IFRS 2 SHARE BASED PAYMENT
Share-based payment transaction
A transaction in which the entity receives goods or services as consideration for equity instruments of
the entity (including shares or share options), or acquires goods or services by incurring liabilities to the
supplier of those goods or services for amounts that are based on the price of the entity’s shares or
other equity instruments of the entity.
IFRS 2 requires an entity to reflect the effects of share-based payment transactions in its profit and loss
and financial position.
IFRS 2 applies to all share-based payment transactions. There are three types.
(a) Equity-settled share-based payment transactions, in which the entity receives goods or services
in exchange for equity instruments of the entity (including shares or share options).
(b) Cash-settled share-based payment transactions, in which the entity receives goods or services
in exchange for amounts of cash that are based on the price (or value) of the entity’s shares or
other equity instruments of the entity.
(c) Transactions in which the entity receives or acquires goods or services and either the entity or
the supplier has a choice as to whether the entity settles the transaction in cash (or assets) or by
issuing equity instruments.
This is based on an equation:
Period
Cumulative remuneration expense = No of rights expected to vest x FV x
Vesting period
Recognition depends on the type of share based payment.
The fair value is recognised as follows:
Form of Settlement Name Fair value
1. Settled in Equity Share Options Grant Fair Value
2. Settled in Cash Share Appreciation Current Fair value
Rights (SARs)
Key Definitions
Share-based payment arrangement
An agreement between the entity and another party (including an employee) to enter into a share-
based payment transaction, which thereby entitles the other party to receive cash or other assets of the
entity for amounts that are based on the price of the entity’s shares or other equity instruments of the
entity, or to receive equity instruments of the entity, provided the specified vesting conditions, if any,
are met.
1 Compiled by T T Herbert (0773 038 651 / 0712 560 772 / 0734 521 688)
Equity Instrument
It is a contract that evidences a residual interest in the assets of an entity after deducting all of its
liabilities.
Equity instrument granted
It is the right (conditional or unconditional) to an equity instrument of the entity conferred by the entity
on another party, under a share-based payment arrangement.
Share option
It is a contract that gives the holder the right, but not the obligation, to subscribe to the entity’s shares
at a fixed or determinable price for a specified period of time.
Fair value
It is the amount for which an asset could be exchanged, a liability settled, or an equity instrument could
be exchanged, between knowledgeable, willing parties in an arm’s length transaction.
Grant date:
It is the date at which the entity and another party (including an employee) agree to a share-based
payment arrangement, being when the entity and the other party have a shared understanding of the
terms and conditions of the arrangement. At grant date the entity confers on the other party (the
counterparty) the right to cash, other assets, or equity instruments of the entity, provided the specified
vesting conditions, if any, are met. If that agreement is subject to an approval process (for example, by
shareholders), grant date is the date when that approval is obtained.
Intrinsic value
It is the difference between the fair value of the shares to which the counterparty has the (conditional
or unconditional) right to subscribe or which it has the right to receive, and the price (if any) the other
party is (or will be) required to pay for those shares. For example, a share option with an exercise price
of $15 on a share with a fair value of $20 has an intrinsic value of $5.
Measurement date
It is the date at which the fair value of the equity instruments granted is measured. For transactions with
employees and others providing similar services, the measurement date is grant date. For transactions
with parties other than employees (and those providing similar services), the measurement date is the
date the entity obtains the goods or the counterparty renders service.
Vest
It is to become an entitlement. Under a share-based payment arrangement, a counterparty’s right to
receive cash, other assets, or equity instruments of the entity vests upon satisfaction of any specified
vesting conditions.
2 Compiled by T T Herbert (0773 038 651 / 0712 560 772 / 0734 521 688)
Vesting conditions
These are conditions that must be satisfied for the counterparty to become entitled to receive cash,
other assets or equity or equity instruments of the entity, under a share-based payment arrangement.
Vesting conditions include service conditions, which require the other party to complete a specified
period of service, and performance conditions, which require specified performance targets to be met
(such as a specified increase in the entity’s profit over a specified period of time).
Vesting Period
It is the period during which all the specified vesting conditions of a share-based payment arrangement
are to be satisfied.
