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Share-based Payment

SME Par.IFRS SMEU.S. GAAP
Scope of this section
26.1 This section specifies the accounting for all share-based payment transactions including:
  1. equity-settled share-based payment transactions, in which the entity acquires goods or services as consideration for equity instruments of the entity (including shares or share options);
  2. cash-settled share-based payment transactions, in which the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price (or value) of the entity’s shares or other equity instruments of the entity; and
  3. transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash (or other assets) or by issuing equity instruments.
 FASB ASC 505-50 applies to share-based payments to non-employees.  FASB ASC 718 applies to share-based payment transactions with employees and employee stock ownership plans.

FASB ASC 718 contains guidance on determining whether to classify an award as equity or a liability.

Under IFRS for SMEs, the definition of an employee is broader than the U.S. GAAP definition.
26.2 Cash-settled share-based payment transactions include share appreciation rights. For example, an entity might grant share appreciation rights to employees as part of their remuneration package, whereby the employees will become entitled to a future cash payment (rather than an equity instrument), based on the increase in the entity’s share price from a specified level over a specified period of time. Or an entity might grant to its employees a right to receive a future cash payment by granting to them a right to shares (including shares to be issued upon the exercise of share options) that are redeemable, either mandatorily (eg upon cessation of employment) or at the employee’s option.  
Recognition
26.3 An entity shall recognise the goods or services received or acquired in a share-based payment transaction when it obtains the goods or as the services are received. The entity shall recognise a corresponding increase in equity if the goods or services were received in an equity-settled share-based payment transaction, or a liability if the goods or services were acquired in a cash-settled share-based payment transaction. A grantor shall recognize the goods acquired or services received in a share-based payment transaction when it obtains the goods or as services are received. FAS 123(R), paragraph 5, sequence 83.1A grantor may need to recognize an asset before it actually receives goods or services if it first exchanges share-based payment for an enforceable right to receive those goods or services. Nevertheless, the goods or services themselves are not recognized before they are received. FAS 123(R), paragraph 5, sequence 84

A grantor shall recognize either a corresponding increase in equity or a liability, depending on whether the instruments granted satisfy the equity or liability classification criteria established in FASB ASC paragraphs 718-10-25-6 through 25-19.
26.4 When the goods or services received or acquired in a share-based payment transaction do not qualify for recognition as assets, the entity shall recognise them as expenses.  
Recognition when there are vesting conditions
26.5 If the share-based payments granted to employees vest immediately, the employee is not required to complete a specified period of service before becoming unconditionally entitled to those share-based payments. In the absence of evidence to the contrary, the entity shall presume that services rendered by the employee as consideration for the share-based payments have been received. In this case, on grant date the entity shall recognise the services received in full, with a corresponding increase in equity or liabilities. U.S. GAAP contains extensive guidance about vesting conditions and attribution of compensation cost.
26.6 If the share-based payments do not vest until the employee completes a specified period of service, the entity shall presume that the services to be rendered by the counterparty as consideration for those share-based payments will be received in the future, during the vesting period. The entity shall account for those services as they are rendered by the employee during the vesting period, with a corresponding increase in equity or liabilities.  
Measurement of equity-settled share-based payment transactions
 Measurement principle
26.7 For equity-settled share-based payment transactions, an entity shall measure the goods or services received, and the corresponding increase in equity, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the entity shall measure their value, and the corresponding increase in equity, by reference to the fair value of the equity instruments granted. To apply this requirement to transactions with employees and others providing similar services, the entity shall measure the fair value of the services received by reference to the fair value of the equity instruments granted, because typically it is not possible to estimate reliably the fair value of the services received. Share-based payments to non-employees generally are measured at the earlier of the completion of performance and the performance commitment date, based on the fair value of the instruments issued. However, if the fair value of the goods or services can be determined objectively, then their value may be used instead.
26.8 For transactions with employees (including others providing similar services), the fair value of the equity instruments shall be measured at grant date. For transactions with parties other than employees, the measurement date is the date when the entity obtains the goods or the counterparty renders service. Equity-classified grants to employees generally are measured based on the grant date fair value of the equity instruments issued.

