Group share schemes in subsidiary accounts

When a parent company grants options over its own shares to the staff of a subsidiary, the subsidiary still recognises a share based payment expense in its own accounts under FRS 102 Section 26, even though it issues nothing and pays nothing. Because the subsidiary has no obligation to settle the award, it is treated as equity settled, so the debit to staff costs is matched by a credit to equity that represents a contribution from the parent. Any recharge from the parent, and the corporation tax deduction under Part 12 of the Corporation Tax Act 2009, are separate questions that need their own analysis.

Why does a subsidiary record a charge for its parent’s options?

Section 26 is about the services an entity receives, not about whose shares are used. Paragraph 26.1A of FRS 102 says a share based payment may be settled by another group entity, or by a shareholder of any group entity, on behalf of the entity receiving the services. It applies the section to an entity that receives services when another group entity has the obligation to settle, and to an entity that has the obligation to settle when another group entity receives the services. The only escape is where the transaction is clearly for a purpose other than payment for services supplied to the entity receiving them.

In practice this means the trading subsidiary that employs the option holders bears the cost of their remuneration in its own profit and loss account. Leaving the charge out because “the parent granted the options” is one of the most common errors in subsidiary accounts. The general measurement rules for options are explained in FRS 102 Section 26: share based payment; this page deals with what changes when a group is involved.

Is the award equity settled or cash settled in the subsidiary?

Classification is made separately in each set of accounts. The FRS 102 glossary defines an equity settled share based payment transaction as one in which the entity receives goods or services either in exchange for its own equity instruments, or where it has no obligation to settle the transaction with the supplier. A subsidiary whose employees hold options over the parent’s shares, where the parent will deliver those shares, falls within the second limb, so it accounts for the award as equity settled.

Paragraph 26.2A deals with the entity doing the settling. It recognises the arrangement as equity settled only if it is settled in its own equity instruments; otherwise it is cash settled. The ICAEW Technical Advisory Service helpsheet on share options under FRS 102 sets out the combinations in a table, which can be summarised as follows:

Who settles, and with what	Subsidiary’s own accounts	Parent’s separate accounts	Consolidated accounts
Parent settles in parent’s shares	Equity settled	Equity settled	Equity settled
Parent settles in cash	Equity settled	Cash settled	Cash settled
Subsidiary settles in parent’s shares	Cash settled	Not applicable	Equity settled
Subsidiary settles in its own shares	Equity settled	Not applicable	Equity settled

The third row catches people out. If the subsidiary itself is obliged to deliver parent shares to its staff, it will have to acquire them, so in its own accounts it carries a liability remeasured at each reporting date under paragraphs 26.14 to 26.14C rather than a fixed grant date charge.

How is the charge measured, and can the group allocate it?

For an equity settled award, paragraph 26.7 measures employee services by reference to the fair value of the equity instruments granted, and paragraph 26.8 fixes that fair value at grant date. Where the options vest only after a period of service, paragraph 26.6 spreads the charge over the vesting period as the services are received. The fair value used is that of the parent’s shares, because those are the instruments granted.

Paragraph 26.16 gives groups a practical alternative. Where a share based payment is granted to the employees of one or more group entities, those entities may measure their expense on the basis of a reasonable allocation of the expense for the group, calculated under FRS 102, IFRS 2 or an equivalent basis. This is useful where a parent reports under IFRS and has already valued the scheme, or where staff move between subsidiaries during the vesting period. A subsidiary using this route must disclose that fact and the basis of allocation under paragraph 26.22.

What does a worked example look like?

Illustration only. A parent grants 10,000 options over its own shares to employees of its trading subsidiary. The options vest after three years of service, the grant date fair value is £3 per option, and the subsidiary expects 90% of the options to vest. The parent will issue new shares on exercise.

Entity	Annual entry in years 1 to 3
Subsidiary	Debit staff costs £9,000; credit equity (contribution from parent) £9,000
Parent, separate accounts	Debit investment in subsidiary £9,000; credit equity £9,000
Group, consolidated	Debit staff costs £9,000; credit equity £9,000

The £9,000 is 10,000 options x 90% x £3, spread over three years. If the expected vesting rate changes, the cumulative charge is trued up in the year of change, as for any equity settled award. The parent’s debit to its investment reflects the common view that it is making a capital contribution to its subsidiary by remunerating the subsidiary’s staff; the investment is then subject to the normal impairment review.

