Preface

Accurate accounting for equity-settled share-based payment transactions ensures that the grant-date fair value of equity instruments like shares and options is recognized progressively over the vesting period in alignment with employee service periods.

Key considerations in accounting for share-based payment expenses include distinguishing between immediate vesting and graded vesting scenarios, while adhering to the modified grant-date method for consistent expense recognition.

By applying guidelines for variable vesting periods and handling graded vesting, businesses ensure transparent financial reporting of equity-settled share-based payments, reflecting the true cost of employee services.

Recognition

Services Received:

When an employee receives equity-settled share-based payments, the services provided by the employee are recognized as they are received.

Expense vs. Asset:

The cost of these services is generally recognized as an expense unless the services qualify for recognition as an asset. The corresponding credit is made to equity. Hence, the term “share-based payment cost” is commonly used to describe this expense. In practice, unless otherwise specified, this cost is typically referred to as a “share-based payment expense” because examples often illustrate employee services that do not qualify for asset recognition.

Immediate Vesting:

If the employee does not need to satisfy any vesting conditions to be entitled to the granted equity instruments, these instruments vest immediately. In this case, it is presumed that the services provided as consideration for these instruments have already been received. Therefore, the grant-date fair value of these instruments is recognized immediately with a corresponding credit to equity.

Vesting Period:

If the equity instruments vest only after the employee completes a period of service, it is presumed that the services will be provided in the future. The entity accounts for these services as they are received during the vesting period.

Cost Recognition

The costs are recognized on a straight-line basis over the vesting period using the modified grant-date method. This means the expense is spread evenly across the vesting period.

1. Straight-Line Basis: The total expense is divided equally across the vesting period, ensuring that the expense is recognized progressively as the employee renders the services.
2. Variable Vesting Periods: In cases where the vesting period is variable, the recognition of expenses follows specific guidelines to account for this variability. For example, if the performance period is shorter than the service period, different recognition approaches are applied to ensure accurate accounting.
3. Graded Vesting: One grant may contain multiple vesting periods, known as graded vesting. This occurs when different portions of the grant vest at different times. Each portion is treated separately for the purpose of expense recognition.

Explanation

Equity-settled share-based payments involve granting employees equity instruments such as shares or share options. These transactions recognize the value of services employees provide in exchange for equity instruments. The main goal is to reflect the cost of these services accurately over the period during which the employees earn the right to these instruments.

• Immediate Recognition: When no further service is required from the employee, the entire cost is recognized immediately.
• Over Time Recognition: When further service is required, the cost is spread over the vesting period, aligning the recognition of expense with the employee’s service period.

This approach ensures that the financial statements reflect the true cost of employee services in relation to share-based compensation, maintaining consistency and transparency in financial reporting.

Our CFO services provide strategic insights into managing share-based payment accounting, ensuring compliance with IFRS standards and accurate cost allocation across vesting periods.