IFRS 2

Share-based Payment
 Objective
• The objective of this IFRS is to specify the
financial reporting by an entity when it
undertakes a share-based payment transaction.
• An entity shall apply this IFRS in accounting
for all share-based payment transactions.
 OVERVIEW
• a share-based payment is a transaction in which
the entity receives goods or services as
consideration for its equity instruments or
• acquires goods or services by incurring
liabilities for amounts that are based on the price
(or value) of the entity’s shares (or other equity
instruments of the entity).
 OVERVIEW
• The transaction is settled by the issuance of:
1. Equity instruments;
2. Cash; or
3. Equity and cash.
Reasons for granting share-based payments

• Principal-agent theory
• Reward for past services
• share-based payments is to receive goods or
services without affecting the entity’s liquidity
 General principle
• The general principle is that all share-based
payment transactions should be recognised in
the financial statements at fair value.
• Depending on the type of share-based
payment, fair value may be determined based
on the value of goods or services received, or
by the value of the shares or rights to shares
given up.
 Rules
• If the equity-settled share-based payment is for
goods or services (other than from employees and
others providing similar services), the equity-
settled share-based payment should be measured by
reference to the fair value of goods and services
received;
• If the equity-settled share-based payment is to
employees (or those similar to employees), the
transaction should be measured by reference to the
fair value of the equity instruments granted at the
date of grant;
 Rules
• For cash-settled share-based payments, the fair
value should be determined at each reporting
date; and
• If the share-based payment can be settled in
cash or in equity, then the equity component
should be measured at the grant date only, but
the cash component is measured at each
reporting date.
 Recognition
• An entity shall recognise 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 recognise a corresponding
increase in equity if the goods or services were
received in an equity-settled share-based
payment transaction, or a liability if the goods
or services were acquired in a cash-settled
share-based payment transaction.
 Recognition
• When the goods or services received or
acquired in a share-based payment transaction
do not qualify for recognition as assets, they
shall be recognised as expenses.
 Considerations
• Equity share
• share options
• share apreciation right
 Options
• Options are characterised by the right, but not
the obligation, to buy a share at a fixed price.
An option has a value (i.e. the option
premium), because the option holder has the
benefit of any future gains and has none of the
risks of loss beyond any option premium paid.
 Conditions
• No conditions
• Vesting conditions
• Non - vesting conditions
 vesting conditions,
• Are conditions, that must be met before receiving any
share-based payment. IFRS 2 recognizes 2 types of
vesting conditions:
1. Service conditions: they require the counterparty to
complete a specified period or service;
2. Performance conditions: they require the
counterparty to complete a specified period of
services AND specified performance targets to be met.
 Market condition
 Non-market performance
 Non vesting conditions,
• Any condition other tan vesting conditions are
called non vesting.
• although non-vesting conditions are just as
important as vesting conditions for the
counterparty, they are unrelated to the
requirement to deliver services to the entity.
 No conditions
• In the absence of evidence to the contrary, the
entity shall presume that services rendered by the
counterparty as consideration for the equity
instruments have been received.
• In this case, on grant date the entity shall
recognise the services received in full, with a
corresponding increase in equity.
 No conditions
• On 1 January Year 1, Company C grants a share
option to an employee. The share option can be
exercised at any time within the next five years
and has no conditions.
• In this example, no future services are required;
therefore, the share-based payment does not
contain a vesting condition. The employee can
leave C on 2 January Year 1 and still be entitled
to exercise the option at any time until 31
December Year 5.
 Case
• On 1 January Year 1 Company B, a listed
company, grants 10 share options each to its 100
employees, subject to a two-year service
condition. B is obliged to settle the transaction in
its own shares, unless an employee gets a long-
term illness. In this case, the employee is entitled
to receive cash equal to the intrinsic value of the
options at vesting date for a pro rata amount of
options and the remainder of the options lapses.
 Case
• On 1 January Year 1, Company D grants a
share option to an employee, subject to a
two‑year service condition. The share option
can be exercised at any time in the period from
1 January Year 3 until 31 December Year 5.
• In this example, the employee is required to
provide future services – i.e. to satisfy a
