What is share-based compensation financial reporting and how does it impact company financial statements?

How share-based compensation impacts financial statements

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  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).

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  2. Impact on your 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.

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  3. Impact on your 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.

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  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.)