All cancellations, whether by the entity or by other parties, are accounted for in the same way. A grant of equity instruments, that is cancelled or settled during the vesting period, is treated as an acceleration of vesting. The entity should recognise immediately the amount that otherwise would have been recognised for services received over the remainder of the vesting period.

There are two acceptable approaches to calculating the amount that should be recognised at cancellation:

• one approach ignores potential future forfeitures; and
• the second includes potential future forfeitures in determining the amount that should be recognised immediately.

Any payment made to a counterparty, on the cancellation or settlement of a grant of equity instruments, should be accounted for as a repurchase of an equity interest (effectively, as a deduction from equity). If the payment exceeds the fair value of the equity instruments repurchased (measured at the repurchase date), any such excess should be recognised as an expense.

An entity might grant new equity instruments as consideration for the cancellation or settlement of an old grant. If the entity identifies the new equity instruments (at the grant date of the new equity instruments) as a replacement for the cancelled equity instruments, it should treat this as a modification. If the entity does not identify the new equity instruments as a replacement for the cancelled instruments, it should account for those new equity instruments as a new grant.

Cancellations and settlements

We believe that the charge should reflect all awards that are outstanding at the date of cancellation; and no adjustment should be made for any estimate of the number of awards that are not expected to vest.

This is because the cancellation results in early vesting (that is, satisfaction of a non-market vesting condition); and so, it gives rise to accelerated recognition of the grant date fair value. There is an alternative interpretation that focuses on the words “… the amount that otherwise would have been recognised for services received over the remainder of the vesting period”.

It recognises a charge that reflects the number of awards that were expected to achieve the service or performance condition immediately before the award was cancelled. Either interpretation could be applied, but we believe that the first is more closely aligned with the principles of IFRS 2.

Example – Cancellation during vesting period

On 1 January 20X5, entity A makes an award of 100 shares to an employee. The only condition associated with the award is that the employee should remain in entity A’s employment for three years. The award’s grant date fair value is C1,200. The employee is expected to remain with the entity for at least three years; and so, the award is expected to vest.

The award is cancelled on 1 January 20X6; and entity A settles in cash on a pro rata basis. So, the employee receives C400 (C1,200 × 1/3 years). The award’s fair value on this date is determined to have fallen from C1,200 to C300. The amount recognised as an expense during 20X5 – before taking account of the cancellation – was C400 (C1,200 × 1/3 years). The entity accounts for the cancellation or settlement as an acceleration of vesting; and it recognises immediately the amount that otherwise would have been recognised for services received over the remainder of the vesting period.

So, on the basis of the number of awards outstanding at the cancellation date, the amount to be recognised immediately as an expense is C800 (C1,200 – C400); with a credit to equity of C800. If the award had been made to more than one employee, we believe that management should (at the date of cancellation) accelerate the share-based payment expense; this should be based on the actual number of awards on cancellation rather than the number of awards that management had previously expected to vest.

But an alternative approach, based on the number of awards expected to vest (as noted above), could also be considered. The C400 payment to the employee, on cancellation of the award, exceeds the award’s fair value of C300 on the date of repurchase. Paragraph 28(b) of IFRS 2 requires an amount equal to the fair value (C300) to be treated as the repurchase of an equity instrument; and the excess is recognised as an expense.

This means that C300 is deducted from equity; and C100 (C300 – C400) is recognised as an expense. In summary, the entity would record the following:

Year ended 31 December 20X5 Dr Cr C C Dr Employee benefits expense 400 Cr Equity 400 Year ended 31 December 20X6 Dr Employee benefits expense – cancellation of the award 800 Cr Equity 800 Dr Employee benefits expense – incremental fair value on settlement in cash 100 Dr Equity 300 Cr Cash 400 Where the cancellation of an award has been reported, an entity cannot later identify a replacement award.

We believe that the standard is clear that a replacement award should be identified at the same time as the original award is cancelled. It might not always be clear whether an award has been cancelled or modified. For example, where the number of share options awarded to an employee is reduced, the question arises whether part of the award has been cancelled.

Forfeitures

A forfeiture occurs when there is a failure to meet a condition attached to an award. A failure to meet either a service or a non-market performance condition during the vesting period affects the number of awards that may vest.

Failures to meet either market or non-vesting conditions have no accounting consequences, because they are already taken into account when determining the grant date fair value, but should still be included in the disclosure of options forfeited as required by IFRS 2 paragraph 45(b) (there is no equivalent detailed disclosure requirement that applies to forfeitures in the context of cash settled awards).

