Employee share options and the equity-liability distinction: a way forward?
Date
2014-08-06
Authors
Wallington, Craig
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Abstract
This paper explores the distinction between ‘equity’ and ‘liabilities’ in financial reporting in
order to assess the merits of the current system of accounting for share-based payment
transactions. It applies an interpretive methodology. Data were collected from a series of
interviews with purposefully selected experts. Criticisms of and support for the current
accounting regime are interpretively analysed and used to identify key themes or
principles for evaluating the merits of three models proposed in the academic literature:
the strict liability, narrow equity and ownership-settlement models. The study finds that
the strict liability approach remains supported on the grounds that it provides decisionuseful
information with which users are familiar. The other models are rejected as they
are perceived as diminishing the usefulness of financial reporting. The study also
identifies support for an obligation-centric approach, not fully developed in the literature,
which may require detailed consideration by standard-setters.
Overall, these findings will be useful for both practitioners and academics grappling with
the difficulty of defining ‘equity’ and ‘liabilities’. In addition, the research makes a valuable
contribution by addressing the need for interpretive-inspired financial reporting research.
To the best of the author’s knowledge, this thesis is also the first South African study to
investigate the appropriate classification criteria for instruments such as share-based
payments and provide normative recommendations for the International Accounting
Standards Board.
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Keywords
Financial reporting, Equity, Liabilities