What is a Cash-Settled Share-Based Payment Transaction?

Explanation of cash-settled share-based payment transaction

A cash-settled share-based payment transaction allows an entity to obtain goods or services while promising to make a future cash payment linked to the value of shares or share options. Although the payment is based on the value of equity instruments, the supplier receives cash or another asset rather than shares.

These arrangements are commonly used in employee remuneration, where bonuses or incentive awards are linked to the performance of the company’s share price. Because the entity has an obligation to make a future payment, the arrangement gives rise to a liability that is measured and remeasured in accordance with the applicable accounting standards until settlement.

Under UK accounting standards, including FRS 102, and under IFRS 2 Share-based Payment, cash-settled share-based payment transactions are accounted for differently from equity-settled arrangements because they create a financial liability rather than an equity interest.

Key characteristics of cash-settled share-based payment transaction

Key characteristics of a Cash-Settled Share-Based Payment Transaction include:

• The entity receives goods or services in exchange for a future cash or asset payment.
• The amount payable is based on the value of equity instruments.
• The arrangement creates a liability rather than issuing shares.
• The liability is remeasured until it is settled where required by the applicable accounting standards.
• It is commonly used in employee incentive and remuneration schemes.

How a cash-settled share-based payment transaction works

1. An entity receives goods or services from a supplier or employee.
2. The entity incurs a liability instead of issuing equity instruments.
3. The amount payable is linked to the value of the entity’s shares or share options.
4. The liability is measured and recognised until it is settled through a cash or other asset payment.

Example of cash-settled share-based payment transaction in practice

A UK company grants senior employees share appreciation rights that entitle them to receive a cash payment based on the increase in the company’s share price over a three-year period. At the end of the vesting period, the employees receive cash rather than shares, making the arrangement a cash-settled share-based payment transaction.

Related terms

• Share-based payment
• Equity-settled share-based payment transaction
• Share option
• Equity instrument
• Liability
• IFRS 2
• FRS 102
• Fair value

Common misconceptions about cash-settled share-based payment transaction

• A cash-settled arrangement does not involve the issue of shares to the recipient.
• It is not the same as an equity-settled share-based payment transaction.
• The payment amount may change as the value of the relevant equity instruments changes.

Frequently asked questions

What is a cash-settled share-based payment transaction?

It is a share-based payment arrangement in which an entity acquires goods or services by incurring a liability to pay cash or other assets based on the value of equity instruments.

How does a cash-settled share-based payment differ from an equity-settled arrangement?

A cash-settled arrangement results in a cash or asset payment and creates a liability, whereas an equity-settled arrangement is satisfied by issuing equity instruments.

Where are cash-settled share-based payment transactions commonly used?

They are commonly used in employee incentive schemes, including share appreciation rights and other cash bonuses linked to share price performance.

Why is a liability recognised in a cash-settled share-based payment transaction?

A liability is recognised because the entity has an obligation to transfer cash or other assets to settle the arrangement based on the value of equity instruments.