The accounting for forfeitures due to a failure of a service or non-market performance condition is different from that for cancellations (described in para 13.48 onwards). Where a number of individual awards within a larger portfolio of awards are forfeited, the expense is revised to reflect the best available estimate of the number of equity instruments expected to vest.

So, on a cumulative basis, no expense is recognised for goods or services received if the equity instruments do not vest as a result of a service or non-market performance condition not being met (for example, if the employee or counterparty fails to complete a specified service period). The expiry (or lapsing) of a vested award has no accounting implications under the IFRS accounting framework at the time when the award expires or lapses.

If the expiry (or lapsing) results from a post-vesting restriction, this will have been incorporated into the grant date fair value, and hence expiry (or lapsing) will not impact the accounting under IFRS. In some jurisdictions, further accounting implications might result from local legislation.

Example – Employee made redundant

Entity A grants share option awards to a number of its employees. The individuals are required to remain in service with the entity for three years from the grant date. After 18 months, one employee is made redundant. Having been made redundant, the employee is unable to satisfy the three-year service condition; so, this should be treated as a forfeiture rather than a cancellation. The expense recognised to date is reversed. But, if the award was cancelled before the employee was made redundant, there would be an accelerated charge.

Modifications, cancellations and settlements for cashsettled awards

Accounting for modifications, cancellations and settlements of cash-settled awards is straightforward. Any change in the value of the liability (including adjusting for the settlement price) will be recognised in profit or loss.

Amendments to IFRS 2 clarified the treatment of modifications that change the classification from cash-settled to equitysettled and, at the same time, change the value of the award. The entity first accounts for the change in value in the award, and then it reclassifies the liability to equity.

Cancellation of cash-settled awards

Where an entity cancels or settles a cash-settled award, it should derecognise the liability. Any difference between the carrying amount of the liability and the consideration paid to cancel/settle the award (if any) should be recognised in the income statement.

Reclassification from cash-settled to equity-settled

Where an award is modified, so that the classification changes from cash-settled to equity-settled, the entity takes the amount recognised as a liability, up to the modification date, and immediately reclassifies it to equity.

The expense for the remainder of the vesting period is based on the award’s fair value, measured at the modification date and not at the original grant date. An award might be modified so that the fair value or a vesting condition is changed in addition to the classification change from cash-settled to equity-settled (for example, fair value is increased, the vesting period is extended, or a performance condition is added). Because IFRS 2 gave no clear guidance on whether an entity should account first for the change in classification or the other modifications, we believe that either approach was acceptable. On 20 June 2016, this issue was addressed by the Interpretations Committee through a limited scope amendment, effective from 1 January 2018 (EU endorsement on 26 February 2018) that requires any change in value to be dealt with before the change in classification.

Example

Entity X has a cash-settled share-based payment (in the form of share appreciation rights) that will vest in three years. At the end of year 1, the fair value of the award is estimated to be C300. So, a charge of C100 has been recognised in the income statement with a corresponding liability. At the end of year 2, the fair value of the award is C360. So, a charge of C140 (C240 − C100) would be recognised in the income statement, with a corresponding increase in the liability if there was no change to the award.

At the end of year 2, entity X decides to modify the share-based payment award from cash-settled to equity-settled, and to extend the vesting period by a year. The employees will now receive equity instruments for the same value after four years. Entity X will provide shares based on the value of the share appreciation rights at the settlement date (that is, C360); but employees will need to provide services for two more years. Under the amended guidance, the entity should first apply modification accounting to the change in vesting period, and it should then account for the change in classification. So, the entity would true-up the liability at the end of year 2, based on a change in vesting period.

A liability of C180 (C360 ÷ 4 years × 2 years), with the result that a charge of C80, rather than C140, would be recognised for the year. Entity X would then reclassify the total liability of C180 to equity. An expense of C180 (which is based on the fair value of the award at modification date of C360, less the amount of C180 already recognised in the income statement) would be recognised over the remaining vesting period of two years.

Transactions with settlement alternatives

Some share-based payment transactions give the entity or the counterparty the choice of whether to settle in cash or equity instruments, or the method of settlement might be contingent on an event, which might or might not be within the control of one of the parties.

An entity should account for such a transaction as cash-settled if it has incurred a liability to settle in cash or other assets; otherwise, it should account for the transaction as equity-settled. In practice, the accounting depends which party has the choice of settlement method and whether there is any difference in value between the alternatives at settlement date.

The counterparty can choose the settlement method

If the counterparty can choose the method of settlement, the entity is considered to have issued a compound financial instrument. The entity has issued an instrument with a debt component (to the extent that the counterparty has a right to demand cash) and an equity component (to the extent that the counterparty has a right to demand settlement in equity instruments by giving up its right to cash).

• An entity should first establish the value of the debt component when valuing a compound financial instrument. The equity component is then measured as the difference between that amount and the value of the instrument as a whole. IFRS 2 applies a similar approach.

For transactions in which the fair value of goods or services is measured directly, the fair value of the equity component is measured as the difference between the fair value of the goods or services received and the fair value of the debt component. Consideration should also be given to whether any unidentifiable goods or services exist.

It is necessary to estimate the fair value of the compound instrument as a whole for transactions in which the fair value of goods or services is measured indirectly by reference to the fair value of the instruments granted.

The debt and equity components should be valued separately, taking into account the fact that the counterparty should forfeit its right to receive cash in order to receive the equity instrument. Transactions are often structured so that the fair value of each settlement alternative is the same. For example, the counterparty might have the choice of receiving share options or cash-settled share appreciation rights.

In order to receive the options, the counterparty would have to ‘give up’ a cash award of equivalent fair value; so, by deduction, the fair value of the equity component will be zero. But, if the fair value of the equity component is greater than zero, each component should be accounted for separately. The debt component will be accounted for as a cash-settled share-based payment transaction; and the equity component will be accounted for as an equity-settled share-based payment.

The liability for the debt component is re-measured at fair value at the settlement date. The actual method of settlement chosen by the counterparty will determine the accounting, as shown below:

Compound instruments: equity and cash alternatives have the same value

An entity establishes a bonus plan on 1 January 20X5. The employees can choose a cash payment equal to the market value of 100 shares at 31 December 20X5, or they can receive 100 shares on the same date.

At the grant date, the fair value of the right to cash is C5,000 and the fair value of the right to shares is C5,000. The value of the two alternatives is the same at any time. The equity component is the difference between the fair value of the compound instrument as a whole and the fair value of the liability.

The fair value of the compound instrument as a whole is C5,000; this is because the cash and share alternatives are mutually exclusive and of equal value. So, the equity component is zero (being the difference between the C5,000 fair value of the compound instrument and the C5,000 fair value of the debt component). This reflects the arrangement’s economic substance: there is no benefit to the employee in choosing shares or cash.

Compound instruments: fixed cash amount or number of shares

An entity grants a bonus to its employees on 1 January 20X5. The bonus is payable in five years, when each employee can choose a cash payment of C1,000 or can choose to obtain 100 shares of the entity. The share price on 1 January 20X5 is C5 per share.

There are no vesting conditions. The appropriate discount rate is 5% per year. The entity should recognise the debt component on 1 January 20X5 at its fair value of C784. Fair value is determined as the present value of the future cash outflow, that is C1,000/1.05^5. The entity should then measure the equity alternative, taking into consideration that the employee has to forfeit the right to C1,000 cash in order to obtain the shares.

In substance, the equity alternative is a share option with an exercise price of C10 per share and a term of five years. The grant date fair value of the option to buy 100 shares was determined as C25 at 1 January 20X5.

A corresponding increase in equity should be recognised on 1 January 20X5. The entity should re-measure the liability component to its fair value at each subsequent balance sheet date; and it should recognise the changes in fair value in the income statement. The amounts recognised for the equity component are not subject to subsequent re-measurement.

Compound instruments: settlement in shares

Consider the award granted in previous question  if the share price on 31 December 20X9 was C17. A sensible employee would select settlement in shares because this alternative has a higher fair value of C1,700 (C17 × 100 shares); so, the option is ‘in the money’.

The entity should accrete the liability to its fair value of C1,000 on the exercise date through the income statement.

Total expense of C1,025 (C784 initial recognition for the liability component plus 216 interest cost for unwinding the time value of money and 25 for the grant date fair value of the equity component) on a cumulative basis is recognised between 1 January 20X5 and 31 December 20X9. The liability of C1,000 is transferred to equity when the shares are issued. An employee might choose the cash alternative, even though the fair value of the settlement in shares is higher.

The entity first accretes the liability to its fair value of C1,000 on the exercise date through the income statement. The entity subsequently records the payment of C1,000 cash against the liability. The charge of C25, that is recognised in respect of the equity component, is not adjusted.

Employee choice of settlement where vesting periods for cash and equity alternatives are different

An entity agrees the details of an award with its employees on 1 January 20X6. Under the terms, on 31 March 20X7 employees can choose either: cash payment of between 25% and 50% of salary, depending on specified performance measures, at 31 March 20X7; or shares with value equivalent to 150% of the cash payment (based on the 31 March 20X7 share price); but the employee should remain in service for a further three years.

The grant date is 1 January 20X6; this is the date when both parties have a shared understanding of the terms and conditions, including the formula that will be used to determine the amount of cash to be paid (or the number of shares to be delivered). The entity has given the employee the right to choose whether a share-based payment transaction is settled in cash or by the issue of equity instruments.

The entity has granted a compound financial instrument, which includes a debt component (that is, the counterparty’s right to demand cash payment) and an equity component (that is, the counterparty’s right to demand settlement in equity instruments).

The entity should account separately for the goods or services received or acquired in respect of each of the compound instrument’s components. The vesting period of the equity component and that of the debt component should be determined separately; and the vesting period of each component might be different. In the above example, the vesting period for the debt component is 1.25 years (1 January 20X6 to 31 March 20X7); and the vesting period for the equity component is 4.25 years (1 January 20X6 to 31 March 20Y0) – because employees are entitled to shares only if they complete a 4.25-year service period.

The entity can choose the settlement method

The entity should determine whether, in substance, it has created an obligation to settle in cash, even where it can choose the settlement method. This could be, for example, if:

• The choice of settlement in equity instruments has no commercial substance (for example, because the entity is legally prohibited from issuing shares).
• The entity has a past practice or stated policy of settling in cash.
• The entity generally settles in cash whenever the counterparty requests it.

Settlement choice changes from equity-settled to cash-settled

Where an entity whose equity instruments are not publicly traded enters into share-based payment arrangements with its employees, it might have a choice of settlement. For example, the entity might allow employees to keep shares when they leave, or it might make a cash payment to repurchase the shares instead.

In these cases, the entity is likely to settle in cash; this is because a private entity would not generally allow employees who leave the entity to continue to hold its shares. The entity might reach a different conclusion if it expected to create a market for the shares (for example, by an IPO or sale of the entity). Past practice can be the determining factor. The following example explores this. Entity A is privately owned by a venture capitalist.

The entity enters into a share-based payment arrangement with its senior employees whereby: Each employee will receive 1,000 shares if they remain employed for a period of five years. If an employee leaves the entity after the five-year period, but before the entity is listed, the entity has an option to purchase the shares for fair value from the employee.

The grant date fair value of the award is C2,000. No employees are expected to leave during the five-year period. On grant date, the entity expects to list in the next three to five years. The entity has no past practice or stated policy of buying back shares from employees when the employees leave, because this is the first such plan to be put in place. Also, the entity does not expect that it will settle the awards in cash. At the end of year 2, the entity no longer expects to list; and the employees are informed of this fact.

The entity states that, if it is not listed after the five years and employees leave the entity, the entity will repurchase the shares. The fair value of the shares is C3,000 on this date. At the end of year 3, the fair value of the liability has increased to C4,000. On the grant date, the employer accounts for the arrangement as an equity-settled share-based payment; this is because there is no present obligation to settle in cash. The entries recorded in the first year would be:

Dr Employee expense

Cr Equity 400

to record the grant date fair value vesting over a period of five years. At the end of year 2, with the change in intention, the employees would assume that their award will be settled in cash if they work the five-year period.

The award would be reclassified at the end of the second year; this is because the entity has created an obligation to settle in cash through a change in stated policy: Dr Employee expense 400 Cr Equity 400 to record the C2,000 vesting over a period of five years which was the expectation until year end. Dr Equity 1,200 Cr Liability (C3,000 × 2/5) 1,200 Reclassification of the equity award to cash-settled. Although the cumulative credit to equity is C800, it is appropriate to debit equity by more than this amount in order to set up the liability; this is because IFRS 2 allows the fair value of the resulting liability to be accounted for as a deduction from equity (that is, similar to a repurchase of an equity instrument).

At the end of year 3, the award is accounted for on a cash-settled basis as follows:

Dr Employee expense 1,200 Cr Liability (C4,000 × 3/5 – C1,200) 1,200 Where an entity has a choice of settlement and has classified an award as equity-settled, care should be taken when the entity actually settles the award, especially if the fair values of the alternatives are not the same. Where an entity settles an award in cash, this is a strong indication (in the absence of other factors) that a constructive obligation to pay cash has been established through past practice for the remaining awards; and so, the outstanding awards should be reclassified as cash-settled on a prospective basis.

