IFRS 2 - Share Based Payment (detailed review)

Objective

Share based payments are the normal feature of the business activities i.e. entity often acquires goods or services and make payment in the form of equity instruments or cash on the basis of equity instruments of the entity. This standard prescribes the guidelines for the entity to deal with the accounting treatment of share based payment in the financial statements of the entity along with related disclosure requirements.

Scope

The requirements of this standard are applicable to the transactions in which entity acquires goods or services and settles the transaction as under:

• Share based equity settled transactions in which entity acquires goods or services and payment is made in the form of equity instruments of the entity (i.e. shares or share options) 

• Share based cash settled transactions in which entity acquires goods or services and payment is made in the form of cash which is based on value of certain number of equity instruments

• Share based with alternative settlement transactions in which entity acquires goods or services and payment is made either, in the form of equity instruments or cash which is based on value of certain number of equity instruments of the entity

• Share based payment between the group entities, when one group entity settles the share based payment transaction on behalf of another group entity receiving goods or services

IFRS 2 is applicable to the above share based payment transactions whether or not the goods or services (in part or all) received in the transaction are identifiable

However, this standard is not applicable to the following transactions, as these do not involve the acquisition of goods or services such as:

• When an entity deals with an individual in his capacity as a share holder i.e. issue of right shares at discounted market price or bonus share issue to an existing share holder. Such transactions are covered under IFRS 9: Financial Instruments.

• Issue of shares by the parent entity to acquire control in a business combination. Such transactions are covered under IFRS 3: Business Combination.

• Speculative transactions in which entity enters other than to satisfy its own purchase or usage requirements and are covered within the scope of IAS 32 Presentation of Financial Instruments

Definitions

Share Based Payment Transaction

Under share based payment transaction the entity acquires goods or services and payment is made in the form of:

• Equity instruments of the entity (i.e. shares or share options) or
• Cash which is based on value of certain number of equity instruments of the entity

Share Option

It is a contract which gives holder the right (not an obligation) to purchase the shares of the entity at a determinable fixed price on some certain future date

Vesting Conditions

The conditions which entitle the counter party for the share based payment are termed as vesting conditions

Vesting Period

It is period of time within which the vesting conditions relating to the share based payment should be satisfied

Grant Date
 
It is the date when entity and counter party agree on regarding the material terms and conditions of share based payment arrangement such as mode of payment (equity instruments or cash on the basis of equity instruments), vesting conditions (if any) and relating vesting period.
On this date the entity grants the counter party the right (conditional or unconditional) to the equity instruments or cash on the basis of equity instrument of the entity if specified vesting condition are satisfied.

Measurement Date

It is date according to which the value of share based payment is measured in accordance with this IFRS.

• For transaction with employee, measurement date is grant date
• For transaction with creditors and others, measurement date is transaction date

Intrinsic Value

It is the difference between the market value of share and the exercise price of the share option. It is the benefit of the holder.

1. Share Based Equity Settled

Under this kind of transactions, entity acquires goods or services and payment is made in the form of equity instruments of the entity (i.e. shares or share options).

Recognition

The entity will recognize the share based equity settled transactions as follows:

• In case of acquisition of services an expense will be recognize immediately, if the share based payment is unconditional i.e. it does not require the counter party to satisfy a certain period of services

• In case of acquisition of services an expense will be recognize over the vesting period on straight line basis, if the share based payment is conditional i.e. it requires the counter party to satisfy a certain period of services

• However, the expense relating to the acquisition of services may be included in the cost of another asset if required by a particular standard such as IAS 2 Inventories and IAS 16 Property, Plant and Equipment

• In case of acquisition of goods, an asset will be recognized if the goods received are to be consumed over the period of time such as inventory or it may be recognized as an expense if goods received do not quality for recognition as an asset

• The corresponding credit element will be the increase in the equity of the entity

Measurement

The entity will measure the share based equity settled transactions as follows:

a) In case of transaction with employees

• The share based payment transaction will measured at fair value of equity instrument granted at grant date, because fair value of services received is not measurable with sufficient reliability

• If fair value of equity instrument granted is not reliably measurable then share based payment transaction will measured at intrinsic value of the instrument granted

 

b) In case of transaction with creditors and others

• The share based payment transaction will measured at fair value of goods or services received on transaction date

• If fair value of goods or services received is not reliably measurable, then the share based payment transaction will measured at fair value of equity instrument granted

• If fair value of equity instrument granted is not reliably measurable then share based payment transaction will measured at intrinsic value of the instrument granted

 

In both of above cases if the transaction is measured at fair value once allocated to the share based payment transaction will not change later on.

