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What are not share-based payments?
The following transactions are scoped out of IFRS
2:
| a) |
Equity instruments
issued in a business combination in exchange
for control over the acquiree [IFRS2.5] ; |
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| b) |
Derivatives covered by IAS 39 - contracts
to purchase non-financial items that can be
settled net in cash if they are not entered
into to satisfy an entity's purchase or usage
requirements [IFRS2.6] [IAS39R.5-7] ; |
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| c) |
Cash payments that are not tied
to the market value of the entity's shares . |
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| d) |
A transfer of equity
instruments to an employee that is for a purpose
other than payment for employee services [IFRS2.4]
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Classification of share-based payment transactions
Share-based payments are classified into three
categories:
1) equity-settled,
2) cash-settled, and
3) transactions with settlement alternatives.
Equity-settled transactions are those in which
the entity receives goods or services as consideration
for issuing its own equity instruments (for example,
shares or share options) [IFRS2.2(a)]
Cash-settled transactions are those in which the
entity acquires goods or services by incurring liabilities
to the supplier that are based on the price (or
value) of its equity instruments [IFRS2.2(b)]. The
liability also exists if the entity has a past practice
or a stated policy of buying back shares for cash,
or generally settles in cash when the counterparty
asks for cash settlement [IFRS2.41] .
Transactions with settlement alternatives are those
in which the entity receives goods or services,
and either the entity or the supplier may choose
whether the purchase is settled in cash or by issuing
equity instruments [IFRS2.2(c)] .
Transfers of equity instruments of the entity's
parent or equity instruments of another entity in
the same group to parties that have supplied goods
or services (including employees) to the entity
are share-based payment transactions if the transfer
is a payment for the goods or services supplied
[IFRS2.3] .
Recognition and measurement
Measurement methods
Different recognition and measurement methods should
be applied to:
| a) |
equity-settled purchases
of goods and non-employee services, |
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| b) |
equity-settled transactions with employees,
and |
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| c) |
cash-settled transactions. |
Equity-settled purchases of goods and non-employee
services
Goods and non-employee services are recognised
as assets if they qualify for recognition as assets,
or are expensed when the entity obtains the goods
or as the services are received [IFRS2.7] [IFRS2.8].
Services are presumed to be provided and are therefore
expensed over the vesting period [IFRS2.15]. The
corresponding entry is to increase equity.
The amount recognised is the fair value of the
goods or services received (direct measurement).
There is a rebuttable presumption that this fair
value can be estimated reliably [IFRS2.13].
Equity-settled transactions measured indirectly
at the fair value of the equity instruments granted
Entities should measure share-based compensation
of employees indirectly at the fair value of the
equity instruments granted [IFRS2.11] . This method should also be used when the
entity rebuts the presumption that the fair value
of goods and non-employee services can be estimated
reliably.
Option-pricing models are used to determine fair
value by reference to a number of parameters. These
include:
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the share price
at grant date, |
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the exercise price, |
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the expected life of the
option, |
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the volatility
of the underlying share price, |
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the expected dividends,
and |
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the risk-free rate. |
An option's fair value is normally higher than
its intrinsic value at the grant date.
Market vesting conditions should be taken into
account when estimating the fair value of the equity
instruments [IFRS2.21] .
Non-market vesting conditions should not be considered
in determining the fair value of the equity instruments.
The amount recognised should be based on the best
available estimate of the number of equity instruments
that are expected to vest [IFRS2.19] .
The measurement date is the grant date [IFRS2.11].
This is the date at which the entity and another
party agree to a share-based payment arrangement
and therefore have a shared understanding of the
terms and conditions of the arrangement. If the
arrangement is subject to an approval process, grant
date is the date when that approval is obtained
.
The grant date fair value should be recognised
when goods are acquired or expensed over the vesting
period over which services are presumed to be provided
[IFRS2.11] [IFRS2.15].
The estimate of the number of equity instruments
expected to satisfy non-market vesting conditions
should be revised at each balance sheet date. The
cumulative effect on current and prior periods of
the change in estimate should be recognised by adjusting
the amount of acquired goods or services received
[IFRS2.19].
Market vesting conditions should be taken into
account when estimating the fair value at the grant
date. No revisions should be made to the fair value
even if subsequent information indicates that forfeitures
are likely to differ from initial estimates. The
expense is not reversed if a market-vesting condition
is ultimately not met [IFRS2.21].
An entity should not reverse a previously recognised
expense if a vested share option expires unexercised.
Cash-settled transactions
The goods or services recognised in a cash-settled
transaction are measured at the fair value of the
liability incurred. The liability is subsequently
re-measured to its fair value through the income
statement. The liability is only recognised to the
extent to which services have been rendered [IFRS2.30]
[IFRS2.33] .
Choice of settlement
Transactions that allow choice of settlement are
accounted for as cash-settled to the extent that
the entity has incurred a liability [IFRS2.34].
IFRS 2 requires a different method to determine
the value of the constituent parts of a compound
instrument than that required by IAS 32. For transactions
in which the fair value of goods or services is
measured directly, the fair value of the equity
component is measured as the difference between
the fair value of the goods or services received
and the fair value of the debt component.
