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Topic: IFRS / HKFRS 2 Share-based payment

 Reference reading:

  1. https://www.rsm.global/insights/global-ifrs-news-and-updates/rsm-insight-common-issues-accounting-share-based-payments
  2. https://www.bdo.global/getmedia/94f19f0a-35b0-46d6-a922-01d576b5b737/IFRS-2-AAG_1.pdf
  3. Binomial options pricing model – Wikipedia

What is a share-based payment arrangement?

IFRS / HKFRS 2 Share Based Payment defines a share-based payment arrangement as an agreement between the entity (or another group entity or any shareholder of any group entity) and another party (including an employee) that entitles the other party to receive:

(a) cash or other assets of the entity for amounts that are based on the price (or value) of equity instruments (including shares or share options) of the entity or another group entity, or

(b) equity instruments (including shares or share options) of the entity or another group entity, provided the specified vesting conditions, if any, are met.

In the above definition (a), the transaction is a share-based payment if the entity receives goods from suppliers or services renders from employees by giving equity instruments (e.g. shares or share options) in the entity.

Classification of share-based payments:

 IFRS / HKFRS 2 classifies share-based payment transactions into three types:

(a) Equity-settled share-based payment transactions

(b) Cash-settled share-based payment transactions

(c) Share-based payment transactions with cash alternatives

‘Equity settled’ and ‘cash settled’ awards

The method of accounting depends on whether the share award is an equity-settled award, cash-settled award or an award where the employer or employee has the choice of settling the transaction in cash or equity.

Equity-settled share-based payment transactions include share options and long-term equity incentive plans where the overall outcome is that the employee receives shares. For these awards, fair value is to be measured at the date of grant and charged to the profit and loss over the vesting period. The vesting period refers to the period of time before shares in an employee plan are unconditionally owned by an employee.

Cash-settled share-based payments include phantom options and stock appreciation rights where the overall outcome is that the employee receives cash. For these awards, the expense is also spread over the vesting period and the carried liability is re-measured at each reporting date.

In this case, the company must make an adjustment to the expense recorded in each financial reporting period until the liability is finally settled. The adjustment takes into account: reassessment of the fair value of the award (rather than the intrinsic value of the award) and changes in the number of awards likely to vest.

If it is the employee’s choice to receive cash or shares, then the award is treated as a compound instrument with both an equity and liability element under IFRS 2.

Fair Value Measurement of share-based payments

The fair value for the purpose of determining the expense to be recorded for equity settled and cash settled awards made to employees would be determined according to option pricing models, such as Black-Scholes, binomial model or Monte Carlo simulation. IFRS / HKFRS 2 does not explicitly require the application of a specific option pricing model in the valuation of share-based payment. Financial statements preparers shall consider all the facts and circumstances in order to adopt the most appropriate valuation model in their fair value assessments.