Even the Australian Accounting Standards Board (AASB) recognises that accounting for ‘share-based payments’ (or, what everyone typically calls employee share plans, or equity incentives) is not easy.
The AASB commenced its latest news update on 21 July with the rhetorical question:
“Having difficulty accounting for certain types of share-based payment transactions under AASB 2 Share-based Payment? “
(a) the accounting for the effects of vesting conditions on the measurement of cash-settled share-based payments (SBPs);
(b) the classification of SBP transactions with a net-settlement feature for withholding tax obligations; and
(c) the accounting for a modification to the terms and conditions of a SBP that changes the classification of the transaction from cash-settled to equity-settled.
Accounting for cash-settled SBPs
Cash-settled SBPs are becoming more common both as an incentive instrument itself and in order to address the potential adverse tax implications on termination of employment (when will the Government ever fix this?). Examples of cash-settled SBPs are share appreciation rights, market share units, and rights and options that are settled in cash either compulsorily or at the choice of the employee (the latter may also be referred to as ‘indeterminate rights’).
The effect of these amendments to AASB2 is to make it clear that market and non-market vesting conditions should be taken into account when determining the fair value of the cash-settled SBP liability in the same way as they are for equity-settled SBPs.
|Market conditions (e.g. TSR)||Are taken into account when fair valuing|
|Non- market conditions (e.g. EPS)||Are not taken into account when fair valuing but reflected when calculating the number of SBPs expected to vest|
|Non- vesting conditions||Are taken into account when fair valuing|
Since the fair value of cash-settled SBPs is re-measured at the end of each reporting period and on settlement, changes in the fair value will be recognized in the P & L for the period.
This means, in summary, that the cumulative amount ultimately recognized for a cash-settled SBP is equal to the cash that is paid.
Accounting for net-settlement features
Tax laws in many countries may require the company to withhold an amount for an employee’s tax obligation in respect of a SBP and pay that amount, normally in cash, to the tax authority under their withholding regime. This tax payment obligation is typically met by the company withholding the number of equity instruments equal to the cash value of the employee’s tax obligation from the total number of equity instruments that otherwise would have been issued to the employee upon exercise (or vesting) of the SBP.
Notwithstanding that this component may appear to be cash-settled, the amendments to AASB2 provide that this type of obligation as described above shall be classified in its entirety as an equity-settled SBP if it would otherwise have been so classified.
The payments made by the company for the withholding tax are debited to equity.
This approach of treating the whole arrangement as equity-settled will not apply where:
- The company has no obligation under the relevant tax law to withhold amounts to cover the employee’s tax obligations in respect of the SBP, or
- The company withholds equity instruments in excess of the employee’s tax obligation under the SBP arrangement. In such cases, the excess equity instruments are accounted for as cash-settled SBPs if they are paid in cash.
Accounting for cash-settled changing to equity-settled SBPs
If the terms of a cash-settled SBP transaction are modified with the result that it becomes an equity-settled SBP, the transaction is accounted for as such from the date of the modification. Specifically:
- The fair value of the equity-settled SBP is measured at the modification date. The equity-settled SBP is recognised in equity on the modification date to the extent to which goods or services have been received.
- The liability for the cash-settled SBP as at the modification date is derecognised on that date.
- Any difference between the carrying amount of the liability derecognised and the amount of equity recognised on the modification date is recognised immediately in profit or loss.
When do they apply?
These amendments to AASB2 apply to annual reporting periods beginning on or after 1 January 2018. Reporting entities can, of course, adopt them early. There are specific transitional provisions for each of these amendments.© Guerdon Associates 2023 Back to all articles