ACCA Strategic Professional · Strategic Business Reporting (International) · Share-based payment
Vega plc grants employees the right to choose, at vesting, between receiving 500 shares or a cash amount equal to the value of 400 shares. How does IFRS 2 classify this arrangement?
The arrangement is a compound instrument. Vega recognises a liability for the cash alternative at its fair value and an equity component for the amount by which the fair value of the share alternative exceeds the cash alternative, because the employees choose the settlement.
- AWholly equity-settled, because shares may be received
- BWholly cash-settled, because cash can be demanded
- CA compound instrument with a liability component for the cash alternative and an equity component for any excessCorrect
- DOutside IFRS 2 because the counterparty has a choice
Explanation
Where the counterparty can choose the settlement method, the entity has granted a compound financial instrument. The debt component is the right to cash, measured at fair value of the cash alternative, and the equity component is the excess fair value of the share alternative over the cash alternative. Choice does not remove the transaction from IFRS 2.
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