Cash Settled Share Based Payment

Cash Settled Share Based Payment

In cash settled share based payments, the price of payment of goods is linked to the share prices. The share prices are expected to change, therefore liability will also vary until it is settled and liability is measured at each reporting date. In case of vesting condition are attached to liability, then liability is spread out like equity based transactions.

Some important characteristics of cash settled share based transaction are listed below

a)    Liability is linked with share price.

b)   Liability is re-measured at each reporting date based on share price.

c)    Liability is fully reported in case of no vesting conditions.

d)   Liability is speared out in case of vesting conditions are attached.

e)    Term Cash appreciation right is used for cash settled share based payments.

Accounting Treatment Example

Cash Appreciation Rights= 100

No of Employees= 600

Condition= 3 year working

Fair Value = $10, $ 12, $ 15

Expectation of Employee = 500 and 520 (First Year & 2^nd Year respectively).

Actual employees avail appreciation= 530

Solution

First year Cost of Service & Liability (500 Employees)

500 x 100 x 1/3 x $ 10= 166,667

Date	Particulars	Dr	Cr
	Cost of Service A/c	166,667
	Liability A/c		166,667

2^nd Year Cost of Service & Liability (520 Employees)

520 x 100 x 2/3 x $ 12= 416,000

416,000-166,667= 249,333 (Acc. Liability this year- acc. Liability last year)

Date	Particulars	Dr	Cr
	Cost of Service A/c	249,333
	Liability A/c		249,333

3^nd Year Cost of Service & Liability (530 Employees)

530 x 100 x $ 15= 795,000 (accumulated Liability 3^rd year)

795,000-416,000=378,333

(Accumulated liability 3^rd Year- Accumulated Liability 2^nd Year)

Date	Particulars	Dr	Cr
	Cost of Service A/c	379,000
	Liability A/c		379,000

Statement of Financial Position (Balance Sheet)

First Year	2nd Year	3rd Year
166,667	416,000	795,000

Statement of Comprehensive Income (Profit & Loss)

First Year	2nd Year	3rd Year
166,667	249,333	379,000

Equity Settled Share Based Payment

Equity Settled Share Based Payment

Share based payment can be broadly classified into equity based payment and cash settled payment. In equity settled share based payment equity is issued against the service or goods, where in cash settled share based payment, the payment of services and good are linked to share price.

In this article we would explain the accounting treatment of equity settled share based payment.

Equity Settled Share Based Payment Accounting

In equity settled share based payment the liability is measured at fair value at grant date. This is an important point in the accounting of equity settled share based payment. The equity Settled Share based payment can be divided into vesting condition and no vesting conditions.

No Vesting Condition

In this case the accounting treatment is simple, because entitlement to equity is immediate. The expense is debited and equity is credited with fair value of goods and services.

ABC buy inventory = 30,000

Issue equity for payment 5,000 @ 4= 20,000

Solution

Date	Particulars	Dr	Cr
	Inventory	30,000
	Equity		20,000
	Share premium		10,000

Vesting Conditions

In some equity settled transaction some condition are attached for entitlement of equity instrument. The important vesting condition is timing of employment. In such cases the cost of equity is speared over the period, because service is expected to receive in more than one period.

No of employees= 300

No of share options= 1000

Fair value grant date= $ 10

Vesting Condition = 3 Years

Estimate leave employee= 30%

Solution

First Year Cost of Service

 ( 1/3 x 300 x 1000 x 10 x 70%)= 700,000

Journal entry for first year cost of service will be recorded as under

Date	Particulars	Dr	Cr
	Cost of Service A/c	700,000
	Equity		700,000

2^nd year Cost of Service

(2/3 x 300 x 1000 x 10 x 70%) =1,400,000

= 1,400,000-700,000 (accumulative cost – Last year accumulative cost)

=700,000

Date	Particulars	Dr	Cr
	Cost of Service A/c	700,000
	Equity		700,000

3^rd year Cost of Service

210 x 1000 x10 = 1,920,000

2,100,000-1,400,000  (accumulative cost – last year accumulative cost).

700,000

Date	Particulars	Dr	Cr
	Cost of Service A/c	700,000
	Equity		700,000

In practical example the estimated changes every year. This has been explained in example section of this blog.