Share-Based Payments

Sometimes, when an entity wants to purchase an asset or incur a cost but is short on funds and/or external financing is also not available then the entity may resort to share based payments i.e.

  • Purchasing the asset/ goods/ services by issuing shares
  • Issuing shares to employees as a performance bonus instead of giving cash bonus

Example-1:

A company purchaseda machinery costing $50,000 through issuance of its 20,000shares.Themarket value of shares at the time of purchase of machinery was$ 2.5 per share while par value was $1 per share.

The above transaction is an example of share based payment as payment is being done through shares not cash. However, there is an element of share premium involved as the transaction is being settled at market value which is higher than the par value so the transaction will be recorded as follows:

Description

Debit

Credit

Plant & Machinery

50,000

 

Share Capital

 

20,000

                Share Premium

 

30,000

Workings:
Share based payment = 20,000 shares @ 2.5/-  = 50,000.
Value of shares issue (at par value) = 20,000 x 1 = 20,000
Share premium = 20,000 x (2.5 – 1) = 30,000

One thought on “Share-Based Payments”

  1. Great article, very useful !!

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