Accounting for Cash Settled Share Based Payment Transactions with Employees

Preface

Understanding cash-settled share-based payments is critical for companies that use employee compensation accounting based on the fair value measurement of liabilities tied to vesting conditions. This blog explores the remeasurement of liabilities in share-based payment transactions, ensuring compliance with standards while accurately reflecting the grant-date fair value in financial statements. Companies must carefully manage profit or loss recognition for cash-settled share-based payments, particularly when factoring in service and performance conditions that influence liability measurement.

“The proper accounting for employee services tied to non-vesting conditions can significantly impact the capitalization of costs, such as in development project accounting or inventory cost allocation. Remeasurement adjustments during and after the vesting period ensure that the cumulative net cost of the transaction equals the settlement payment, maintaining accurate share-based payment transaction reporting. Businesses can optimize their financial strategy by understanding how the capitalization of costs for intangible asset recognition and inventory are affected by remeasurements of liabilities in cash-settled share-based payments.

 

Initial Measurement:

Cash-settled share-based payments result in the recognition of a liability, which represents an obligation to make a payment in cash or other assets based on the price of the underlying equity instrument (e.g., share price). Employee services received in a cash-settled share-based payment are measured indirectly at the fair value of the liability at the grant date. The initial measurement of the liability is based on the fair value of the underlying instruments, taking into account the extent to which services have been rendered to date.

An entity measures the fair value of a cash-settled liability by considering only market and non-vesting conditions. Service and non-market performance conditions affect the measurement of the liability by adjusting the number of rights to receive cash based on the best estimate of the service and non-market performance conditions that are expected to be satisfied. The accounting for the effects of vesting conditions on cash-settled share-based payment transactions follows the approach used for equity-settled share-based payments.

The grant-date fair value of the liability is recognized over the vesting period. If no services are required, the amount is recognized immediately. The grant-date fair value of the liability is capitalized if the services received qualify for asset recognition.

Remeasurements:

At each reporting date, and ultimately at the settlement date, the fair value of the recognized liability is remeasured. Remeasurement applies to the recognized portion of the liability through to the vesting date. The full amount is remeasured from the vesting date to the settlement date. The cumulative net cost, including amounts recognized in profit or loss, that will ultimately be recognized in respect of the transaction will be equal to the amount paid to settle the liability. This differs from equity-settled transactions, where there is no adjustment of the share-based payment cost for failure to satisfy a market or non-vesting condition.

Remeasurements during the vesting period are recognized immediately to the extent that they relate to past services, and recognition is spread over the remaining vesting period to the extent that they relate to future services. In the period of the remeasurement, there is a catch-up adjustment for prior periods to ensure that the recognized liability at each reporting date equals a defined proportion of the total fair value of the liability. The recognized proportion is generally calculated by dividing the period for which services have been provided as of the reporting date by the total vesting period. Remeasurements are recognized in profit or loss. Remeasurements after the vesting period are recognized immediately in profit or loss.

Capitalization of the Services Received:

Only the grant-date fair value of the arrangement may qualify for capitalization under other standards. Accordingly, the remeasurement of the liability is recognized in profit or loss even if the related share-based payment cost has been capitalized. Failure to satisfy a market or non-vesting condition will trigger a remeasurement of the liability to zero through profit or loss and will not impact any amounts capitalized for services received.

Common examples in which services received qualify for capitalization include employees working on a development project that qualifies for recognition as an intangible asset and employee services forming part of the cost of inventory.

No Service Period Required

If there is no service period required, the grant-date fair value is recognized immediately. Nevertheless, remeasurement is required until the settlement date, and remeasurements are recognized in full in profit or loss because there is no vesting period.

 

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Tahir Ijaz