Accounting for share schemes

By Tolley
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The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Accounting for share schemes
  • Introduction
  • Recognition and measurement
  • Valuation techniques
  • Cancellation and settlement
  • Disclosure requirements
  • Deferred tax

Introduction

The accounting requirements for Share Based Payment (SBP) arrangements are set out in the International Accounting Standards (IFRS 2) and the corresponding UK standard FRS 102, s 26.

Under previous UK GAAP, smaller companies which were applying the Financial Reporting Standard for Smaller Entities (FRSSE) were not required to account for equity-settled share-based payment arrangements. However, the accounting requirements for SBP arrangements now apply to all companies for periods commencing on or after 1 January 2016 except for the very smallest UK companies that choose to apply FRS 105 “The Financial Reporting Standard applicable to the Micro-entities Regime ”. The underlying principles in respect of SBP accounting under FRS 102 are similar but not identical to those under FRS 20 (the previous UK standard for SBP arrangements).

The principal feature of share-based payment arrangements is that shares are provided in return for other assets, goods or services. Such arrangements have accounting implications even where no cash changes hands, for example where employees receive shares in return for services provided by those employees. In such instances the employer records a cost in its income statement in respect of the services being provided. The effect on the balance sheet depends upon whether the SBP arrangement is equity-settled or cash-settled, as discussed below.

The SBP requirements distinguish between two different types of arrangement. Awards of share options, shares and interests in shares are usually accounted for as equity-settled SBPs whereas cash bonuses linked to the share price (ie phantom share schemes) are generally accounted for as cash-settled SBPs. In most cases it is relatively easy to distinguish between the two types of awards, but this is not always the case. For example, consider a share buyback arrangement where the entity is forced to acquire the shares initially for cash. The award is treated as an equity-settled SBP if the employee will receive shares. The

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