Overview of the equity settled share based payments accounting regime
Overview of the equity settled share based payments accounting regime

The following Share Incentives guidance note provides comprehensive and up to date legal information covering:

  • Overview of the equity settled share based payments accounting regime
  • Measurement and timing of fair values including outline of the Black Scholes model
  • Spreading of fair value in accounting periods
  • Accounting double entries
  • Impact of performance and vesting conditions and trueing up
  • Cancellations and modifications of awards

Measurement and timing of fair values including outline of the Black Scholes model

The accounting cost for an equity-settled share based payment (SBP) is normally determined and measured at the date of grant, and is based on a theoretical ‘fair’ value of the award at that date. For further details on the difference between fair and market value, see Practice Note: The difference between the face and fair value of a share option.

Timing of fair value

Normally, when an entity uses goods or services, it incurs an accounting expense and has a liability until the liability is paid. In an equity settled SBP transaction, an entity also receives goods or services but, instead of incurring a liability which is then paid, it receives those goods or services in exchange for equity instruments in the entity. This results in the entity not needing to recognise the goods and services it receives as a liability in its financial statements but still needing to recognise the goods and services as an accounting cost.

The fair value of the equity instrument is the product of a combination of the underlying value of the equity instrument and the probability of an award vesting.

The measurement date of the fair value is the date at which there is a common understanding of the terms of the SBP