Entity choice: cash settlement is a repurchase

Learning objectives

• Determine the classification of an award for which the entity chooses the settlement method.L3
• Account for the cash settlement of an award classified as equity-settled.L3

Normative references

• IFRS 2 §41If the entity has the choice of settlement, it determines whether it has a present obligation to settle in cash and accounts for the transaction accordingly. Such an obligation exists if settlement in equity instruments has no commercial substance (for example because the entity is legally prohibited from issuing shares), if the entity has a past practice or a stated policy of settling in cash, or if it generally settles in cash whenever the counterparty asks for cash settlement.
• IFRS 2 §43If there is no present obligation to settle in cash, the transaction is accounted for as equity-settled; on settlement: (a) a cash payment is accounted for as the repurchase of an equity interest, deducted from equity; (b) the delivery of equity instruments requires no further entry other than a possible transfer between components of equity; (c) if the entity elects the settlement alternative with the higher fair value at the date of settlement, the excess value given is an additional expense.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• Lumen SA has a plan settled, at vesting, either by delivering shares or by paying an equivalent amount in cash, at Lumen's choice. No commitment, practice or communication obliges Lumen to settle in cash (case facts). How does it classify the award?L3
• Lumen SA has classified as equity-settled a plan whose settlement method it chooses. At vesting, it decides to settle in cash and pays {cash_paid}, an amount equal to the fair value of the instruments at the settlement date (case data). Record the settlement entry.L3