Help needed

Barry

I wonder if someone can help with a share based payment question as I cannot get my head around it.

An entity establishes a bonus plan on 1.1.05. The employees have a right to choose between a cash payment equal to the market value of 100 shares at 31.12.05 or to receive 100 shares on the same date. At the grant date the fair value of the right to cash is $5000 and the fair value of the right to shares is $5000. The value of the 2 alternatives is the same at all times.

What is the equity amount of the shares?

Steve Collings

Hi

Think of the share based payment as a financial instrument. When there is the potential to settle something in cash or shares you have a compound (sometimes called a 'complex') financial instrument and this situation you describe is exactly that.

The equity component of any compound financial instrument is the difference between the fair value of the compound instrument as a whole and the fair value of the liability portion.

In this case the fair value of the instrument (as a whole) is $5,000 because the cash settlement and the share options are mutually exclusive and are both of the same value. So to answer your question the equity component is the difference between the fair value of the compound instrument $5,000 and the fair value of the debt component - also $5,000 hence the equity component is zero!

This occurs because you are reporting the economic substance which is that there is no benefit to the employee from choosing shares or cash in this scenario.

Hope that helps.

Steve