The following Share Incentives guidance note Produced in partnership with William Franklin of Pett Franklin LLP provides comprehensive and up to date legal information covering:
A cash settled share based payment (SBP) expense arises when an employee provides services in return for the company accepting a liability or obligation to pay the employee in cash (or by the transfer of some other asset of the company). Examples of cash settled SBPs include phantom options and stock appreciation rights. For a comparison of cash settled share based payments versus equity-settled share-based payments, see Practice Note: Introduction to accounting for share-based payments. For an introduction into the equity-settled share based payments accounting regime, see Practice Note: Overview of the equity settled share based payments accounting regime.
During the life of cash based awards, the liability needs to be measured at each balance sheet date and included as a liability in the company’s balance sheet. The liability, therefore, is periodically re-measured until the award matures and is paid to the employee. This is fundamentally different accounting from equity settled SBP accounting where the employee receives an equity instrument and the fair value is measured only once at the making of the award and not subsequently revised, except for trueing up. If the liability is directly linked to the market value of the company, for example when a company uses a phantom share option to replicate an option, paragraph 33 of the SBP standards requires the liability to be quantified by
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