matter to be determined in the light of specific facts and circumstances, it is not
considered in this example. Any impairment charge would be recorded in profit or loss.
In addition to accounting for the share-based payment transaction, the parent records
its transactions with the EBT and the issue of shares.
£
£
y/e 31.12.20x1
Investment in subsidiary*
500
Equity
500
y/e 31.12.20x2
Investment in subsidiary*
1,000
Equity
1,000
y/e 31.12.20x3
Investment in subsidiary*
1,000
Equity
1,000
y/e 31.12.20x4
Investment in subsidiary*
500
Equity
500
1.9.20x6 Cash†
10,500
Share
capital/premium
10,500
*
Total increase in investment £3,000 (3000 shares × £1 fair value of each option), recognised over
36 months. Increase in period to December 20x1 is 6/36 × £3,000 = £500, and so on. In practice, where
options were granted to a group of individuals, or with variable performance criteria, the annual adjustment
would be based on a continually revised cumulative adjustment (see further discussion at 6.1 to 6.4 above).
†
£10,500 from EBT (which has received £4,500 option exercise proceeds from employee plus £6,000
contribution from the subsidiary).
Share-based
payment
2711
12.5.2.B
Accounting by parent where subsidiary is the employing entity and EBT
is treated as extension of parent
The parent accounts for the share-based payment transaction under IFRS 2 as an
equity-settled transaction, since the parent settles the award by delivering its own
equity instruments, via its EBT, to the employees of the subsidiary (see 12.2.4 above).
However, as discussed at 12.2.4 above, instead of recording a cost, as in its consolidated
financial statements, the parent records an increase in the carrying value of its
investment in subsidiary. It might then be necessary to consider whether the ever-
increasing investment in subsidiary is supportable or is in fact impaired. As this is a
matter to be determined in the light of specific facts and circumstances, it is not
considered in this example. Any impairment charge would be recorded in profit or loss.
In addition to accounting for the share-based payment transaction, the parent records
the transactions of the EBT and the issue of shares.
£
£
y/e 31.12.20x1
Investment in subsidiary*
500
Equity
500
y/e 31.12.20x2
Investment in subsidiary*
1,000
Equity
1,000
y/e 31.12.20x3
Investment in subsidiary*
1,000
Equity
1,000
y/e 31.12.20x4
Investment in subsidiary*
500
Equity
500
1.9.20x6 Cash†
10,500
Equity‡
6,000
Profit or loss**
6,000
Share
capital/premium
10,500
*
Total increase in investment £3,000 (3000 shares × £1 fair value of each option) spread over 36 months.
Increase during period to December 20x1 is 6/36 × £3,000 = £500, and so on. In practice, where options
were granted to a group of individuals, or with variable performance criteria, the annual adjustment would
be based on a continually revised cumulative adjustment (see further discussion at 6.1 to 6.4 above).
†
£4,500 option exercise proceeds from employee plus £6,000 contribution from the subsidiary.
‡
This assumes that local law requires the entity to record share capital and share premium (additional
paid-in capital) of £10,500, as in 12.5.2.A above. However, IFRS prima facie requires the £6,000 cash
received by the EBT from the subsidiary to be treated as income (see ** below) rather than as part of
the proceeds of the issue of shares. In order, in effect, to reconcile these conflicting analyses, £6,000 of
the £10,500 required by law to be capitalised as share capital and share premium has been treated as an
appropriation out of other equity.
** The £6,000 contribution by the subsidiary to the EBT has been treated as a distribution from the
subsidiary (see 12.2.7 above) and recorded in profit or loss. It might then be necessary to consider
whether, as a result of this payment, the investment in the subsidiary had become impaired (see Chapter 8
at 2.4). As this is a matter to be determined in the light of specific facts and circumstances, it is not
considered in this Example. Any impairment charge would be recorded in profit or loss.
12.5.2.C
Parent as employing entity
If, in Example 30.54, the employing entity were the parent rather than the subsidiary, it
would clearly have to record an expense under IFRS 2. It would also have to fund the
£6,000 shortfall between the option exercise proceeds of £4,500 and the £10,500 issue
proceeds of the shares.