Entity settlement choice where award is settled in cash

The facts are the same as in previous EXPERT Q&A, except that, at the end of year 2, the entity does not tell employees that it will repurchase the shares after a five-year period, and a listing of the entity’s shares is still seen as achievable. At the end of year 6, the entity has not yet listed; and one of the employees leaves the entity.

The entity exercises its settlement choice and buys the leaving employee’s shares for fair value. In the absence of other evidence, the settlement of this employee award might create a valid expectation that the remaining employees will also receive cash when they leave. But judgement will be required to determine whether one transaction establishes ‘past practice’ for which the entity has now created an obligation to settle in cash.

If this is the case, the entity should treat the remaining awards as cash-settled, because it now has a past practice of settling in cash. The entity would also need to revisit the classification of any similar grants that it has made and consider whether it should reclassify them to cash-settled.

Entity choice of settlement: equity-settled

In practice, it is unusual for the alternatives to have different values when the entity can choose the settlement method; the example below is included purely to illustrate the application of paragraphs 41–43 of IFRS 2.

Example

A listed entity has granted to its chief executive the right to either 10,000 phantom shares (that is, the right to receive a cash payment equal to the value of 10,000 shares) or 15,000 listed shares in the entity. The entity can choose the settlement method. Stipulating that the entity has not established an obligation, the transaction would be accounted for as equity-settled.

In that case, the expense is measured on the basis that the grant date fair value of the 15,000 shares is C80,000. The opposing credit is recognised in equity. On the settlement date, the entity’s share price is C10. So, the fair value of the phantom shares is C100,000; and the fair value of the listed shares is C150,000. If the entity chooses to settle the transaction in cash (that is, the settlement method with the lower fair value), the payment of C100,000 is deducted from equity. Even though only C80,000 had been recognised as an expense in equity, the additional C20,000 should also be deducted from equity. In substance, it represents the repurchase by the entity of its own shares; so, no further expense is recognised.

But, if the entity chooses to settle the transaction by issuing shares, the excess of the fair value of the shares over the amount of cash that would otherwise have been paid (that is, C50,000) is recognised as an expense. Dr Cr C C Dr Equity 100,000 Dr Income statement 50,000 Cr Share capital/equity 150,000 If, instead, the fair value of the cash alternative at settlement date was C150,000 and the fair value of the equity alternative was C100,000, the accounting would be as set out below. If the entity chose to settle the transaction by issuing shares (that is, the settlement method with the lower fair value), no further accounting would be required.

If the entity chose to settle the transaction in cash, the fair value of the equity instruments that would otherwise have been issued (that is, C100,000) would be deducted from equity. The excess of the amount actually paid over the amount deducted from equity (that is, C50,000) is recognised as an expense. Dr Cr C C Dr Equity 100,000 Dr Income statement 50,000 Cr Cash 150,000 In summary, if the award is treated as equity-settled, it should be accounted for in the same way as any other equity-settled transaction until the point of settlement. On settlement, the accounting is straightforward, provided that the entity chooses the method of settlement with the lower fair value at that date. But, if it chooses the settlement method with the higher fair value at that date, the excess is treated as an additional expense.

Entity choice of settlement: cash-settled

An entity operates a share plan whereby employees are granted free shares in the entity. Under the share plan, the employee is entitled to dividends and can vote. But, if an employee leaves within three years, the entity can exercise a buy-back option at that time and repurchase all of the employee’s shares. The price paid by the entity depends on when the employee leaves:

Before the end of year 1 – nil. After year 1 but before the end of year 2 – 30% of the share’s fair value. After year 2 but before the end of year 3 – 50% of the share’s fair value. In the past, the entity has always exercised the buy-back option, because there is economic compulsion to do so (that is, the repurchase right is below fair value).

Although the entity has no legal obligation, it has a constructive obligation to buy the shares back on resignation; this obligation arises as a result of past practice and the fact that, in substance, the call option is a vesting mechanism.

In substance, the award consists of three separate components: 30% vests over one year; 20% vests over two years (represented by 50% less the 30% that vests after year 1); and 50% vests over three years. The entity has a choice of settlement for the 30% and 20% tranches; but past practice indicates that the entity settles in cash. The remaining 50% can only be settled in equity (because the buy-back option falls away after three years).

