financial statements of ABC would be as set out below. It should be noted that all these pronouncements
require various entries to be recorded in ‘equity’. Thus, some variation may be found in practice as to the
precise characterisation of the reserves, depending on local legal requirements and other ‘traditions’ in
national GAAP which are retained to the extent that they do not conflict with IFRS.
£
£
1 January
Own shares (equity)
250,000
Cash 250,000
To record purchase of 100,000 £1 shares at £2.50/share
1 May – 31 December
Profit or loss
52,500
Equity† 52,500
To record cost of vested 350,000 options at £0.15/option
1 September
Own shares (equity)
795,000
Cash 795,000
To record purchase of 300,000 £1 shares at £2.65/share
Share-based
payment
2701
£
£
31 December
Cash 945,000
Equity†1
945,000
Receipt of proceeds on exercise of 350,000 options at £2.70/share
Equity† 914,375
Own shares (equity)2 914,375
Release of shares from EBT to employees
1
This reflects the fact that the entity’s resources have increased as a result of a transaction with an owner,
which gives rise to no gain or loss and is therefore credited direct to equity.
2
It is necessary to transfer the cost of the shares ‘reissued’ by the EBT out of own shares, as the deduction
for own shares would otherwise be overstated. The total cost of the pool of 400,000 shares immediately
before vesting was £1,045,000 (£250,000 purchased on 1 January and £795,000 purchased on
1 September), representing an average cost per share of £2.6125. £2.6125 × 350,000 shares = £914,375.
†
We recommend that, subject to any local legal restrictions, these amounts should all be accounted for in
the same component of equity.
Example 30.50 illustrates the importance of keeping the accounting treatment required
by IAS 32 for the cost of the shares completely separate from that for the cost of the
award required by IFRS 2. In cash terms, ABC has made a ‘profit’ of £30,625, since it
purchased 350,000 shares with a weighted average cost of £914,375 and issued them to
the executives for £945,000. However, this ‘profit’ is accounted for entirely within
equity, whereas a calculated IFRS 2 cost of £52,500 is recognised in profit or loss.
Example 30.51: Interaction of IFRS 10, IAS 32 and IFRS 2 (fresh issue of shares)
On 1 January in year 1, the EBT of ABC plc subscribed for 100,000 £1 shares of ABC plc at £2.50 per share,
paid for in cash provided by ABC by way of loan to the EBT. Under local law, these proceeds must be credited
to the share capital account up to the par value of the shares issued, with any excess taken to a share premium
account (additional paid-in capital). These were the only ABC shares held by the EBT at that date.
On 1 May in the same year, ABC granted executives options over between 300,000 and 500,000 shares at
£2.70 per share, which will vest at the end of year 1, the number vesting depending on various performance
criteria. It is determined that the cost to be recognised in respect of this award is £0.15 per share.
Four months later, on 1 September, the EBT subscribed for a further 300,000 shares at £2.65 per share, again
paid for in cash provided by ABC by way of loan to the EBT.
At the end of year 1, options vested over 350,000 shares and were exercised immediately.
The accounting entries for the above transaction required by IFRS 10, IAS 32 and IFRS 2 in the consolidated
financial statements of ABC would be as set out below. It should be noted that all these pronouncements
require various entries to be recorded in ‘equity’. Thus, some variation may be found in practice as to the
precise characterisation of the reserves, depending on local legal requirements and other ‘traditions’ in
national GAAP which are retained to the extent that they do not conflict with IFRS.
£
£
1 January
Equity†1
250,000
Share capital
100,000
Share premium 150,000
To record issue of 100,000 £1 shares to EBT at £2.50/share
1 May – 31 December
Profit or loss
52,500
Equity† 52,500
To record cost of vested 350,000 options at £0.15/option
2702 Chapter 30
£
£
1 September
Equity†1
795,000
Share capital
300,000
Share premium 495,000
To record issue of 300,000 £1 shares at £2.65/share
31 December
Cash 945,000
Equity2†
945,000
Receipt of proceeds on exercise of 350,000 options at £2.70/share
1
This entry is required to reconcile the requirement of local law to record an issue of shares with the fact
that, in reality, there has been no increase in the resources of the reporting entity. All that has happened
is that one member of the reporting group (the EBT) has transferred cash to another (the parent entity).
