What is a Share-Based Payment Transaction?
A share-based payment transaction is a transaction in which an entity receives goods or services in exchange for equity instruments such as shares or share options. Alternatively, the payments may be based on the value of these equity instruments. This concept is crucial in financial reporting as it ties employee compensation and other incurred costs directly to the company’s equity measures. The transactions can be classified into three main types:
- Equity-Settled: Where goods/services are paid by issuing equity instruments.
- Cash-Settled: Where payments are based on the value of the equity instruments, resulting in a cash outflow.
- Choice of Settlement: Where the counterparty can choose between equity instruments or cash.
These transactions are governed by Section 26 of the Financial Reporting Standard Applicable in the UK and Republic of Ireland and International Financial Reporting Standard (IFRS) 2, Share-based Payment.
Examples
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Equity-Settled Example: A company provides its employees with stock options as part of their compensation package. Employees can purchase shares at a predetermined price after a certain period, linking their performance to the success of the company.
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Cash-Settled Example: A company may promise to pay a bonus to its employees based on the appreciation of its stock value over a certain period. At the end of this period, the employees receive their bonus in cash.
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Choice of Settlement Example: Alternatively, a company might offer its supplier the choice of receiving either cash or shares for their goods or services, thereby leaving the settlement method open to the supplier’s preference.
Frequently Asked Questions (FAQs)
What is the purpose of share-based payment transactions?
Purpose: To align the interests of employees and other stakeholders with the shareholders by providing them with an ownership stake or value tied to company performance.
How is the cost of share-based payments calculated?
Calculation: The cost is generally based on the fair value of the equity instruments at the grant date and is recognized over the period during which the service or performance conditions are fulfilled.
What is IFRS 2?
IFRS 2: International Financial Reporting Standard 2, Share-based Payment, is the regulation that sets out principles and specific guidance for accounting for share-based payment transactions.
Are all share-based payments treated the same way in financial statements?
Treatment: No, equity-settled and cash-settled transactions are treated differently. Equity-settled payments impact equity directly, whereas cash-settled payments result in liabilities that can fluctuate based on the company’s stock price.
What is a vesting period?
Vesting Period: The period over which employees must wait to earn the right to exercise their stock options or receive shares. Typically, this is tied to service conditions or performance milestones.
Related Terms
Equity Instruments
- Definition: Financial assets entitling the holder to a residual interest in the issuing entity’s assets after deducting liabilities, such as shares, stock options.
Share Options
- Definition: Contracts granting the holder the right, but not the obligation, to buy shares at a predetermined price within a specified period.
IFRS 2
- Definition: A standard guiding the accounting for share-based payment transactions, ensuring transparent and consistent reporting across organizations.
Vesting
- Definition: The process by which employees acquire non-forfeitable rights over their stock options or shares after meeting specific conditions or periods.
Online References
Suggested Books
- “International Financial Reporting Standards (IFRS) Workbook and Guide” by Abbas A. Mirza
- “Wiley IFRS: Interpretation and Application of International Financial Reporting Standards” by PKF International Ltd
- “Share-based Payment: An Analysis by the ASB Institute” by DASB
Accounting Basics: “Share-Based Payment Transaction” Fundamentals Quiz
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