entity a holds a 30 interest in entity b and accounts for its interest in b as an as 611780
Equity-settled share based payment transactions of associate or joint venture
Entity A holds a 30% interest in Entity B and accounts for its interest in B as an associate using the equity method. This interest arose on incorporation of B. Accordingly, there are no fair value adjustments required related to the assets of B in A”s consolidated financial statements and its equity-accounted amount represents an original cost of £1,500 (30% of B”s issued equity of £5,000) together with A”s 30% share of B”s retained profits of £5,000.
Entity B issues share options to its employees which are to be accounted for by B as an equity-settled share-based payment transaction. The options entitle the employees to subscribe for shares of B, representing an additional 20% interest in the shares of B. If the options are exercised, the employees will pay £2,400 for the shares. The grant date fair value of the options issued is £900 and, for the purposes of the example, it is assumed that the options are immediately vested. Accordingly, B has recognised a share-based payment expense of £900 in profit or loss and a credit to equity of the same amount.
How should A account for its share of the share-based payment expense recognised by B, in particular what is the impact of the credit to equity recognised by B in the financial statements of A?
The description of the equity method in IAS 28 states that ‘the carrying amount [of the investment in an associate or a joint venture] is increased or decreased to recognise the investor”s share of the profit or loss of the investee after the date of acquisition. … Adjustments to the carrying amount may also be necessary for changes in the investor”s proportionate interest in the investee arising from changes in the investee”s other comprehensive income. …’ [IAS 28.10].
Accordingly, it is clear that A must recognise its proportionate share of the equity-settled share-based payment expense recognised by B. The expense recognised by A as a result is not a dilution expense, but represents its proportionate share of the associate”s expense (due to the fact that the services received by the associate cannot be recognised as an asset).
As far as the credit to shareholders” equity recognised by B is concerned, this is not part of comprehensive income and given that paragraph 10 of IAS 28 implies that the investor only recognises its share of the elements of profit or loss and of other comprehensive income, A should not recognise any portion of the credit to shareholders” equity recognised by B. If and when the options are exercised, A will account for its reduction in its proportionate interest as a deemed disposal. It is noted that this approach results in the carrying amount of the equity investment no longer corresponding to the proportionate share of the net assets of the investee (as reported by the investee).
However, this approach appears consistent with the requirement in IAS 28 for dealing with undeclared dividends on cumulative preference shares held by parties other than the investor . In that situation, the undeclared dividends have not yet been recognised by the investee at all, but the investor still reduces its share of the profit or loss (and therefore its share of net assets). It is also consistent with the treatment of any non-controlling interests in an associate”s or joint venture”s consolidated financial statements, whereby the investor”s share of profits, other comprehensive and net assets under the equity method is after deducting any amounts attributable to the non-controlling interests. The treatment is also consistent with that which is applicable for equity-settled share based payment transactions of a subsidiary in the consolidated financial statements of the parent.