The accounting by the parent will depend on how the EBT is treated (i.e. whether it
is accounted for as a separate entity or as an extension of the parent – see 12.3 above
for guidance). The parent should apply the accounting set out in the appropriate
section below:
• EBT treated as separate entity (see 12.4.2.A below); and
• EBT treated as extension of parent (see 12.4.2.B below).
We also discuss, at 12.4.2.C below, the accounting implications if the parent, rather than
– as in Example 30.53 – a subsidiary, is the employing entity.
12.4.2.A
Accounting by parent where subsidiary is the employing entity and EBT
is treated as separate entity
The parent accounts for the share-based payment transaction under IFRS 2 as an
equity-settled transaction, since the parent settles the award by delivering its own
equity instruments to the employees of the subsidiary (see 12.2.4 above). However, as
discussed at 12.2.4 above, instead of recording a cost, as in its consolidated financial
statements, the parent records an increase in the carrying value of its investment in
subsidiary. It might then be necessary to consider whether the ever-increasing
investment in subsidiary is supportable or is in fact impaired. As this is a matter to be
determined in the light of specific facts and circumstances, it is not considered in this
example. Any impairment charge would be recorded in profit or loss.
2706 Chapter 30
In addition to accounting for the share-based payment transaction, the parent records
its transactions with the EBT and the purchase of shares.
This gives rise to the following entries:
£
£
y/e 31.12.20x1
Investment in subsidiary*
500
Equity
500
1.1.20x2
Loan to EBT
6,000
Cash
6,000
y/e 31.12.20x2
Investment in subsidiary*
1,000
Equity
1,000
y/e 31.12.20x3
Investment in subsidiary*
1,000
Equity
1,000
y/e 31.12.20x4
Investment in subsidiary*
500
Equity
500
1.9.20x6 Cash
6,000
Loan to EBT
6,000
*
Total increase in investment £3,000 (3000 shares × £1 fair value of each option) recognised over 36 months.
Increase during period to December 20x1 is 6/36 × £3,000 = £500, and so on. In practice, where options
were granted to a group of individuals, or with variable performance criteria, the annual adjustment would
be based on a continually revised cumulative adjustment (see further discussion at 6.1 to 6.4 above).
12.4.2.B
Accounting by parent where subsidiary is the employing entity and EBT
is treated as extension of the parent
The parent accounts for the share-based payment transaction under IFRS 2 as an
equity-settled transaction, since the parent settles the award by delivering its own
equity instruments to the employees of the subsidiary (see 12.2.4 above). However, as
discussed at 12.2.4 above, instead of recording a cost, as in its consolidated financial
statements, the parent records an increase in the carrying value of its investment in
subsidiary. It might then be necessary to consider whether the ever-increasing
investment in subsidiary is supportable or is in fact impaired. As this is a matter to be
determined in the light of specific facts and circumstances, it is not considered in this
example. Any impairment charge would be recorded in profit or loss.
In addition to accounting for the share-based payment transaction, the parent records
the transactions of the EBT and the purchase of shares.
This gives rise to the following entries:
£
£
y/e 31.12.20x1
Investment in subsidiary*
500
Equity
500
1.1.20x2
Own shares (equity)
6,000
Cash
6,000
y/e 31.12.20x2
Investment in subsidiary*
1,000
Equity
1,000
y/e 31.12.20x3
Investment in subsidiary*
1,000
Equity
1,000
y/e 31.12.20x4
Investment in subsidiary*
500
Equity
500
Share-based
payment
2707
£
£
1.9.20x6 Cash†
6,000
Equity‡
1,500
Profit or loss§
1,500
Own shares** (equity)
6,000
*
Total increase in investment £3,000 (3000 shares × £1 fair value of each option) spread over 36 months.
Increase during period to December 20x1 is 6/36 × £3,000 = £500, and so on. In practice, where options
were granted to a group of individuals, or with variable performance criteria, the annual adjustment would
be based on a continually revised cumulative adjustment (see further discussion at 6.1 to 6.4 above).
†
£4,500 option exercise proceeds from employee plus £1,500 contribution from S Limited.
‡
This is essentially a balancing figure representing the fact that the entity is distributing own shares with
an original cost of £6,000, but has treated £1,500 of the £6,000 of the cash it has received as income (see
§ below) rather than as payment for the shares.
§
The £1,500 contribution by the subsidiary to the EBT has been treated as a distribution from the
subsidiary (see 12.2.7 above) and recorded in profit or loss. It might then be necessary to consider
whether, as a result of this payment, the investment in the subsidiary had become impaired (see Chapter 8
at 2.4). As this is a matter to be determined in the light of specific facts and circumstances, it is not
considered in this example. Any impairment charge would be recorded in profit or loss.
** £6,000 cost of own shares purchased on 1 January 20x2 now transferred to 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.
12.4.2.C
Parent company as employing entity
If, in Example 30.53, the employing entity were the parent rather than the subsidiary, it
would record an expense under IFRS 2. It would also normally waive £1,500 of its
£6,000 loan to the EBT (i.e. the shortfall between the original loan and the £4,500
option proceeds received from the employee).
If the EBT is treated as an extension of the parent, the accounting entries for the parent
would be the same as those for the group, as set out in 12.4.1 above.
