Summary

Section 26 deals with the accounting for all share based payment transactions settled directly by the entity or another group entity on behalf of the entity including required disclosures.

What is new?

Section 26 allows a directors’ valuation if fair value cannot be determined in certain circumstances.

Section 26 allows an alternative treatment for groups of companies where the share based payment award is granted to employees of one or more members of a group to recognise and measure the share based payment expense on the basis of a reasonable allocation of the group expense.

What is different?

Section 26 does not include a definition of vesting conditions, however, old GAAP (FRS 20) did. This is not likely to be a huge issue as it is likely FRS 20 guidance will be utilised.

Old GAAP mandated the use of the option pricing model where market information was not available, however, it is not mandated by Section 26. However, it is likely that this will be required to be used in order to provide a reliable estimation of the fair value so differences should not occur in practice.

Other standards affecting Section 26 where differences arise:

Section 35 provides an exemption whereby share based payments which were granted prior to the date of transition can continue to be accounted for under old GAAP i.e. FRS 20 but any new shares granted since the date of transition should be accounted for under Section 26. Cash settled transaction settled prior to the date of transition do not have to be accounted for under Section 26.

Section 35 also provides an exemption for entities who have not had to account for share based payments under old GAAP not to account for share grants prior to the date of transition. For any grants after that date Section 26 should be applied.

What are the key points?

An equity-settled share-based payment transaction is one where the entity acquires goods or services as consideration for its equity instruments.

A cash-settled share-based payment transaction is one where the entity acquires goods or services by incurring liabilities to the supplier based on the price or value of its equity instruments.

Cash-settled share-based payments include share appreciation rights.

An arrangement is still classified as a share-based payment when one group entity receives goods or services and another group entity issues equity, or cash based on equity prices, to pay for those goods or services. This classification applies to both of the group companies involved.

As goods or services are received they are recognised with an increase in equity for equity settled transactions and a liability for cash settled transactions. If they are dependent on a specified period of service, the services are accounted for as they are rendered i.e. over the vesting period.

Cancellations are accounted for as an acceleration of vesting and the remaining element is charged to the profit and loss.

For modifications that benefit the employees, the incremental fair value is charged over the remainder of the vesting period while the original value continues to be charged. For modifications that reduces the employee benefit, the original fair value continues to be charged with no downward adjustment made.

The incremental value = fair value of instrument under new terms at the date of modification less fair value of original instrument at the date of modification.

For cash settled transactions, goods or services received and the corresponding liability are measured at the fair value of that liability, which is re-measured at each reporting date, with changes recognised in the profit and loss.

Arrangements where the entity has a choice between settlement in cash or equity are accounted for as equity-settled, unless either the entity:

• has a past practice or stated policy of settling in cash or generally settles in cash when the counterparty asks for cash settlement; or
• the cash alternative has no commercial substance (Section 26.15).

Where the counterparty has a choice of settlement in cash or equity then it should be treated as a cash settled transaction unless the choice has no commercial substance because the cash settled amount bears no relationship to, or is likely to be lower in value, than the fair value of the equity (Section 26.15B).

The fair value is determined in relation to the hierarchy detailed in section 26.10 with the first option being the market price for the equity instrument if there are observable market prices. Non market vesting conditions should not be taken into account when determining fair value.

If a parent grants options to employees of a subsidiary, the employer has two options:

• Measure and account for the transaction using the same principles as if it were paying the cash or shares itself, that is in accordance with the remainder of section 26; or
• recognise a charge based on a reasonable allocation of the group expense.

What do accountants need to do?

Be aware of the differences between old GAAP and Section 26.

Advise group companies who have share based schemes in operation of the group allocation method so as to reduce workload for clients.

What do Companies need to do?

Be aware of the differences between old GAAP and Section 26 and see whether the group allocation method provides a better option for the entity.