We asked Rachel Procopis, the Financial Controller lead at Suncorp about the importance of share-based payment arrangements.
Share-based Payments Insights – Accounting for Share-based payment arrangements.
Share-based payment arrangements are transactions between an entity and another party generally an employee, a contactor or supplier (collectively referred to as counterparty), where an entity awards a share-based payment to a counterparty in exchange for goods or services delivered to the entity provided the specified vesting conditions, if any, are met.
Vesting conditions include service conditions, where a specified length of service to the entity must be completed or performance conditions, including specified performance targets such as the entity’s own operational and/or financial performance targets are met or can include a combination of both.
Share-based payment arrangements can be settled via the following means.
- equity settled, where goods or services received are settled by issuing equity instruments such as shares or share options of the entity; or
- cash settled, where goods and services received are settled by cash or other assets of the entity that are based on the price/value of equity instruments.
It is critical to understand how the instruments will be settled as this impacts the subsequent measurement and the expense profile.
Share-based payment arrangements are required to be measured at fair value and expensed over the service period.
An advantage to an entity offering share-based payment arrangements is that it creates an incentive for employees to stay with the entity and talent can be retained. Further, it aligns the interests of the employees with the shareholders. Share-based payment arrangements are provided as part of the remuneration package for key management personal of an entity. For disclosing entities, and particularly ASX listed entities, this remuneration is required to be disclosed to the public under the Corporations Act (2001) hence the importance of ensuring correct accounting policies is applied.
As share-based payment arrangements are required to be expensed over the service period, future reporting periods can be impacted. As such effective budgeting and forecasting is required to ensure the financial impact is captured for all impacted future reporting periods and no surprises arise in subsequent periods.
Other challenges in accounting for share-based transactions are that share-based payment arrangements can differ significantly between counterparties (e.g. they may be tailored to a specific employee) and that arrangements can be modified part way through a service period. Share-based payment arrangements should be reviewed annually to ensure they align to the entity’s performance outcomes.
Modifications may impact the number of instruments granted, the exercise price of a share, the service period required arrangement to vest, the performance targets the counterparty must achieve for vesting to occur and how the arrangement will be settled – from equity to cash, from cash to equity, or adding settlement options.
Modifications are only accounted for and the fair value of the award updated if the modification is beneficial to the counterparty (e.g. increase in instruments granted, shorter service period). Any incremental fair value resulting from the modification will be recognised as an additional expense over the remaining vesting period. When modifications are non-beneficial, there is no change to the amount recognised as an expense based on the grant date fair value of the original award in either the current year, or future reporting periods. The Corporations Act (2001) and Australian Accounting Standards requires an entity to make specific disclosures about the details and impacts of the modification, including the fair value of the award before and after the modification.
Management of the entity need to understand and ensure the conditions of the share-based payment are clearly documented and agreed on with its employee and suppliers. It is critical that Finance teams work closely with Human Resources to ensure that changes to terms and conditions in share-based payment arrangements are accurately reflected in the accounting treatment.
Key takeaways
- Modifications to share-based payment arrangements may affect the fair value and the accounting treatment of the awards.
- Only beneficial modifications, which increase the value or reduce the requirements for the counterparty, are accounted for by updating the fair value of the award and recognising an additional expense.
- Non-beneficial modifications, which decrease the value or increase the requirements for the counterparty, do not affect the accounting treatment based on the original grant date fair value.
- Entities need to disclose the details and impacts of any modifications to share-based payment arrangements in accordance with the Corporations’ Act and Australian Accounting Standards.
- Management and Finance teams need to communicate and document the conditions and changes of share-based payment arrangements clearly and accurately.
Want to know more?
MUFG Corporate Markets has a dedicated team assisting clients with award valuations, share based payment expense report and total shareholder return reporting. Please contact your client relationship manager for further information.