Equity Settled Share Based Payments as per IFRS 2 account for the payment for goods/services in the form of equity instruments (shares or share options) of the company/group company.
The objective of IFRS 2 Share Based Payment is to SPECIFY the financial reporting by an entity when it undertakes a share-based payment transaction.
| IFRS 2 Share-Based Payment [Types] |
|---|
| (a) Equity Settled |
| (b) Cash Settled |
| (c) Settlement Alternative |
Table of Contents
- Equity Settled Share Based Payments – Key Definitions
- IFRS 2 Equity Settled Share Based Payments – Measurement Guidelines
- Equity Settled Share Based Payments – Detailed Consideration
- IFRS 2 Equity Settled Share Based Payments – Other Aspects
- Synopsis
1. Grant Date
The ‘Date’ at which the entity and other party agree to the share-based payment arrangement. At this date the entity AGREES to pay cash, other assets or equity instruments to the other party provided that specified vesting conditions if any are met.
If the agreement is subject to shareholder approval, then the approval date becomes the ‘Grant Date‘.
2. Vesting Period
The ‘Period’ during which the vesting conditions are to be satisfied.
3. Vesting Date
The ‘Date’ on which all vesting conditions have been met and the employee/third party becomes entitled to the share-based payment.
4. Vesting Conditions
The ‘Conditions’ must be satisfied for the other party to become entitled to receive the share-based payment.
| Vesting conditions are EITHER: |
|---|
| (a) Service Condition A ‘Vesting Condition’ that requires the counter-party to complete a specified period of service during which services are provided to the entity. |
| (b) Performance Condition A ‘Vesting Condition’ that requires the counter-party to meet specified performance target(s) while the counter-party is rendering the services. The performance conditions are EITHER Market Conditions or Non-Market Conditions. |
5. Performance Condition
A ‘Vesting Condition’ that requires the counter-party to meet a specified performance target(s) while it is rendering the services.
| Performance conditions are EITHER: |
|---|
| (a) Market Condition A ‘Vesting Condition’ where the performance target is defined with reference to the market price of the entity’s equity instruments. For example, – A minimum increase in the Share Price of the entity – A minimum increase in Shareholder’s Return – A specified Target Share Price Relative to an Index of Market Prices |
| (b) Non-Market Condition A ‘Vesting Condition’ where the performance target is defined with reference to the entity’s own operations (or activities). For example, – Achievement of Minimum Sales Target – Achievement of a Specific Increase in Profit or Earnings per Share (EPS) – Completion of a Particular Project |
| Counterparty is Other than Employee | Counterparty is an Employee of the Entity |
|---|---|
| Measure at fair value (FV) of Goods/Services received at the receipt date. If FV of goods/services cannot be reliably measured; Measure at fair value (FV) of Equity Instruments granted at the grant date. | Measure at fair value (FV) of Equity Instruments granted at the grant date. If FV of equity instruments cannot be reliably measured; Measure at intrinsic value of Equity Instruments granted and Re-Measure at each reporting date. |
1. Vesting Condition
| ‘Service Condition‘ | ‘Performance Condition‘ (a) Non-Market Condition (b) Market Condition |
[Note: Both Service and Non-Market conditions are taken into account in estimating the no. of Equity Instruments (likely to be vested) at the reporting date.]
2. Non-Vesting Condition/Post-Vesting Condition
[Note: Both Market and Non-Vesting conditions are taken into account in determining the FV of Equity Instruments at the grant date (by the actuary).]
3. No Vesting Condition (Immediate Vesting)
| If there is no vesting conditions or the share based payment is vested immediately, IFRS 2 regards such transaction as granted in return of the counterparty’s services in the past. |
[RECOGNIZE full expense immediately with the corresponding increase in equity.]
1. Fair Value of Equity Instruments
Market based vesting conditions and Non-Vesting conditions are taken into account in measuring the FV of Equity Instruments at the grant date.
| The FV of the equity instruments granted under Equity Settled Share Based Payments is measured by the actuary of the company using: |
|---|
| (a) Black-Scholes Model |
| (b) Binomial Model; OR |
| (c) Monte-Carlo Model |
The grant date FV of Equity Instruments is NOT Adjusted/Re-Measured subsequently for any changes in the:
- Fair value of (FV) of underlying instruments;
- Possibility of not measuring the Market based vesting conditions and Non-Vesting conditions; AND
- Actual outcome of Market based vesting conditions and Non-Vesting conditions.
If the ‘Equity Instrument’ do NOT vest due to breach of Market based vesting conditions, any amount recognized in share-based payment reserve will remain in equity.
[Expense is NOT REVERSED through P&L.]
2. Number of Equity Instruments
Non-Market based vesting conditions and Service conditions are taken into account in estimating the number of Equity Instruments that are likely to be vested.