In our view, this amount should not necessarily be accounted for within any ‘Own shares reserve’ in
equity if such a reserve is generally restricted to shares acquired from third parties.
2
This reflects the fact that the entity’s resources have increased as a result of a transaction with an owner,
which gives rise to no gain or loss and is therefore credited direct to equity.
†
We recommend that, subject to any local legal restrictions, these amounts should all be accounted for in
the same component of equity.
12.3.4
Separate financial statements of sponsoring entity
As noted at 12.3.2 above, in contrast to some national GAAPs, where an EBT is treated
as a direct extension of the parent or other sponsoring entity, such that the assets and
liabilities of the EBT are included in both the separate financial statements of the
sponsoring entity and the group consolidated financial statements, under IFRS the
accounting model is prima facie to treat the EBT as a separate group entity.
This means that the separate financial statements of the sponsoring entity must show
transactions and balances with the EBT rather than the transactions, assets and liabilities
of the EBT. This raises some accounting problems, for some of which IFRS currently
provides no real solution, as illustrated by Example 30.52 below. This has led the
Interpretations Committee and others to discuss whether the ‘separate entity’ approach
to accounting for EBTs is appropriate (see further discussion below).
Example 30.52: EBTs in separate financial statements of sponsoring entity
An entity lends its EBT €1 million which the EBT uses to make a market purchase of 200,000 shares in the
entity. In the separate financial statements of the EBT the shares will be shown as an asset. In the consolidated
financial statements, the shares will be accounted for as treasury shares, by deduction from equity.
I
n the separate financial statements of the entity, on the basis that the EBT is a separate entity, like any other
subsidiary, the normal accounting entry would be:
€
€
Loan to EBT
1,000,000
Cash 1,000,000
The obvious issue with this approach is that it is, in economic substance, treating the shares held by the EBT
(represented by the loan to the EBT) as an asset of the entity, whereas, if they were held directly by the entity,
they would have to be accounted for as treasury shares, by deduction from equity. If the share price falls such
that the EBT has no means of repaying the full €1,000,000, prima facie this gives rise to an impairment of the
€1,000,000 loan. Again, however, this seems in effect to be recognising a loss on own equity.
Suppose now that employees are granted options over the shares. The options have an exercise price of zero and
a value under IFRS 2 of €1,200,000. The entity will therefore book an expense of €1,200,000 under IFRS 2.
Share-based
payment
2703
When the options are exercised, the shares are delivered to employees. At that point the €1,000,000 loan to the
EBT clearly becomes irrecoverable (as it has no assets), and must be written off. Normally, the write-off of an
investment or loan is an expense required to be recognised in profit or loss. However, to recognise the €1,000,000
loan write-off as an expense as well as the €1,200,000 IFRS 2 charge would clearly be a form of double counting.
Some suggest that a solution to this problem is to say that the entity has effectively bought a gross-settled call
option over its own shares from the EBT, whereby it can require the EBT to deliver 200,000 shares in return
for a waiver of its €1,000,000 loan. Thus the accounting for the settlement of the call over the shares is as for
any other gross-settled purchased call option over own equity under IAS 32 – see Chapter 43 at 11.2.1.
€
€
Own shares (deduction from equity)
1,000,000
Loan to EBT
1,000,000
When the shares are delivered to employees (some milliseconds later), the entry is:
€
€
Other component of equity
1,000,000
Own shares (deduction from equity)
1,000,000
At its meetings in May and July 2006, the Interpretations Committee discussed whether
the EBT should be treated as an extension of the sponsoring entity, such as a branch, or
as a separate entity. The Interpretations Committee decided to explore how specific
transactions between the sponsor and the EBT should be treated in the sponsor’s
separate or individual financial statements and whether transactions between the EBT
and the sponsor’s employees should be attributed to the sponsor.
Interestingly, the Interpretations Committee fell short of dismissing the ‘extension of the
parent company’ approach and has not since revisited this topic other than to re-confirm
in March 2011 that it had not become aware of additional concerns or of diversity in
practice and hence it did not think it necessary for this to be considered for the IASB’s
agenda. In our view, whilst any requirement to consolidate EBTs under IFRS 10 could be
argued to give a clear steer towards treating the EBT as a separate entity, until there is any
final clarification of this issue, it appears acceptable to treat an EBT as an extension of the
sponsoring entity in that entity’s separate financial statements. This treatment would
result in outcomes essentially the same as those in Examples 30.50 and 30.51 above, while
avoiding the problems highlighted in Example 30.52 above.
