IFRS 2 – SHARE BASED

PAYMENTS

IDENTIFICATION

A share-based payment is a transaction in which:

- The entity receives goods or services as consideration for equity instruments of the entity; or
- Acquires goods or services by incurring liabilities to the supplier that are based on the price of the
entity’s shares or other equity instruments of the entity.

Share-based payments exclude:

- Normal share transactions where no goods / services are exchanged

o Consider if employees are being dealt with in their capacity as employees or shareholders
- Transactions where the entity acquires goods as part of a business combination
o Consider if employees are being dealt with in their capacity as employees or shareholders
(owners)

Deals with non-financial assets

- Excludes transactions that fall into the scope of IAS 32 & IFRS 9

Goods and services include both identifiable and non-identifiable items

- Where FV of the equity instruments granted or liabilities incurred exceeds the FV of identifiable goods
and services  indicator that unidentifiable goods or services are present
o FV of unidentifiable component = difference calculated above

CLASSIFICATION

Equity-settled share-based payment transactions (02 (a))

- A share based payment transaction in which the entity

a) Receives goods or services as consideration for equity instruments of the entity (including shares
or share options).
 o It is important to note that reference is made to the shares of the entity itself; thus, for
example the shares of the holding company will not qualify as equity settled in the
subsidiary’s individual books but will qualify as equity settled in the group’s records.
b) Receives goods or services but has no obligation to settle the transaction with the supplier.

Cash-settled share-based payment transactions (02.(b))

a) A share based payment transaction in which the entity acquirers goods or services by incurring a
liability to transfer cash or other assets to the supplier of those goods or services for amounts that
are based on the price (or value) of equity instruments (including shares or share options) of the
entity or another group entity.

Compound (or choice) transactions

- in which the entity receives or acquires goods or services and the terms of the arrangement provide
either the entity or the supplier (Level 1) of those goods or services with a choice of whether the
entity settles the transaction in cash (or other assets) or by issuing equity instruments. (.02(c))

RECOGNITION

Receipt of goods / services drives recognition

Equity-Settled Share-based payments

Dr: Asset/Expense
Dr leg determined by relevant standard
Cr: Equity

Cash-Settled Share-based payments

Dr: Asset/Expense

Cr: Liability

RECOGNITION DATES (TIMING)

 - In absence of evidence of the contrary presume services have already been received

Grant Date:

- When both parties agree to the share-based payment agreement

o Shared understanding of T&Cs

Measurement Date:

- When FV of equity instruments granted (equity-settled) is measured

o Employees: grant date
o Other: date entity obtains goods / services

Vest:

- To become an entitlement.
o Under a share-based payment arrangement, a counterparty’s right to receive cash, or other
assets, or equity instruments of the entity vests upon satisfaction of any specified vesting
conditions

Vesting conditions:

- The conditions that must be satisfied for the counterparty to become entitled to receive cash, other
assets, or equity instruments of the entity, under a share-based payment arrangement.
o Vesting conditions include service conditions, which require the other party to complete a
specified period of service, and performance conditions, which require specified
performance targets to be met (such as a specified increase in the entity’s profit over a
specified period of time).
o A performance condition might include a market condition.

 Vesting period:
 - The period during which all the specified vesting conditions of a share-based payment arrangement
are to be satisfied.

MEASUREMENT

CASH-SETTLED SHARE-BASED PAYMENTS

- Entity will ultimately make a cash payment

- Goods/ services acquired and corresponding liability are measured at the FV of ultimate liability
o Recognise over the vesting period
o Liability re-measured at each reporting date with changes in FV recognised in P&L

- Adjust number of shares with non-market conditions

o Number of shares takes into account number of employees
 As employee numbers change the share numbers will change

- Vesting conditions, other than market conditions, shall NOT be taken into account when estimating
the fair value of the cash-settled share-based payment at measurement date. i.e. fair value should
reflect only market conditions.
o Vesting conditions, other than market conditions, shall be taken into account by adjusting
the number of awards included in the measurement of the liability.
Fair value = future value. Takes into account risk, TVM.

