P2:ch11 - Share-Based Payments

Front 1

Define share-based payments

Back 1

Share-based payment occurs when an entity buys goods or services from other parties (such as employees or suppliers), and settles the amounts payable by issuing shares or share options to them.
• Part of the remuneration of directors is often in the form of shares or options. Employees may also be granted share options.
• Many new 'e-businesses' do not expect to be profitable in their early years, so try to attract quality staff by offering to employees share schemes rather than high cash salaries.

Front 2

What are the two types of share-based payments?

Back 2

• an equity-settled share-based payment transaction, the entity receives goods or services in exchange for equity instruments of the entity (e.g. shares or share options)
• a cash-settled share-based payment transaction, the entity acquires goods or services in exchange for amounts of cash measured by reference to the entity's share price.

Front 3

What are the basic principles of a share-based payment?

Back 3

When an entity receives goods or services as a result of a share-based payment transaction, it recognises either an expense or an asset.
• If the goods or services are received in exchange for equity (e.g., for share options), the entity recognises an increase in equity.
- The double entry is: Dr Expense/Asset; Cr Equity (normally a special reserve).
• If the goods or services are received or acquired in a cash-settled share-based payment transaction, the entity recognises a liability.
- The double entry is: Dr Expense/Asset; Cr Liability.

Front 4

How is fair value determine for share-based payments?

Back 4

If the value of the goods/services can be measured reliably and are not associated with employees or others providing a similar service, measure at the fair value of the goods/services at the date they were received.

For all other scenarios, measure at the value at the grant date.

Front 5

Define grant date

Back 5

The grant date is the date at which the entity and another party agree to the arrangement.

Front 6

What are the different conditions attached to share-based payments?

Back 6

• Vesting conditions - conditions that determine whether the entity receives the services that entitle the counterparty (i.e. scheme members) to receive cash, other assets or equity instruments of the entity , under a share-based payment arrangement.
• Service conditions - requires those who are scheme members to complete a specified period of service, say, three years. This is normally referred to as the vesting period i.e. the period over which those who are in the scheme must provide work and service to be eligible to exercise share options at a later date.
• Market performance conditions - one that is related to the market price of the entity's equity instruments.
• Non-market performance conditions - are taken into consideration when estimating the number of share options that will vest at a later date. Examples of non-market performance conditions include EPS or profit targets