IFRS 2 - Share Based Payments

Definition

A share-based payment is a transaction in which the entity receives or acquires goods or services either as consideration for its equity instruments or by incurring liabilities for amounts based on the price of the entity's shares or other equity instruments of the entity.

The accounting requirements for the share-based payment depend on how the transaction will be settled, that is, by the issuance of (a) equity, (b) cash or (c) equity or cash.

Scope

The concept of share-based payment is broader than employee share options. IFRS 2 encompasses the issuance of shares, or rights to shares, in return for services and goods. Examples of items included in the scope of IFRS 2 are share appreciation rights, employee share purchase plans, employee share ownership plans, share option plans and plans where the issuance of shares (or rights to shares) may depend on market or non-market related conditions.

IFRS 2 applies to all entries. There is no exemption for private or smaller entries. Furthermore subsidiaries using their parent's or fellow subsidiary's equity as consideration for goods or services are within the scope of the standard.

There are two exemptions to the general scope principle.

• First, the issuance of shares in a business combination should be accounted for under IFRS 3 Business Combinations. However, care should be taken to distinguish share-based payments related to the acquisition from those related to employee services.
• Second, IFRS 2 does not address share-based payments within the scope of paragraphs 8-10 of IAS 32 Financial Instruments: Disclosure and Presentation, or paragraphs 5-7 of IAS 39 Financial Instruments: Recognition and Measurement. Therefore, IAS 32 and 39 should be applied for commodity-based derivative contracts that may be settled in shares or rights to shares.

IFRS 2 does not apply to share-based payment transactions other than for the acquisition of goods and services. Share dividends, the purchase of treasury shares, and, ans the issuance of additional shares are therefore outside its scope.

Types of share-based payment

Three types of transactions are defined:

• Equity-settled share-based payment transactions, in which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options)
• Cash-settled share-based payment transactions, in which the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the pirce (or value) of the entity's shares or other equity instruments of the entity. Transactions involving share appreciation rights (SARs) full into this category: and
• Transactions in which the entity receives or aquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash (or other assets) or by issuing equity instruments.

IFRS 2 includes separate measurement requirements for each of these, which are discussed in the remainder of this guide. Business combinations and certain arrangements within the scope of IAS 32 are excluded from the scope of IFRS 2.

If the equity instruments granted do not vest until the counterparty completes a specified period of service, it is presumed that the service period equals the vesting period. The services are accounted for as they are rendered by the counterparty during this vesting period, with a corresponding increase in equity.

Recognition and Measurement

The goods or services received or acquired in a share-based payment transaction are recognized when the goods are obtained or as the services are received. A corresponding increase inequity is recognized if the goods or services were received in an equity-settled transaction. A liability is recognized if the goods or services were acquired in a cash-settled transaction.

The goods or services received in a share-based payment transaction may qualify for recognition as an asset. If not, they are recognized as an expense.

The goods or services involved in a share-based payment transaction should be recognized when they are acquired / received. It will normally be relatively straightforward to as certain when goods are received, but this is not necessarily so when services are involved.

Equity-settled share-based payment transactions

If equity instruments vest immediately then, in the absence of evidence to the contrary, it is presumed that the consideration for the instruments (e.g. employee services) has been received. The consideration (i.e. an expense or asset, as appropriate) should, therefore, be recognized in full, with a corresponding increase in equity.

Vest

To become an entitlement. Under a share-based payment arrangement, a counterparty's right to receive cash, other assets, or equity instruments of the entity vests upon satisfaction of any specified vesting conditions.

Vesting conditions

The conditions that must be satisfies for the counterparty to become entitled to receive cahs, other assets or equity instruments of the entity, under a share-based payemnt arrangement. Vesting conditions includeservice conditions, which require specified performance targets to be met (such as a specified increase in the entity's profit over a specified period of time)

Vesting period

The period during which all the specified vesting conditions of a share-based payment arrangement are to be satisfied.

Cash-settled share-based payment transactions

The principles discussed above also apply to cash-settled share-based payments. The consideration for such payment is recognized when it is received (i.e. immediately or over any vesting period), with a corresponding liability.

