Share-based payment (ifrs 2) - Group share-based payments an...

Learning Outcomes

After reading this article, you will be able to explain the accounting for group share-based payments under IFRS 2, including who recognizes the expense, the effect of intra-group arrangements, and the disclosure requirements. You will also be able to identify typical exam pitfalls and confidently apply the rules to both equity-settled and cash-settled group schemes within consolidated groups.

ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are required to understand and apply the accounting standards governing group share-based payment transactions and related disclosures. Focus your revision on:

• The principles of recognition and measurement for group share-based payments under IFRS 2
• The distinction between equity-settled and cash-settled awards in a group context
• The impact of which group entity grants or settles the share-based payment
• Consolidation adjustments for share-based payment schemes in groups
• The specific disclosure requirements for share-based payments in group accounts

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which entity recognizes the expense where a parent grants options over its own shares to employees of a subsidiary?
   1. The parent only
   2. The subsidiary only
   3. Both the parent and subsidiary
   4. No expense is recognized

2. True or false? If a subsidiary grants cash-settled share appreciation rights based on the value of the parent’s shares to its own employees, the subsidiary always classifies it as equity-settled.

3. Which of the following is required by IFRS 2 for group share-based payment arrangements?
   1. Only the consolidating entity must provide disclosures
   2. Only the entity granting the scheme must recognize an expense
   3. Each entity receiving employee services must recognize an expense regardless of who settles the award
   4. No disclosure for intra-group share-based payments

4. Briefly explain the difference in accounting when a parent settles a subsidiary’s share-based payment obligation in cash versus shares.

Introduction

IFRS 2 Share-based Payment prescribes the accounting for transactions where an entity receives goods or services as consideration for equity instruments or incurs liabilities based on the value of those instruments. In groups, share-based payment arrangements often involve more than one entity. For ACCA Strategic Business Reporting (SBR) exam, you must be precise in identifying which entity recognizes the expense, the classification as equity- or cash-settled, and how to present and disclose these schemes in consolidated financial statements.

Key Term: share-based payment
A transaction in which an entity receives goods or services as consideration for its own equity instruments or incurs a liability for payment based on the value of those instruments.

Group Share-Based Payment Arrangements

Group share-based payments typically arise where a parent, subsidiary, or another group entity issues or settles share-based awards to employees of a fellow group member.

Recognition and Measurement Principles

Entities must recognize the expense for goods or services received, regardless of which group entity sets up, settles, or grants the award. The entity receiving the services recognizes the corresponding increase in equity or a liability, depending on the nature of settlement.

Key Term: equity-settled share-based payment
A share-based payment transaction in which goods or services are received as consideration for equity instruments (including shares or options) of the entity.

Key Term: cash-settled share-based payment
A share-based payment transaction in which goods or services are received as consideration for amounts that are based on the price (or value) of the entity's equity instruments and are paid in cash or other assets.

Types of Intra-Group Arrangements

1. Parent Awards to Subsidiary Employees

• Parent grants equity-settled awards (e.g., options over parent shares) to subsidiary employees:
  • The subsidiary recognizes the expense and credits equity as a capital contribution from the parent.
  • The parent shows the corresponding transaction in its own equity without an expense.

2. Subsidiary Awards to Its Own Employees

• Subsidiary settles awards in its own shares: Apply normal single-entity equity-settled accounting.
• Subsidiary settles awards in cash or in parent shares: The subsidiary may recognize either a liability (cash-settled) or equity (if settled in its own shares), depending on settlement terms.

3. Parent Settles Subsidiary Awards in Cash

• Parent pays subsidiary employees in cash based on parent shares: The subsidiary recognizes a liability (cash-settled) and an expense for services received. The parent recognizes a receivable from the subsidiary.

Worked Example 1.1

A parent company, Alpha, grants 100,000 share options over its own shares to key employees of its subsidiary, Beta. The grant is conditional on three years’ service in Beta. Fair value at grant date is $2 per option, and settlement will be in parent shares.

Question: Which company recognizes the share-based payment expense, and how is it presented in the accounts?

Answer:
Beta receives the employee services, so it recognizes an expense of $200,000 ($2 × 100,000) over three years. The credit entry is equity, as a capital contribution from Alpha. Alpha recognizes the increase in its investment in Beta, but no expense in its own profit or loss.

Worked Example 1.2

Suppose in the example above, Alpha agrees to settle the options in cash based on its own share price instead of issuing shares.

Question: How does Beta account for this award?

Answer:
As the award is cash-settled, Beta recognizes a liability in respect of the expected cash payment and an expense as the employees render service. The liability is remeasured at fair value at each reporting date with changes going to profit or loss until settlement.

Exam Warning

In group arrangements, the entity receiving the employee services must recognize the share-based payment expense and classify the award according to the method of settlement (equity or cash), irrespective of whether it issues its own shares or those of another group entity.

Accounting in Consolidated Financial Statements

When preparing consolidated accounts:

• Eliminate intra-group balances arising from capital contributions.
• Do not double-count expenses; expense is recognized at group level only once for the group as a whole.
• Ensure any liabilities for unsettled cash-settled awards are correctly reflected.
• Disclosures should be provided at group level showing the nature and terms of all group share-based payment schemes.

Disclosure Requirements

IFRS 2 requires detailed disclosures for all share-based payment arrangements, including:

• A description of each type of share-based payment arrangement
• The number and weighted average exercise prices of options or rights outstanding
• The method and assumptions used to estimate fair value of awards
• Total expenses recognized and how liabilities were measured for cash-settled schemes

The disclosures apply equally to individual and consolidated financial statements. The group must ensure it presents all relevant information about arrangements affecting the group, regardless of which entity grants or settles the award.

Worked Example 1.3

Consider a group where Parent Co. (which prepares consolidated accounts) operates a cash-settled share appreciation right (SAR) scheme for staff of multiple subsidiaries. The total recognition at group level at year end is a liability of $300,000, based on current fair value.

Question: What additional disclosure must be made?

Answer:
The consolidated financial statements must describe the SAR scheme, the basis for measuring fair value, the amount recognized as an expense and liability during the year, and the terms of settlement. There must be sufficient information for users to understand the possible cash outflows and the nature of the scheme.

Revision Tip

Always establish which entity receives services, which entity settles or grants the awards, and how settlement occurs, before deciding the accounting entries. This clarity is critical for ACCA exam questions on group arrangements.

Summary

In group share-based payment arrangements, the entity receiving employee services recognizes the expense, classified as equity- or cash-settled based on how the award will be settled. For equity-settled awards granted by a parent to subsidiary employees, the subsidiary credits equity as a capital contribution, with the parent reflecting a corresponding increase in investment. Cash-settled awards lead to liability recognition. Consolidated financial statements require careful elimination of intra-group entries and full IFRS 2 disclosures.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain the recognition and measurement of group share-based payments under IFRS 2
• Differentiate between equity-settled and cash-settled group arrangements
• Identify how intra-group awards and settlements affect accounting entries for both individual and group accounts
• Apply the correct consolidation adjustments for group share-based payment schemes
• List and apply the required IFRS 2 disclosures for group share-based payment transactions

Key Terms and Concepts

• share-based payment
• equity-settled share-based payment
• cash-settled share-based payment