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Accounting for employee options under IFRS (see description)


If a starting company is issuing share options (option for own equity) for its employees (shares are not openly traded) should it show it as an expense and make a reserve for it

D Expenses  - 95

 C Reserve (options) - 95

if the following conditions exist: the nominal value of the share is 10 USD, fair value of the share (using a cash flow method could be 100 USD), and exercise price is 5 USD. Using a Black Scholes method - the value could be something like 95 USD, and option can be exercised in 3 years. Btw - the last year company had a huge net loss.

Also, what will be the closing procedures when the option is exercised:

D Cash - 5

D Loss (option) - 5

 C Own shares/equity -10

What will happen with reserve?

D Reserve (liability) - 95

 C Not operat. income  95

In that case what is the point of this reserve?

Thank you!

asked Dec 16, 2016 in IFRS 2 - Share-based Payment by David

1 Answer

0 votes
Under IFRS 2, the cost recognized depends on the vesting conditions. A performance target can be defined by reference to the entity’s own operations or activities.

A performance condition is further defined as either a market condition or a non-market condition. A condition linked to a purely internal financial performance measure, such as profit is not a market condition.

Here in this case condition is linked to profits and so it is non-market condition.  Such conditions will affect the share price, but are not directly linked to it, and hence are not market conditions.

Non-market vesting conditions are not taken into account when estimating the fair value of the shares or share options at the grant date. Instead, these vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so as to reflect the number of awards that are expected to vest.

To close the entry, if counter party chooses settlement of the award in either shares or cash, IFRS 2 treats it as a compound award. A compound award is split into two components: a liability component and an equity component. Once split, the entity accounts for the two components separately.
answered Dec 17, 2016 by accountingpool Level 1 Member (2,000 points)
Thank you. But it seems you just copied text from IFRS 2 which i read, and not given the direct answer to the question.

Refer to question asked mainly it touched three main areas of IFRS 2 which I have explained in my answer. These three areas basically are;

  • Cost recognized on initial level
  • Conditions for option vested (and)
  • Closing the entry

With the help of my knowledge of IFRS 2, I have compiled and explained my answer to which it pertain in the question, so it is not merely copied but well constructed as first I refer what is stated in IFRS 2 and then linked that to your case, I hope you read my answer again and find better referencing to the IFRS and the question asked.

Further, upon reading the question again and again I come up with conclusion that your question basically lies in the last line “In that case what is the point of this reserve?” As far as replying to this query my reply in accounting point of view is very simple that maintaining reserve is according to underlying concept of accounting, Prudence Concept which suggests that accountants need to record expense soon as they occur but never overestimate the revenues until it actually realized. Hence it is the point to maintain the reserve.

I hope that I may have interpret your question properly and so satisfied with proper answer. But still if there would be any problem it would be my pleasure to resolve the issue, interpreting the relevant IFRS/IAS. Thanks and waiting for comments.

Hi. Thing that is still not clear to me, it is why should i use the fair value method to the value the reserve and expenses when in fact in the end i will use nominal value for own equity and in the end the will be a zero effect on PL over the course of three years. If i possible coud you explain on the facts i provided, because at the moment - IFRS 2 is not clear enough on the specific matter.

Thank in you advance.
There is a one thing that is still not clear to me. Why should i use a fair value method when evaluating the potential liability when company's own shares are and will be shown at their nominal value which will eventually lead to result where estimates loss will be greater that the real result, and as i shown it before there will be a 0 zero effect on a PL in course of the three year period.

It would be good if you could maybe make an example using the data i provided. I've read the ifrs 2 but i think it can not be applied in the case i described.


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