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Share-Based Payments and the Positive Accounting Theory


Share-based payments are notable aspects of employee remuneration offered to directors, senior managers, and other employees. Share-based payments mainly include share options and shares offered to senior managers in an organisation. Besides, an entity can offer share-based payments to parties such as suppliers and key business stakeholders. The aim of the share-based payments as an element of remuneration is to bolster the performance of the individuals granted the payments, thus enhancing the effective and efficient performance of an organisation. The IFRS 2 standard requires organisations to observe the effective awarding of share-based payment as a crucial aspect of the total compensation package (Nichols, Betancourt & Scott 2017). However, in some instances, unreliable financial reporting occurs in organisations when managers seek to secure their self-interest. The Positive Accounting Theory (PAT) applies to situations where accounting professionals fabricate records to favour the interests of top managers in a company. As such, the IFRS 2 underlines the need to integrate measures that foster the reliability of the financial records that capture share-based payments (Nazareth et al. 2017). In this respect, this paper justifies the extent to which the key assumptions of PAT facilitate an understanding of self-interest practices regarding share-based payments offered to senior employees, including directors and managers among other parties.

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The Key Assumptions of PAT

The positive accounting theory is based on the forecasting of the future’s real-world occurrences and the translation of the foreseen events into current accounting transactions. PAT seeks to explain and forecast events unlike normative theories that aim at providing recommendations for the actions that a party needs to consider. In this respect, professionals in the area of accounting use PAT to explain and predict future events, thus making accounting decisions in the meantime. The key assumptions of PAT facilitate the development of explanations and predictions regarding the financial position of an organisation. Nonetheless, the theory’s key hypotheses may undermine the observation of the required accounting standards in an organisation (McCarthy 2015). For instance, accounting managers can use biased predictions to record financial statements that seek to favour their interests as the beneficiaries of share-based transactions.

Important to note, the PAT framework facilitates an understanding of the behaviours of accountants, owing to the assumptions it upholds. The key hypotheses include the bonus plan, debt covenants, and political costs. Three key hypotheses of PAT facilitate an understanding of the application of the theoretical framework in the field of accounting. Through the hypotheses or assumptions, accountants’ behaviour falls in line with the expectations of accounting standards such as the ones provided by the IFRS 2.

The bonus payment hypothesis assumes that managers in the accounting area are more likely to select accounting procedures that move the foreseen earnings to the current period (Nnadi & Tanna 2016). The move is geared towards increasing the bonuses and benefits granted to them in the current period. The approach is also applicable to share-based payments where accountants use predictions of future earnings to place them in the current reports for their benefits (Deller 2017). The debt covenant hypothesis holds that accountants are more likely to increase the current earnings from the expected earnings, thus violating the accounting-based debt covenant. By so doing, the management “escapes” the violation of the debt covenant by using future figures to fix the current situation. Moreover, the political cost assumption seeks to fabricate the current financial figures by using expected earnings to prevent the attraction of additional costs from political policies such as taxation.

The key assumptions of the PAT influence the share-based payments issued to directors and managers among other parties. In particular, the theory uncovers how managers’ self-interest makes them behave in ways that undermine the observance of accounting standards (Griffiths & Lucas 2016). Thus, looking at the extent to which the self-interest approach undermines the accounting standards recommended by IFRS 2 is relevant in the context of this paper.

The Issue of Self-interest in the Recognition and Measurement of Share-based Payments

The IFRS 2 provisions offer the criteria for recognising and measuring share-based interest to facilitate the observance of accounting standards in an organisation (Deller 2017). Notably, the standard aims at undermining the aspect of self-interest among managers by providing a basis for recording dealings that indicate the actual transactions, which denote an improvement of a company’s financial performance (Lueg, Punda & Burkert 2014). Therefore, by recognising all transactions that merit the granting of share-based payments, as well as the appropriate measurement procedures in accounting, the IFRS 2 instils the need for accountants to observe the recommended professional standards.

The IFRS holds that shares or the rights to shares issued to directors and managers among relevant parties need to be in line with any increase in the equity component (Melis, Gaia & Carta 2015). As such, the accountant is required to expense the offsetting debit entry in a scenario where the payment of particular goods or services does not meet the representation of a particular asset. Therefore, there is the need for acknowledging the underlying expenses whenever goods or services are consumed. For instance, issuing shares to a manager to purchase an inventory should be regarded as an increase in inventory that should be expensed accordingly only after the selling or impairment of the directory. Nonetheless, the aspect of self-interest undermines the recognition of such share-based payments where accountants expense the inventory increment before it is sold and/or impaired (Richter & Schrader 2017). Thus, the accountant will be predicting the sale of the inventory in the future and recording the expected earnings in the current financial records as a way of ensuring that they benefit from the share-based payments in the present period.

