Share-based payments are a popular method to reward, motivate and retain staff. Remuneration policies of larger companies usually include share or option grants which vest on the satisfaction of specified performance and / or service conditions. Accounting standards are now impacting the design of employee equity scheme, along with tax and legal considerations.
It is well understood that accounting standard AASB 2 "Share-based Payment" prescribes that share-based payments are measured at fair value and expensed over the vesting period (i.e. the period over which all vesting conditions are expected to be satisfied).
What is less understood is the impact of AASB 2 on the design of employee equity schemes. Accounting and valuation considerations are now an integral part of the design phase of employee equity schemes, as outlined below.
- Vesting conditions
Vesting conditions are classified as either:
- Market conditions - generally where the vesting or exercise price depends on an entity's share price or share price relative to the share prices of other entities (eg. Total Shareholder Return relative to the S&P/ASX 200 index); or
- Other conditions – examples are target EPS and minimum service period.
- Equity-settled vs cash-settled
Share-based payment transactions are classified as either:
- Equity-settled share-based payments – where equity instruments are granted; or
- Cash-settled share-based payments – where a liability to transfer cash or other assets is incurred based on the price or value of the entity's equity instruments.
Special rules apply where the entity or employee has a choice of settlement method.
Careful upfront planning can help avoid last minute nasty accounting surprises.
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