TRANSACTIONS THAT CAN BE SETTLED FOR SHARES OR CASH
An entity has purchased property, plant, and equipment for $10 million. The supplier can choose howthe purchase price can be settled.
The choices are the receipt of 1 million shares of the entity in oneyear’s time
or
the receipt of a cash payment in six months’ time equivalent to the market value
of800,000 of the entity’s shares.
It is estimated that the fair value of the
First alternative would be $11 million
Second alternative would be $9 million.
Solution
When the entity receives the property, plant, and equipment, it should record a liability of $9 million and an increase in equity of $1 million (the difference between the value of the property, plant, and equipment and the fair value of the liability).
Debit PPT 10 Million
Credit Liability 9 Million
Credit Equity 1 Million
An entity grants one of its employees the right to choose
either 1 million shares or
to receive a cash payment equal to 750,000 shares.
At the grant date,
the value of the market price of the share is $6.
The entity estimates that the fair value of the share alternative is $5 per share.
Answer
The method of settlement chosen by the employee will then determine the final accounting.
The fair value of
the equity alternative will be 1 million times $5, or $5 million.
the cashalternative will be $6 times 750,000 shares, or $4.5 million.
Therefore, the fair value of the equity componentof the compound financial instrument is deemed to be the difference between these two values, or$500,000.
At the settlement date, the liability element of the debt component should be measured at fairvalue. The method of settlement chosen by the employee will then determine the final accounting.
Failure to meet a non-vesting condition and cancellations.
The revised IFRS 2 specifically address both of the aforementioned scenarios and prescribesthe following accounting treatment:
a. If the entity or the counterparty have the option to choose as to whether to meet a non-vestingcondition, a failure by the entity or the counterparty to meet the non-vesting condition will be treated as a cancellation; or
b. If neither the entity nor the counterparty has the choice as to whether to meet a non-vestingcondition, a failure to meet this nonvesting condition does not have any accounting effect,similar to the treatment of market conditions.
If a grant of equity instruments (under a share-based arrangement) is cancelled or settled by theentity or the counterparty, the entity recognizes immediately the amount of expense that would otherwisehave been recognized over the remainder of the vesting period (i.e. the share-based paymentexpensed is accelerated and recognized immediately).
If the share-based payment contains a liabilitycomponent, the liability should be fair valued at the date of cancellation or settlement.
Anypayment made to settle the liability component should be accounted for as an extinguishment of theliability.