Share this content

Share Options issued - are they even options?

Didn't find your answer?

I have a client - LTD company, who has issued share options. Not sure at this point if they are an employee or not. But if they are it is an employee of their overseas branch and he is not UK resident. let's call him Mr X.

Share options are issued and Mr X pays £4 for them. The company then issues the shares as class B Ordinary shares with no voting or dividend rights. So that Mr X only gets a pay out when the company is sold or liquidated. 

The option agreement states that each option gives Mr X the right to 1 ordinary share excercisable on liquidation. 

Are these even options or is it not just an issue of shares, since the class B share was issued?

At the moment i have just - DR Bank and CR Share options (capital). 

What i would have though would be the case is the shares were only issued upon decision to liquidate and the double entry would be Dr Bank, CR other income. 

Am i missing something here? is the issue of the shares a provision/premium or somthing? 

Forgive my ignorance on this one, not something i regularly see 

Thanks for any input!

Replies (17)

Please login or register to join the discussion.

boat
By SouthCoastAcc
27th Jan 2022 20:11

FRS101, 102 105 etc?

Thanks (0)
Replying to SouthCoastAcc:
avatar
By harpsong
27th Jan 2022 20:26

FRS102 S1A, thanks

Thanks (0)
boat
By SouthCoastAcc
27th Jan 2022 20:45

.

Thanks (0)
avatar
By Tax is always taxing
28th Jan 2022 08:06

What are the full rights attached to the B shares?

You say no voting and no dividend rights, but do they have capital/distribution rights?

Thanks (0)
Replying to Tax is always taxing:
avatar
By harpsong
28th Jan 2022 09:27

Yes they have capital rights

Thanks (0)
Replying to harpsong:
avatar
By Tax is always taxing
28th Jan 2022 09:41

If they have capital rights it makes absolutely no sense, you no longer have options, as they have been exercised.

"Share options are issued and Mr X pays £4 for them. The company then issues the shares as class B Ordinary shares with no voting or dividend rights. So that Mr X only gets a pay out when the company is sold or liquidated.

The option agreement states that each option gives Mr X the right to 1 ordinary share excercisable on liquidation."

In your scenario above, he has already exercised his option, which is only exercisable on liquidation according to the agreement.

Well actually, it might even now entitle him to exercise his option in the event of liquidation and get further ordinary shares - so will be entitled to double the shares in the event of a liquidation - Firstly on his B shares, and then again on his option shares.

Who drew up this nonsense? And who issued the shares? Were ERS issues considered?

Thanks (0)
Replying to Tax is always taxing:
avatar
By harpsong
28th Jan 2022 09:54

They did actually consult with a specialist on the ERS issues and the draw up of this, so i can only assume at this point that it has been done correctly and i am missing something. thanks for the help, I think i know the further questions i should be asking now, it is all a bit more clear in my head

Thanks (0)
avatar
By paul.benny
28th Jan 2022 08:36

harpsong wrote:
Share options are issued and Mr X pays £4 for them. The company then issues the shares as class B Ordinary shares with no voting or dividend rights. So that Mr X only gets a pay out when the company is sold or liquidated. 

The option agreement states that each option gives Mr X the right to 1 ordinary share excercisable on liquidation. 

Are you sure about your facts?

Share options give the holder the right to acquire shares at a specified price in specified circumstances. On the one hand you talk of issuing shares and elsewhere about options being exercisable on liquidation.

Share options granted to employees are a bit complex to account for - see S26 FRS102. They're effectively a form of remuneration.

It's not obvious why anyone would want to exercise options in the circumstances you describe- ie buy shares in a company in liquidation. (Unless, perhaps, for a single purpose company and liquidation is the way the shareholders extract value).

Thanks (0)
Replying to paul.benny:
avatar
By harpsong
28th Jan 2022 09:31

Thanks I'll give S26 a good detailed read. I indeed am questioning the facts too now, as it doesn't really make sense. I feel that i am missing a piece of the puzzle. The option agreement was written by someone who English was not their first language so I think this may have something to do with it.

Thanks (0)
avatar
By johnt27
28th Jan 2022 09:00

I'm wondering if these are growth shares rather than options. More info required.

Thanks (1)
avatar
By harpsong
28th Jan 2022 09:32

Thanks all, I feel this has given me enough to think about and i know what further questions to ask etc now

Thanks (1)
Replying to harpsong:
avatar
By johnt27
28th Jan 2022 10:34

If these are options or growth shares don't forget that for accounts purposes, irrespective of the application of 1A, you will need these to be valued and accounted for over the vesting period.

Thanks (0)
Replying to johnt27:
avatar
By harpsong
28th Jan 2022 10:50

Yep i think i have that right.

Dr wages and salaries
Cr share option reserves

and then on exercise (which may have already happened)
Dr cash
Cr Share cap
Cr Share premium
Dr share option reserve
Cr P&L reserve

If for some reason it has already been exercised in the same accounting period as it was issued then:
Dr Cash
CR Share capital

Cr Share Premium (if there is any)
Dr wages and salaries (with the same amount of share premium)

Thanks (0)
Replying to harpsong:
avatar
By johnt27
28th Jan 2022 14:06

I don't fully follow your double entry but it's close! Remember the P&L/option reserve adjustments reflect the FV of the options issued not the exercise price, which will be vastly different - the company gets a tax deduction in the CT comp for the difference between exercise price and market price

Thanks (0)
Replying to johnt27:
avatar
By harpsong
28th Jan 2022 14:41

Yep effectively the share premium is the P&L expense, as this is effectively wages/remuneration

Thanks (0)
Replying to harpsong:
avatar
By johnt27
28th Jan 2022 18:25

That's not correct.

This is a real world example from one of my clients:
Par value is £0.01
Share options issued with an exercise price of £0.95 (vesting over 3 years)
Fair value of each option is £0.05

The P&L charge and share option reserve will total £0.05 spread equally over the vesting period.

When exercised the option holder will pay £0.95 per share:
DR Cash £0.95
CR Share cap £0.01
CR Share premium £0.94

You can also shift the £0.05 share option reserve to P&L reserve if you want to on exercise, forfeiture or expiry.

The share premium never hits P&L

Thanks (0)
Replying to johnt27:
avatar
By harpsong
31st Jan 2022 10:22

Hi, thanks for this, that is what i posted, i believe?

"Dr wages and salaries
Cr share option reserves

and then on exercise (which may have already happened)
Dr cash
Cr Share cap
Cr Share premium

Dr share option reserve
Cr P&L reserve"

Thanks (0)
Share this content