The ‘OBJECTIVE’ of IFRS 2 is to Specify the ‘financial reporting’ by an entity when it undertakes a share‑based payment transaction. In particular, it requires an entity to reflect in its profit or loss and financial position the effects of share‑based payment transactions, INCLUDING expenses associated with transactions in which ‘share options‘ are granted to employee(s).
Table of Contents
- IFRS 2 Effective Date
- IFRS 2 – Scope
- IFRS 2 – Recognition
- Equity Settled Share-based Payment Transactions
- Cash Settled Share-based Payment Transactions
- Share-based Payment Transactions With Cash Alternatives
- Share-based Payment Transactions Among Group Entities
- IFRS 2 – Disclosures
IFRS 2 Effective Date
An entity shall apply this IFRS for annual periods beginning on or after 1 January 2005.
Earlier application is ‘ENCOURAGED’.
If an entity applies the IFRS 2 for a period beginning before 1 January 2005, it shall disclose that fact.
IFRS 2 – Scope
An entity shall apply this IFRS in accounting for all share‑based payment transactions (SBP), whether or not the entity can identify specifically some or all of the goods or services received, INCLUDING:
- equity settled SBP;
- cash settled SBP; AND
- transactions in which the entity receives or acquires 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’.
In the absence of specifically identifiable goods or services, other circumstances May indicate that goods or services have been (or will be) received, in which case this IFRS applies.
For the purpose(s) of IFRS 2, a transaction with an employee (or other party) in his/her capacity as a holder of equity instruments of the entity is NOT a share‑based payment transaction.
For example, if an entity grants all holders of a particular class of its equity instruments the right to acquire additional equity instruments of the entity at a price that is LESS than the fair value of those ‘Equity Instruments’, and an employee receives such a right because he/she is a holder of equity instruments of that particular class, the granting or exercise of that right is NOT subject to the requirements of this IFRS.
IFRS 2 – Recognition
An entity shall recognize the goods or services received or acquired in a share‑based payment transaction when it obtains the goods or as the services are received. The entity shall recognize a corresponding increase in Equity if the goods or services were received in an ‘Equity-settled SBP transaction’, or a Liability if the goods or services were acquired in a ‘Cash-settled SBP transaction’.
When the goods or services received or acquired in a share‑based payment transaction do NOT qualify for recognition as assets, they shall be recognized as expenses.
1. Overview
IFRS 2 states that for Equity Settled Share‑based Payment Transactions, the entity shall MEASURE the goods or services received, and the corresponding increase in ‘equity’, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably.
If the entity cannot estimate reliably the fair value of the goods or services received, the entity shall MEASURE their value, and the corresponding increase in ‘equity’, indirectly, by reference to the fair value of the equity instruments granted.
2. Transactions in Which Services Are Received
If the ‘Equity Instruments’ granted vest immediately, the counter-party is NOT required to complete a specified period of service before becoming unconditionally entitled. In the absence of evidence to the contrary, the entity shall PRESUME that services rendered by the counter-party as consideration for the equity instruments have been received. In this case, on grant date the entity shall RECOGNIZE the services received in full, with a corresponding increase in ‘equity’.
If the ‘Equity Instruments’ granted do not vest until the counter-party completes a specified period of service, the entity shall PRESUME that the services to be rendered by the counter-party as consideration will be received in the future, during the vesting period. The entity shall ACCOUNT for those services as they are rendered by the counter-party during the vesting period, with a corresponding increase in ‘equity’.
3. Transactions Measured by Reference to the Fair Value of the Equity Instruments Granted
3.1 Determining the Fair Value of Equity Instruments Granted
For transactions Measured by reference to the fair value (FV) of the ‘Equity Instruments’ granted, an entity shall MEASURE the Fair Value (FV) at the Measurement date, based on Market Prices if available, taking into account the terms and conditions upon which those equity instruments were granted.
