Preface

Accounting for share-based payment transactions where the entity has a choice of settlement requires assessing factors like intent to settle, past practices, and the ability to settle in equity instruments, ensuring compliance with IFRS standards.

Classification as cash-settled or equity-settled share-based payments depends on whether the entity has a present obligation to settle in cash, and reassessments are crucial for reflecting changes in intent or settlement practices.

Key considerations for accounting include managing fair value remeasurement, addressing higher or lower fair value settlements, and ensuring transparency in cases of equity reclassification or cash settlements.

Introduction

When the entity, rather than the employee, has the choice of settlement, the entity accounts for the transaction either as cash-settled or equity-settled in its entirety. This determination hinges on whether the entity has a present obligation to settle in cash. Key factors in this assessment include:

• Entity’s Intent: Whether the entity intends to settle in cash or equity instruments.
• Past Practice: Whether the entity has a history of settling in cash or equity instruments.
• Ability to Settle: Whether the entity is capable of settling in equity instruments.

If the entity explicitly states an intent to settle in equity, it does not have a present obligation to settle in cash unless it has a history of settling in cash or is unable to settle in equity instruments. A present obligation to settle in cash exists if the choice to settle in equity lacks commercial substance (e.g., legal prohibition against issuing shares).

If the entity explicitly states an intent to settle in cash, it has a present obligation to settle in cash regardless of past practices.

If the entity has no stated intent, the transaction is classified as cash-settled if there is a past practice of cash settlement or an inability to settle in equity instruments; otherwise, it is classified as equity-settled.

Settlement Accounting if Classified as Cash-Settled

If the transaction is classified as cash-settled, the entity follows the requirements for cash-settled share-based payments until settlement. This means the liability is remeasured to its fair value at each reporting date and ultimately at settlement date, with the cash payment settling the liability.

Settlement Accounting if Classified as Equity-Settled

Accounting can be more complex if the transaction is classified as equity-settled, but the entity chooses to settle in cash.

• Lower Fair Value at Settlement: If the entity elects to settle with the lower fair value (cash or equity), and it settles in cash, the cash payment is recognized as a deduction from equity, reflecting a repurchase of equity instruments. If it settles in equity as expected, no additional accounting entries are required, except for possibly transferring amounts within equity components.
• Higher Fair Value at Settlement: If the entity chooses the higher fair value at settlement, it recognizes an additional expense for the excess value given, representing the difference between the equity and cash alternatives at the settlement date.

Reassessment of Classification

Initially, the classification of a share-based payment as equity- or cash-settled is determined at the grant date. However, reassessment may be necessary if there are changes in circumstances before the settlement date, such as changes in the entity’s intent or settlement practices.

• Change in Intent: A change in the entity’s intent from equity to cash settlement should prompt a reassessment of the classification of outstanding transactions.
• Cash Settlement Instances: If the entity settles a few transactions in cash due to isolated circumstances (e.g., illness in an employee’s family), this may not change the classification to cash-settled for other transactions. However, if cash settlements become a common practice, a reclassification to cash-settled is likely warranted.

Initial Accounting as Equity-Settled

If transactions were initially accounted for as equity-settled, but the entity subsequently changes its intent to settle in cash, this change should lead to a reassessment. If the entity’s intent is to continue settling in equity, isolated cash settlements may not affect the classification. However, frequent cash settlements may establish a practice that necessitates reclassification to cash settled.

Initial Accounting as Cash-Settled

If the share-based payment was initially classified as cash-settled, changing this classification may be challenging because employees might expect continued cash settlement. Establishing a practice of equity settlement requires consistent settlement in equity and possibly overcoming liquidity challenges in the market for the entity’s equity instruments. Until such a practice is established, the entity should continue classifying these payments as cash settled.

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