Intermediate Accounting — Share-Based Payment: Equity-Settled and Cash-Settled

Companies reward directors and employees with shares or share-price-linked awards instead of cash. Even though no cash leaves, the company has received services in return, so there is an expense. K-IFRS 1102 Share-based Payment (IFRS 2) measures awards differently depending on how they are settled: equity-settled or cash-settled. The effect on diluted earnings per share is covered in chapter 17.

1. Basic terms

• Grant date: the date the company and the employee agree the terms of the award.
• Vesting conditions: conditions that must be met for the right to the award to become unconditional. They include service conditions, requiring a period of service, and performance conditions, requiring targets to be met. Performance conditions are further divided into market conditions, related to the share price, and non-market conditions.
• Vesting period: the period over which the vesting conditions must be satisfied.

2. Equity-settled: fixed at grant-date fair value

Equity-settled awards are measured at the fair value of the equity instruments at grant date and are not remeasured when the share price later changes. An expense and equity (share options) are recognized over the vesting period.

A. Worked example

At the beginning of 20X1 company KK granted 100 share options each to 10 executives, vesting after three years of service. The grant-date fair value is ₩20,000 per option. At the end of 20X1 the company expected two executives to leave; at the end of 20X2 it revised this to one; and in fact one left by the end of 20X3.

When the estimate of the number vesting changes, the cumulative figure catches up; periods already recognized are not rewritten. Even if the share price rises and the option’s fair value becomes ₩30,000, the expense does not change.

B. Exercise and lapse

Suppose all nine executives exercise in 20X4, paying the exercise price of ₩15,000 per share (par ₩5,000) and receiving 900 new shares. Cash of ₩13.5 million plus share options of ₩18 million, ₩31.5 million in total, become share capital of ₩4.5 million and share premium of ₩27 million. If vested options lapse unexercised, the expense already recognized is not reversed, though the share options may be transferred to another component of equity.

C. The special nature of market conditions

With a market condition such as “vests if the share price doubles within three years”, the probability of meeting it is reflected in the grant-date fair value. So if the market condition is later not met but the other vesting condition (service) is, the expense is not reversed. Non-market performance conditions (such as a revenue target) are reflected in the estimate of the number vesting, and the expense is reversed if they are not met.

3. Cash-settled: remeasured at each reporting date

Awards that pay the increase in share price in cash, such as share appreciation rights (SARs), create a liability because the company must pay cash. The liability is remeasured at fair value at each reporting date and at settlement, with changes recognized in profit or loss.

Had KK granted SARs instead of share options on the same terms, with a SAR fair value of ₩24,000 at the end of 20X1 the liability would be $8 \times 100 \times 2.4 \times 1/3 = 640$ (₩10,000), i.e. ₩6.4 million. If fair value fell to ₩18,000 at the end of 20X2, the liability would be $9 \times 100 \times 1.8 \times 2/3 = 1{,}080$, i.e. ₩10.8 million, and the expense for the year ₩4.4 million.

Check your understanding

At the beginning of 20X1 company LL granted 20 share options each to 50 employees, vesting after two years of service; grant-date fair value is ₩50,000 per option. At the end of 20X1 it expected 45 to vest; at the end of 20X2, 42 actually vested. What is the share-based payment expense for 20X1 and 20X2? If the share price at the end of 20X2 is 30% above the grant-date price, does the expense change?

Cumulative expense at the end of 20X1 is $45 \times 20 \times 5 \times 1/2 = 2{,}250$ (₩10,000), so the expense is ₩22.5 million. Cumulative expense at the end of 20X2 is $42 \times 20 \times 5 = 4{,}200$, so the expense is $4{,}200 - 2{,}250 = 1{,}950$, i.e. ₩19.5 million. Equity-settled awards are fixed at grant-date fair value, so the rise in share price does not change the expense.

References

• Korea Accounting Standards Board, K-IFRS 1102 Share-based Payment
• Korean Commercial Act, Article 340-2 (stock options) — National Law Information Center
• Donald Kieso, Jerry Weygandt and Terry Warfield, Intermediate Accounting: IFRS Edition, ch. 16