3.2 Treatment of Vesting Conditions
A grant of ‘Equity Instruments’ Might be conditional upon satisfying specified vesting conditions.
For example, a grant of shares or share options to an employee is typically conditional on the employee remaining in the entity’s employ for a specified period of time. There Might be ‘performance conditions‘ that Must be satisfied, such as the entity achieving a specified growth in profit or a specified increase in the entity’s share price.
‘Vesting conditions‘, other than market conditions, shall NOT be taken into account when estimating the fair value (FV) of the shares or share options at the Measurement date. Instead, they shall be taken into account by adjusting the number of ‘Equity Instruments‘ included in the Measurement of the transaction amount so that, ultimately, the amount recognized for goods or services received as consideration for the equity instruments granted shall be based on the number of equity instruments that eventually vest.
Hence, on a cumulative basis, NO amount is recognized for goods or services received if the ‘Equity Instruments’ granted do not vest because of failure to satisfy a vesting condition, other than a Market condition, e.g, the counter-party fails to complete a specified service period, or a performance condition is not satisfied.
3.3 Treatment of Non-Vesting Conditions
Similarly, an entity shall TAKE into account all ‘Non‑Vesting conditions’ when estimating the fair value (FV) of the ‘Equity Instruments’ granted. Therefore, the entity shall RECOGNIZE the goods or services received from a counter-party that satisfies all vesting conditions that are not market conditions (e.g services received from an employee who remains in service for the specified period of service), IRRESPECTIVE of whether those Non‑Vesting conditions are satisfied.
3.4 After Vesting Date
Having recognized the goods or services received, and a corresponding increase in equity, the entity shall make NO subsequent adjustment to total equity after vesting date.
For example, the entity shall NOT subsequently reverse the amount recognized for services received from an employee if the vested ‘Equity Instruments’ are later forfeited or, in the case of Share Options, the options are not exercised. However, this requirement does not preclude the entity from recognizing a transfer within equity, i.e a transfer from one component of equity to another.
4. Modifications to the Terms and Conditions on Which Equity Instruments Were Granted, Including Cancellations and Settlements
As per IFRS 2, an entity Might ‘Modify‘ (Share-based Payment Modifications) the terms and conditions on which the Equity Instruments were granted.
For example, it Might reduce the exercise price of options granted to employees (ie reprice the options), which increases the fair value of those options.
IFRS 2 depicts that for Cash Settled Share‑based Payment Transactions, the entity shall MEASURE the goods or services acquired and the liability incurred at the fair value of the liability.
Until the liability is settled, the entity shall Re-Measure the fair value (FV) of the liability at the end of each reporting period and at the date of settlement, with any changes in fair value recognized in ‘profit or loss’ for the period.
The entity shall RECOGNIZE the services received, and a liability to pay for those services, as the employees render service.
For example, some ‘Share Appreciation Rights’ vest immediately, and the employees are therefore NOT required to complete a specified period of service to become entitled to the cash payment. In the absence of evidence to the contrary, the entity shall PRESUME that the services rendered by the employees in exchange have been received. Thus, the entity shall RECOGNIZE immediately the services received and a liability to pay for them.
If the ‘Share Appreciation Rights’ do not vest until the employees have completed a specified period of service, the entity shall RECOGNIZE the services received, and a liability to pay for them, as the employees render service during that period.
1. Treatment of Vesting and Non-Vesting Conditions
A Cash-Settled SBP transaction Might be conditional upon satisfying specified ‘vesting conditions’. There Might be performance conditions that should be satisfied, such as the entity achieving a specified growth in profit or a specified increase in the entity’s share price.
Vesting conditions, other than Market conditions, shall NOT be taken into account when estimating the fair value (FV) of the cash settled SBP at the Measurement date. Instead, they shall be taken into account by adjusting the number of awards included in the Measurement of the liability arising from the transaction.
