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Share based payments (Measurement (The standard states that for equity…
Share based payments
Measurement
The standard states that for equity settled share based payment transactions given for employee services, the entity should measure the goods or services received (and the corresponding increase in equity) indirectly (ie by reference to the fair value of the equity instruments granted as it will not be possible to measure reliably the employee services received)
The instrument share or share options for example will be measured at the grant date and will not be re-measured even if the value of the equity instrument changes because entities do not recognise changes in the value of their own equity once the equity has been issues, where the services are rendered over time, i.e over a vesting period, the expense for consuming those services will be spread over that period
If the level of leavers varies from that expected, the entity will adjust for the actual number of leavers and may also revise its expectations of total leavers during the vesting period. The total expense will therefore end up being based on the actual number of options that vest
Usually there will be vesting conditions that have to be met for an employee to receive the awards. These may be limited to having to remain employed by the entity up to and including the vesting date, which is often the case with general all employee schemes
Vesting conditions may also include meeting target earnings over the vesting period, a target share price being achieved or some other measure which is designed to incentivise employees although these are often confined to schemes for directors or other managers who are more likely to be able to influence the outcome of such measures
The measurement of shares given for employee services will often be straightforward, particularly if the entity has listed shares. For share options and unlisted shares the standard specifies the methods of valuation which can be complex and may require expert advice from a valuer
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If an entity uses its equity instruments to purchase services from others eg a lawyer or accountant or to purchase an asset it is acceptable to use the fair value of the services or asset receive as long as a reliable valuation can be established which will often be the case
Where an entity enters into cash settled share based payment transactions it must measure the goods or services acquired and the liability incurred at the fair value of the liability
Until the liability is settled the entity will remeasure the fair value of the liability at the end of each reporting period and at the date of settlement with ay changes in fair value recognised in profit or loss for the period
For share based payment transactions where either the entity or the counterpart has the choice of whether the entity settles the transaction in cash (or other assets) or by using equity instruments, the accounting will depend on the overall substance of the arrangement and particularly whether any obligation has incurred
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It has become much more common for companies to pay employees, often part of their bonus or incentive arrangements in shares or share options
It is common practice to give these instruments at nil cost to employees or the legal minimum for such instruments
Until IFRS 2 Share Based Payment came into force, the difference between the fair or market value of the instrument and the amount, if any, paid by an employee was not accounted for by the entity, it was thus remuneration that was 'free' to the entity.
IFRS 2 requires an entity to reflect in its profit or loss and financial position the effects of share based payment transactions including expenses associated with the transactions in which share options are granted to employees
IFRS 2 covers transactions with employees that involve any payment in shares or other equity instruments or for cash where the amount payable is by reference to the value of such equity instruments. Or where goods or services are received and the terms of the arrangements give either the entity or the employee the choice of settling in equity or cash