Recognition criteria
An entity should recognise goods or services received or acquired in a share-based payment transaction
when it obtains the goods or as the services are received. Goods or services received or acquired in a
share-based payment transaction should be recognised as expenses unless they qualify for recognition
as assets. For example, services are normally recognised as expenses (because they are normally
rendered immediately), while goods are recognised as assets.
If the goods or services were received or acquired in an equity-settled share-based payment transaction
the entity should recognise a corresponding increase in equity (reserves).
If the goods or services were received or acquired in cash-settled share-based payment transaction the
entity should recognise a liability.
EQUITY SETTLED SHARE-BASED PAYMENTS
Question 1
ABC Ltd grants 50 share options to each of its 150 employees. The individual employees will be entitled
to the options if they work for the company over the next four years. The company estimates that the
fair value of each option is $100. It also estimates that 15% of the employees will forfeit their rights to
the options after failing to complete the required
a) Calculate the remuneration expense and the cumulative remuneration expense for each of the
four years assuming that the estimates are correct.
b) Calculate the remuneration expense and the cumulative remuneration expense for each of the
four years assuming the following:
Year 1 15 employees leave, the company revises its estimate of total resignations over the 4
year period from 15% to 10%.
Year 2 18 employees leave; the company revises its estimate of total resignations over the 4
year period from 10% to 16%
Year 3 14 employees leave; the company revises its estimate of total resignations over the 4
year period from 16% to 13%
Year 4 0 employees leave
3 Compiled by T T Herbert (0773 038 651 / 0712 560 772 / 0734 521 688)
Question 2
On 1 January 2011 an entity grants 100 share options to each of its 400 employees. Each grant is
conditional upon the employee working for the entity until 31 December 2013. The fair value of each
share option is $20.
During 2011 20 employees leave and the entity estimates that 20% of the employees will leave during
the three year period.
During 2012 a further 25 employees leave and the entity now estimates that 25% of its employees will
leave during the three year period.
During 2013 a further 10 employees leave.
Required
Calculate the remuneration expense that will be recognised in respect of the share-based payment
transaction for each of the three years ended 31 December 2013.
Question 3
At the beginning of year, B. Ltd grants 8 000 share options with a 10 year life to each of 10 senior
executives. The options will vest and become exercisable immediately if and when the company’s share
price increases from $120 to $150, on condition that the individual remains in service until the share
price target is achieved.
The company estimates that the fair value of the options at grant date is $30 per option. Of all the
possible outcomes, the most likely outcome of the market condition is that the share price target will be
achieved at the end of year 5, thus the company expects the vesting period to be 5 years. The company
also estimates that 2 executives will have left by the end of 5 years, implying that 8 000 options x 8
executives will vest at the end of that year. From years 1 to 4, the company continues to believe that 2
executives will leave by the end of year 5. However, 1 executive left in each of years 3, 4 and 5. The
share price was achieved at the end of year 6.
Required:
Calculate the remuneration expense and the cumulative remuneration expense for each of the years up
to the end of the vesting period.
Question 4 (Accounting for share options based on the intrinsic value method)
At the beginning of year 1, D Ltd. Granted 750 share options each to 80 employees. The share options
will vest at the end of year 3 provided the individual employees would be in service at that time. These
options have a life of 10 years, with both the exercise price and the company’s share price being $70 at
that grant date. On this date, it was not possible to estimate reliably that fair value of the options.
4 Compiled by T T Herbert (0773 038 651 / 0712 560 772 / 0734 521 688)
At the end of year 1, 3 employees had left, and the company estimated that 7 more employees would
leave in the next 2 years. 2 employees left during year 2, and the estimate of the number of shares
expected to vest was revised to 85%. Another 2 employees left during year 3.
The following table shows details of the company’s share price from years 1 to 10 and the number of
options exercised from years 4 to 10. Assume that all these options were exercised at the end of the
years in question.
Year Share Price at Number of share
Year-end option exercised
1 74 0
2 78 0
3 90 0
4 95 7 000
5 100 7 500
6 120 6 000
7 128 5 800
8 143 8 000
9 150 4 200
10 166 3 000
Required
Calculate the remuneration expense and the cumulative remuneration expense for each of the years 1
to 10.
Cash-Settled Share Based Payment Transaction
“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 services acquired and the
liability incurred at the fair value of the liability at each reporting date and at the date of settlement,
with any changes in fair value recognised in profit or loss for the period.”