Market conditions, such as a ‘target share price‘ alongside Non-Vesting conditions, shall be taken into account when estimating the fair value (FV) of the cash settled SBP granted and when Re-Measuring the fair value at the end of each reporting period and at the date of settlement.
IFRS 2 describes that for SBP transactions in which the terms of the arrangement provide either the Entity or the Counter-party with the Choice of whether the entity settles the transaction in cash (or other assets) or by issuing ‘Equity Instruments’, the entity shall ACCOUNT for that transaction, or the components of that transaction, as a ‘cash settled SBP transaction’ if, and to the extent that, the entity has incurred a liability to settle in cash or other assets, or as an ‘equity settled SBP transaction’ if, and to the extent that, no such liability has been incurred.
If an entity has granted the counter-party the right to choose whether a SBP transaction is settled in cash or by issuing ‘Equity Instruments’, the entity has granted a Compound Financial Instrument, which INCLUDES a debt component (i.e the counter-party’s right to demand payment in cash) and an equity component (i.e the counter-party’s right to demand settlement in Equity Instruments rather than in cash).
For transactions with parties other than employees, in which the fair value (FV) of the goods or services received is Measured directly, the entity shall MEASURE the equity component of the ‘compound financial instrument‘ as the difference between the fair value (FV) of the goods or services received and the fair value (FV) of the debt component, at the date when the goods or services are received.
At the Settlement-Date, the entity shall RE-MEASURE the liability to its fair value (FV). If the entity issues ‘Equity Instruments‘ on settlement rather than paying cash, the liability shall be transferred direct to equity, as the consideration for the equity instruments issued.
If the entity pays in cash on settlement rather than issuing ‘Equity Instruments‘, that Payment shall be applied to settle the liability in full. Any equity component previously recognized shall remain within equity. By electing to receive cash on settlement, the counter-party forfeited the right to receive Equity Instruments.
However, this Requirement does NOT preclude the entity from recognizing a transfer within equity, i.e a transfer from one component of equity to another.
For a SBP transaction in which the terms of the arrangement provide an entity with the choice of whether to settle in cash or by issuing ‘Equity Instruments’, the entity shall DETERMINE whether it has a present obligation to settle in cash and account for the SBP transaction accordingly.
The entity has a Present Obligation to settle in cash if the choice of settlement in equity instruments has NO ‘commercial substance‘ (e.g, because the entity is legally prohibited from Issuing shares), or the entity has a ‘past practice’ or a stated policy of settling in cash, or generally settles in cash whenever the counter-party asks for cash settlement.
IFRS 2 elaborates that for Share‑based Payment Transactions Among Group Entities, in its ‘separate or individual financial statements‘, the entity receiving the goods or services shall MEASURE the goods or services received as EITHER an Equity‑Settled or a Cash‑Settled SBP transaction by assessing:
- the nature of the awards granted; AND
- its own rights and obligations.
The Amount recognized by ‘the Entity receiving the goods/services’ May differ from the amount recognized by the consolidated group or by another group entity settling the SBP transaction.
The ‘Entity settling a SBP transaction’ when another entity in the group receives the goods or services shall RECOGNIZE the transaction as an Equity‑Settled SBP transaction only if it is settled in the entity’s own ‘Equity Instruments‘.
Otherwise, the Transaction shall be RECOGNIZED as a cash‑settled SBP transaction.
IFRS 2 – Disclosures
An Entity shall DISCLOSE information that enables users of the ‘Financial Statements’ to understand the nature and extent of SBP arrangements that existed during the period.
An Entity shall DISCLOSE information that ‘enables‘ users of the ‘Financial Statements’ to understand how the fair value (FV) of the goods or services received, or the fair value (FV) of the ‘Equity Instruments’ granted, during the period was determined.
An Entity shall DISCLOSE information that enables users of the ‘Financial Statements’ to understand the effect of SBP transactions on the entity’s profit or loss (P&L) for the period and on its Financial Position.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)