BIM44190 - Measuring the profits (specific rules & practices) - receipts & deductions: specific deductions - employee share schemes: providing shares - accounting periods starting before 1 January 2003: accounting for employee share ownership (ESOP) trusts - single company schemes, examples 1 & 2
These examples show how employee share awards and share options are accounted for where:
- Example 1 - new shares are to be issued direct to the employees (UITF17),
- Example 2 - an employee share ownership trust is set up after the initial awards have been made (UITF17 and UITF13).
Background facts
- Conditional award of up to 1000 shares; nominal value 10p each.
- Award becomes unconditional and vests in full if performance targets are met over a 3 year period; no consideration payable by employee.
- At award date market value of a share is £5.
- End of Year 1: estimate of % of award likely to be satisfied = 50%.
- End of Year 2: estimate of % of award likely to be satisfied = 80%.
- End of Year 3: actual % of award satisfied = 75%.
- Start of Year 4: 750 new shares issued to employees when market value of a share is £8.
Top of page
Example 1 - no trust - UITF17
Calculation of award costs at each year end:
- Year 1 = 1/3 x 50% x 1000 @ £5 = £833
|
Debit P&L account £833 |
Credit reserves (shares to be issued) £833 |
- Year 2 = 2/3 x 80% x 1000 @ £5 = £2667
|
Debit P&L account £1834 |
Credit reserves £1834 |
- Year 3 = 750 x £5 = £3750
|
Debit P&L account £1083 |
Credit reserves £1083 |
At start of Year 4:
- Debit ‘shares to be issued’ £3750.
- Credit share capital £75.
- Credit reserves £3675 (not share premium as no cash paid above nominal value).
Top of page
Example 2 - ESOP trust set up to buy shares in the market after initial awards - UITF17 and UITF13
- During Year 2: Company contributes £6000 to ESOP trust; ESOP trust buys 1000 shares in market for £6000.
Accounting entries (UITF13):
| Debit ‘own shares’ held £6000 |
Credit cash £6000 |
Calculation of award costs at each year end (UITF17 and UITF13):
|
|
Debit P&L account £833 |
Credit reserves (shares to be issued) £833 |
- Year 2 = 2/3 x 80% x £6000 = £3200
|
Debit P&L account £2367Debit ‘shares to be issued’ £833 |
Credit ‘own shares’ held £3200 |
- Year 3 = 750 x £6 = £4500
|
Debit P&L account £1300 |
Credit ‘own shares’ held £1300 |
At start of Year 4:
- ‘Own shares’ still held on company’s balance sheet at cost £1500 (250 x £6 each).
