FRS 20 specifies the accounting treatment to be adopted (including the disclosures to be provided) by entities making share-based payments.  In particular, it requires entities to recognise an expense, measured at fair value, in respect of the share-based payments they make.  The FRS is mandatory for accounting periods beginning on or after 1 January 2005 for listed entities and 1 January 2006 for unlisted entities (other than those applying the Financial Reporting Standard for Smaller Entities (FRSSE)).

• The term ‘share-based payments’ includes all types of executive share option and share purchase plans and employee share option and share purchase schemes, including Save-As-You-Earn (SAYE) plans and similar arrangements.  It also includes arrangements such as share appreciation rights, where a cash payment is made, the amount of which depends on the share price.  However, the FRS does not apply just to transactions with employees; it also applies to transactions with suppliers of goods or non-employee services that involve share-based payments being made in exchange for those goods or services. 
• A ‘listed entity’ is an entity that has shares or other capital instruments it has issued traded on the London Stock Exchange or any other regulated market of an EU Member State. 

Apart from the delayed implementation for unlisted entities and the exemption for entities applying the FRSSE, FRS 20 is identical to the IASB’s IFRS 2 ‘Share-based Payment’ and therefore has the effect of implementing that IFRS in the UK.

FRS 20 identifies three types of share-based payment transaction:

• equity-settled share-based payment transactions.  These are transactions in which the entity receives goods or services as consideration for equity instruments of the entity. 
• cash-settled share-based payment transactions.  These are transactions in which the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price (or value) of the entity’s equity instruments.
•  transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide one or other of the parties to the transaction with a choice as to whether the transaction is settled in cash or by issuing equity instruments.

The FRS then sets out the measurement principles and specific requirements that apply to each type of transaction.  For equity-settled transactions, entities are required to measure the goods or services received at their fair value, unless that fair value cannot be estimated reliably in which case that fair value should be estimated by reference to the fair value of the equity instruments granted.  

If a non-employee (or similar) transaction is involved, there should be a rebuttable presumption that the fair value of the goods or services received can be estimated reliably.  The relevant measurement date is the date the entity obtains the goods or the counterparty renders service. 

However, it is typically not possible to estimate reliably the fair value of employee services received so, for transactions with employees and others providing similar services, the entity should use the grant date fair value of the equity instruments granted. 

• That fair value should be based on market prices and should take into account the terms and conditions upon which the instruments were granted.  In the absence of market prices, a valuation technique (such as an option pricing model) will need to be used. 
•  Vesting conditions other than market conditions should not be taken into account when estimating the fair value of the instruments granted.  Instead, those conditions should be taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that the aggregate amount recognised is based on the number of equity instruments that vest. 

The FRS requires, in the case of cash-settled share-based payment transactions, the entity to measure the goods or services acquired and the liability incurred at the fair value of the liability.  Until the liability is settled, the entity will remeasure the fair value of the liability at each reporting date and at the date of settlement, and should recognise any changes in value in profit or loss for the period.

For share-based payment transactions in which one of the parties to the transaction has a choice of settlement method, the transaction, or the components of that transaction, should be accounted for as a cash-settled share-based payment transaction if, and to the extent that, the entity has incurred a liability to settle in cash (or other assets), or as an equity-settled share-based payment transaction if, and to the extent that, no such liability has been incurred.

The FRS also contains various disclosure requirements designed to enable users of financial statements to understand the nature and extent of share-based payment arrangements, their effect on the period’s financial statements, and the methodologies used in arriving at the numbers included in the financial statements.

FRS 20 supersedes the existing UK accounting requirements in this area, which were set out mainly in UITF Abstract 17 ‘Employee share schemes’. 

In March 2006 the ASB issued an exposure draft proposing amendment to clarify the treatment of cancellations of share options by employees.