Whether incentivizing the Board and staff by the granting of performance rights or options or paying for goods and services with equity instruments, to conserve cash, both of these are caught by the accounting standard AASB 2 Share-based Payment.
The standard is complex and there are many things that need to be considered in accounting for these equity issues. The following are provisions in the standard that in our experience are often misinterpreted or missed altogether.
A director signs an employment agreement in June with the Company that entitles them to receive 1,000,000 performance rights which will convert to ordinary shares in the Company if the Director remains with the Company for two years. The grant of the rights is subject to shareholder approval which is likely to be at the AGM in November. The service period subject to the vesting condition begins when the director begins rendering services to the Company.
The standard requires the entity to recognise services when received.
This means that in some situations, for example, where the issue of the equity instruments are subject to shareholder approval at a future date (the grant date), the entity should estimate the grant date fair value of the equity instruments (e.g. by estimating the fair value of the equity instruments at the end of the reporting period), for the purposes of recognising the services received during the period between service commencement date and grant date. Once the date of grant has been established, the entity should revise the earlier estimate so that the amounts recognised for services received in respect of the grant are ultimately based on the grant date fair value of the equity instruments.
All or none non-market vesting conditions
The Board agrees to issue 1,000,000 options to the Chief Geologist subject to attainment of a JORC compliant resource of 700,000 ounces of gold at the company’s main project. The Chief Geologist has until expiry of the options to achieve the performance vesting condition.
Vesting conditions, other than market conditions, shall be taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognised for goods or services received as consideration for the equity instruments granted shall be based on the number of equity instruments that eventually vest.
We have observed that often the quantum of the expense is reduced by the probability of achievement where the instruments to be issued pertain to an individual. This is not consistent with the standard. The vesting condition is an all or none vesting condition. If achievement is probable (more than a 50% chance of vesting) then the expense to be recognised is to reflect the fair value of the instruments that will ultimately vest over the vesting period, that is 100% of the instruments granted. If the probability is less than 50% at balance date, then nothing would be recognised in the general ledger.
Where probability does play a factor in reducing the expense recognised is for example when instruments are issued to say 10 individuals and the vesting condition is that those individuals need to remain in employ of the company for two years to receive those instruments. At balance date an assessment is made to assess the probability that those individuals will remain with the company. Based on historic attrition 2 employees are expected to resign in that time. The expense recognised for that period will be 80% multiplied by the fair value of the instrument value at grant date, multiplied by the proportion of time lapsed.
A broker and the Company agree a contract where the broker is to receive 5% of a capital raising of $2,000,000 and 10,000,000 options at a deemed value of $2,000 for brokerage services. The Company performs a Black and Scholes and the value of the options is $100,000.
There shall be a rebuttable presumption that the fair value of the goods or services received can be estimated reliably. That fair value shall be measured at the date the entity obtains the goods or the counterparty renders service. In rare cases, if the entity rebuts this presumption because it cannot estimate reliably the fair value of the goods or services received, the entity shall measure the goods or services received, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders service.
Under the standard the first requirement is to fair value the services provided by the broker and as a result the Company records the 6% brokerage fee and $2,000 as a share issue cost.
If the identifiable consideration received (if any) by the entity appears to be less than the fair value of the equity instruments granted or liability incurred, typically this situation indicates that other consideration (i.e. unidentifiable goods or services) has been (or will be) received by the entity. The entity shall measure the identifiable goods or services received in accordance with the Standard. The entity shall measure the unidentifiable goods or services received (or to be received) as the difference between the fair value of the share-based payment and the fair value of any identifiable goods or services received (or to be received). The entity shall measure the unidentifiable goods or services received at the grant date.
The difference between the deemed value of $2,000 and $100,000 should be recognised in the general ledger in accordance with the nature of the additional services received or to be received.
The Board agree to issue shares to settle a liability owed by the Company to a drilling company for a recent drill program. The liability incurred is $250,000. The parties agree 400,000 shares are to be issued to satisfy the debt.
The difference between the carrying amount of the financial liability (or part of a financial liability) extinguished, and the consideration paid, shall be recognised in profit or loss. The equity instruments issued shall be recognised initially and measured at the date the financial liability (or part of that liability) is extinguished.
On the date the shares are issued to settle the debt the closing market price of the shares are $1 per share. The value of the shares is $400,000. As a result, $150,000 is recognised as an expense in profit or loss.
The matters noted above are but a few of the issues we have encountered over the years.