two‑year service condition – before the share
option vests and becomes exercisable.
 Case
• On 1 January Year 1, Company B grants a
share option to an employee, subject to a
three-year service condition and B’s share
price meeting a target of at least 120 at vesting
date. The share option is exercisable for a
period of five years after 31 December Year 3,
regardless of whether the employee is still
employed with B at that time.
 Case
• On 1 January Year 1, Company C grants a
share option to an employee, subject to a
three-year service condition and to C’s profit
being at least 10 million in Year 3. The share
option is exercisable for a period of five years
after 31 December Year 3, regardless of
whether the employee is still employed with C
at that time.
 Case
• Company S issued a share-based payment to
its employees on 1 January Year 1, subject to
the conditions that the employees remain in
service for two years and that S achieves a
cumulative revenue target of 10,000 over those
two years.
 Case
• Modifying Example above, the plan has the
same performance condition requiring
Company S to meet a cumulative revenue
target of 10,000 over the two years, but
employees can leave S after one year without
losing entitlement to the award – i.e. there is
only a one-year service requirement.
 Equity-settled share-based payment
transactions
• 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.
 Equity-settled share-based payment
transactions
• Typically, shares, share options or other equity
instruments are granted to employees as part of
their remuneration package.
• with parties other than employees, there shall
be a rebuttable presumption that the fair value
of the goods or services received can be
estimated reliably.
• That fair value shall be measured at the date
the entity obtains the goods or the counterparty
renders service.
 fair value of equity instruments granted
• For transactions measured by reference to the
fair value of the equity instruments granted, an
entity shall measure the fair value of equity
instruments granted at the measurement date,
based on market prices if available.
• If market prices are not available, the entity
shall estimate the fair value of the equity
instruments granted using a valuation technique
 Equity-settled share-based payments with
employees
• Equity-settled share-based payment transactions
with employees require indirect measurement
and each equity instrument granted is measured
on its grant date not exercise date.
 Equity-settled share-based payments with
employees
• The fair value of the equity instruments
granted for services received from employees
in an equity-settled share-based payment is
determined at grant date rather than on every
date on which services are received.
• although the services are recognised over the
service period, they are measured only once, at
grant date,
 Equity-settled share-based payments with
employees
• ‘Grant date’ is the date at which the entity and
the employee agree to a share-based payment
arrangement, and requires that the entity and the
employee have a shared understanding of the
terms and conditions of the arrangement.
• Grant date is not reached until there is
acceptance of the offer. The acceptance may be
explicit (e.g. by signing a contract) or implicit
(e.g. by commencing to render services).
 Equity-settled share-based payments with
employees
• The classification of a share-based payment
transaction is not affected by how an entity
obtains the equity instruments that it will use to
settle its obligations.
• For example, to settle an obligation to transfer
shares to the counterparty, an entity may expect
to buy its own shares in the market, either
because it is prohibited from issuing new shares
or because it wishes to avoid dilution.
 Grants of equity instruments ‘to the
value of’
• An ‘equity-settled transaction’ is defined as a
transaction in which the entity receives goods
or services as consideration for equity
instruments of the entity.
• Therefore, a transaction that is settled in a
variable number of shares is generally
classified as an equity-settled share-based
payment transaction,
 Equity-settled share-based payments with
employees
• If the equity instruments do not vest until the
employee completes a period of service, then the
entity presumes that services are to be provided in
the future. The entity accounts for the services as
they are received during the vesting period.
• The costs are recognised on a straight-line basis
over the vesting period following the modified
grant-date method
 Case
• On 1 January Year 1, Company B grants one share
option to each of its 100 employees in a share-based
payment transaction, subject to a three-year service
condition. If the service condition is met, then the
employees can exercise their option at any date in
Year 4 at an exercise price of 50 per share.
• On grant date and at the end of each year, B
estimates the number of employees expected to have
satisfied the service condition at 31 December Year
3 and the number of instruments expected to vest.
• The fair value of a share option at grant date is 9.
 Case