However, if the transaction is measured at intrinsic value, then it will be remeasured at each reporting date till the date of settlement and changes in value at reporting date will be charged to the statement of profit or loss 

If the value of identifiable goods or services received in the share based payment transaction seems to be lower than the fair value of the equity instruments granted or liability assumed, it will reflect that entity has received some unidentifiable goods or services therefore the entity will measure the identifiable goods or services received as per the requirements of this standard and unidentifiable goods or services received will be measured at a value which is as the difference between the fair value of identifiable goods or services received and the fair value of the share-based payment

Determination of Fair Value of Equity Instrument Granted

The entity is required to determine the fair value of equity instruments granted at the measurement date on the basis of quoted prices available in market, considering the effect of terms and conditions relating to those equity instruments.

However, if quoted prices are not available from market prices, the entity will determine the fair value of the equity instruments granted using the appropriate valuation techniques which are used for pricing the financial instruments considering all the relevant facts and circumstances that market participants would consider.

The entity should also consider any market conditions which are attached to the equity instrument granted in determination of fair value.

Vesting Conditions

The conditions which entitle the counter party for the share based payment are termed as vesting conditions; these may be service conditions or performance conditions. If the terms of share based payment requires the counter party to satisfy the vesting conditions then the expense will be recognize on straight line basis over the vesting period and the entity will account for the vesting conditions as follows:

a) Service Conditions

These require the employee to stay in service with the entity for a specified time period. These are taken into consideration when the share based payment expense is recognized at reporting date by adjusting the number of equity instruments expected to vested 

b) Performance Conditions

These require the employees to meet a certain target. Performance conditions may be non-market or market; these are accounted for as follows:
 

• Non-market Conditions

When performance conditions contain a target which is not linked to the market are termed as non-market conditions such as increase in net profit percentage, increase in the number of units produced per year or decrease in inventory turnover days
These are also taken into consideration when the share based payment expense is recognized at reporting date.    

• Market Conditions

When performance conditions contain a target which is linked to the market are termed as market conditions such as increase in entity’s share price, increase in the earning per share of the entity to the market threshold of earning per share.
These are not taken into consideration when the share based payment expense is recognized at reporting date as these are already included in the fair value of equity instrument granted.

Modification

When the entity changes the terms and conditions of the share based payment arrangement, it is termed as modification such as:

• Increase or decrease in number of equity instrument granted
• Increase or decrease in the exercise price of equity instrument granted
• Change in the vesting conditions    

The entity will account for the modification as follows:

a) If Changes are Beneficial for the Counter Party

If changes to the share based payment transaction are beneficial for the counter party such as:

• Increase in number of equity instrument granted
• Decrease in exercise price

The entity will recognize the ‘Incremental Benefit’ over the remaining vesting period

b) If Changes are not Beneficial for the Counter Party

If changes to the share based payment transaction are not beneficial for the counter party such as:

• Increase in exercise price
• Harder vesting conditions
• Decrease in the number of equity instrument granted

In case of increase in exercise price or harder vesting conditions, the entity is required to ignore such events and entity will continue to recognize the original expense over the original vesting period, had the original conditions met, which will reflect the consumption of services by the entity and at maturity date the credit to the equity reserve will be transferred to another equity reserve.
However, the decrease in number of equity instruments granted will be treated as cancellation and it will be accounted for as follows:

Cancellation

When there is decrease in number of equity instrument granted, the entity will account for such an event as cancellation, it will be accounted for as follows:

a) In case of cancellation with settlement i.e. when entity cancels the grant and settlement occurs immediately in respect of employees vested benefit, it will be treated as repurchase of own equity instrument granted therefore, the entity is required to:

• First recognize the unamortized benefit immediately which would have been recognized in future periods, had the modification not taken place and 

• Then the difference between the fair value of equity instrument granted at repurchase date and settlement value will be treated as expense if the settlement value is higher

b) In case of cancellation with replacement i.e. when entity cancels the original grant and replaces this with the new grant, the entity is required to:

• First recognize the unamortized benefit immediately which would have been recognized in future periods, had the modification not taken place and 

• Any incremental benefit on the replacement grant will be recognized over the remaining vesting period

2. Share Based Cash Settled

Under this kind of transactions, entity acquires goods or services and payment is made in the form of cash which is based on value of certain number of equity instruments such as when the grant of share appreciation rights which entitles the holder to the cash payment equal to the increase in the value of share since grant date. The entity will account for such transactions as follows:

• In case of acquisition of services an expense will be recognized immediately, if the share based payment is unconditional i.e. it does not require the counter party to satisfy a certain period of services

• In case of acquisition of services an expense will be recognized over the vesting period on straight line basis, if the share based payment is conditional i.e. it requires the counter party to satisfy a certain period of services

• However, the expense relating to the acquisition of services may be included in the cost of another asset if required by a particular standard such as IAS 2 Inventories and IAS 16 Property, Plant Equipment

• In case of acquisition of goods, an asset will be recognized if the goods received are to be consumed over the period of time such as inventory or it may be recognized as an expense if goods received do not quality for recognition as an asset
• For share based cash settled transactions the credit element will recognized as liability, because the entity has an obligation to pay cash.

 

• The entity will recognize the goods or services received at the fair value of liability and it will be remeasured at each reporting date till the date of settlement with the changes in fair value charged to profit or loss account

3. Share Based with Alternative Settlement

Under this kind of transactions, entity acquires goods or services and payment is made either in the form of equity instruments or cash which is based on the value of certain number of equity instruments of the entity. The entity will account for such transactions as follows:

a) If Choice of Settlement Method rests with the Counter Party

Under share based with alternative settlement transactions, if choice of settlement rests with the counter party i.e. counter party has the right to chose the settlement method and it can chose either to take the payment in the form of equity instrument or cash on the basis of value of share, the entity will assume that it has issued a compound financial instrument which contains both the equity element (payment in the form of equity instrument) and debt element (cash on the basis of value of shares) therefore, such transaction will be classified into both of these components as follows:

• In case of transaction with employees, equity component will be equal to fair value of equity alternative less the fair value of liability component

• In case of transaction with creditors or others, equity component will be equal to fair value of goods or service received less the fair value of liability component

After the classification, each component will be accounted for separately against the acquisition of goods or services received such as the entity will account for the equity component as share based equity settled and debt component as share based cash settled

If on settlement date, the entity is required to issue equity instruments to settle the transaction rather than cash payment, the liability will be transferred directly to the equity as the consideration for the equity instruments issued.

If on settlement date the entity is required to pay in cash to settle the transaction rather than issuing equity instruments, the cash payment made will be used to settle the liability in full and the equity component previously recognized will remain within the equity or alternatively it may be transferred to other component of equity

b) If Choice of Settlement Method rests with the Entity

Under share based with alternative settlement transactions, if choice of settlement rests with the counter entity i.e. entity has the right to chose the settlement method and it can chose either to take the payment in the form of equity instrument or cash on the basis of value of share, the entity needs to determine whether in substance it has an obligation to pay cash, this may be the case if:

i) Issue of equity instrument by the entity does not have any commercial viability (i.e. legal restrictions)

ii) The entity has a past practice of settling such transactions in cash

iii) The instruments to be issued by the entity are redeemable

• If the entity has in substance an obligation to settle the transaction in cash, it will account for the transaction as share based cash settled transaction.

• If no such obligation exists, the entity will account for the transaction as share based equity settled transaction up to the date of settlement, and upon settlement:

i) If the entity chooses to settle the transaction by payment of cash, it will be accounted for as the repurchase of an equity instrument granted by the entity and will be taken as a deduction from equity

ii) If the entity chooses to settle the transaction by issue of equity instruments, no further accounting treatment is required

iii) However, if the entity chooses to settle the transaction in settlement alternative which has the higher fair value, the excess payment will be treated as expense in the statement of profit or loss

4. Share Based Payments among the Group Entities

When one group entity settles the share based payment transaction on behalf of another group entity receiving goods or services, it will be accounted for as follows:

a) The entity receiving the goods or services will measure the goods or services received as share based equity settled transaction if:

• If the instrument granted are its own equity instruments and

• The entity do not has an obligation to settle the share based payment transaction

b) In such case, the entity settling a share based payment transaction when another entity in the group receives the goods or services, will account for the transaction as share based equity settled transaction, if the transaction will be settled in own equity instruments of the entity, in all other cases it will be accounted for as a share based cash settled transaction.

Disclosures

The standard requires the entity to disclose the following:

• Details of share based payment transactions that occurred during the year
• Information how the entity has determined the fair value of instrument granted
• Details of valuation techniques used to determine the fair value of instrument granted
• In case of modification, the details of the modification to the share based payment arrangement (if any)