Accounting Theory Report: Share-Based Payments and Financial Reporting

This report delves into the intricacies of share-based payment systems within the framework of accounting theory. It examines the widespread adoption of these systems, where shares or options are used as compensation, and their crucial role in motivating employees and fostering long-term business growth. The report highlights the evolution of accounting standards, particularly the introduction of AASB 2, which mandates the recognition of share-based payments as expenses to provide a more accurate reflection of a company's financial position and performance. The analysis includes discussions on the benefits of expensing share-based payments, the impact on financial statements, and the importance of transparency in disclosing these transactions. The report also addresses the potential downsides, such as the impact on job creation and innovation, especially for early-stage businesses. The report references relevant literature and provides a comprehensive overview of the subject matter.

Running head: ACCOUNTING THEORY
Accounting Theory
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1ACCOUNTING THEORY
Task One
In this report, an effort has been made to discuss the issue of share based payment
systems that has been adopted on a large scale by the entities across the country. The share
options or shares are used in place other kinds of payments and is one of the ways in which
the business motivates its employees to perform well in the future as well. This is very crucial
for the businesses to grow in long run. It cannot be denied that the provision of payment
through share-based system does not result in direct flow cash however, this does not signify
that this system of payment do not cost the business anything. Apparently, the business is
giving up a few things that might have a value not at present will surely be in future when
these options are exercised.
Previously in Australia the organisation remunerating its employees by way of
providing them with the shares of the company, which they could, encash in the future did
not make any entry in respect of this transaction in the financial statements of the company. It
is very common for the entities to issue shares for the compensation of the employees. This
type of remuneration was more often adopted for remunerating the senior executives and the
directors of the company.
Prior to the introduction of the AASB 2 Share Based Payment, there were no
standards in this respect that covered the recognition and the measurement of these kinds of
transactions. This soon became one of the main areas of concerns as the prevalence of this
kind of compensation became common in the organisation across the country.

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With the increase in the prominence of the share based awards became larger in
respect of the employee and executive compensation, the personnel responsible for setting up
of the standards became aware that share based compensations are becoming an integral part
of the total compensation package. It was hence concluded that all the entities were supposed
to recognise the share based payments as an expense, exactly as it does in the case of cash
transactions.
The benefit for expensing the share-based model is immense. The shareholders are
able to get the real economic reality of the entity’s financial position and the financial
performance of the organisation. The companies were trying to con the general public by not
factoring in the share-based payments made to the Directors and the senior executives. For
instance in case of a company called Salesforce.com the company was able to earn a total
revenue of $658 million over the period of last three years of its operations whereas the for
the same period its employees were babble to net an earning amounting to $1 billion in cash.
They achieved it by cashing in the shares received by them through shared based
compensation model of the company. This shows the importance of the AASB 2. Previously
it was even possible for the employees to be earning even more than the company itself
without the shareholders knowing about it due to the non-disclosure of the amount of it in the
face of the financial statement of the company.
The importance of the Standard can also be gauged from the fact that if the share
based payment is used for compensating the suppliers of the company without recording the
same in the financial statements of the company, then the financial obligations of the
company will not be reflected by the financial statements at all. Hence, it is of utmost
importance that all the share-based payments entered into by the company are duly recorded
and accounted for in the financial statements of the company.

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However, on the other side, this is detrimental for creation of jobs, growth of the
economy and innovation. This situation has recently worsened due to planned process for
valuation. In early levels of the business are characterised through extremely volatile earnings
and revenues. This influences the volatility of the shares that are latent. As a result, the
Options are given to employees in early stages of the businesses might be under the proposed
standards. This displays a bigger expense than the similar options that are given to employees
in the firm with steady maintainable revenues.
In context to Share based payments is concerned, distinct persons may consider that
the issue of this type of transaction may cost the entity anything that is fully reliant on the
terms and conditions of the issue. As an example, if the entity gives its executives or
employees an options that are exercisable in a future date that meant that the employee would
work more dedicatedly in increasing the value of the entity (Steinberg et al. 2016). From the
side of the business, they are not giving any real value to employees until the shares values of
the entity are improved through dedicated work of the employees. This will have a good
impact on the performance of the entity. Therefore, the shares or options values are related to
the entities growth and prosperity in the future.

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Reference
Ozcan, P. and Santos, F.M., 2015. The market that never was: Turf wars and failed alliances
in mobile payments. Strategic management journal, 36(10), pp.1486-1512.
Steinberg, J., Morris, A., Konar, V., Perro, F.R., Senesac, P. and Polakoff, D., 2016. Paving
the Way for Practice Success Under Value-Based Payments.
Yilmaz, E., 2015. Accounting for share based payments according to TFRS-2.