2712 Chapter 30
If the EBT is treated as an extension of the parent, the accounting entries for the parent
would be the same as those for the group, as set out in 12.5.1 above.
In our view, the treatment in 12.5.1 above may also be appropriate for this specific
transaction, even where the EBT is treated as a separate entity. The issue of shares
requires the parent company to fund the EBT with £6,000 which immediately returns
it to the parent, along with the £4,500 received from the employee, in exchange for an
issue of shares. Whilst this ‘circulation’ of the £6,000 might have some significance for
legal purposes it is, economically speaking, a non-transaction that could be ignored for
accounting purposes under IFRS. It might, however, be relevant, under local law, to the
amount of equity shown as share capital and share premium (additional paid-in capital),
in which case the expanded entry in 12.5.1 above would be appropriate.
Where, however, the EBT is treated as a separate entity, and the cash used to subscribe
for the shares arises from a prior transaction, such as an earlier loan to the EBT, matters
are more complicated. Suppose that, during the life of the award under discussion, the
company were to advance £50,000 to the EBT for general funding purposes. At that
point it would clearly record the entry:
£
£
Loan to EBT
50,000
Cash
50,000
Suppose that, on exercise of the option, the EBT were to use some of that cash to fund
the parent’s ‘top up’ for the share issue. This effectively impairs the loan by £6,000 and
leaves a ‘missing debit’ indicated by ‘?’ in the journal below:
£
£
Cash
10,500
?
6,000
Loan to EBT
6,000
Share
capital/premium
10,500
&n
bsp; This looks very much like an impairment loss on the loan required to be reported in
profit or loss. On the other hand, it does not resemble a loss in any conventional sense.
This suggests that another analysis may be possible.
Example 30.52 at 12.3.4 above addresses the situation where an EBT is pre-funded to
enable it to buy the reporting entity’s own shares in the market, and those shares are
finally delivered to the entity for distribution to employees. Example 30.52 suggests
that this could be construed as the execution of a gross-settled purchased call option
by the entity.
If that analogy is extended, the present situation could be construed as comprising a
back-to-back:
• gross-settled purchased call option (whereby the entity can require the EBT to
provide 3,000 shares in return for waiver of £6,000 of its outstanding loan to the
EBT), which triggers the exercise of;
Share-based
payment
2713
• a gross-settled written call option (whereby the EBT can require the entity to issue
3,000 fresh shares for £10,500 to the EBT, so that it can satisfy its obligations to
the entity under the purchased call).
If these two call options are accounted for under IAS 32 (see Chapter 43 at 11.2), the
write-off of the loan to the EBT can be effectively charged to equity, as follows:
£
£
Cash
10,500
Share
capital/premium
10,500
Exercise by EBT of written call
Own shares (Equity)
6,000
Loan to EBT
6,000
Exercise by entity of purchased call
Equity
(other)
6,000
Own shares (Equity)
6,000
Issue of shares to employee
12.5.3 Employing
subsidiary
The employing subsidiary is required to account for the IFRS 2 expense and the
contribution to the EBT on exercise of the award. This gives rise to the accounting
entries set out below. The entries to reflect the IFRS 2 expense are required by IFRS 2
(see 12.2.3 above). The contribution to the EBT is treated as a distribution (see 12.2.7
above).
£
£
y/e 31.12.20x1
Profit or loss*
500
Equity
500
y/e 31.12.20x2
Profit or loss*
1,000
Equity
1,000
y/e 31.12.20x3
Profit or loss*
1,000
Equity
1,000
y/e 31.12.20x4
Profit or loss*
500
Equity
500
1.9.20x6 Equity†
6,000
Cash
6,000
*
Total cost £3,000 (3000 options × £1) spread over 36 months. Charge for period to December 20x1 6/36
× £3,000 = £500, and so on. In practice, where options were granted to a group of individuals, or with
variable performance criteria, the annual charge would be based on a continually revised cumulative
charge (see further discussion at 6.1 to 6.4 above).
