IFRS 2:
Share-based Payment
A share-based payment is a transaction in which the
entity receives goods or services either as
consideration for its equity instruments or by
incurring liabilities for amounts based on the price of the entity’s shares
or other equity instruments of the entity.
A share option is a contract which gives the holder the right to purchase a
share for a defined price at some point of time in the future
It is potentially valuable to the holder because it may allow the holder to
purchase the shares at less than the market price
Definitions
Equity instrument is the conditional or unconditional right to an equity
instrument of an entity conferred under a share-based payment.
A share option is a contract that gives the holder a right but not an
obligation to subscribe to an entity’s shares at a fixed or determinable
price for a specified period of time
Fair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable, willing parties in an arm’s length
transaction
Grant date: The date at which the entity and another party including an
employee another party agree to the share based payment arrangement.
Vest: to become an entitlement. The counter party’s right to receive cash
or other assets or equity instruments of the entity upon the satisfaction of
the any specified vesting conditions
Vesting conditions:
The conditions that must be satisfied for the counter party to become
entitled to receive cash or other assets or equity instruments of the entity
under a share-based payment
Vesting period- duration for which the specified vesting conditions of a
share based payment arrangement are to be satisfied.
Types of Share-based payment transactions
● Equity-settled share-based payment- Where the entity acquires
goods or services in exchange for equity instruments of the entity
(e.g. shares or share options)
• Cash-settled share-based payment-- the entity acquires
goods or services in exchange for amounts of cash measured
by reference to the entity’s share price.
● Transaction with the choice of settlement- the entity
acquires goods or services and the terms of arrangement
provide either the entity or the supplier with a choice of
whether the entity settles the transaction in cash or by
issuing equity instruments.
Recognition
An entity should recognize goods and services received or acquired in a share-based
transaction when it obtains the goods or as the services are received.
Goods or services received or acquired are to be recognized as expense or asset as the
case may be.
Where the Equity credit may be shown has not been specified.
Some entities present a separate component of equity (eg 'Share-based payment
reserve'); other entities may include the credit in retained earnings.
If grant equity instruments vest immediately, it is presumed that the services
have already been received and the full expense is recognised on the grant
date.
If however there are vesting conditions attached to the equity instruments
granted, the expense should be spread over the vesting period
Measurement
There are two methods to measure the expense under the standard:
1) Direct Method- fair value of goods and services received
2) Indirect Method using fair value of equity instruments granted usually
used for employee services where it is not possible to measure value
of services received.
- Equity-settled where we use the fair value of equity instruments at
the grant date and do not update subsequent changes in the fair
value.
- Cash-settled where the fair value is updated at each year end with
changes recognized in profit or loss.
Transactions with employees- entities may reward employees by granting
them a share-based payment if they remain in employment for certain
period- being the vesting period. In this case the expense should be spread
over the vesting period measured using indirect method. In the first year the
expense will be
2. Cash settled SBP
SHARE RIGHT TO
APPRECIATION SHARES THAT
RIGHTS ARE
REDEEMABLE
Employees are entitled to a future cash payment based on
over the increase in the entity’s share price from a specific
level a specified time. Note : Fair value at year end should be taken into
account
NOTE:
1. Liability must be recognised and remeasured at each year end
2. Consider Fair value of SAR at year end on 31.12.X1 = $14.40
3. Less : Cash paid on SAR by the employees from the liability balance
4. Calculate (3) using intrinsic value of SAR on date of exercise
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ENTITY HAS CHOICE OF SETTLEMENT
Is there a present obligation to pay?YES
YES NO
Cash - settled SBP Equity - settled SBP
COUNTERPARTY HAS CHOICE OF SETTLEMENT
compound financial instrument
Debt Equity
FV of shares alternative
Cash - settled SBP less: FV of cash alternative
@ grant date
VESTING CONDITIONS
Conditions that must be satisfied by the counterparty to become unconditionally entitled to receive
payment under a SBP agreement
1. Service conditions
When the counterparty is required to be complete a specific period of service.
2. Performance conditions
When a specific growth in profits or EPS is to be shown.
3. Market conditions
A market condition is one which is related in some way to the market price of the entity’s equity
shares at any given time. Over the vesting period, the likely impact of market conditions on the
number of options vesting does not need to be considered, since it has been factored into the
measurement of the fair value of a share option in the first place.
MODIFICATIONS
If the market value of the share starts to fall the option package becomes less favourable. In such
circumstances the company might decide to ‘re-price’ it, by reducing the exercise price
In such situations IFRS2 requires :
i. The recognition of the original package measured at grant fair value over the vesting period
as before.
ii. The increase in the fair value of the package caused by the re-pricing shall be recognised as
an additional cost over the remaining vesting period.
CANCELLATION
● The cancellation should be treated as an ‘acceleration of vesting’. This means that any
unrecognised vesting cost should be recognised immediately.
● Any compensation payment to the affected employees should be deducted from equity
(ie effectively set against the credits to equity already made).
● If any compensation payment made exceeds the fair value of the relevant equity
instrument at the date of cancellation, then the excess should be treated as an additional
employment cost.
Deferred tax implications
