prepare any necessary entries in e s consolidated financial statements for the years 613373

Recovery of employment tax on share-based payment from employee

On 1 January 2013, an entity granted an executive an award of free shares with a fair value of €100,000 on condition that the executive remain in employment for three years ending on 31 December 2015. In the jurisdiction concerned, an employment tax at the rate of 12% is payable when the shares vest, based on their fair value at the date of vesting. As a condition of obtaining the shares on vesting, the executive is required to pay cash equal to the tax liability to the employer.

When the shares vest on 31 December 2015, their fair value is €300,000, on which employment taxes of €36,000 are due. The executive pays this amount to the entity.

In our view, this arrangement can be construed in one of two ways, with somewhat different accounting outcomes:

• View 1: The executive’s obligation to make whole the employer’s tax liability means that this is, economically, not an award of free shares, but an option to acquire the shares for an exercise price equivalent to 12% of their market value at the date of exercise. The employer’s tax liability is a separate transaction.
• View 2: The executive’s obligation to make whole the employer’s tax liability should be accounted for as such, separately from the share-based payment transaction.

In our view, either approach may be adopted, so long as it is applied consistently as a matter of accounting policy. The essential differences between View 1 and View 2, as illustrated below, are that:

• under View 1 the reimbursement received from the employee is credited to equity, whereas under View 2 it is credited to profit or loss; and
• under View 1, the IFRS 2 charge is lower than under View 2 reflecting the fact that under View 1 the award is construed as an option, not an award of free shares.

View 1 Reimbursement treated as exercise price

On this analysis, the award is construed as an option to acquire shares with an exercise price of 12% of the fair value, at vesting, of the shares. The grant date fair value of the award construed as an option is €88,000. The entity would process the following accounting entries (on a cumulative basis).

View 2 Reimbursement treated separately from the IFRS 2 charge

On this analysis, the award is construed as an award of free shares, with a grant date fair value of €100,000. The reimbursement is accounted for as such, giving rise to a credit to profit or loss. The entity would process the following accounting entries (on a cumulative basis).

It will be seen that View 1 results in a total employee expense of €124,000, while View 2 results in a total employee expense of €100,000.