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payment
The essential guide
(updated March 2009)
An overview of IFRS 2 IFRS 2 is one of the more challenging
accounting standards since it involves
Share-based payment complex valuation issues and, as described
below, is sometimes counter-intuitive. The
Share-based payment awards (such as
general principle of IFRS 2 is that an entity
share options and shares) are a key issue
recognises an expense for goods or services
for executives, entrepreneurs, employees,
(or an asset, if the goods or services
and directors. This guide gives an overview
received meet the criteria for recognising
of IFRS 2 Share-based payment (IFRS 2 or
an asset) with the credit entry recognised
the Standard) and related interpretations
either in equity or as a liability (depending
IFRIC 8 Scope of IFRS 2 and IFRIC 11 Group
on the classification of the share-based
Treasury Share Transactions. A glossary of
payment award). The definitions of ‘equity’
terms relating to share-based payments is
and ‘liability’ in IFRS 2 are very different
at the end of this document.
from those used in IAS 32 Financial
Instruments: Presentation and IAS 39
Background to IFRS 2 Financial Instruments: Recognition and
IFRS 2 was issued in February 2004 and Measurement.
prescribes the measurement and The Standard requires entities to recognise
recognition principles for all share-based all share-based payment awards in the
payment awards. IFRS 2 applies to financial statements based on fair value
transactions with employees and third when the goods and services are received,
parties, whether settled in cash, other which is determined at the grant date for
assets (relatively uncommon, but for share-based payments issued to
example, gold) or equity instruments. employees. As share-based payment
The Standard was recently amended awards have become a larger component
with respect to vesting conditions and of employee and executive compensation
cancellations which became effective on (for example, in the Silicon Valley
1 January 2009. The International technology companies in the late 1990s),
Accounting Standards Board (IASB) is standard-setters came to believe that
currently drafting an amendment with share-based payment awards are an
respect to group cash-settled awards. integral component of a total compensation
package. As such, they concluded that an
entity should recognise an expense for
share-based payments, just as it does for
cash compensation.
Recognition Expense
(debit entry)
Asset (if goods/services qualify as asset)
Does the condition determine whether the entity receives the services that
entitle the counterparty to the share-based payment?
No Yes
Yes No
Yes No
Of the six required inputs above, only as the expected life of the option,
two – the exercise price of the option and long-term average level of volatility, the
the current share price – are objectively length of time an entity’s shares have
determinable. The remaining assumptions been publicly traded, and the appropriate
are subjective and generally require interval for price observations
significant analysis and judgment, including
• Expected dividend yield: (if an
consideration of the following factors:
employee is not entitled to dividends on
• Expected life of the option: the vesting the underlying shares while holding the
period, past history of employee share option) the current expectation
exercise, the price of the underlying about an entity’s dividend policy
shares, the employee’s level within the • Risk-free interest rate: the implied
organisation and the expected volatility yield currently available on zero-coupon
• Expected volatility: (a measure of the government issues denominated in the
amount by which a share price has currency of the market in which the
fluctuated during a given period) the underlying shares primarily trade, over
historical volatility over the same period the same period as the expected life
of the option
11
IFRS 2 Share-Based Payment: The essential guide March 2009
In some cases, it is difficult to distinguish Share-based payment
between forfeiture and a cancellation. For
example, an unvested share-based payment awards with a cash
award that expires upon termination of alternative
employment by the employer could be
argued to be either a forfeiture (i.e., IFRS 2 gives specific guidance when
reversal of the cost of the award already cash-settlement is an election. The
recognised) or a cancellation (i.e., accounting differs depending on whether
acceleration of the cost of the award not yet the choice rests with the counterparty or
recognised). IFRS 2 appears to support the entity.
both views. Therefore, entities must
If a counterparty can choose settlement in
determine their accounting policy and apply
either shares or cash, IFRS 2 treats the
it consistently.
award as a compound award, which is split
There are additional practical difficulties into a liability component (the
if the award includes a non-market counterparty’s right to demand settlement
performance condition. IFRS 2 requires in cash) and an equity component (the
an entity to determine a cumulative charge counterparty’s right to demand settlement
at each reporting date based on its ‘best in shares). Once split, the entity accounts
available estimate’ of the number of awards for the two components separately.
that will vest. However, that guidance
If an entity chooses the settlement method,
seems to conflict with the requirement upon
it treats the whole award either as cash-
cancellation to recognise the amount that
settled or as equity-settled, depending on
‘otherwise would have been recognised for
whether or not the entity has a present
services received over the remainder of the
obligation to settle in cash, which results in
vesting period.’ It is unclear whether the
accounting for the award as a liability.
entity’s best estimate at the date of
cancellation encompasses employees at the An entity has a present obligation to settle
cancellation date, or employees that would in cash, if any of the following apply:
have vested if the award was not cancelled
• The choice of settlement has no
(that is, considering forfeitures that
commercial substance (e.g., because
otherwise still might have occurred over the
an entity is prohibited by law from
remaining vesting period). It is also unclear
issuing shares)
whether the entity’s best estimate reflects
the number of awards expected to vest • An entity has a past practice or stated
based on progress towards achieving policy of settling in cash
non-market performance conditions as of • An entity generally settles in cash
the cancellation date (or lack of progress), whenever the counterparty asks for cash
or the total awards that otherwise could settlement
have vested (that is, the maximum grant). If an entity does not have a present
IFRS 2 appears to support various views. obligation to settle in cash, it is an equity-
Therefore, entities must determine their settled award.
accounting policy and apply it consistently.
13
IFRS 2 Share-Based Payment: The essential guide March 2009
Transition to IFRS Summary
IFRS 1 First-time Adoption of International It is crucial that those involved in
Financial Reporting Standards sets out the structuring plans are familiar with IFRS 2
transitional provisions for entities adopting and the related expense ramifications. As
IFRS for the first time. discussed above, vesting conditions affect
the expense charged to the income
Under IFRS 1, IFRS 2 is applicable for equity
statement differently. If an option has a
settled awards granted after 7 November
market vesting condition or a non-vesting
2002 (publication date of the Exposure
condition, an entity might still recognise an
Draft of IFRS 2) that have not vested
expense even if that condition is not
as of the transition date to IFRS. However,
attained and the option does not vest. By
entities must make some disclosures about
contrast, an award subject only to a
outstanding awards for which it has not
non-market vesting condition does not
applied IFRS 2 (such as the number
result in an IFRS 2 expense if the condition
outstanding and weighted-average
is not met.
exercise price).
Decision-makers must also consider ‘hidden’
Under IFRS 1, IFRS 2 is applicable to
share-based payment awards, which may
cash-settled awards that are settled on
fall within the scope of IFRS 2 such as a
or after the date of transition to IFRS. A
situation in which:
first-time adopter is encouraged, but not
required, to apply IFRS 2 to cash-settled • A non-corporate shareholder of an entity
awards that were settled before the date of gives shares to employees of the entity
transition to IFRS. • Employees receive a cash payout equal
to the increase in an index of shares
• An entity gives an employee a limited-
recourse loan to acquire shares
15
IFRS 2 Share-Based Payment: The essential guide March 2009
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