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Home > Students > Examresources > Professionallevel > P2CorporateReporting > Technicalarticles

IFRS 2, SHARE-BASED PAYMENT

183

IFRS2,SharebasedPayment,applieswhenacompanyacquiresorreceivesgoodsandservices
forequitybasedpayment.Thesegoodscanincludeinventories,property,plantandequipment,
intangibleassets,andothernonfinancialassets.Therearetwonotableexceptions:shares
issuedinabusinesscombination,whicharedealtwithunderIFRS3,BusinessCombinations
andcontractsforthepurchaseofgoodsthatarewithinthescopeofIAS32andIAS39.In
addition,apurchaseoftreasuryshareswouldnotfallwithinthescopeofIFRS2,norwoulda
rightsissuewheresomeoftheemployeesareshareholders.
ExamplesofsomeofthearrangementsthatwouldbeaccountedforunderIFRS2includecalloptions,
shareappreciationrights,shareownershipschemes,andpaymentsforservicesmadetoexternal
consultantsbasedonthecompanysequitycapital.

RECOGNITIONOFSHAREBASEDPAYMENT
IFRS2requiresanexpensetoberecognisedforthegoodsorservicesreceivedbyacompany.The
correspondingentryintheaccountingrecordswilleitherbealiabilityoranincreaseintheequityofthe
company,dependingonwhetherthetransactionistobesettledincashorinequityshares.Goodsor
servicesacquiredinasharebasedpaymenttransactionshouldberecognisedwhentheyarereceived.In
thecaseofgoods,thisisobviouslythedatewhenthisoccurs.However,itisoftenmoredifficultto
determinewhenservicesarereceived.Ifsharesareissuedthatvestimmediately,thenitcanbeassumed
thattheseareinconsiderationofpastservices.Asaresult,theexpenseshouldberecognised
immediately.
Alternatively,iftheshareoptionsvestinthefuture,thenitisassumedthattheequityinstrumentsrelateto
futureservicesandrecognitionisthereforespreadoverthatperiod.

EQUITYSETTLEDTRANSACTIONS
Equitysettledtransactionswithemployeesanddirectorswouldnormallybeexpensedandwouldbe
basedontheirfairvalueatthegrantdate.Fairvalueshouldbebasedonmarketpricewhereverthisis
possible.Manysharesandshareoptionswillnotbetradedonanactivemarket.Ifthisisthecasethen
valuationtechniques,suchastheoptionpricingmodel,wouldbeused.IFRS2doesnotsetoutwhich
pricingmodelshouldbeused,butdescribesthefactorsthatshouldbetakenintoaccount.Itsaysthat
intrinsicvalueshouldonlybeusedwherethefairvaluecannotbereliablyestimated.Intrinsicvalueisthe
differencebetweenthefairvalueofthesharesandthepricethatistobepaidforthesharesbythe
counterparty.
TheobjectiveofIFRS2istodetermineandrecognisethecompensationcostsovertheperiodinwhich
theservicesarerendered.Forexample,ifacompanygrantsshareoptionstoemployeesthatvestinthe
futureonlyiftheyarestillemployed,thentheaccountingprocessisasfollows:
Thefairvalueoftheoptionswillbecalculatedatthedatetheoptionsaregranted.
Thisfairvaluewillbechargedtoprofitorlossequallyoverthevestingperiod,withadjustmentsmadeateach
accountingdatetoreflectthebestestimateofthenumberofoptionsthatwilleventuallyvest.
Shareholdersequitywillbeincreasedbyanamountequaltothechargeinprofitorloss.Thechargeintheincome
statementreflectsthenumberofoptionsvested.Ifemployeesdecidenottoexercisetheiroptions,becausetheshare
priceislowerthantheexerciseprice,thennoadjustmentismadetoprofitorloss.Onearlysettlementofanaward
withoutreplacement,acompanyshouldchargethebalancethatwouldhavebeenchargedovertheremainingperiod.

EXAMPLE1
Acompanyissuedshareoptionson1June20X6topayforthepurchaseofinventory.Theinventoryis
eventuallysoldon31December20X8.Thevalueoftheinventoryon1June20X6was$6mandthis
valuewasunchangeduptothedateofsale.Thesaleproceedswere$8m.Thesharesissuedhavea
marketvalueof$6.3m.
Howwillthistransactionbedealtwithinthefinancialstatements?
Answer
IFRS2statesthatthefairvalueofthegoodsandservicesreceivedshouldbeusedtovaluetheshare
optionsunlessthefairvalueofthegoodscannotbemeasuredreliably.Thusequitywouldbeincreased
by$6mandinventoryincreasedby$6m.Theinventoryvaluewillbeexpensedonsale.

