BC218 Some share options might not be exercised. For example, a share option holder is unlikely to exercise a share option if the share price is below the exercise price throughout the exercise period. Once the last date for exercise is passed, the share option will lapse.

BC219 The lapse of a share option at the end of the exercise period does not change the fact that the original transaction occurred, ie goods or services were received as consideration for the issue of an equity instrument (the share option). The lapsing of the share option does not represent a gain to the entity, because there is no change to the entity’s net assets. In other words, although some might see such an event as being a benefit to the remaining shareholders, it has no effect on the entity’s financial position. In effect, one type of equity interest (the share option holders’ interest) becomes part of another type of equity interest (the shareholders’ interest). The Board therefore concluded that the only accounting entry that might be required is a movement within equity, to reflect that the share options are no longer outstanding (ie as a transfer from one type of equity interest to another).

BC220 This is consistent with the treatment of other equity instruments, such as warrants issued for cash. When warrants subsequently lapse unexercised, this is not treated as a gain; instead the amount previously recognised when the warrants were issued remains within equity. [However, an alternative approach is followed in some jurisdictions (eg Japan and the UK), where the entity recognises a gain when warrants lapse. But under the Framework, recognising a gain on the lapse of warrants would be appropriate only if warrants were liabilities, which they are not.]