received by the sponsoring entity in respect of contributions to the fund.
10.8 Share-based payment transactions
The accounting treatment of share-based payment transactions, some knowledge of
which is required to understand the discussion below, is dealt with in Chapter 30.
In many tax jurisdictions, an entity receives a tax deduction in respect of
remuneration paid in shares, share options or other equity instruments of the entity.
The amount of any tax deduction may differ from the related remuneration expense,
and may arise in a later accounting period. For example, in some jurisdictions, an
entity may recognise an expense for employee services in accordance with IFRS 2
(based on the fair value of the award at the date of grant), but not receive a tax
deduction until the share options are exercised (based on the intrinsic value of the
award at the date of exercise).
As noted at 6.1.4 above, IAS 12 effectively considers the cumulative expense associated
with share-based payment transactions as an asset that has been fully expensed in the
financial statements in advance of being recognised for tax purposes, thus giving rise to
a deductible temporary difference. [IAS 12.68A, 68B].
If the tax deduction available in future periods is not known at the end of the period, it
should be estimated based on information available at the end of the period. For
example, if the tax deduction will be dependent upon the entity’s share price at a future
date, the measurement of the deductible temporary difference should be based on the
entity’s share price at the end of the period. [IAS 12.68B].
10.8.1
Allocation of tax deduction between profit or loss and equity
Where the amount of any tax deduction (or estimated future tax deduction) exceeds the
amount of the related cumulative remuneration expense, the current or deferred tax
associated with the excess should be recognised directly in equity. [IAS 12.68C]. This
treatment is illustrated by Example 29.49 below.
2466 Chapter 29
Example 29.49: Tax deductions for share-based payment transactions –
allocation to profit or loss and equity
At the start of year 1, an entity with a tax rate of 40% grants options, which vest at the end of year 3 and are
exercised at the end of year 5. Tax deductions are received at the date of exercise of the options, based on
their intrinsic value at the date of exercise. Details of the expense recognised for employee services received
and consumed in each accounting period, the number of options expected to vest by the entity at each year-
end during the vesting period and outstanding after the end of the vesting period, and the intrinsic value of
the options at each year-end, are as follows:
IFRS 2 expense
Cumulative
Number
Intrinsic value
Total intrinsic
Year
for period
IFRS 2 expense
of options
per option
value
£ £
£
£
1 188,000 188,000
50,000
5
250,000
2 185,000 373,000
45,000
8
360,000
3 190,000 563,000
40,000
13
520,000
4
563,000
40,000
17
680,000
5
563,000
40,000
20
800,000
The tax base of, and the temporary difference and deferred tax asset associated with, the employee services
is calculated as follows. Since the book value of the employee services is in all cases zero, the temporary
difference associated with the services is at all times equal to their tax base as set out below.
Tax base (and
Intrinsic value Expired portion of
temporary
Year (see table above)
vesting period 1
difference)
Tax asset 2
Tax income 3
£
£
£
£
a
b
c = a × b
40% of c
1 250,000
1/3
83,333
33,333
33,333
2 360,000
2/3
240,000
96,000
62,667
3 520,000
3/3
520,000
208,000
112,000
4 680,000
3/3
680,000
272,000
64,000
5 800,000
3/3
800,000
320,000
48,000
1
The expired portion of the vesting period is consistent with that used to calculate the cumulative charge
employee costs under IFRS 2 (see Chapter 30).
2
Deferred tax asset in years 1 to 4 and current tax asset in year 5.
3
Year-on-year increase in asset.
By comparing the ‘Cumulative IFRS 2 expense’ column in the first table with the ‘Tax base (and temporary
difference)’ column in the second table it can be seen that in years 1 to 3 the expected tax deduction is lower
than the cumulative expense charged, and is therefore dealt with entirely in profit or loss. However in years 4
and 5 the expected (and in year 5 the actual) tax deduction is higher than the cumulative expense charged. The
tax relating to the cumulative expense charged is dealt with in profit or loss, and the tax relating to the excess of
the tax-deductible amount over the amount charged in profit or loss is dealt with in equity as follows:
Income
taxes
2467
Debit
Credit
Year 1
Deferred tax (statement of financial position)
33,333
Deferred tax (profit or loss)
33,333
Year 2
Deferred tax (statement of financial position)
62,667
Deferred tax (profit or loss)
62,667
Year 3
Deferred tax (statement of financial position)
112,000
Deferred tax (profit or loss)
112,000
Year 4
Deferred tax (statement of financial position)
64,000
Deferred tax (profit or loss)1 17,200
Equity
46,800
Year 5
Deferred tax (profit or loss)
225,200
Deferred tax (equity)
46,800
Deferred tax (statement of financial position)
272,000
Current tax (statement of financial position)
320,000
Current tax (profit or loss)2 225,200
Current tax (equity)
94,800
1
Cumulative tax credit to profit or loss restricted to 40% of cumulative expense of £563,000 = £225,200.