†
£3,000 of this payment should be treated as a reduction of whatever component of equity was credited
with the £3,000 quasi-contribution from the parent in the accounting entries above. The remaining
£3,000 would be treated as a distribution and charged to any appropriate component of equity.
2714 Chapter 30
12.6 Illustrative example – cash-settled transaction not settled by the
entity receiving goods or services
The discussion in 12.6.1 to 12.6.3 below is based on Example 30.55.
Example 30.55: Cash-settled scheme not settled by receiving entity
On 1 July 20x1 an employee of S Limited, a subsidiary of the H plc group, is awarded a right, exercisable
between 1 July 20x4 and 1 July 20x7, to receive cash equivalent to the value of 3,000 shares in H plc at the
date on which the right is exercised. Exercise of the right is subject to a service condition and certain
performance criteria being met in the three years ending 30 June 20x4. The cash will be paid to the employee
not by S, but by H. Throughout the vesting period of the award, H and S take the view that it will vest in full.
The award does in fact vest, and the right is exercised on 1 September 20x6.
The fair value of the award (per share-equivalent) at various relevant dates is as follows:
Date Fair
value
£
1.7.20x1 1.50
31.12.20x1 1.80
31.12.20x2 2.70
31.12.20x3 2.40
31.12.20x4 2.90
31.12.20x5 3.30
1.9.20x6 3.50
If the award had been equity-settled (i.e. the employee had instead been granted a right to 3,000 free shares),
the grant date fair value of the award would have been £1.50 per share.
H plc and its subsidiaries have a 31 December year end.
12.6.1
Consolidated financial statements
The group has entered into a cash-settled transaction which is accounted for using the
methodology discussed at 9.3 above. This gives rise to the following accounting entries:
£
£
y/e 31.12.20x1
Profit or loss*
900
Liability
900
y/e 31.12.20x2
Profit or loss*
3,150
Liability
3,150
y/e 31.12.20x3
Profit or loss*
1,950
Liability
1,950
y/e 31.12.20x4
Profit or loss*
2,700
Liability
2,700
y/e 31.12.20x5
Profit or loss*
1,200
Liability
1,200
y/e 31.12.20x6
Profit or loss*
600
Liability
600
1.9.20x6 Liability
10,500
Cash
10,500
Share-based
payment
2715
*
Charge for period to 31 December 20x1 is 6/36 × 3000 × £1.80 [reporting date fair value] = £900. Charge
for year ended 31 December 20x2 is 18/36 × 3000 × £2.70 = £4,050 less £900 charged in 20x1 = £3,150
and so on (refer to Example 30.37 at 9.3.2 above). In practice, where options were granted to a group of
individuals, or with variable performance criteria, the annual charge would be based on a continually
revised cumulative charge (see further discussion at 9 above).
12.6.2 Parent
The parent accounts for the share-based payment transaction under IFRS 2 as a cash-
settled transaction, since the parent settles the award by delivering cash to the
employees of the subsidiary (see 12.2.4 above). However, as discussed at 12.2.4 above,
instead of recording a cost, as in its consolidated financial statements, the parent treats
the debit entry (including, as a matter of accounting policy choice, any remeasurement
of the liability) as an increase in the carrying value of its investment in subsidiary. It
might then be necessary to consider whether the ever-increasing investment in
subsidiary is supportable or is
in fact impaired. As this is a matter to be determined in
the light of specific facts and circumstances, it is not considered in this example. Any
impairment charge would be recorded in profit or loss.
This would result in the following accounting entries.
£
£
y/e 31.12.20x1
Investment in subsidiary*
900
Liability
900
y/e 31.12.20x2
Investment in subsidiary*
3,150
Liability
3,150
y/e 31.12.20x3
Investment in subsidiary*
1,950
Liability
1,950
y/e 31.12.20x4
Investment in subsidiary*
2,700
Liability
2,700
y/e 31.12.20x5
Investment in subsidiary*
1,200
Liability
1,200
y/e 31.12.20x6
Investment in subsidiary*
600
Liability
600
1.9.20x6 Liability
10,500
Cash
10,500
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 541