For other transactions in which the fair value
of goods or services (including employee services)
is measured indirectly by reference to the fair
value of the instruments granted, management must
estimate the fair value of the compound instrument
as a whole. It should take into account the fact
that the counterparty must forfeit its right to
receive cash in order to receive the equity instrument.
The equity component is determined as follows :
Transactions are often structured in such a way
that the fair value of each settlement alternative
is the same on settlement. The fair value of the
equity component will therefore be nil .
Intrinsic value method
The intrinsic value method should be used where
the fair value of the granted equity instruments
cannot be reliably estimated. The intrinsic value
of an option is the positive difference between
share price and exercise price. The goods or services
should be measured at intrinsic value at the date
when the entity obtains the goods or when the counterparty
renders the service. This is presumed to be over
the vesting period. The amounts should be re-measured
at each balance sheet date until the options are
exercised or forfeited. Changes in intrinsic value
should be recognised in the income statement. Use
of the intrinsic value method can result in significant
income statement volatility.
Management should consider vesting conditions (both
market and non-market vesting conditions under the
intrinsic value method) in estimating the number
of equity instruments that are expected to vest
[IFRS2.24(b)]. The estimate should be revised at
each balance sheet date, and the cumulative effect
on current and prior periods should be recognised
by adjusting the amount of goods or services acquired
or received.
Reload feature
Certain schemes provide for an automatic grant
of additional share options when the previously
granted options are exercised using the entity's
shares, rather than cash, to satisfy the exercise
price. Such a reload feature should not be taken
into account when estimating the fair value of options
granted; the additional options should be treated
as a new award [IFRS2.22].
Modifications
Management may change the terms of equity instruments
granted - for example, by reducing the exercise
price of share options. This may occur when the
entity's share price is lower than expected and
the options are out of the money. Entities often
revise the exercise price, lengthen the exercise
period, increase the number of shares to which employees,
or those who render similar services to the entity,
are entitled or add a cash bonus. Options that are
re-priced should reflect the cancellation of one
award for a new award. The entity repurchases the
original instrument by issuing a new instrument.
Management should recognise the incremental value
of the modified instruments after issuing equity
instruments with modified terms. The incremental
value should be measured by the difference between
the higher fair value of the modified equity instruments
and the fair value of the old instruments at the
date of modification. This should be recognised
over the remaining vesting period. The fair value
determined at the original grant date continues
to be recognised over the original vesting period
[IFRS2.Appendix.B43] [IFRS2.26] .
Modifications that are not beneficial to the counterparty
because they reduce the fair value of the equity
instruments granted or make the instruments less
likely to vest are ignored for accounting purposes
[IFRS2.Appendix.B44] .
Cancellations
Management should account for a grant of equity
instruments as an acceleration of vesting if it
cancels or settles the grant without replacement.
Any payment made in connection with the cancellation
should be considered as the repurchase of an equity
instrument and deducted from equity except if the
payment exceeds the fair value of the equity instruments
at the cancellation or repurchase date. The excess
value should be expensed [IFRS2.28].
Impact on earnings per share
Share options should be treated as potential ordinary
shares in computing diluted earnings per share
[IAS33R.30]. To determine if the potential shares
are dilutive, the consideration receivable by the
entity on potential issuance of the shares should
include the cash payable by the counterparty for
the exercise price of the options and the fair value
of any goods or services to be supplied to the entity
in the future under the share-based payment arrangement
[IAS33R.47A] .
Income taxes
A tax deduction that relates to share-based employee
compensation may differ from the related cumulative
remuneration expense and may arise in different
periods. Such temporary differences result in recognition
of deferred taxes. Deferred tax in equity-settled
transactions should be charged to equity if the
anticipated tax deduction exceeds the tax effects
of the related cumulative remuneration expense (the
remuneration expense multiplied by the tax rate)
[IAS12.68A-C] .
Tax effects of cash-settled transactions are recognised
in the income statement.
Transitional provisions
IFRS 2 applies to equity-settled transactions if
the equity instruments were granted after 7 November
2002 and had not vested by the beginning of the
first accounting period beginning after 1 January
2005 (or the date of early application of the standard)
. Comparatives
should be restated. IFRS 2 also applies to all modifications
that occur after the date of adoption.
IFRS 2 may be applied to other grants of equity
instruments if their fair values were publicly disclosed
. Disclosures should be made whether
or not a grant falls under IFRS 2 .
IFRS 2 applies to liabilities existing on the date
of adoption. Comparative information should be restated
to the extent it relates to periods after 7 November
2002 .
Specific rules apply to first-time adopters. They
do not need to apply IFRS 2 to grants of equity
instruments after 7 November 2002 that vested before
the later of the date of transition to IFRS and
1 January 2005. First-time adopters do not need
to apply IFRS 2 to liabilities that were settled
before the later of the date of transition to IFRS
and 1 January 2005.
Disclosure
Share-based payment disclosures are extensive.
Disclosure is required to enable users of financial
statements to understand the nature and extent of
such arrangements, how the fair value of the goods
or services received or fair value of the equity
instruments granted was determined, and the effect
on profit or loss and the balance sheet [IFRS2.44-52].
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