Intrinsic value = present value. Actual appreciation

NFB
Intrinsic value:

- Difference between FV of the shares to which counterparty has the right to subscribe/receive and the
price the counter party is required to pay for those shares

MODIFICATIONS AND CANCELLATIONS

- Remeasure liability in P&L
- Remeasure to latest fair value
- If period changes, measure using new period prospectively

Cash settled to equity settled (also a cancel and replace) (awareness)

1. Equity settled from modification date

2. Derecognise liability
3. Recognise equity
4. Difference of 2 and 3 = P/L

Remember paragraphs B44A-B44C –See IG Example 12C

Dr Liability –value at derecognition date

Cr Equity (FV at modification date x number x period to date / total vesting period)

Dr/Cr Expense or Income

EQUITY-SETTLED SHARE-BASED PAYMENTS

 Dr Cr

Reason: how can we FV “blood and sweat” of EEs? We can’t, therefore, use FV of equity

MEASUREMENT DATE
Date on which goods and services are received (recognition date), unless-

- FV is based on equity instrument

o Measure on grant date, recognise over vesting period

VESTING CONDITIONS AND DETERMINING THE FV OF EQUITY INSTRUMENTS GRANTED

The fair value of an equity instrument granted is defined as:

- The amount for which the equity instrument granted could be exchanged between knowledgeable
willing parties in an arm’s length transaction. (Appendix A)
- The fair value of an equity instrument granted shall be based on market prices if available, taking into
account the terms and conditions upon which those equity instruments were granted.
Examples of market performance features are:

-  Vesting based on achieving a specific share price of the equity instrument.

-  Vesting based on a specified target share price relative to an index of market prices.

Examples of a non-market performance features are:

-  Vesting based on growth in either revenue, profits, EPS or other financial measure.
-  Vesting based on non-financial targets (such as number of employees).

Treatment

- Market condition
 o Vesting conditions are taken into account in determining FV of shares / share options on
measurement date
- Non-market condition
o Vesting conditions are not taken into account in determining FV of shares / share options on
measurement date
 Taken into account by adjusting the number of equity instruments included in the
measurement of the transaction amount
 The amount recognised for goods or services received as consideration for the
equity instruments granted shall be based on the number of equity instruments
that eventually vest. Hence, on a cumulative basis, no amount is recognised for
goods or services received if the instruments granted do not vest because of failure
to satisfy a vesting condition.
 Use best available estimate of number of equity instruments
 On vesting date, revise estimate to equal number of equity instruments ultimately
vested

No adjustment to total equity after the vesting date

TRANSACTIONS OTHER THAN WITH EMPLOYEES

The goods or services received and corresponding increase in equity are measured at:

- the fair value of the goods or services received (i.e. directly), unless the fair value cannot be
estimated reliably in which case:
o the measurement is based on the fair value of the equity instruments granted (i.e. indirectly).
- where share-based payments are made for apparently no or inadequate consideration, the
consideration received should be measured by reference to the fair value of the equity instrument
granted.

The fair value shall be measured at the date the entity obtains the goods or the counterparty renders the
services.
TRANSACTIONS WITH EMPLOYEES
Measurement of transactions with employees and others providing similar services are therefore measured at:

o the fair value of the equity instrument granted, and

o the fair value shall be measured at the grant date (i.e. not the date the service is rendered).

The fair value of the equity instruments shall be based on market prices if available. If no market prices are
available, an appropriate valuation model must be used. The terms and conditions of the arrangement, other
than non-market vesting conditions, must be taken into account in valuing the instrument.

Consider immediate vesting vs subsequent vesting

IMMEDIATE VESTING

SUBSEQUENT VESTING

- Service condition = non-market

Service condition

Non-market
 Service condition -
>Non-market

Performance condition -
> Market

Essentially a fixed cost

as is incurred regardless

Any reserves not utilised during vesting period -> transfer to another reserve -> not through P/L or OCI

MODIFICATIONS AND CANCELLATIONS

Continue to recognise at least the amount that would have been recognized under original share based
payment

- Cannot reduce the amount

If an award is cancelled
Equity cannot be
- Recognise the non-vested amount in p/l immediately
remeasured
Modified

- If beneficial to EE (increase total FV of SBP)

o Recognise benefit / increase in p/l
- Not beneficial to EE
o Ignore ( prevents the reduction of equity)