Nonpublic entities are allowed to measure stock-based compensation awards by using the fair-value (preferred) method or the calculated-value method. In come cases, a nonpublic entity could use the intrinsic-value method.
26.9 A grant of equity instruments might be conditional on employees satisfying specified vesting conditions related to service or performance. For example, a grant of shares or share options to an employee is typically conditional on the employee remaining in the entity’s employ for a specified period of time. There might be performance conditions that must be satisfied, such as the entity achieving a specified growth in profit (a non-market vesting condition) or a specified increase in the entity’s share price (a market vesting condition). All vesting conditions related to solely employee service or to a non-market performance condition shall be taken into account when estimating the number of equity instruments expected to vest. Subsequently, the entity shall revise that estimate, if necessary, if new information indicates that the number of equity instruments expected to vest differs from previous estimates. On vesting date, the entity shall revise the estimate to equal the number of equity instruments that ultimately vested. All market vesting conditions and non-vesting conditions shall be taken into account when estimating the fair value of the shares or share options at the measurement date, with no subsequent adjustment irrespective of the outcome. U.S. GAAP contains extensive guidance about vesting conditions.

Estimates of the number of equity-settled instruments that vest are adjusted to the actual number that vests. No adjustment is made for failure to achieve a market condition.
 Shares
26.10 An entity shall measure the fair value of shares (and the related goods or services received) using the following three-tier measurement hierarchy:
  1. If an observable market price is available for the equity instruments granted, use that price.
  2. If an observable market price is not available, measure the fair value of equity instruments granted using entity-specific observable market data such as
    1. a recent transaction in the entity’s shares, or
    2. a recent independent fair valuation of the entity or its principal assets.
  3. If an observable market price is not available and obtaining a reliable measurement of fair value under (b) is impracticable, indirectly measure the fair value of the shares or share appreciation rights using a valuation method that uses market data to the greatest extent practicable to estimate what the price of those equity instruments would be on the grant date in an arm’s length transaction between knowledgeable, willing parties. The entity’s directors should use their judgement to apply the most appropriate valuation method to determine fair value. Any valuation method used should be consistent with generally accepted valuation methodologies for valuing equity instruments.
 Observable market prices of identical or similar equity or liability instruments in active markets are the best evidence of fair value and, if available, shall be used as the basis for the measurement of equity and liability instruments awarded in a share-based payment transaction with employees. FAS 123(R), paragraph A7, sequence 277.1Determining whether an equity or liability instrument is similar is a matter of judgment, based on an analysis of the terms of the instrument and other relevant facts and circumstances. FAS 123(R), paragraph A7, sequence 278 For example, awards to employees of a public entity of shares of its common stock, subject only to a service or performance condition for vesting (non-vested shares), shall be measured based on the market price of otherwise identical (that is, identical except for the vesting condition) common stock at the grant date. FAS 123(R), paragraph A7, sequence 277.2

If observable market prices of identical or similar equity or liability instruments of the entity are not available, the fair value of equity and liability instruments awarded to employees shall be estimated by using a valuation technique that meets all of the following criteria: FAS 123(R), paragraph A8, sequence 279.1
  1. It is applied in a manner consistent with the fair value measurement objective and the other requirements of this FASB ASC 718. FAS 123(R), paragraph A8, sequence 279.2.1
  2. It is based on established principles of financial economic theory and generally applied in that field. FAS 123(R), paragraph A8, sequence 279.2.2.1 Established principles of financial economic theory represent fundamental propositions that form the basis of modern corporate finance (for example, the time value of money and risk-neutral valuation). FAS 123(R), paragraph A8, sequence 281
  3. It reflects all substantive characteristics of the instrument (except for those explicitly excluded by FASB ASC 718, such as vesting conditions and reload features). FAS 123(R), paragraph A8, sequence 279.2.2.2.1
That is, the fair values of equity and liability instruments granted in a share-based payment transaction shall be estimated by applying a valuation technique that would be used in determining an amount at which instruments with the same characteristics (except for those explicitly excluded by FASB ASC 718) would be exchanged.

An estimate of the amount at which instruments similar to employee share options and other instruments granted to employees would be exchanged would factor in expectations of the probability that the requisite service would be rendered and the instruments would vest (that is, that the performance or service conditions would be satisfied). However the measurement objective in FASB ASC 718 is to estimate the fair value at the grant date of the equity instruments that the entity is obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments. Therefore, the estimated fair value of the instruments at grant date does not take into account the effect on fair value of vesting conditions and other restrictions that apply only during the requisite service period. Under the fair-value-based method required by FASB ASC 718, the effect of vesting conditions and other restrictions that apply only during the requisite service period is reflected by recognizing compensation cost only for instruments for which the requisite service is rendered. FAS 123(R), paragraph A9, sequence 282 FAS 123(R), paragraph A8, sequence 279.2.2.2.2
 Share options and equity-settled share appreciation rights
26.11 An entity shall measure the fair value of share options and equity-settled share appreciation rights (and the related goods or services received) using the following three-tier measurement hierarchy:
  1. If an observable market price is available for the equity instruments granted, use that price.
  2. If an observable market price is not available, measure the fair value of share options and share appreciation rights granted using entity-specific observable market data such as for a recent transaction in the share options.
  3. If an observable market price is not available and obtaining a reliable measurement of fair value under (b) is impracticable, indirectly measure the fair value of share options or share appreciation rights using an option pricing model. The inputs for the model (such as the weighted average share price, exercise price, expected volatility, option life, expected dividends, and the risk-free interest rate) should use market data to the greatest extent possible. Paragraph 26.10 provides guidance on determining the fair value of the shares used in determining the weighted average share price. The entity should derive an estimate of expected volatility consistent with the valuation methodology used to determine the fair value of the shares.
  