12.3.5
Financial statements of the EBT
The EBT may be required to prepare financial statements in accordance with
requirements imposed by local law or by its own trust deed. The form and content of
such financial statements are beyond the scope of this chapter.
12.4 Illustrative example of group share scheme – equity-settled
award satisfied by market purchase of shares
The discussion in 12.4.1 to 12.4.3 below is based on Example 30.53 and addresses the
accounting treatment for three distinct aspects of a group share scheme – a share-based
payment arrangement involving group entities (see 12.2 above), the use of an EBT
(see 12.3 above) and a group recharge arrangement (see 12.2.7 above).
2704 Chapter 30
This illustrative example treats the recharge by the parent to the subsidiary as an income
statement credit in the individual accounts of the parent and recognises the recharge
when it is paid. In some situations, entities might consider it appropriate to apply
alternative accounting treatments (see 12.2.7 above).
Example 30.53: Group share scheme (market purchase of shares)
On 1 July 20x1 an employee of S Limited, a subsidiary of the H plc group, is awarded options under the
H group share scheme over 3,000 shares in H plc at £1.50 each, exercisable between 1 July 20x4 and 1 July
20x7, subject to a service condition and certain performance criteria being met in the three years ending
30 June 20x4.
H plc is the grantor of the award, and has the obligation to settle it. On 1 January 20x2, in connection with
the award, the H plc group EBT purchases 3,000 shares at the then prevailing market price of £2.00 each,
funded by a loan from H plc. On exercise of the option, S Limited is required to pay the differential between
the purchase price of the shares and the exercise price of the option (£0.50 per share) to the EBT.
For the purposes of IFRS 2, the options are considered to have a fair value at grant date of £1 per option.
Throughout the vesting period of the option, H takes the view that the award will vest in full.
The option is exercised on 1 September 20x6, at which point the EBT uses the option proceeds, together with
the payment by S Limited, to repay the loan from H plc.
H plc and its subsidiaries have a 31 December year end.
12.4.1
Consolidated financial statements
So far as the consolidated financial statements are concerned, the transactions to be
accounted for are:
• the purchase of the shares by the EBT and their eventual transfer to the employee; and
• the cost of the award.
Transactions between H plc or S Limited and the EBT are ignored since, in this
Example, the EBT is consolidated (see 12.3 above). The accounting entries required are
set out below. As in other examples in this chapter, where an entry is shown as being
made to equity the precise allocation to a particular component of equity will be a
matter for local legislation and, possibly, local accounting ‘tradition’, to the extent that
this is not incompatible with IFRS.
£
£
y/e 31.12.20x1
Profit or loss (employee costs)*
500
Equity
500
1.1.20x2
Own shares (equity)
6,000
Cash
6,000
y/e 31.12.20x2
Profit or loss (employee costs)*
1,000
Equity
1,000
y/e 31.12.20x3
Profit or loss (employee costs)*
1,000
Equity
1,0
00
Share-based
payment
2705
£
£
y/e 31.12.20x4
Profit or loss (employee costs)*
500
Equity
500
1.9.20x6
Cash (option proceeds)†
4,500
Equity‡
1,500
Own shares (equity)**
6,000
*
Total cost £3,000 (3000 options × £1) spread over 36 months. Charge for period to December 20x1 is
6/36 × £3,000 = £500, and so on. In practice, where options are granted to a group of individuals, or with
variable performance criteria, the annual charge will be based on a continually revised cumulative charge
(see further discussion at 6.1 to 6.4 above).
†
3,000 options at £1.50 each.
‡
This reflects the fact that the overall effect of the transaction for the group in cash terms has been a ‘loss’
of £1,500 (£6,000 original cost of shares less £4,500 option proceeds received). However, under IFRS
this is an equity transaction, not an expense.
** £6,000 cost of own shares purchased on 1 January 20x2 now transferred to the employee. In practice, it
is more likely that the appropriate amount to be transferred would be based on the weighted average
price of shares held by the EBT at the date of exercise, as in Example 30.50 at 12.3.3 above. In such a
case there would be a corresponding adjustment to the debit to equity marked with ‡ above.
12.4.2 Parent
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 539
