Reporting the financial performance of a range of entities (C4)-IFRS2

IFRS 2: Share-based Payment

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Overview

IFRS 2 applies when a company:

1. Receives goods or services in exchange for its equity instruments (e.g., shares or share options).
2. Settles transactions with cash amounts based on the price of its equity instruments.

Exclusions:

• Shares issued in a business combination (covered under IFRS 3).
• Contracts to buy goods (under IAS 32 or IFRS 9).
• Treasury share purchases or rights issues for shareholders.

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Key Concepts and Applications

1. Recognition of Share-Based Payments

• An expense is recorded for goods/services received, matched with either:
  • Equity Increase: If settled in shares.
  • Liability: If settled in cash.

When to Recognize?

• For goods: Recognize upon receipt.
• For services: Recognize as they are rendered, depending on vesting conditions.

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2. Equity-Settled Transactions

• Definition: The company grants equity instruments (e.g., shares, options) to employees or others.
• Measured at fair value at the grant date.
• Fair value is based on the market price or valuation models (e.g., option pricing models).

Accounting Steps:

1. Calculate fair value of equity instruments at the grant date.
2. Spread the expense over the vesting period (period during which conditions are fulfilled).
3. Adjust for best estimate of equity instruments expected to vest.

Example 1:

• Scenario: A company grants share options to employees, vesting in 3 years.
• Grant Date Fair Value: $10 per option for 2,000 options to 2 employees.
• Calculation: $$2,000 \, \text{options} \times 2 \, \text{employees} \times \$10 \, \text{per option} \times \frac{1}{3} = \$13,333$$
  • Expense of $13,333 recognized in profit or loss.
  • Equity increased by $13,333.

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3. Cash-Settled Transactions

• Definition: The company pays cash based on the price of its equity instruments (e.g., share appreciation rights).
• Recognize a liability measured at fair value, revalued at each reporting date.

Example 2:

• Scenario: A company grants 300 share appreciation rights to 500 employees (80% expected to remain) over 2 years.
• Fair Value at Year-End: $15 per right.
• Calculation: $$300 \, \text{rights} \times 500 \, \text{employees} \times 80\% \times \$15 \times \frac{1}{2} = \$900,000$$
  • Liability of $900,000 recognized.
  • Expense of $900,000 in profit or loss.

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4. Performance and Vesting Conditions

• Vesting Conditions: Requirements (e.g., employment or market price targets) to be met for share-based payments to vest.
  • Service Condition: Employment over time (e.g., 3 years).
  • Market Condition: Share price target (ignored when estimating number of shares to vest, as it’s factored into fair value).

Example 3:

• Scenario: Share options granted to 3 directors (2 expected to remain). Market price condition ignored; service condition applied.
• Calculation: $$2,000 \, \text{options} \times 2 \, \text{directors} \times \$10 \, \text{value} \times \frac{1}{3} = \$13,333$$
  • Expense $13,333 recognized in profit or loss.
  • Equity increased by $13,333.

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5. Deferred Tax Implications

• Equity-Settled:
  • Tax deduction often based on intrinsic value (difference between share price and exercise price).
  • Deferred tax asset arises if the tax deduction exceeds the IFRS 2 expense.

Example 4:

• Scenario: Tax deduction based on intrinsic value of $4.2m (tax rate 30%). Options vest over 3 years.
• Calculation: $$\$4.2m \times 30\% \times \frac{1}{3} = \$420,000$$
  • Deferred tax asset $420,000 recognized.

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6. Disclosure Requirements

IFRS 2 requires disclosures to help users understand:

1. Nature and extent of share-based payments.
2. Valuation methods for determining fair value.
3. Impact on profit or loss.

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Simplified Accounting Entries

1. Equity-Settled Transactions:

   • Dr Expense (Profit or Loss)
   • Cr Equity

2. Cash-Settled Transactions:

   • Dr Expense (Profit or Loss)
   • Cr Liability

3. Deferred Tax (if applicable):

   • Dr Deferred Tax Asset
   • Cr Deferred Tax Income

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Summary

IFRS 2 ensures transparent reporting of share-based payments by recognizing expenses for goods or services in profit or loss and appropriately adjusting equity or liabilities. Understanding these principles and applying them step-by-step ensures compliance and accurate reporting.

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