The liability is remeasured at each reporting date and at settlement date. Any charges in the fair value of the liability are recognized as personnel expense in profit or loss.

Measurement guidance

Depending on the type of share-based payment, fair value may be determined by the value of the shares or rights to shares given up, or by the value of the goods or services received:

General fair value measurement principle

In principle, transactions in which goods or services are received as consideration for equity instruments of the entity should be measured at the fair value of the goods or services received. Only if the fair value of the goods or services cannot be measured reliably would the fair value of the equity instruments granted be used.

Measuring employee share options

For transactions with employees and other providing similar services, the entity is required to measure the fair value of the equity instruments granted, because it is typically not possible to estimate reliably the fair value of employee services received.

When to measure fair value-options

For transactions measured at the fair value of the equity instruments granted (such as transactions with employees), fair value should be estimated at grant date.

When to measure fair value-goods and services

For transactions measured at the fair value of the goods or services received, fair value should be estimated at the date of receipt of those goods or services.

Measurement guidance

For goods or services measured by reference to the fair value of the equity instruments granted, IFRS 2 specifies that, in general, vesting conditions are not taken into accounts when estimating the fair value of the shares or options at the relevant measurement date (as specified above) Instead, vesting conditions are taken into account by adjusting the number of equity instruments included in the measurements of the transaction amount so that, ultimately, the amount recognized for goods or services received as consideration for the equity instruments granted is based on the number of equity instrument that eventually vest.

More measurement guidance

IFRS 2 requires the fair value of equity instruments granted to be based on market prices, if available, and to take into account the terms and conditions upon which those equity instruments were granted. In the absence of market prices, fair value is estimated using a valuation technique to estimate what the price of those equity instruments would have been on the measurement date in an arm's length transaction between knowledgeable, willing parties. The standard does not specify which particular model should be used.

If fair value can not be reliably measured, IFRS 2 requires the share-based payment transaction to be measured at fair value for both listed and unlisted entities. IFRS 2 permits the use of intrinsic value (that is, fair value of the shares less exercise price) in those "rare cases" in which fair value of the equity instruments cannot be reliably measured. However this is not simply measured at the date of grant. An entity would have to remeasure intrinsic value at each reporting date until final settlement.

Performance conditions

IFRS 2 makes a distinction between the handling of market based performance features from non-market features. Market conditions are those related to the market price of an entity's equity, such as achieving a specified share price or a specified target based on a comparison of the entity's share price with an index of share prices of other entities. Market based performance features should be included in the grant-date fair value measurement. However, the fair value of the equity instruments should not be reduced to take into consideration non-market based performance features or other vesting features.

Modifications, Cancellations and Settlements

The determination of whether a change in terms and conditions has an effect on the amount recognized depends on whether the fair value of the new instruments is greater than the fair value of the original instruments (both determined at the modification date)

Modification of the terms on which equity instruments were granted may have an effect on the expense that will be recorded. IFRS 2 clarifies that the guidance on modifications also applies to instruments modified after their vesting date. If the fair value of the new instruments is more than the fair value of the old instruments (e.g. by reduction of the exercise price or issuance of additional instruments), the incremental amount is recognized over the remaining vesting period an a manner similar to the original amount. If the fair value of the new instruments is less than the fair value of the old instruments, the original fair value for the equity instruments granted should be expensed as if the modification never occurred.

The cancellation or settlement of equity instruments is accounted for as an acceleration of the vesting period and therefore any amount unrecognized that would otherwise  have been charged should be recognized immediately. Any payments made with the cancellation or settlement (up to the fair value of the equity instruments) should be accounted for as the repurchase of an equity interest. Any payment in excess of the fair value of the equity instruments granted is recognized as an expense.

New equity instruments granted may be identified as a replacement of cancelled equity instruments. In those cases, the replacement equity instruments should be accounted for as a modification. The fair value of the replacement equity instruments is determined at grant date, while the fair value of the cancelled instruments is determined at the date of cancellation, less any cash payment on cancellation that is accounted for as a deduction from equity.

Disclosure

Required disclosures include:

• The nature and extent of share-based payment arrangements that existed during the period.
• How the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined; and
• The effect of share-based payment transactions on the entity's profit or loss for the period and on its financial position.