Example of Cash settled share based payment

Example of Cash settled share based payment

The following are the important point for solving Cash settled share based payment.

• .  Liability is measured at fair value at each year
•     Formula for the closing year liability is (Rights expected to vest x fair value x time Ratio)

Example of Cash settled share based payment

Cash settlement offer was made to director against 140,000 Shares vested in 2 years. The fair value at grant date was $ 2. Other information is as under

year	Option Expect to vest	Fair value $
0	110,000	3
1	105,000	4
2	108,000	5
3	112,000	4

Calculate the financial statement

Solution

Equity settled liability is calculated at each year by (Rights expected to vest x fair value x time Ratio). Fair value of Rights at Grant date i.e. $ 2 in this example.

Year	Expected Rights	Fair Value	Time Ratio	Liability	Profit & Loss
0	110,000	3	0/3	0	0
1	105,000	4	1/3	140,000	140,000
2	108,000	5	2/3	360,000	220,000
3	112,000	4	3/3	448,000	88,000

Statement of Financial Position (2001, 2002, 2003)

Year	2003	2002	2001
Share based payment Reserve	448,000	360,000	140,000

Statement of income Statement (2001, 2002, 2003)

Year	2003	2002	2001
Share based payment Expense	88,000	220,000	140,000

Important learning Point

•   Formula is for the measurement of closing liability (and not for the current year charge)
•     Liability under equity based settlement charged Liability
•     Current year expenses charge (increase in liability) is balancing figure.