Example of Equity settled share based payment

Example of Equity settled share based payment

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

1.      Liability is measured at fair value at Grant Date

2.      Formula for the closing year liability is (Rights expected to vest x fair value x time Ratio)

Example of Equity settled share based payment

Director is offered a option of 120,000 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	92,000	2
1	87,000	3
2	90,000	2.5
3	88,000	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	P&L
0	92,000	2	0/3	0	0
1	87,000	2	1/3	58,000	58,000
2	90,000	2	2/3	120,000	57,800
3	88,000	2	3/3	176,000	56,000

Statement of Financial Position (2001, 2002, 2003)

Year	2003	2002	2001
Share based payment Reserve	176,000	120,000	56,0000

Statement of income Statement (2001, 2002, 2003)

Year	2003	2002	2001
Share based payment Expense	56,000	57,800	58,000

Important learning Point

1.      Formula is for the measurement of closing liability (and not for the current year charge)

2.      Liability under equity based settlement charged to Share based payment Reserve

3.      Current year expenses charge (increase in liability) is balancing figure.