Share-based payment issues and equity incentives under STIB

By He Yu and Chen Shuo, AnJie Law Firm
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Q: What is share-based payment? A: According to the Accounting Standards for Business Enterprises No. 11, a share-based payment refers to a transaction in which an enterprise grants equity instruments, or assumes liabilities determined on the basis of equity instruments, to obtain services from employees and other parties. Any equity incentive plan established in accordance with such standards should be accounted. The granting price of a company’s equity incentives is generally lower than the fair value. The company’s profits in this case will be reduced due to accrual of share-based payments regardless of whether the equity incentives are accounted in the current period or amortized on a yearly basis.

Share-based payment
He Yu
Partner
AnJie Law Firm

Q: What is the latest standard of the China Securities Regulatory Commission (CSRC) for the accounting treatment of share-based payments? A: The Answers to Certain Issues in the IPO Business (2) gave comprehensive answers to the issues of share-based payments in the IPO business.

Share-based payments shall be made in case of allocation of new shares by the issuer to employees (including shareholding platforms), customers, and suppliers, etc., or in case of transfer of shares from main shareholders and their affiliates to employees (including shareholding platforms), customers, and suppliers, etc., or in case of acquisition of new shares by actual controllers/existing shareholders exceeding their original shareholding ratio during the three-year reporting period. If any equity change is caused by non-transactional activities such as division, inheritance and bestowal of family property, etc., or due to asset restructuring, business mergers and acquisitions, etc., no share-based payment shall be made.

With respect to the measurement method, the answers clearly require that when the share-based payment cost is recognized, if the additional or transferred shares are immediately granted or the transfer is completed without clear agreement on service period and other restrictions, in principle, the share-based payment cost should be included in non-recurring gains and losses as accidental events for the current period. For share payments with restrictions such as service period, the share-based payment cost can be amortized during the service period by an appropriate method and included in the recurring gains and losses.

The answers unify the measurement standard of one-time accrual or amortization, that is, whether the right status of the equity is stable, and whether the incentive object receives the equity. Before then, one-time grants, one-time payment of equity prices, and one-time industrial and commercial registration for all incentives can be accrued at one time, but it is now necessary to examine whether service period restrictions have been set.

Share-based payment
Chen Shuo
Senior Associate
AnJie Law Firm

Q: Does the Science and Technology Innovation Board (STIB) have a rigid requirement for a company’s profits? A: Unlike the Main Board and the GEM, which have high requirements on financial indicators, the STIB even allows eligible companies running under deficit to go public. The Review Rules for Shares Listing and Issuance in the STIB of Shanghai Stock Exchange provide five sets of listing standards for general companies (other than red chips or companies with different voting rights). However, only the first of them requires the companies to make profits, that is:

(1) the market value of a company is expected to be no less than RMB1 billion (US$144.4 million), the net profit in the last two years is positive, and the accumulated net profit is not less than RMB50 million; or (2) the market value is expected to be no less than RMB1 billion, the net profit in the previous year is positive, and the operating income is not less than RMB100 million.

Equity incentives will reduce a company’s profits. The implementation time of equity incentives will influence the accounting treatment of share-based payment. Therefore, for companies with large R&D investment, long profit cycle and poor performance of early-stage profits, equity incentives have a significant impact on profits. To meet the first set of financial standards for listing on the STIB, a company should focus on the implementation time of equity incentives.

Q: How is it possible to grasp the implementation time of equity incentives under the STIB? A: In order to play a certain role in restraining the incentive object and encouraging his/her long-term service for the company, most of the equity incentives of proposed IPO enterprises have arrangements for incentive equity to be repurchased if the incentive object resigns before the service period expires.

The impact of an equity incentive plan on the three-year financial statements must be fully estimated to ensure that the share-based payment does not delay the company’s filing time. For companies that file according to the first set of standards, it is very important to complete the provision of share-based payment cost one or two years before the filing. The authors recommend that the arrangement for incentive equity to be repurchased for an unfulfilled service period should not be made for the equity incentive plan set-up at this stage, or the service period should be shortened accordingly. It is necessary to actually grant the incentive equity to the incentive object before the enterprise files for listing.

The other four sets of standards stipulated in the listing and issuance review rules do not require a company to make a profit. If a company intends to file according to the other four sets of standards, the service period and repurchase arrangement may be set in the equity incentive plan.

Q: How does one prepare relevant agreements on equity incentives under the STIB? A: If the company intends to file for listing according to the first set of standards, the authors recommend the following schemes: The company grants equity incentives to incentive objects using a limited partnership as shareholding platform, and the incentive objects indirectly hold the company’s equity by holding the shares of the limited partnership. The incentive equity will be granted at one time. An incentive object can be registered as the incentive object of the shareholding platform after paying the full price.

The partnership agreement of the shareholding platform may stipulate that the partnership equity of an incentive object shall be locked up for several years from the date that he/she obtains the partnership shares of the shareholding platform through transfer, and is registered as the partner of the shareholding platform. The incentive object has the right to dispose of the partnership shares he/she holds after expiration of the lockup period. If the employee resigns from the company during the lockup period, it may sell his/her equity to other incentive objects of the company upon negotiation. The successor shall assume the equity-lockup obligation.

He Yu is a partner and Chen Shuo is a senior associate at AnJie Law Firm

Share-based payment

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