 Modifications to the terms and conditions on which equity instruments were granted
26.12 If an entity modifies the vesting conditions in a manner that is beneficial to the employee, for example, by reducing the exercise price of an option or reducing the vesting period or by modifying or eliminating a performance condition, the entity shall take the modified vesting conditions into account in accounting for the share-based payment transaction, as follows:
  1. If the modification increases the fair value of the equity instruments granted (or increases the number of equity instruments granted) measured immediately before and after the modification, the entity shall include the incremental fair value granted in the measurement of the amount recognised for services received as consideration for the equity instruments granted. The incremental fair value granted is the difference between the fair value of the modified equity instrument and that of the original equity instrument, both estimated as at the date of the modification. If the modification occurs during the vesting period, the incremental fair value granted is included in the measurement of the amount recognised for services received over the period from the modification date until the date when the modified equity instruments vest, in addition to the amount based on the grant date fair value of the original equity instruments, which is recognised over the remainder of the original vesting period.
  2. If the modification reduces the total fair value of the share-based payment arrangement, or apparently is not otherwise beneficial to the employee, the entity shall nevertheless continue to account for the services received as consideration for the equity instruments granted as if that modification had not occurred.
 The modification of equity-classified instruments results in the recognition of any incremental fair value, but not any reduction in fair value. No minimum compensation cost must be recognized when the modification of an equity-classified award that at the date of modification is improbable of vesting under the original terms.
 Cancellations and settlements
26.13 An entity shall account for a cancellation or settlement of an equity-settled share-based payment award as an acceleration of vesting, and therefore shall recognise immediately the amount that otherwise would have been recognised for services received over the remainder of the vesting period. The cancellation of a share-based payment results in acceleration of the unrecognized cost.
Cash-settled share-based payment transactions
26.14 For cash-settled share-based payment transactions, an entity shall measure the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the entity shall remeasure the fair value of the liability at each reporting date and at the date of settlement, with any changes in fair value recognised in profit or loss for the period. Liability-classified awards are initially measured at grant-date fair value. At each reporting date until settlement, liability-classified awards are remeasured to fair value. 

Nonpublic entities can choose to measure liability-classified awards at fair value, calculated value or intrinsic value.
Share-based payment transactions with cash alternatives
26.15 Some share-based payment transactions give either the entity or the counterparty a choice of settling the transaction in cash (or other assets) or by transfer of equity instruments. In such a case, the entity shall account for the transaction as a cash-settled share-based payment transaction unless either
  1. the entity has a past practice of settling by issuing equity instruments, or
  2. the option has no commercial substance because the cash settlement amount bears no relationship to, and is likely to be lower in value than, the fair value of the equity instrument.
In circumstances (a) and (b), the entity shall account for the transaction as an equity-settled share-based payment transaction in accordance with paragraphs 26.7–26.13.		 An award is generally classified as a liability, if the employee has the choice of settlement. If the choice of settlement resides with the entity, the award is classified as equity unless the entity has an established practice of settling in cash or doing so when the employee requests cash settlement.
Group plans
26.16 If a share-based payment award is granted by a parent entity to the employees of one or more subsidiaries in the group, and the parent presents consolidated financial statements using either the IFRS for SMEs or full IFRSs, such subsidiaries are permitted to recognise and measure share-based payment expense (and the related capital contribution by the parent) on the basis of a reasonable allocation of the expense recognised for the group.  
Government-mandated plans
26.17 Some jurisdictions have programmes established under law by which equity investors (such as employees) are able to acquire equity without providing goods or services that can be specifically identified (or by providing goods or services that are clearly less than the fair value of the equity instruments granted). This indicates that other consideration has been or will be received (such as past or future employee services). These are equity-settled share-based payment transactions within the scope of this section. The entity shall measure the unidentifiable goods or services received (or to be received) as the difference between the fair value of the share-based payment and the fair value of any identifiable goods or services received (or to be received) measured at the grant date.  
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