How should a recharge from the parent be treated?

Many groups make the subsidiary pay the parent for the shares delivered to its employees, often on exercise and often equal to the intrinsic value at that date. FRS 102 contains no paragraph dealing with intragroup recharges, so the treatment is a matter of accounting policy that should be applied consistently.

A widely used approach is for the subsidiary to debit the recharge to equity, against the contribution previously credited, on the basis that it is in substance a return of that contribution. Where the recharge exceeds the cumulative contribution, the excess is commonly treated as a distribution to the parent, which raises company law questions about distributable profits. In the parent, the receipt is credited against the investment up to the amount previously added to it, with any excess treated as income. What the recharge must not do is replace the Section 26 charge: the expense is measured by reference to the award, whether or not cash later changes hands.

Which company gets the corporation tax deduction?

Part 12 of the Corporation Tax Act 2009 gives a statutory deduction when employees acquire qualifying shares. Section 1007 gives the relief to the employing company, which must carry on the business in relation to which the employment exists and be within the charge to corporation tax on its profits. HMRC’s Business Income Manual at BIM44295 confirms that shares in a company of which the employing company is a 51% subsidiary can qualify, so options over a UK parent’s shares do not prevent the subsidiary claiming. The shares must still meet the other conditions, explained in corporation tax relief for employee share acquisitions.

Where Part 12 relief is available, section 1038 denies any other deduction in relation to the provision of the shares or the option. Section 1038(5) says this includes amounts paid or payable by the employing company in relation to the employee’s participation in the scheme, which is exactly what a recharge is. So the subsidiary adds back both the accounting charge and the recharge, and claims the Part 12 deduction instead. Section 1038(6) still allows scheme set up costs, administration costs, borrowing costs and incidental costs such as stamp duty.

Where the shares are not qualifying shares, BIM44460 explains that a recharge to a UK employer for a global group scheme is considered under general principles, including whether the employees work wholly and exclusively for the UK company and whether transfer pricing applies. The timing of any deduction then follows the employee benefit trust rules, which defer relief until employees receive taxable benefits.

What can a subsidiary leave out of its disclosures?

A subsidiary that is a qualifying entity can use the reduced disclosure framework. Paragraph 1.12(d) exempts it from paragraphs 26.18(b), 26.19 to 26.21 and 26.23, provided the arrangement concerns equity instruments of another group entity and equivalent disclosures are given in the consolidated accounts in which it is included. It still describes each arrangement under paragraph 26.18(a) and, where it uses a group allocation, gives the paragraph 26.22 disclosure. The FRS 102 edition issued in September 2024 applies to accounting periods beginning on or after 1 January 2026, as the ICAEW helpsheet notes, and the paragraph numbers above are taken from it.

What mistakes come up in practice?

• No charge in the subsidiary because the parent issued the options, contrary to paragraph 26.1A.
• Treating the award as cash settled in the subsidiary when the parent, not the subsidiary, will deliver the shares.
• Expensing the recharge instead of the Section 26 charge, or expensing both.
• Claiming a deduction for the recharge in the tax computation when section 1038 disallows it.
• Forgetting that the timing difference between the accounting charge and the Part 12 deduction may give rise to deferred tax under FRS 102.
• Overlooking PAYE and National Insurance on share options, which are the employer’s responsibility even where the parent’s shares are delivered.

For tax advantaged schemes such as EMI options, the accounting is the same: the tax status of the scheme does not change the Section 26 analysis in the subsidiary.

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Related Accountapedia entries

• Share options in micro entity accounts
• Accounting for EMI options
• Capital contributions from a parent company
• Investments in subsidiaries in the parent’s accounts
• FRS 102 Section 22: liabilities and equity

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• ICAEW: Share options under frs 102
• legislation.gov.uk: Act 2009 c. 4, section 1007
• GOV.UK: Manual page BIM44295
• legislation.gov.uk: Act 2009 c. 4, section 1038
• GOV.UK: Manual page BIM44460

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.