Can't find your country listed? Please visit our global website instead. IFRS 2, Share-based Payment , applies when a company acquires or receives goods and services for equity-based payment.

These goods can include inventories, property, plant and equipment, intangible assets, and other non-financial assets. There are two notable exceptions: In addition, a purchase of treasury shares would not fall within the scope of IFRS 2, nor would a rights issue where some of the employees are shareholders. IFRS 2 requires an expense to be recognised for the goods or services received by a company. The corresponding entry in the accounting records will either be a liability or an increase in the equity of the company, depending on whether the transaction is to be settled in cash or in equity shares.

Goods or services acquired in a share-based payment transaction should be recognised when they are received. In the case of goods, this is obviously the date when this occurs. However, it is often more difficult to determine when services are received. If shares are issued that vest immediately, then it can be assumed that these are in consideration of past services.

As a result, the expense should be recognised immediately. Alternatively, if the share options vest in the future, then it is assumed that the equity instruments relate to future services and recognition is therefore spread over that period. Equity-settled transactions with employees and directors would normally be expensed and would be based on their fair value at the grant date. Fair value should be based on market price wherever this is possible.

Many shares and share options will not be traded on an active market. If this is the case then valuation techniques, such as the option pricing model, would be used. IFRS 2 does not set out which pricing model should be used, but describes the factors that should be taken into account. Intrinsic value is the difference between the fair value of the shares and the price that is to be paid for the shares by the counterparty.

The objective of IFRS 2 is to determine and recognise the compensation costs over the period in which the services are rendered. For example, if a company grants share options to employees that vest in the future only if they are still employed, then the accounting process is as follows:. EXAMPLE 1 A company issued share options on 1 June 20X6 to pay for the purchase of inventory. The inventory is eventually sold on 31 December 20X8. Answer IFRS 2 states that the fair value of the goods and services received should be used to value the share options unless the fair value of the goods cannot be measured reliably.

The inventory value will be expensed on sale. Schemes often contain conditions which must be met before there is entitlement to the shares. These are called vesting conditions. The thinking behind this is that these conditions have already been taken into account when fair valuing the shares.

If the vesting or performance conditions are based on, for example, the growth in profit or earnings per share, then it will have to be taken into account in estimating the fair value of the option at the grant date.

EXAMPLE 2 A company grants 2, share options to each of its three directors on 1 January 20X6, subject to the directors being employed on 31 December 20X8.

The options vest on 31 December 20X8. It is anticipated that on 31 December 20X6 only two directors will be employed on 31 December 20X8.

How will the share options be treated in the financial statements for the year ended 31 December 20X6? Answer The market-based condition ie the increase in the share price can be ignored for the purpose of the calculation. However the employment condition must be taken into account. The options will be treated as follows:.

Equity will be increased by this amount and an expense shown in profit or loss for the year ended 31 December 20X6. The expense for cash settled transactions is the cash paid by the company. This creates a liability, and the recognised cost is based on the fair value of the instrument at the reporting date.

The fair value of the liability is re-measured at each reporting date until settlement. EXAMPLE 3 Jay, a public limited company, has granted share appreciation rights to each of its employees on 1 July 20X5.

International Financial Reporting Standards - Wikipedia

What is the fair value of the liability to be recorded in the financial statements for the year ended 31 July 20X6? In some jurisdictions, a tax allowance is often available for share-based transactions. It is unlikely that the amount of tax deducted will equal the amount charged to profit or loss under the standard.

A deferred tax asset will be recognised if the company has sufficient future taxable profits against which it can be offset. For cash settled share-based payment transactions, the standard requires the estimated tax deduction to be based on the current share price. As a result, all tax benefits received or expected to be received are recognised in the profit or loss.

EXAMPLE 4 A company operates in a country where it receives a tax deduction equal to the intrinsic value of the share options at the exercise date.

The deferred tax will only be recognised if there are sufficient future taxable profits available. The standard is applicable to equity instruments granted after 7 November but not yet vested on the effective date of the standard, which is 1 January IFRS 2 applies to liabilities arising from cash-settled transactions that existed at 1 January Which of the following do not come within the definition of a share-based payment under IFRS 2?

A employee share purchase plans B employee share option plans C share appreciation rights D a rights issue that includes some shareholder employees. A company issues fully paid shares to employees on 31 July 20X8.

These shares have been given to the employees because of the performance of the company during the year. A company grants share options to each of its six directors on 1 May 20X7. The options vest on 30 April 20X9. It is anticipated that all of the share options will vest on 30 April 20X9. What will be the accounting entry in the financial statements for the year ended 30 April 20X8?

A public limited company has granted share appreciation rights SARs to each of its employees on 1 January 20X6. The rights are due to vest on 31 December 20X8 with payment being made on 31 December 20X9. During 20X6, 50 employees leave, and it is anticipated that a further 50 employees will leave during the vesting period. Fair values of the SARs are as follows:. The issue of fully paid shares is deemed to relate to past service and should be expensed to profit or loss at 31 July 20X8.

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IFRS 2, share-based payment. For example, if a company grants share options to employees that vest in the future only if they are still employed, then the accounting process is as follows: The fair value of the options will be calculated at the date the options are granted.

This fair value will be charged to profit or loss equally over the vesting period, with adjustments made at each accounting date to reflect the best estimate of the number of options that will eventually vest.

The charge in the income statement reflects the number of options vested. If employees decide not to exercise their options, because the share price is lower than the exercise price, then no adjustment is made to profit or loss.

On early settlement of an award without replacement, a company should charge the balance that would have been charged over the remaining period. How will this transaction be dealt with in the financial statements? The options will be treated as follows: Answer A deferred tax asset would be recognised of: Information that enables users of financial statements to understand the nature and extent of the share-based payment transactions that existed during the period.

Information that allows users of financial statements to understand how the fair value of the goods or services received, or the fair value of the equity instruments which have been granted during the period, was determined.

Use of IFRS by jurisdiction

A employee share purchase plans B employee share option plans C share appreciation rights D a rights issue that includes some shareholder employees 2. What amount would be expensed to profit or loss for the above share issue?

Fair values of the SARs are as follows: What liability will be recorded on 31 December 20X6 for the share appreciation rights? ACCA ON THE WEB ACCA Mail ACCA Careers ACCA Blogs ACCA Learning Community Your Future USEFUL LINKS Our qualifications ACCA-X online courses Find an accountant ACCA Rulebook News MOST POPULAR myACCA ACCA Qualification Member events and CPD Work for us Past exam papers.

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