Share based compensation reporting unpacked

Financial reporting plays a crucial role in analyzing a listed corporation’s financial health, performance, and growth trends.

As a significant component of financial reporting, share-based compensation requires transparent disclosure across various sections in the listed corporation’s annual report to comply with financial reporting standards like IFRS 2 or ASC 718. Thus, all listed companies are required to disclose and account for the costs of their share-based compensation.

Share-based compensation (i.e. employee share plans) has become a critical component of modern compensation packages, where companies award their own shares to employees or third parties.

Companies use share-based compensation to align employee interests with shareholders, incentivizing long-term performance and retention.

Common types of share-based compensation include: 

1. Stock Options 

2. Restricted Stock Units (RSUs) 

3. Employee Stock Purchase Plans (ESPPs) 

Since share-based compensation affects expenses, liabilities, and equity, they must be accurately measured, recognized, and disclosed in financial statements.  In addition, companies disclose share-based payments for details in financial reports, including grant terms, expense recognition, and dilution effects, ensuring transparency.  

1. Impact on your company’s Income Statement 

A company’s income statement reports profit and loss over the reporting period. Share-based compensation is recognized as an expense or asset (i.e. inventories) and is measured at fair value at the grant date (for equity-settled share-based compensation) or remeasured periodically (for cash-settled share-based compensation).

2. Impact on you company’s Balance Sheet

A balance sheet provides a snapshot of a company’s financial health at a specific point in time and includes company assets. Equity settled awards create an increase in additional paid-in capital (i.e. share reserves under IFRS2) throughout the vesting period therefore must be accurately reported on the balance sheet. New shares issued upon option exercise or RSU vesting also increases company equity while recognition of share-based compensation, exercises or forfeitures create a movement in share reserves.

Additionally, liability settled awards are noted on a balance sheet and adjusted at the fair value of the award changes. Deferred tax assets and liabilities are recognized and reported throughout the vesting period.

3. Impact on you company’s Cash Flow Statement 

A cash flow statement provides a comprehensive view of the company’s day-to-day cash flow. Impacts to the cash flow statement include non-cash expenses added back into operating activities, cash inflow in financing activities if employees exercise options (cash received from share purchases) and proceeds from share issuance.

4. Disclosure under Notes to financial statements

Notes to financial statements are supplementary and provide additional details and context regarding the financial information presented within the financial reporting documents. See below for specific disclosure share based compensation information that should be presented within varying financial statements:

a) Nature and Terms of Share-Based Compensation 

● Types of incentives granted (options, RSUs, etc.). 

● Vesting conditions (service period, performance targets)

● Exercise price and expiry dates (for options)

b) Impact on Financial Position 

● Summary of the changes in each grant type during the period

● Weighted-average grant date fair value

● Weighted-average exercise price

● Weighted-average remaining contractual term

● Potential dilution effect on earnings per share

c) Impact on Income Statements

● Total share-based compensation expense for the period 

● Unrecognized future expense from outstanding awards

● Expense breakdown by segment (by function, by geographic)

d) Fair Value Measurement

● Valuation methods used (Black-Scholes, Binomial model, Monte Carlos, etc.) 

● Key assumptions (volatility, risk-free rate, expected term, etc.)

As evidenced by this article, financial reporting plays a crucial role in corporate transparency, with share-based compensation being a key element that can significantly affect your company’s financial statements. By following IFRS 2 and ASC 718 guidelines, companies can maintain transparency, support informed decision-making, and include corresponding disclosures to ensure stakeholders fully understand their effects and uphold investor confidence.

Partnering with an experienced service provider, like ‌Computershare,‌ is essential for efficient accounting and record keeping, ensuring compliance with share-based compensation financial reporting requirements. This level of expertise in global equity administration and deep knowledge of financial reporting requirements keeps equity plans effective and compliant, helps minimize operational risks, and allows companies to stay focused on strategic priorities.

If you or your Finance team would like to learn more about how Computershare can assist in managing your company’s Share Based Compensation Financial Reporting obligations, please scan the QR code below and contact us today.

Follow our official WeChat account for the latest market updates and more information: