Share-based payment (IFRS 2)
Last Updated: October 30, 2012
When share-based payments (shares, options, etc.) in exchange for products or services occur, they have a potentially dilutive effect on earnings and therefore must be reflected on the financial statements.
This IFRS needs to be applied for all share-based payment transactions for products or services including settlements in equity, cash and in transactions when there is a choice of cash or equity settlement.
Exceptions for applying this section include:
- In business combination when equity is exchanged for control (apply IFRS 3)
- Joint ventures when equity is exchanged for a part of the venture (apply IFRS 11)
- Recognize the good or service received when received.
- Recognize a corresponding increase in equity if received in an equity-settled share-based payment transaction. If acquired in a cash-settled share-based payment transaction recognize as a liability.
- If the goods or services received in a share-based payment transactions don’t qualify for recognition as assets, for example, expenses incurred as part of research, recognize as an expense.
Equity-settled share-based payment transactions
- Measure the value of the goods or service received, and the increased equity, at the fair value of the goods or services received, unless the fair value is not reliably measurable in which case measure by reference to the fair value of the equity investment on the date the entity receives the goods or service (market price or valuation technique if market price unavailable).
- When granting payments to employees, typically you would measure at the fair value of the equity on the grant date.
- When equity granted vests immediately for services received, recognize equity payment immediately.
- When equity granted vests over time for services being received, recognize the service over the vesting period with a corresponding increase in equity.
- When equity granted based on performance criteria for some future date, presume performance will occur and estimate based on most likely outcome.
- After the vesting date, no subsequent adjustments to total equity are permitted. The entity may not reverse entries even if the equity is not exercised but may record a transfer within equity.
Modification of Equity Instruments:
- Recognize, at a minimum, modifications measured at the grant date fair value of the equity instrument.
- Recognize effects of modifications that increase the total fair value of the equity payment which benefits an employee.
- If a grant of equity instruments is cancelled or settled during the vesting period the entity should recognize the entire amount immediately.
- Any payment made to the employee on cancellation treated as a repurchase of equity to the extent that the payment exceeds the fair value of the equity on the repurchase date and any excess is an expense.
- If any new equity instrument is issued it should be accounted in the same way as a modification of the original grant.
Cash-settled share-based payment transactions
Example: Employees may become entitled to a bonus cash payment based on the future share price of an entity.
- Measure the goods or services received and the liability incurred at the fair value of the liability.
- Remeasure the fair value of the liability at the end of each period and at the date of settlement.
- Recognize changes to fair value in income.
Share-based payment transactions with cash alternatives
Not likely to be examined due to complexity. Big idea: when a compound instrument is granted (equity and/or debt portions/demands) then it should be measured as the difference between the fair value of the goods/services received and the fair value of the debt component at the date that the goods and services are received. For employees, first measure the debt component and then measure the fair value of the equity component.
Entities should disclose information that allows users to understand the nature and extent of share-based payments that existed during the period.
- A description of the share-based payment arrangements including terms and conditions
- Number and weighted average exercise prices for:
- Outstanding at the beginning of period,
- Granted, forfeited, exercised, expired during the period,
- Outstanding and exercisable at the end of the period,
- Weighted average share price at the date of exercise or for the period if multiple exercises occurred.
- For outstanding share options, the range of exercise prices and weighted average remaining contractual life.
- How the fair value of goods/services received or the fair value of the equity instruments granted was determined.
- Information that allows users to understand how share-based payments impacted the income statement and balance sheet.