Deferred bonus plans

A deferred bonus plan is a type of share incentive plan that is common in some jurisdictions. Terms are varied and often complex, but the following are typical features:

A bonus is awarded to employees based on the individual’s and the entity’s performance over one year. At the end of the year, employees can elect to receive a portion of their bonus in the form of shares rather than cash. If an employee elects to receive shares: the shares are restricted insofar as they cannot be sold for three years; and if the individual is still an employee at the end of the three-year period, they receive an allocation of matching shares.

The entitlement to matching shares introduces a degree of complexity; this is because there are, in substance, two awards. The first, which could be settled in cash or shares, vests at the end of the first year. The second (that is, the entitlement to matching shares) vests at the end of the fourth year, but only if the employee has chosen shares instead of cash at the end of the first year. This means that an expense should be recognised over one year for the first award, and another expense should be recognised over four years for the second. As regards measurement, the grant date value of the cash alternative is the present value of the agreed amount of the bonus.

The value of the equity alternative is made up of two components: the restricted shares (the value of which might be slightly less than the cash alternative, if it is appropriate to reduce the value as a result of the sale restriction); and the matching shares. If, at the end of the first year, an employee chooses the cash alternative, they will not receive the equity alternative or the matching shares. By choosing the cash alternative, the employee would no longer be entitled to the second tranche of the grant. This would be treated as a cancellation, which would lead to accelerated expense recognition. On the other hand, if the employee chooses the equity alternative, the balance on the liability is transferred to equity; and the entity will continue to recognise the balance of the expense in respect of the matching shares over the remaining three years. If the employee then leaves after, say, two years, this is a forfeiture, because the employee has failed to satisfy the service condition; so, the expense in respect of the matching shares will be reversed. The expense recognised in the first year in respect of the restricted shares will not be reversed; this is because the former employee will normally be entitled to retain the shares.

If the transaction is accounted for as equity-settled, the entity needs to consider if it has given away further value; this will depend on which alternative has the greater fair value as at the settlement date (as shown in the table below)

Settlement method contingent on event outside control of entity or employee

The conditions of a share-based payment award might provide the employee with either cash or equity, but the choice as to which option occurs is outside the control of both the employee and the entity. We believe that such awards should be accounted for in accordance with the expected form of settlement. If the expectation changes, the accounting should be trued-up to where it would have been if the revised form of settlement had always been expected.

Example – Equity settlement contingent on a successful listing (IPO)

At 1 January 20X8 an entity enters into a share-based payment arrangement with its employees. The terms of the award are as follows: Employees are required to work for the entity for five years; after this time, they will receive a cash payment equal to the value of the entity’s shares. If the entity achieves a successful IPO during the five-year period, the employees will receive free shares rather than a cash payment. So, employees might receive free shares or a cash payment, but not both. No employees are expected to leave the entity over the next five years.

At the date of the award and the first two year ends thereafter; it was not probable that a successful IPO would occur before year 5. At the end of year 3, a successful IPO becomes probable; and management expects it to occur in year 4. At the end of year 4, a successful IPO occurs; and employees receive free shares.

The fair value of the equity-settled award alternative is C1,000 at the grant date. The fair value of the cash-settled alternative, ignoring the probability that an IPO will happen within the five years, is as follows: C50 at the end of year 1; C500 at the end of year 2; C100 at the end of year 3; and C50 at the end of year 4. At the first- and second-year ends, the entity would not record a charge for the equity-settled award; this is because the vesting conditions are not expected to be met (that is, a successful IPO is not probable).

So, a liability is recognised, because cash settlement is probable until year 3. Dr Cr Year end 31 December 20X8 C C Dr Employee expense 10 Cr Liability 10 Cash-settled award recognised over the vesting period. Year end 31 December 20X9 Dr Employee expense 190 Cr Liability 190 Cash-settled award recognised over the vesting period. At the end of year 3, a successful IPO becomes probable; so the entity would record a charge for an equity-settled award.

There should also be a reversal of the cash-settled award, because this award is now deemed not probable. Year end 31 December 20Y0 Dr Liability 200 Cr Employee expense 200 Reversal of cash-settled share-based payment, because IPO deemed probable. Dr Employee expense 750 Cr Equity 750 Equity-settled award measured at grant date fair value of C750 (C1,000 × 3/4), because IPO is now deemed probable. Year end 31 December 20Y1 Dr Employee expense 250 Cr Equity 250 Equity-settled award measured at fair value of C1,000.

All of the vesting conditions for this award have been met in year 4; so, the award has vested, and the remaining charge of C250 (C1,000 – C750) is recognised in the income statement.