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Hi Mike,
Qns : ABC Ltd grants to an employee 1,000 phantom shares or 1,200 original shares. The grant is to be conditional upon completion of 3 years of services. At grant date, the entity share price is $50 per ordinary share. At the end of year 1,2 and 3, the share price is $52, $55 and $60 respectively. It is estimated that the fair value of the share alternative is worth $48 per share currently.
I do not understand why they must compare the fair value of share alternative vs fair value of cash alternative to get the equity component?
Also, why did they multiply (1,200 original shares * $48) share alternative and compare it against with (1,000* $50) cash alternative to get the equity component?
Cash settled share based payment is based on balance sheet date and thus shouldn’t it be multiplied by $52 instead of $50 to get the cash alternative?
Many thanks!
Below are two extracts from the IASPLUS internet summary of IFRS 2. I think these answer your queries but, if not, post again
Measuring employee share options.
For transactions with employees and others providing similar services, the entity is required to measure the fair value of the equity instruments granted, because it is typically not possible to estimate reliably the fair value of employee services received.
When to measure fair value – options.
For transactions measured at the fair value of the equity instruments granted (such as transactions with employees), fair value should be estimated at grant date.
Hi mike,
Based on the above qns, the answer given was that they split out the cash portion vs the equity portion as the company should have offer the employees either cash based or equity settled. Then it depends on whether the employees will exercise the options. I do know understand how come they treat it as a compound instrument as they compare the fair value of cash settled (phantom shares) vs equity settled to derive the equity potion before working out the entries.
It seems like employees has the choice to choose between exercising cash settled vs equity settled.
Agreed – and I don’t remember seeing that before in quite that form (but maybe that’s the fault of my memory!)
But, where we have a compound / mixed instrument, it’s highly improbable that we can separately measure the equity element so our only option is to measure the cash element and deduct that from the face value of the instrument with the balance being attributable to equity
Are you any nearer?
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