At each reporting date, such estimate is adjusted/updated to reflect the number of Equity Instruments for which Non-Market based vesting conditions and Service conditions are expected to be satisfied.
On the ‘Vesting Date’, such estimate is revised to the actual number of equity instruments that do actually vest.
If the Equity Instruments are not likely to vest/do not actually vest due to breach of Non-Market based vesting conditions or service conditions, any amount recognized in share-based payment reserve will be reversed.
[Expense is REVERSED through P&L.]
3. If Vesting Period/Exercise Price/No. of Equity Instruments are Variable
| Market Condition | Non-Market Condition |
|---|---|
| Where, – Vesting period – Exercise price; OR – No. of Equity Instruments are variable depending upon Market Based Vesting Conditions, the amount of share-based payment expense to be recognized in P&L must be based on expected Vesting Period, Exercise Price, No. of Equity Instruments as estimated at the grant date. [Note: Such Estimate is NOT Revised Subsequently.] | Where, – Vesting period – Exercise price; OR – No. of Equity Instruments are variable depending upon Market Based Vesting Conditions, the amount of share-based payment expense to be recognized in P&L must be based on the best estimate at the end of each reporting period. [Note: Such Estimate is Revised at Each Reporting Date.] |
4. If Vesting Period is Variable
4.1 Market Condition
Equity Settled Share Based Payments DEPICTS where vesting period is variable depending upon Market based vesting conditions, the amount of share-based payment expense to be RECOGNIZED in P&L must be based on expected period as estimated at the grant date.
[Such Estimate is NOT Revised Subsequently.]
| Market condition Not Met; OR Actual Vesting Period is MORE than vesting period estimated at grant date. Share-based payment expense to be recognized in P&L must be based on vesting period estimated at the grant date. [IFRS 2 RESTRICTS revision of estimate relating to Market condition.] | Actual Vesting Period is LESS than vesting period estimated at grant date. ‘No guidance in IFRS 2.’ Follow EITHER of the following approaches: Option 1 – Share-based payment expense to be recognized in P&L must be based on vesting period estimated at the grant date. Option 2 – Share-based payment expense to be recognized in P&L must be based on actual vesting period. |
4.2 Non-Market Condition
Equity Settled Share Based Payments SPECIFIES that where vesting period is variable depending upon ‘Non-Market‘ based vesting condition, the amount of share based payment expense to be RECOGNIZED in P&L must be based on the best estimate at the end of each reporting period.
5. Multiple Vesting Conditions
Equity Settled Share-Based Payment MAY require multiple vesting conditions to be satisfied simultaneously.
In that case, Market based vesting conditions and Non-Vesting conditions are taken into account in measuring the FV of the Equity Instruments at the grant date.
Where as Non-Market based vesting conditions and Service conditions are estimated at each reporting date, UNTIL the actual outcome is known.
| Market Condition | Non-Market Condition | Share-based Payment (SBP) Expense |
|---|---|---|
| Met | Met | Recognized |
| Not Met | Met | Recognized |
| Met | Not Met | Not Recognized |
| Not Met | Not Met | Not Recognized |
Where ‘Vesting Period’ is variable depending upon fulfillment of Market as well as Non-Market conditions, the SBP Expense would be recognized at HIGHER of:
- Vesting period estimated at the grant date taking into account the Market condition; OR
- Vesting period estimated at each reporting date taking into account the Non-Market condition.
6. Fair Value of Equity Instruments Can’t be Reliably Measurable
| Measure such ‘Equity Instruments’ at their Intrinsic Value, initially at the date the entity obtains the goods or the counter-party renders services. |
|---|
| Debit: Inventory/ Expense – P&L Credit: Share-Based Payment Reserve |
6.1 Intrinsic Value
Equity Settled Share Based Payments DEFINES this as the difference between the fair value of the shares to which the counter-party has the right to receive and the price (if any) the counter-party is (or will be) required to pay for those shares.
| The Intrinsic Value should then be Re-Measured at each reporting date and at the date of final settlement, with any change in intrinsic value recognized in P&L. |
|---|
| Debit: Expense – P&L Credit: Share-Based Payment Reserve |
7. Vested Options Not Exercised
If after the vesting date, options are NOT exercised or the Equity Instruments are forfeited there will be ‘NO’ impact on the Financial Statements.
This is because the holder of the Equity Instruments has effectively made that decision as an investor.
The services against which Equity Instruments are given were actually received by the entity and the Financial Statements reflect the substance of this transaction.
[IFRS 2 PERMIT a transfer to be made between reserves in such circumstances to avoid an amount remaining in a ‘Separate Equity Reserve’ where NO Equity Instrument will be issued.]
Synopsis
Equity Settled Share Based Payments PRESENTED by International Financial Reporting Standard (IFRS 2) ISSUED in February 2004 requires an entity to recognize share-based payment transactions (such as Granted Shares, Share Options, or Share Appreciation Rights) in its Financial Statements.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)