IFRS 2 – Share Based Payment

Overview:

International Financial Reporting Standard (IFRS) 2 specifies rules and requirements to an Entity when a share-based payment transaction is undertaken by it. The standard requires the Entity to recognize in its Financial Statements all share based payment transactions such as granted shares, share appreciation rights, share options etc. There are specific accounting treatments and requirements for:

• Cash settled share-based payment transactions,
• Equity settled share-based payment transactions and
• Transactions where the entity or the supplier has a choice.

Effective date:

The standard was issued in 2004 in the month of February and became effective to all Entities with period starting on or after 1 January 2005.

Scope:

This standard applies to every share-based payment transaction. These transactions can be defined as under:

• Cash settles:
  A liability is incurred by the Entity to the supplier in a transaction where goods or services are received by the Entity and the payment is based on the value or price of the Entity’s own shares or any other equity instruments of the Entity.

• Equity Settled:
  Transaction in which the Entity exchanges its equity instruments (e.g., share options or shares) for goods and services from the supplier.

• Where Entity or supplier has a choice:
  A transaction in which the Entity is entitled to receive services or goods, the payment is made through equity instruments or price based on equity instruments by a choice of either:
  • The entity itself or,
  • The supplier of those services or goods.

The standard IFRS 2 applies to the following transactions:

1. Transfers to parties by shareholders. This could include employees who have transferred to the Entity any goods and services.
2. When no specific goods or services are received by the Entity.

Following are the exception to application of IFRS 2:

1. Business combination transactions – under IFRS 3
2. Transactions involving joint ventures or joint arrangements – under IFRS 11
3. Share based payment transactions under contracts within the scope of IFRS 9
4. Transactions involving employees while he/she is the holder of equity instrument.

Important Definitions:

• SHARE BASED PAYMENT TRANSACTION:
  A transaction in which an organization receives services or goods in exchange for either:
  • Its own equity instruments,
  • Taking liabilities for which, the payments are based on the Entity’s share price or other equity instruments.
    The accounting requirements for these transactions are dependent on the settlement measures.

Share Based Payment Transaction Conditions:

The recognition of share based payment conditions is vital as the accounting treatment depends upon this classification. There are two main conditions:

1. Vesting conditions,
2. Non-vesting conditions.

1. Vesting conditions:

This condition is used for the determination of the counterparty’s entitlement to receive the share-based payment in exchange for providing goods and services to the Entity. This could be either of the following:

1. Service condition:
   The counterparty is required to complete a specified service period, during which the Entity gets the services. If there is failure from the counterparty to provide services during this period, the condition has not been complied. In this, meeting the performance target is not required.
   TREATMENT:
   • Not included in the fair value calculation at the grant date,
   • The vesting date amount and/ or the number of shares are adjusted for the actual results.

1. Performance condition:
   The counterparty is required to complete a specified service period, during which the Entity gets the services (i.e., service condition). AND the specified performance condition is also required to be met.
   The performance condition further has two more conditions:
   1. Non-Market Condition:
      This relates to the Entity’s operations or another Entity’s operations which is in the  same group.
      TREATMENT:
      • Not included in the fair value calculation at the grant date,
      • The vesting date amount and/ or the number of shares are adjusted for the actual results.

Market Condition:

This is the condition upon which the equity instrument’s price, exercisability or vesting depends and is related to the Entity’s equity instrument’s market price.

TREATMENT:

• Included in the fair value calculation at the grant date,
• The vesting date amount and/ or the number of shares are NOT adjusted for the actual results.

2. Non-Vesting conditions:

This condition is used for the determination of the counterparty’s entitlement to receive the share-based payment in exchange for providing goods and services to the Entity.

TREATMENT:

• Included in the fair value calculation at the grant date,
• The vesting date amount and/ or the number of shares are NOT adjusted for the actual results.

Recognition conditions:

• The received or acquired goods or services are recognized when the services are received or on the acquisition of goods,
• For an equity settled share based payment transaction, an increase in the equity is recognised,
• For cash settled share based payment transaction, a liability is recognized,
• An expense is recognized when the goods or services are received or acquired but are not qualified for asset recognition.

Measurement criteria:

Depending upon the type of share-based payment transaction: the following measurement criteria is applied:

1. Cash settled share-based payment transaction:
   • Initial liability – at fair value, at grant date,
   • Each reporting date – re-measure the liability with fair value changes in profit and loss,
   • Settlement date – re-measure the liability with fair value changes in profit and loss,
   • Recognition of liability over the vesting period (if applicable).

1. Equity settled share-based payment transaction:
   1. With employees:
      • Measured at the grant date fair value of equity instrument,
      • NEVER re-measure the fair value,
      • Recognition of grant date fair value over whole of the vesting period.

1. 1. With non-employee:
      • Measurement based on fair value of the goods and services on the date the goods and services are received,
      • If there cannot be reliable estimate of good and services, measurement is based with reference to the granted equity instruments.

• Choice of settlement:
  • Counterparty has the right to choose:
    Treated as a compound instrument, having both an equity settled instrument and a cash settled instrument.

• • Entity has the right to choose:
    Entity is required to determine whether the settlement in cash is required by a present obligation, and hence to be accounted for as cash settled or if NO obligation exists, the transaction is to be accounted for as equity settled.

1. Group settled share-based payment:

• • An Entity receiving goods and services in a cash settled or equity settled share-based payment transaction is required by IFRS 2 to account for the transaction in its individual or separate Financial Statements,
  • Recognition is made by the Entity receiving the goods and services regardless of the Entity settling the transaction or not, and the equity or cash settled basis is assessed from the perspective of the Entity which has received the goods and services.

Disclosure:

The following disclosures are required by IFRS 2:

• Effect on the Entity’s profit and loss statement and statement of financial position of share-based payment transactions for the period,
• Extent and nature of arrangements during the period relating to share based payment transactions,
• The determination procedures of fair value of the granted equity instruments or fair value of goods and services received.