1 January Year 1 90

31 December Year 1 80

31 December Year 2 75

31 December Year 3 70
 Equity-settled share-based payments with
employees
• The actual number of employees in employment
during the service period is not relevant for the
accounting for the share-based payment.
• Instead, the accounting is based on the number of
instruments expected to vest based on the
number of employees that are expected to meet
the service condition at the end of the vesting
period.
 Dividends
• dividends that are declared during the vesting
period but not paid until vesting should also be
charged to equity and recognised as a liability
when they are declared.
• If an employee resigns before the end of the
vesting period, then it is clear that the requested
services have not been rendered and the
termination is treated as a forfeiture.
 Cash-settled share-based payments
with employees
• the cash amount ultimately paid is based on the value
of the shares of the buyer.
• Cash-settled share-based payment transactions are
measured initially at the fair value of the liability and
are recognised as an expense or capitalised as an asset
if the general asset recognition criteria in IFRS are
met.
• If the payment is subject to a vesting condition, then
the amounts are recognised over the vesting period.
At each reporting date until settlement date, the
recognised liability is re-measured at fair value with
 Case
• At January 1, 20XX, Casablanca grants a cash-settled share-
based payment transaction to 100 employees. In terms of the
transaction, each employee is entitled to receive the increase of
the independent value of the 10 shares of Casablanca above €20,
in cash, after a vesting period of two years’ service.
• On January 1, 20XX, it was expected that 90% of the employees
will still be in service on the vesting date. The actual number of
employees in service on December 31, 20XX+1, was 88.
• The independent expert valued the right attached to one share as
follows:
• December 31, 20XX = €6
• December 31, 20XX+1= €9
• The full liability was settled on December 31, 20XX+1.
 Employee transactions with a choice of
settlement
• Some share-based payment transactions provide one
party with the choice of settlement in cash or in equity
instruments.
• If the entity has the choice of settlement, then the
transaction is classified as an equity-settled or a cash-
settled share-based payment transaction, depending on
whether the entity has a present obligation to settle in
cash.
• If the counterparty has the choice of settlement, then the
entity has granted a compound instrument comprising a
debt component and an equity component.
 Employee transactions with a choice of
settlement
Whether the entity has a present obligation to
settle in cash depends on an assessment of:
• the entity’s intent, if any, to settle in cash or in
equity instruments;
• the entity’s past practice, if any, of settling in
cash or in equity instruments; and
• the entity’s ability to settle in equity
instruments.
 Accounting treatment
• The liability component is measured first. It
equals the fair value of the liability under the
cash alternative.
• the fair value of the equity component is
measured. It takes into account that the employee
forfeits their right to the cash alternative in order
to receive the equity instruments.
 Case
• Company B grants 1,000 SARs to an employee,
subject to a two-year service condition. On
vesting, the employee can choose a cash payment
equal to the increase in share price between grant
date and vesting date for 1,000 shares (i.e. the
intrinsic value of the SARs).
• Alternatively, they can choose to exercise 1,000
share options at an exercise price that equals the
share price at grant date. The fair value of a SAR
and of a share option are identical – i.e. 5 at grant
date.
 Case
• Company B grants 1,000 SARs to an employee,
subject to a two-year service condition. On
vesting, the employee can choose a cash
payment equal to the increase in share price
between grant date and vesting date for 1,000
shares (i.e. the intrinsic value of the SARs).
• Alternatively, they can choose to exercise 1,200
share options at an exercise price that equals the
share price at grant date. The fair value of a SAR
and of a share option are identical – i.e. 5 at
grant date.