Amount credited in years 1 to 3 is £(33,333 + 62,667 + 112,000) = £212,000. Therefore amount
recognised in profit or loss is £(225,200 – 212,000) = £17,200.
2
Current tax credit in profit or loss is restricted to £225,200 as explained in note 1 above. The £48,000
net increase in tot
al cumulative tax income since year 4 (£320,000 – £272,000) is dealt with entirely in
equity (current tax income €94,800 less deferred tax charge €46,800).
Example 29.49 above is based on Example 5 in the illustrative examples accompanying
IAS 12 (as inserted by IFRS 2). However, the example included in IAS 12 states that the
cumulative tax income is based on the number of options ‘outstanding’ at each period
end. This would be inconsistent with the methodology in IFRS 2 (see Chapter 30), which
requires the share-based payment expense during the vesting period to be based on the
number of options expected to vest (as that term is defined in IFRS 2), not the total
number of options outstanding, at the period end. It would only be once the vesting
period is complete that the number of options outstanding becomes relevant. We assume
that this is simply a drafting slip by the IASB.
IAS 12 asserts that the allocation of the tax deduction between profit or loss and equity
illustrated in Example 29.49 is appropriate on the basis that the fact that the tax
deduction (or estimated future tax deduction) exceeds the amount of the related
cumulative remuneration expense ‘indicates that the tax deduction relates not only to
remuneration expense but also to an equity item.’ [IAS 12.68C].
2468 Chapter 29
The treatment required by IFRS 2 seems to have been adopted for consistency with US
GAAP. However, as the IASB acknowledges, while the final cumulative allocation of
tax between profit or loss and equity is broadly consistent with that required by US
GAAP, the basis on which it is measured and reported at reporting dates before exercise
date is quite different. [IFRS 2.BC311-BC329].
10.8.2
Determining the tax base
IAS 12 does not specify exactly how the tax base of a share-based payment transaction
is to be determined. However, Example 5 in the illustrative examples accompanying
IAS 12 (the substance of which is reproduced at 10.8.1 above) calculates the tax base as:
• the amount that would be deductible for tax if the event triggering deduction
occurred at the end of the reporting period; multiplied by
• the expired portion of the vesting period at the end of the reporting period.
IFRS 2 treats certain share-based payment awards as, in effect, a parcel of a number of
discrete awards, each with a different vesting period. This may be the case where an
award is subject to graded vesting, has been modified, or has separate equity and
liability components (see Chapter 30). In order to determine the tax base for such an
award, it is necessary to consider separately the part, or parts, of the award with the
same vesting period, as illustrated in Example 29.50 below.
Example 29.50: Tax deductions for share-based payment transactions – ‘multi-
element’ awards
An entity awards 550 free shares to an employee, with no conditions other than continuous service. 100 shares
vest after one year, 150 shares after two years and 300 shares after three years. Any shares received at the
end of years 1 and 2 have vested unconditionally.
At the date the award is granted, the fair value of a share delivered in one year’s time is €3.00; in two years’
time €2.80; and in three years’ time €2.50.
Under IFRS 2, the analysis is that the employee has simultaneously received an award of 100 shares vesting over
one year, an award of 150 shares vesting over two years and an award of 300 shares vesting over 3 years (see
Chapter 30 at 6.2.2). This would be accounted for as follows (assuming that the award was expected to vest in full at
each reporting date and did actually vest in full – see Chapter 30):
Cumulative
Expense for
Year Calculation of cumulative expense
expense (€)
period (€)
1 [100 shares × €3.00] + [150 shares × €2.80 × 1/2] +
[300 shares × €2.50 × 1/3]
760
760
2 [100 shares × €3.00] + [150 shares × €2.80 × 2/2] +
[300 shares × €2.50 × 2/3]
1,220
460
3 [100 shares × €3.00] + [150 shares × €2.80 × 2/2] +
[300 shares × €2.50 × 3/3]
1,470
250
The entity receives a tax deduction at 30% for the awards based on the fair value of the shares delivered. The
fair value of a share at the end of years 1, 2 and 3 is, respectively, €3.60, €2.00 and €6.00.