PERFORMANCECONDITIONS
Schemesoftencontainconditionswhichmustbemetbeforethereisentitlementtotheshares.Theseare
calledvestingconditions.Iftheconditionsarespecificallyrelatedtothemarketpriceofthecompanys
sharesthensuchconditionsareignoredforthepurposesofestimatingthenumberofequitysharesthat
willvest.Thethinkingbehindthisisthattheseconditionshavealreadybeentakenintoaccountwhenfair
valuingtheshares.Ifthevestingorperformanceconditionsarebasedon,forexample,thegrowthin
profitorearningspershare,thenitwillhavetobetakenintoaccountinestimatingthefairvalueofthe
optionatthegrantdate.
EXAMPLE2
Acompanygrants2,000shareoptionstoeachofitsthreedirectorson1January20X6,subjecttothe
directorsbeingemployedon31December20X8.Theoptionsveston31December20X8.Thefairvalue
ofeachoptionon1January20X6is$10,anditisanticipatedthaton1January20X6alloftheshare
optionswillveston30December20X8.Theoptionswillonlyvestifthecompanyssharepricereaches
$14pershare.
Thesharepriceat31December20X6is$8anditisnotanticipatedthatitwillriseoverthenexttwo
years.Itisanticipatedthaton31December20X6onlytwodirectorswillbeemployedon31December
20X8.
Howwilltheshareoptionsbetreatedinthefinancialstatementsfortheyearended31December20X6?
Answer
Themarketbasedcondition(ietheincreaseintheshareprice)canbeignoredforthepurposeofthe
calculation.Howevertheemploymentconditionmustbetakenintoaccount.Theoptionswillbetreatedas
follows:
2,000optionsx2directorsx$10x1year/3years=$13,333
Equitywillbeincreasedbythisamountandanexpenseshowninprofitorlossfortheyearended31
December20X6.

CASHSETTLEDTRANSACTIONS
Cashsettledsharebasedpaymenttransactionsoccurwheregoodsorservicesarepaidforatamounts
thatarebasedonthepriceofthecompanysequityinstruments.Theexpenseforcashsettled
transactionsisthecashpaidbythecompany.
Asanexample,shareappreciationrightsentitleemployeestocashpaymentsequaltotheincreaseinthe
sharepriceofagivennumberofthecompanyssharesoveragivenperiod.Thiscreatesaliability,and
therecognisedcostisbasedonthefairvalueoftheinstrumentatthereportingdate.Thefairvalueofthe
liabilityisremeasuredateachreportingdateuntilsettlement.
EXAMPLE3
Jay,apubliclimitedcompany,hasgranted300shareappreciationrightstoeachofits500employeeson
1July20X5.Themanagementfeelthatasat31July20X6,theyearendofJay,80%oftheawardswill
veston31July20X7.Thefairvalueofeachshareappreciationrighton31July20X6is$15.
Whatisthefairvalueoftheliabilitytoberecordedinthefinancialstatementsfortheyearended31July
20X6?
Answer
300rightsx500employeesx80%x$15x1year/2years=$900,000

DEFERREDTAXIMPLICATIONS
Insomejurisdictions,ataxallowanceisoftenavailableforsharebasedtransactions.Itisunlikelythatthe
amountoftaxdeductedwillequaltheamountchargedtoprofitorlossunderthestandard.Often,thetax
deductionisbasedontheoptionsintrinsicvalue,whichisthedifferencebetweenthefairvalueand

