- 15 Marks
Question
a. Share-based payment occurs when an entity purchases good or services from another party such as, a supplier or employee and rather than pay directly in cash, the transactions are settled by issuing shares, share options or future cash amount linked to the value of the shares.
Before the publication of IFRS 2 – Share-Based Payments, there appeared to be an anomaly to the extent that, if a company pays its employee in cash, an expense is recognised in the statement of profit or loss but if the payment is in share options, no expense is recognised.
Required:
Discuss briefly THREE types of share-based payment transactions recognised under IFRS 2.
(3 Marks)
b. Adimula Plc is a company established by a group of Information Technology (IT) experts based in Lagos with offices in various computer villages across the six geo-political zones of the country. The company has a special development programme for its young employees, which involves sending them to Japan on regular basis to acquire knowledge in Artificial Intelligence (AI) as well as internet of things (IOT).
However, because of shortage of I.T experts with specialisation in AI in the country, the multinational companies operating in Nigeria frequently poaches the staff of Adimula Plc, after they had been trained by the company.
The board of directors of Adimula Plc decided to introduce a staff incentive scheme to prevent losing employee to the multinational companies.
In view of this, Adimula Plc granted 100 cash share appreciation rights (SARs) to each of its 500 employees. Each grant is conditional upon the employee working for Adimula Plc over the next three (3) years.
Further information available about the SARs are as follows;
| Year | Actual employees leaving the company in the year | Estimate of further employees that may leave in future | Number of employees whose interest is expected to vest and actually vested |
|---|---|---|---|
| Dec. 31, 2019 | 35 | 60 | 405 |
| Dec. 31, 2020 | 40 | 25 | 400 |
| Dec. 31, 2021 | 22 | — | 403 |
Adimula Plc estimates the fair value of SARs at the end of each year in which liability exist as shown below:
| Year | Fair value |
|---|---|
| December 31, 2019 | 15 |
| December 31, 2020 | 18 |
| December 31, 2021 | 20 |
Required:
Calculate the expense and liability that will be shown in the financial statements of Adimula Plc for all the relevant years.
(12 Marks)
Answer
(a) Under IFRS 2 – Share-Based Payment, there are three main types of share-based payment transactions that an entity may recognise. These are:
i. Equity-settled share-based payments This is the most common form of share-based payment.
Definition: The entity receives goods or services in exchange for equity instruments (such as shares or share options).
Recognition: An expense is recognised in the statement of profit or loss and a corresponding increase is made in equity.
Measurement: The fair value of the equity instruments granted is measured at the grant date and is not remeasured thereafter.
Example: An employee is granted share options as part of a compensation package.
ii. Cash-settled share-based payments
Definition: The entity receives goods or services and settles the obligation by paying a cash amount based on the price or value of its shares or other equity instruments.
Recognition: A liability is recognised (instead of equity), along with an expense.
Measurement: The liability is measured at the fair value at each reporting date until settlement, and revalued through profit or loss.
Example: A supplier is promised a cash bonus equivalent to the value of a fixed number of shares after providing services.
iii. Share-Based Payments with cash or equity alternatives
Definition: The entity or the counterparty has a choice of whether the transaction is settled in cash or equity instruments.
Treatment: The accounting depends on who has the choice:
- If the entity has the choice: It must assess whether there is a present obligation to settle in cash; and
- If the counterparty has the choice: The transaction is treated as a compound financial instrument, with separate components for the equity and cash-settled parts.
Example: An employee can choose to receive a bonus in the form of either cash or shares.
These three transaction types ensure that all forms of share-based compensation are accounted for consistently, resolving the anomaly that existed before IFRS 2 was issued.
(b) Calculation of expense and liability that will be shown in the financial statements of Adimula Plc for all the relevant years.
| Dec. 31 2019 ₦ | Dec. 31 2020 ₦ | Dec. 31 2021 ₦ | |
|---|---|---|---|
| Number of employees whose interest is expected to vest (i) | 405 | 400 | 403 |
| Number of rights (ii) | 100 | 100 | 100 |
| Fair value of rights (iii) | 15 | 18 | 20 |
| Total expected expense (i x ii x iii) | 607,500 | 720,000 | 806,000 |
| Fraction of vesting period | 1/3 | 2/3 | 3/3 |
| Liability at year end | 202,500 (607,500 x 1/3) | 480,000 (720,000 x 2/3) | 806,000 (806,000 x 3/3) |
| Liability at the beginning | — | (202,500) | (480,000) |
| Expenses charged to P or L | ₦202,500 | ₦277,500 | ₦326,000 |
- Tags: Cash SARs, Expense Calculation, Liability, Share-Based Payments, Vesting Conditions
- Level: Level 3
- Topic: Employee Benefits (IAS 19), Share-Based Payments (IFRS 2)
- Series: MAY 2025
- Uploader: Samuel Duah