If the EBT is treated as a separate entity, the accounting entries might be as follows:
£
£
y/e 31.12.20x1
Profit or loss*
500
Equity
500
1.1.20x2
Loan to EBT
6,000
; Cash
6,000
y/e 31.12.20x2
Profit or loss*
1,000
Equity
1,000
y/e 31.12.20x3
Profit or loss*
1,000
Equity
1,000
y/e 31.12.20x4
Profit or loss*
500
Equity
500
1.9.20x6
Own shares (Equity)†
1,500
Cash
4,500
Loan to EBT
6,000
Equity
1,500
Own shares (Equity)
1,500
*
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 were granted to a group of individuals, or
2708 Chapter 30
with variable performance criteria, the annual charge would be based on a continually revised cumulative
charge (see further discussion at 6.1 to 6.4 above).
†
This takes the approach of treating the parent as having a gross-settled purchased call option over its
own equity (see Example 30.52 at 12.3.4 above), under which it can acquire 3,000 own shares from the
EBT for the consideration of the waiver of £1,500 of the original £6,000 loan. The £4,500 cash inflow
represents the £4,500 option exercise proceeds received by the EBT from the employee, which is then
used to pay the balance of the original £6,000 loan.
12.4.3 Employing
subsidiary
The employing subsidiary is required to account for the IFRS 2 expense and the
contribution to the EBT on exercise of the award. This gives rise to the accounting entries
set out below. The entries to reflect the IFRS 2 expense are required by IFRS 2 (see 12.2.3
above). The contribution to the EBT is treated as a distribution (see 12.2.7 above).
£
£
y/e 31.12.20x1
Profit or loss*
500
Equity
500
y/e 31.12.20x2
Profit or loss*
1,000
Equity
1,000
y/e 31.12.20x3
Profit or loss*
1,000
Equity
1,000
y/e 31.12.20x4
Profit or loss*
500
Equity
500
1.9.20x6 Equity†
1,500
Cash
1,500
*
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 were granted to a group of individuals, or
with variable performance criteria, the annual charge would be based on a continually revised cumulative
charge (see further discussion at 6.1 to 6.4 above).
†
This should be treated as a reduction of whatever component of equity was credited with the £3,000
quasi-contribution from the parent in the accounting entries above.
12.5 Illustrative example of group share scheme – equity-settled
award satisfied by fresh issue of shares
Such schemes raise slightly different accounting issues. Again, these are most easily
illustrated by way of an example. The discussion in 12.5.1 to 12.5.3 below is based on
Example 30.54. As with Example 30.53 at 12.4 above, this section 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).
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).
Share-based
payment
2709
Example 30.54: Group share scheme (fresh issue 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. The fair value of the options on 1 July 20x1 is £1 each.
H plc grants the award and has the obligation to settle it.
When preparing accounts during the vesting period H plc and its subsidiaries assume that the award will vest
in full. The options are finally exercised on 1 September 20x6, at which point H plc issues 3,000 new shares
to the EBT at the then current market price of £3.50 for £10,500. The EBT funds the purchase using the
£4,500 option proceeds received from the employee together with £6,000 contributed by S Limited,
effectively representing the fair value of the options at exercise date (3,000 × [£3.50 – £1.50]).
H plc and its subsidiaries have a 31 December year end.
12.5.1
Consolidated financial statements
The consolidated financial statements need to deal with:
• the charge required by IFRS 2 in respect of the award; and
• the issue of shares.
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*
500
Equity
500
y/e 31.12.20x2
Profit or loss*
1,000
Equity
1,000
y/e 31.12.20x3
Profit or loss*
1,000
Equity
1,000
y/e 31.12.20x4
Profit or loss*
500
Equity
500
1.9.20x6 Cash
4,500
Equity†
4,500
*
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 were granted to a group of individuals, or
with variable performance criteria, the annual charge would be based on a continually revised cumulative
charge (see further discussion at 6.1 to 6.4 above).
†
From the point of view of the consolidated group, the issue of shares results in an increase in net assets of
only £4,500 (i.e. the exercise price received from the employee), since the £6,000 contribution from the
employing subsidiary to the EBT is an intragroup transaction. However, it may be that, in certain
jurisdictions, the entity is required to increase its share capital and share premium (additional paid in capital)
accounts by the £10,500 legal consideration for the issue of shares. In that case,
this entry would be expanded
as below, which effectively treats the £6,000 consideration provided from within the group as a bonus issue.
2710 Chapter 30
£
£
1.9.20x6 Cash
4,500
Other
equity
6,000
Share
capital/premium
10,500
12.5.2 Parent
The accounting by the parent will depend on how the EBT is treated (i.e. whether it is
accounted for as a separate entity or as an extension of the parent – see 12.3 above for
guidance). The parent should apply the accounting set out in the appropriate section below:
• EBT treated as separate entity (see 12.5.2.A below); and
• EBT treated as extension of parent (see 12.5.2.B below).
We also discuss, at 12.5.2.C below, the accounting implications if the parent, rather than
– as in Example 30.54 – a subsidiary, is the employing entity.
12.5.2.A
Accounting by parent where subsidiary is the employing entity and EBT
is treated as separate entity
The parent accounts for the share-based payment transaction under IFRS 2 as an
equity-settled transaction, since the parent settles the award by delivering its own
equity instruments, via its EBT, to the employees of the subsidiary (see 12.2.4 above).
However, as discussed at 12.2.4 above, instead of recording a cost, as in its consolidated
financial statements, the parent records an increase in the carrying value of its
investment in subsidiary. It might then be necessary to consider whether the ever-
increasing investment in subsidiary is supportable or is in fact impaired. As this is a
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 540