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Furthermore, giving fully vested shares, as well as the rights to shares, is acknowledged as recounting to past service whereby the entire amount of the grant-date regarding the fair value is expected to be expensed instantly (Barth et al. 2014). In this respect, the accountant needs to measure the value of the share-based payment at the grant-date and accordingly expense it over the period of vesting (Deller 2017). Nonetheless, managers and accountants’ stakes may prompt them to overlook the grant-date, thus measuring the fully vested shares incorrectly to safeguard their interests. The wrong valuing of shares may undermine the performance of the organisation since few members seek to benefit at the expense of an entire lot of shareholders (Soonawalla, Goh & Joos 2015). For example, issuing shares to managers earlier than the vested period denotes the lack of accounting standards in managing share-based payments since they are remunerated for services they have not fully rendered to the organisation. In the end, the accounting behaviour may pose financial constraints to the company, thereby undermining its profitability.

The Valuation of Awards

Moreover, the valuation of awards also needs to observe key conditions that uphold the practice of accounting standards. In this case, the estimation of share-based payments needs to uphold fairness. Importantly, the incorporation of an option-pricing model is identified as relevant towards ensuring the fair valuing of awards granted to directors and managers (Ali, Akbar & Ormrod 2016). The option-pricing model needs to be in line with the acceptable standards of valuing financial instruments. The inputs of the option-pricing model need to take into account at least six expectations ranging from the life of the alternative to the risk-free interest rate. By so doing, an organisation can secure an accurate valuation of the awards granted to the various beneficiaries (Collis, Jarvis & Skerratt 2017). In this respect, owing to the complexity of the awards valuation process, the organisation may secure the services of external professionals. The approach is crucial towards ensuring that accountants in the organisation can inaccurately value shares in line with their interests.


The IFRS standards offer a framework that requires accountants to embrace professionalism in their line of work. Nonetheless, the PAT predicts that accountants can embrace behaviours that safeguard their self-interest. In some instances, self-interest is manifested in the area of share-based payments where accountants record earnings expected in the future in the current financial books to be granted awards. The situation is worrying since it undermines the professionalism of the accounting field. Thus, there is the need for the integration of models that guide award valuation processes in an organisation to foster accountability and performance.

Reference List

Ali, A, Akbar, S & Ormrod, P 2016, ‘Impact of international financial reporting standards on the profit and equity of AIM listed companies in the UK’, Accounting Forum, vol. 40, no. 1, pp. 45-62.

Barth, M, Landsman, W, Young, D & Zhuang, Z 2014, ‘Relevance of differences between net income based on IFRS and domestic standards for European firms’, Journal of Business Finance & Accounting, vol. 41, no. 3, pp. 297-327.

Collis, J, Jarvis, R & Skerratt, L 2017, ‘The role and current status of IFRS in the completion of national accounting rules–evidence from the UK’, Accounting in Europe, vol. 14, no. 1, pp.1-13.

Deller, A 2017, Share-based payment’ accounting and business, Web.

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Griffiths, M & Lucas, J 2016, Value economics, Palgrave Macmillan, London.

Lueg, R, Punda, P & Burkert, M 2014, ‘Does transition to IFRS substantially affect key financial ratios in shareholder-oriented common law regimes? Evidence from the UK’, Advances in Accounting, vol. 30, no. 1, pp. 241-250.

McCarthy, D 2015, Palgrave dictionary of emerging markets and transition economics, Palgrave Macmillan, London.

Melis, A, Gaia, S & Carta, S 2015, ‘Directors’ remuneration: a comparison of Italian and UK non-financial listed firms’ disclosure’, The British Accounting Review, vol. 47, no. 1, pp. 66-84.

Nazareth, T, Ko, J, Sasane, R, Frois, C, Carpenter, S, Demean, S, Vegesna, A, Wu, E & Navarro, R 2017, ‘Outcomes-based contracting experience: research findings from US and European stakeholders’, Journal of Managed Care & Specialty Pharmacy, vol. 23, no. 10, pp. 1018-1026.

Nichols, N, Betancourt, L & Scott, I 2017, ‘The FASB simplifies the accounting for share‐based payments’, Journal of Corporate Accounting & Finance, vol. 28, no. 4, pp. 8-19.

Nnadi, M & Tanna, S 2016, Economics and political implications of international financial reporting standards, IGI Global, Hershey.

Richter, A & Schrader, S 2017, ‘Levels of employee share ownership and the performance of listed companies in Europe’, British Journal of Industrial Relations, vol. 55, no. 2, pp. 396-420.

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Soonawalla, K, Goh, L & Joos, P 2015, ‘Determinants and valuation implication imperfect stock option disclosures’, Journal of International Financial Management and Accounting, vol. 27, no. 1, pp. 26-64.

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