IFRS 2 Share-based Payment
IFRS 2 Share-based payment deals with accounting for share-based payment transactions and issuance of share options to employees. It is applied to transactions which are settled by transfer of equity of the entity (or that of its parent or sister subsidiary) or by transfer of cash (equivalent to the value of the shares) or either (at the option of either the entity or the vendor).
When an entity receives the goods or services under a share-based payment transaction, it increases its equity if the transaction is an equity-settled share-based payment and recognizes a liability if it is a cash-settled share-based payment. The corresponding goods or services are either capitalized or expensed depending on their nature.
Equity-settled share-based payment transactions
In an equity-settled share-based payment transaction, goods or services received are recognized with reference to their fair value but if it cannot be determined, the value is assigned based on the fair value of the equity instruments transferred. However, if such a transaction is with employees, it is always measured with reference to value of the equity instruments (or associated options) because typically it is not possible to measure the fair value of services received from employees.
When the equity instruments vest immediately, the whole increase in equity is recognized on the grant date. However, if a certain vesting period must pass or a performance condition must be met, the transaction is recognized over the vesting period or the expected time within which satisfaction of the performance condition is expected.
In case of transactions measured with reference to fair value of the equity transaction, the fair value must be based on market prices on measurement date or if such prices are not available, based on established valuation methodologies. After the vesting date, no reversal is made to any increase in equity recognized.
If in the rare situations in which the fair value of the equity instruments cannot be determined, the transactions are recognized with reference to the intrinsic value of the equity transferred.
When there is a modification in terms and conditions of transactions measured with reference to the fair value of the equity instruments, the amount at which services are recognized must not be lower than the value of the vested equity instruments based on their grant date fair value. If equity instruments are canceled or settled other than due to non-satisfaction of vesting conditions, any remaining charge for services is recognized immediately (as if the vesting has accelerated), any payment to employees/vendors is recognized as a repurchase of equity (except any excess of payment over the equity instrument in which case it is recognized as expense).
Cash-settled share-based payment transactions
An entity recognizes the goods or services obtained in a cash-settled share-based payment transaction and their associated liability at the fair value. The liability is remeasured at each reporting date and settlement date and the difference is taken to profit or loss. The liability is recognized as soon as services are rendered unless a vesting period must pass in which case the liability is recognized over the vesting period.
A transaction in which the entity pays an amount on account of an employee withholding tax obligation is to be considered an equity-settled share-based payment transaction if absence of such an withholding would have resulted in the transaction meeting equity-settlement criteria.
Transaction with choice of equity or cash settlement
If a transaction allows the counter-party to require settlement either in cash or in equity, an entity shall segregate the transaction into cash and equity components and account for the associated receipts of goods or services and increase in liability and equity separately. The liability component shall be remeasured at each reporting/settlement date but not the equity component.
If a transaction gives an entity the choice of settling either in cash or equity, it shall determine whether it has a present right to settle in cash (based on assessment of its past practice, written policies, commercial substance, etc.). If there is no present obligation to settle in cash, the transaction shall be recognized an equity-settled share-based payment transaction.
An entity must disclosure information about:
- The nature of the entity’s share-based payments;
- Determination of fair value of the equity instruments and the good and services received;
- The effect of the share-based payment transactions on the company’s profit or loss and financial position.