Examples of vesting Period in Cash Settlement

Examples of vesting Period in Cash Settlement

The only difference between cash settlement and equity based settlement is the valuation of liability at the each year end. in cash settlement liability is measured at the fair value of equity at the end of each year. While under equity based the liability is measured with fair value at Grant date.

Rules of solving the example

1. Cost of equity is spread over the vesting period

2. Cumulative balance of liability is calculated at end of each year

3. Cumulative balance is based on best estimates of management

4. Cost of Service charged each year is change cumulative balance

5. Finally, cost is charged against the actual vested option.

6. Liability is measured at fair value of equity instrument at the end of each year

Number of Employees	200
Options Grant each employee	50
Condition of work	3 years
Estimation of leave each year	20%
Fair value of option	20
Employee left ( first year)	18
Employee left ( 2nd year	26
Employee left ( 3rd year	22
Fair value First year	18
Fair value 2nd year	22
Fair value 3rd year	20

Solution

Cumulative liability Table

	Option Value	Timing	Cumulative Liability
First year	80%(200 x 50 ) x18	1/3	48,000
2nd year	80%(200 x 50 ) x22	2/3	117,334
3rd year	100% (134 x50) x20	3/3	134,000

Service charges during the three years   

                           

	Cumulative Liability	Cumulative Liability	Service charge
	Closing	Opening
First year	48,000	0	48,000
2nd year	117,334	48,000	69,334
3rd year	134,000	117,334	16,667

Examples of vesting Period in options

Examples of vesting Period in options

The share to equity is not vested ( immediately) and subject to some condition.  There may be many vesting condition like performance level, target achievement but most common among those is vesting period.

Rules

1. Cost of equity is spread over the vesting period

2. Cumulative balance of liability is calculated at end of each year

3. Cumulative balance is based on best estimates of management

4. Cost of Service charged each year is change cumulative balance

5. Finally, cost is charged against the actual vested option.
6. Cumulative liability at the end of each is calculated fair value at Grant Date

Number of Employees	200
Options Grant each employee	50
Condition of work	3 years
Estimation of leave each year	20%
Fair value of option	20
Employee left ( first year)	18
Employee left ( first year	26
Employee left ( first year	22

Solution

Cumulative liability Table

	Option Value	Timing	Cumulative Liability
First year	80%(200 x 50 ) x 20	1/3	53,334
2nd year	80%(200 x 50 ) x 20	2/3	106,667
3rd year	100% (134 x 50) x 20	3/3	134,000

Service charges during the three years 

                             

	Cumulative Liability	Cumulative Liability	Service charge
	Closing	Opening
First year	53,334	0	53,334
2nd year	106,667	53,334	53,334
3rd year	134,000	106,667	27,333

Example of share based payment for inventory

Example of share based payment for inventory

Goods are measured at the fair value and not at the fair value of instrument.

Example of inventory Share based payment

Ahmed and company purchase some bags from the market at $ 20,000. Ahmed issued 2000 shares at price of $ 5 each. What is accounting treatment of this transaction?

Date	Particulars	Dr.	Cr.
	Goods and Inventory  A/C	20,000
	Equity A/C		10,000
	Share Premium A/C		10,000

Example of share based payment for employee Services

Example of share based payment for employee Services

Services are measured at the fair value of the equity instrument because it is difficult to establish the fair value of services of employee.

Example of Employees Services Share based payment

Saleem and Company announces a bonus for employees. The bonus will be paid in form of shares of 10,000 shares have fair value of $ 3 and nominal value

Date	Particulars	Dr.	Cr.
	Goods and Inventory  A/C	30,000
	Equity A/C		10,000
	Share Premium A/C		20,000

Example of Journal entry for equity based share based payment

Example of Journal entry for equity based share based payment

In equity based settlement the liability is to be settled against equity, therefore the liability is created in the form of reserve i.e. Share based payment reserves.

Journal entry for equity based payment

Date	Particulars	Dr.	Cr.
	Income statement	$ 200
	Reserve for Share based payment		$ 200

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.