prepare any necessary entries in p s consolidated financial statements as at dec 31 613368

EBTs in separate financial statements of sponsoring entity

An entity lends its EBT €1 million which the EBT uses to make a market purchase of 200,000 shares in the entity. In the separate financial statements of the EBT the shares will be shown as an asset. In the consolidated financial statements, the shares will be accounted for as treasury shares, by deduction from equity.

In the separate financial statements of the entity, on the basis that the EBT is a separate entity, like any other subsidiary, the normal accounting entry would be:

The obvious issue with this approach is that it is, in economic substance, treating the shares held by the EBT (represented by the loan to the EBT) as an asset of the entity, whereas, if they were held directly by the entity, they would have to be accounted for as treasury shares, by deduction from equity. If the share price falls such that the EBT has no means of repaying the full €1,000,000, prima facie this gives rise to an impairment of the €1,000,000 loan. Again, however, this seems in effect to be recognising a loss on own equity.

Suppose now that employees are granted options over the shares with an exercise price of zero, which have a value under IFRS 2 of €1,200,000. The entity will therefore book an expense of €1,200,000 under IFRS 2. When the options are exercised, the shares are delivered to employees. At that point the €1,000,000 loan to the EBT clearly becomes irrecoverable (as it has no assets), and must be written off. Normally, the write-off of an investment or loan is an expense required to be recognised in profit or loss. However, to recognise the €1,000,000 investment write-off as an expense as well as the €1,200,000 IFRS 2 charge would clearly be a form of double counting.

Some suggest that a solution to this problem is to say that the entity has effectively bought a gross-settled call option over its own shares from the EBT, whereby it can require the EBT to deliver 200,000 shares in return for a waiver of its €1,000,000 loan. Thus the accounting for the settlement of the call over the shares is as for any other gross-settled purchased call option over own equity under IAS 32 – see Chapter 45 at 11.2.1.

When the shares are delivered to employees (some milliseconds later), the entry is:

If the entity is a parent company, and the shares are used to satisfy share awards to the employees not of the entity itself but of another member of the group, the parent could argue that a corresponding portion of the loan to the EBT should be transferred to the carrying amount of the investment in the relevant subsidiary. The argument for this treatment is that the transaction is, in its totality, equivalent to the parent making a cash capital contribution to the subsidiary, which then uses the cash to acquire shares in the parent for delivery to employees. Such a cash contribution would normally be accounted for in the first instance as an increase in the investment in the subsidiary rather than as an expense.

The precise timing of the transfer between the loan to the EBT and the investment in the relevant subsidiary (i.e. on initial purchase of the shares by the EBT, on final transfer to the employee or at some time in between) could depend on specific facts and circumstances, such as at what point the subsidiary, rather than the EBT, is exposed to any loss in value of the shares.