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ACCA Strategic Professional · Strategic Business Reporting (International) · Share-based payment

Gamma plc grants its CEO a right to choose, on vesting, between receiving 10,000 shares or a cash amount equal to the value of 9,000 shares. Which accounting approach does IFRS 2 require?

Gamma must account for a compound instrument: a liability for the fair value of the cash alternative (9,000 shares) and an equity component for the excess fair value of the 10,000-share alternative, because the counterparty chooses the settlement method.

  1. AAccount for a compound instrument: a liability component for the cash alternative and an equity component for any excess fair value of the share alternativeCorrect
  2. BTreat entirely as equity-settled because shares are an option
  3. CTreat entirely as cash-settled because cash is offered
  4. DIgnore the arrangement until the CEO makes the choice

Explanation

Where the counterparty can choose settlement, the entity has granted a compound instrument. The debt component is the fair value of the cash alternative (9,000 shares' value), and the equity component is the excess of the fair value of the 10,000-share alternative over it. Treating all as one type ignores this split.

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