exercisepriceoftheshare.Adeferredtaxassetwillthereforearisewhichrepresentsthedifference
betweenataxbaseoftheemployeesservicesreceivedtodateandthecarryingamount,whichwill
effectivelynormallybezero.Adeferredtaxassetwillberecognisedifthecompanyhassufficientfuture
taxableprofitsagainstwhichitcanbeoffset.
Forcashsettledsharebasedpaymenttransactions,thestandardrequirestheestimatedtaxdeductionto
bebasedonthecurrentshareprice.Asaresult,alltaxbenefitsreceived(orexpectedtobereceived)are
recognisedintheprofitorloss.
EXAMPLE4
Acompanyoperatesinacountrywhereitreceivesataxdeductionequaltotheintrinsicvalueofthe
shareoptionsattheexercisedate.Thecompanygrantsshareoptionstoitsemployeeswithafairvalueof
$4.8matthegrantdate.Thecompanyreceivesataxallowancebasedontheintrinsicvalueoftheoptions
whichis$4.2m.Thetaxrateapplicabletothecompanyis30%andtheshareoptionsvestinthreeyears
time.
Answer
Adeferredtaxassetwouldberecognisedof:
$4.2m@30%taxratex1year/3years=$420,000
Thedeferredtaxwillonlyberecognisediftherearesufficientfuturetaxableprofitsavailable.

DISCLOSURE
IFRS2requiresextensivedisclosuresunderthreemainheadings:
Informationthatenablesusersoffinancialstatementstounderstandthenatureandextentofthesharebasedpayment
transactionsthatexistedduringtheperiod.
Informationthatallowsusersoffinancialstatementstounderstandhowthefairvalueofthegoodsorservices
received,orthefairvalueoftheequityinstrumentswhichhavebeengrantedduringtheperiod,wasdetermined.
Informationthatallowsusersoffinancialstatementstounderstandtheeffectofexpenses,whichhavearisenfrom
sharebasedpaymenttransactions,ontheentitysprofitorlossintheperiod.

Thestandardisapplicabletoequityinstrumentsgrantedafter7November2002butnotyetvestedonthe
effectivedateofthestandard,whichis1January2005.IFRS2appliestoliabilitiesarisingfromcash
settledtransactionsthatexistedat1January2005.

MULTIPLE-CHOICE QUESTIONS
1.WhichofthefollowingdonotcomewithinthedefinitionofasharebasedpaymentunderIFRS2?
Aemployeesharepurchaseplans
Bemployeeshareoptionplans
Cshareappreciationrights
Darightsissuethatincludessomeshareholderemployees
2.Acompanyissuesfullypaidsharesto500employeeson31July20X8.Sharesissuedtoemployees
normallyhavevestingconditionsattachedtothemandvestoverathreeyearperiod,attheendofwhich
theemployeeshavetobeinthecompanysemployment.Theseshareshavebeengiventothe
employeesbecauseoftheperformanceofthecompanyduringtheyear.Theshareshaveamarketvalue
of$2mon31July20X8andanaveragefairvaluefortheyearof$3m.Itisanticipatedthatinthreeyears
timetherewillbe400employeesatthecompany.
Whatamountwouldbeexpensedtoprofitorlossfortheaboveshareissue?
A$3m
B$2m
C$1m
D$666,667
3.Acompanygrants750shareoptionstoeachofitssixdirectorson1May20X7.Theoptionsveston30
April20X9.Thefairvalueofeachoptionon1May20X7is$15andtheirintrinsicvalueis$10pershare.
Itisanticipatedthatalloftheshareoptionswillveston30April20X9.Whatwillbetheaccountingentryin
thefinancialstatementsfortheyearended30April20X8?
AIncreaseequity$33,750increaseinexpenseinprofitorloss$33,750
BIncreaseequity$22,500increaseinexpenseinprofitorloss$22,500
CIncreaseliability$67,500increaseinexpenseprofitorloss$67,500
DIncreaseliability$45,000increaseincurrentassets$45,000

4.Apubliclimitedcompanyhasgranted700shareappreciationrights(SARs)toeachofits400
employeeson1January20X6.Therightsareduetoveston31December20X8withpaymentbeing
madeon31December20X9.During20X6,50employeesleave,anditisanticipatedthatafurther50
employeeswillleaveduringthevestingperiod.FairvaluesoftheSARsareasfollows:

1January20X6

15

31December20X6

18

31December20X7

20

Whatliabilitywillberecordedon31December20X6fortheshareappreciationrights?
A$1,260,000
B$1,680,000
C$2,520,000
D$3,780,000
ANSWERS
1(d).
2(b).$2m.Theissueoffullypaidsharesisdeemedtorelatetopastserviceandshouldbeexpensedto
profitorlossat31July20X8.
3(a).750x6(directors)x$15/2years=$33,750
4(a).700x(400100)x$18x1/3=$1,260,000
WrittenbyamemberofthePaperP2examiningteam

Lastupdated:4Dec2015