Question 5
E Ltd granted 1 000 cash share appreciation rights to each of its 120 employees, on condition that they
remained in its employ for the next 3 years.
During year 1, 22 employees left. The company estimated that another 28 would leave the next 2 years.
During year 2, 15 employees left and it was estimated that a further 17 would leave during year 3.
During year 3, 16 employees left. The employees exercised their rights as follows:
End of year No. of employees
3 25
4 20
5 22
67
5 Compiled by T T Herbert (0773 038 651 / 0712 560 772 / 0734 521 688)
The company estimated the fair values and the intrinsic values of the SARs at the end and the relevant
years as follows:
Year Fair value Intrinsic Value
$ $
1 33
2 51
3 63 40
4 60 46
5 58
Required: Calculate the total remuneration expense and the related liability at the end of each of the
years 1 to 5.
Question 6
On 1 January 2011 an entity grants 100 cash share appreciation rights (SARS) to each of its 500
employees, on condition that the employees continue to work for the entity until 31 December 2013.
During 2011, 35 employees leave. The entity estimates that a further 60 will leave during 2012 and
2013.
During 2012, 40 employees leave and the entity estimates that a further 25 will leave during 2013.
During 2013, 22 employees leave.
At 31 December 2013, 150 employees exercise their SARs. Another 140 employees exercise their SARs at
31 December 2014 and the remaining 113 employees exercise their SARs at the end of 2015.
The fair values of the SARs for each year in which a liability exists are shown below, together with the
intrinsic values at the dates of the exercise.
Year Fair value Intrinsic Value
$ $
2011 14.40
2012 15.50
2013 18.20 15.00
2014 21.40 20.00
2015 25.00
Required
Calculate the amount to be recognised in the profit or loss for each of the five years ended 31 December
2015 and the liability to be recognised in the statement of financial position as at 31 December for each
of the five years.
Transactions in which the entity receives or acquires goods or services and either the entity or the
supplier has a choice as to whether the entity settles the transaction in cash (or assets) or by issuing
equity instruments.
6 Compiled by T T Herbert (0773 038 651 / 0712 560 772 / 0734 521 688)
Question 7
F Ltd granted an employee the right to choose either 1,500 phantom shares (that is, the right to a
payment equal to the value of 1,500 shares) or 1,800 shares. This grant is conditional upon the
completion of 3 years’ service. If the employee chooses the share alternative, the shares must be held
for at least 3 years after the vesting date. At the grant date, the entity’s share price is $100 per share. At
the end of years 1, 2 and 3 the share price is $115, $128 and $136 respectively. The entity does not
expect to pay dividends in the next 3 years, and estimates that the grant fair value of the share
alternative is $90 per share.
Required
Calculate the amounts to be posted to expense, equity (that is, share capital) and liability accounts at
the end of year 1 to 3 if the employee chooses, showing also the fair value.
i) Fair value of the cash payment alternative [1 marks]
ii) Fair value of the equity method alternative [1 mark]
iii) Fair value of the equity component of compound instrument [1 mark]
iv) Each year expense, equity and liability [6 mark]
v) End of year totals under both scenarios [1 mark]
Disclosure requirements
a) An entity should disclose information that enables users of its financial statements top understand
the nature and extent of share-based payment arrangements that occurred during the period. The
required information includes the number and weighted average exercise prices of share options
i) Outstanding at the beginning of the period
ii) Granted during the period
iii) Forfeited during the period
iv) Exercised during the period
v) Outstanding at the end of the period
vi) Exercisable at the end of the period
b) An entity should disclose information that enables users of its financial statements to understand
how the fair value of the goods or services received, or the fair value of the equity instruments granted
during the period was determined. For share options granted during the period, the required
information includes the option pricing model used and the inputs into that the model e.g. the weighted
average share price, exercise price, expected volatility, option life, expected dividends, the risk-free
interest rate and the assumptions made to incorporate the effects of any expected early exercise.
c) An entity should disclose information that enables users of its financial statements to understand the
effect of share-based payment transactions on the entity’s profit or any loss for the period and its
financial position. The required information includes i) any goods or services which did not qualify for
recognition as assets and were immediately expensed and ii) the total carrying amount of liabilities
which arose from share-based payment transactions.
7 Compiled by T T Herbert (0773 038 651 / 0712 560 772 / 0734 521 688)
