-based payments. A detailed examination of the terms of the arrangement and instruments must be done to determine the appropriate classification. An arrangement that, at face value, appears to involve settlement in shares or share options may be a cash-settled share-based payment if, for example, the instruments are redeemable or their terms allow the employees (as holders of the instruments) to require redemption or cash settlement of the instruments. If the arrangement is implemented with a stated policy or intention to redeem such instruments despite this not being part of their terms, or such a practice of redemption develops over time, the resulting constructive obligation causes the arrangement to be considered cash-settled.