If Cancels or settles during vesting period

- Acceleration of vesting, immediately in p/l

- Any payment made accounted for as repurchase of equity
o Except to extent, exceeds FV of equity, measured at repurchase date -> excess = expense
 o If contains liability component, remeasure liability at date of cancellation -> any payment
made to settle liability, accounted for as extinguishment of liability

- New equity instrument granted as replacement for cancelled

o Account for in same was as modification (consider if FV increased)
o Incremental FV  difference between FV of replacement and net fair value of cancelled
 Net FV = FV just before cancellation less any payment made to employee

- Entity / counterparty can choose whether to meet non-vesting condition

o Treat failure to meet non-vesting condition during vesting period as a cancellation

- Entity repurchases vested equity instrument

o Payment made = deduction from equity
o Except to the extent, payment exceeds FV at repurchase date -> excess recognised as an
expense

TRANSACTIONS WITH SETTLEMENT ALTERNATIVES (CHOICE TRANSACTIONS)

EMPLOYEE HAS CHOICE

Compound instrument

- Debt component -> EEs right to demand cash

- Equity component -> EEs right to demand equity
o If one is selected the other is sacrificed, therefore, not simply the sum of both

If FV of each component is the same:

 FV debt =1
FV equity =1
FV compound =1
- (equity FV deemed to be 0 as EEs more likely to take cash)
IF FV of components differ:

FV debt =1
FV equity = 1.2
FV compound = 1.2
- (equity FV deemed to be 0.2)
- Equity will always be valued higher as entity is trying to encourage EEs to take the equity over
the cash
Component vs Alternative

- Components make up the compound instrument

- Alternative is the actual value of the settlement option

Account separately for the g/s received or acquired in respect of each component

At settlement date -> remeasure liability to FV

- If settle in equity, transfer liability to equity

- If settle in cash, payment extinguishes liability. Any equity recognised remains equity
EMPLOYER HAS CHOICE
Must account for entirely has equity-settled or cash settled

- Fundamental question: is there a present obligation to deliver cash?

o Emphasis on contractual obligation and past practices leading to a constructive
obligation

If obligation to settle cash  cash settled transaction

If no obligation  equity settled transaction

- On settlement entity can elect how to settle

VARIATION IN PERFORMANCE CONDITION

- Length of vesting, number of equity instruments granted or exercise price varies

o Non-market condition: Estimate at grant date and re-estimate over vesting period
o Market condition: Taken into account in FV determination at grant date and not
subsequently recognised
SHARE BASED TRANSACTIONS AMOUNG GROUP ENTITIES

In separate f/s, entity receiving goods/services:

- Measure g/s as either equity settled or cash-settled by assessing

o Nature of awards granted; AND
o Its own rights and obligations
- May differ from amount recognised by consolidated group or by group entity settling the share-
based transaction

PRINCIPLE 1
Entity chooses/has to repurchase shares in order to settle the share-based obligation

- Results in 2 transactions
o Buying shares
o Settling share-based transaction

PRINCIPLE 2
Parent grants rights to its equity instruments to employees of a subsidiary

- Subsidiary receives the services

STEP 1 – TEST AGAINST SHARE BASED TRANSACTION DEFINITION

STEP 2 – APPLY 43A – 43D
PRINCIPLE 3
Subsidiary grants rights to equity instruments of its parent to employees

- Where, subsidiary has obligation to provide employees with the equity instruments
STEP 1 – DETERMINE IF SHARE BASED TRANSACTION

APPLY 43A-D
 - Cash settled in subsidiary
- Equity settled in group

Parent Subsidiary Group

- Dr exp Dr exp
Cr Liab Cr Equity
Proformas (yr 1)

Dr Liability

Staff costs (difference)

Cr Equity

(In other years consider FV adjustments ; Consider if difference is held in RE)

PRINCIPLE 4
Holding company grants rights to cash payments to the subsidiary employees. Cash payments linked to the
price of the holding companies equity instruments

STEP 1 – DETERMINE IF SHARE BASED TRANSACTION

STEP 2 – APPLY 43A-D

DEFERRED TAX

CASH SETTLED
SARS: Deduction on amounts paid

IFRS 2: Recognise an expense as services received

- Timing difference
EQUITY SETTLED
SARS: Generally no deduction

IFRS 2: Expense as services rendered

- Permanent difference
FRG 2

Dr Bank 100

Dr Expense 70

Cr Equity reserve 170