At the end of year 1, a current tax deduction of €108 (100 shares × €3.60 @ 30%) is receivable in respect of
the 100 shares that vest. The tax base of the shares expected to vest in years 2 and 3 is calculated by reference
to the year-end share price of €3.60 as:
Income
taxes
2469
• in respect of the 150 shares expected to vest at the end of year 2, €270 (150 shares × €3.60 × 1/2). This
will give rise to a deferred tax asset of €81 (€270 @ 30%); and
• in respect of the 300 shares expected to vest at the end of year 3, €360 (300 shares × €3.60 × 1/3). This
will give rise to a deferred tax asset of €108 (€360 @ 30%).
The total deferred tax asset at the end of year is therefore €189 (€81 + €108).
At the end of year 2, a current tax deduction of €90 is receivable in respect of the 150 shares that vest (150 shares ×
€2.00 @ 30%). The tax base of the shares expected to vest in year 3 is calculated by reference to the year-end share
price of €2.00 as €400 (300 shares × €2.00 × 2/3). This gives rise to a deferred tax asset of €120 (€400 @ 30%).
At the end of year 3, a current tax deduction of €540 (300 shares × €6.00 @ 30%) is receivable in respect of
the 300 shares that vest.
When an award has multiple elements that vest at different times, the question arises as to whether the unit
of account for applying the ‘cap’ on recognition of the tax benefit in profit or loss is the award as a whole or
each element separately accounted for. In our view, the determination needs to be made for each element of
the award separately. This is similar to our analysis at 10.7.3 below (multiple awards outstanding) and 10.7.4
below (awards for which a tax deduction is received on exercise which are exercised at different times).
Based on the information above, the total current and deferred tax income or expense (i.e. before allocation
to profit or loss and equity) at the ends of years 1 to 3 would be as follows, assuming in each case that there
is no restriction on the recognition of tax assets (see 7.4 above).
Current tax asset
Deferred tax asset
Deferred tax
Year
and income
income/(expense)
€ €
€
1 108 189
189
2 90 120
(69)
3 540
–
(120)
The required accounting entries for income taxes are as follows:
Debit
Credit
Year 1
Current tax (statement of financial position)
108
Current tax (profit or loss)
90
Current tax (equity)1 18
Deferred tax (statement of financial position)
189
Deferred tax (profit or loss) (€63 + €75 – see below)
138
Deferred tax (equity)2 (€18 + €33 – see below)
51
1
The current tax deduction relates to the 100 shares vesting in year 1, for which the charge to profit or loss is
€300 (100 shares × €3.00). The tax deduction accounted for in profit or loss is therefore restricted to 30% of
€300 = €90. The balance of €18 is credited to equity, and relates to the €0.60 difference between the grant date
fair value of a ‘Year 1’ share at grant (€3.00) and at vesting (€3.60) – 100 shares × €0.60 = €60 @ 30% = €18.
2
The total deferred tax income of €189 represents:
• €81 (see above) in respect of the 150 shares expected to vest in year 2, for which the charge to
profit or loss is €210 (150 shares × €2.80 × 1/2). The tax deduction accounted for in profit or loss
is restricted to 30% of €210 = €63, with the balance of €18 credited to equity; and
• €108 (see above) in respect of the 300 shares expected to vest in year 3, for which the expected charge
to profit or loss is €250 (300 shares × €2.50 × 1/3). The tax deduction accounted for in profit or loss
is therefore restricted to 30% of €250 = €75, with the balance of €33 credited to equity.
2470 Chapter 29
Debit
Credit
Year 2
Current tax (statement of financial position)
90
Current tax (profit or loss)3 90
Deferred tax (profit or loss)4 18
Deferred tax (equity)4 51
Deferred tax (statement of financial position)4
69
3
The current tax deduction relates to the 150 shares vesting in year 2, for which the cumulative charge to
profit or loss is €420 (150 shares × €2.80). The cumulative tax deduction accounted for in profit or loss
would therefore be restricted to 30% of €420 = €126. The entire amount of current tax deduction
received (€90) is therefore credited to profit or loss.
4
At the end of year 2, the deferred tax relates to the 300 shares expected to vest at the end of year 3,
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 492
