IFRS 2 – Class notes

SCOPE

1. This standard shall be applied in accounting for all share-based payment transactions, including:
(i) Equity-settled share-based payment transactions.
(ii) Cash-settled share-based payment transactions.
(iii) Transactions with options for settlement in cash or equity instruments.

Group entities:
This IFRS applies when goods and services are received by one entity and another entity in the
same groups has an obligation to settle a share-based payment transaction.

2. This standard shall not apply to:

(i) Issue of shares to existing holders of equity instruments in their capacity as a holder of equity
instruments. (e.g right issue)
(ii) Issue of shares in business combination.

SHARE-BASED PAYMENT TRANSACTIONS

Share-based payment arrangement

An agreement between the entity (or another group entity or any shareholder of any group entity) and
another party (including an employee) that entitles the other party to receive:
(a) cash or other assets of the entity 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, or

(b) equity instruments (including shares or share options) of the entity or another group entity,

provided the specified vesting conditions, if any, are met.

Share-based payment transaction

A transaction in which the entity:
(a) receives goods or services from the supplier of those goods or services (including an employee) in a
share-based payment arrangement, or

(b) incurs an obligation to settle the transaction with the supplier in a share-based payment arrangement
when another group entity receives those goods or services.

Equity-settled share-based payment transaction

A share-based payment transaction which is settled in entity’s own equity instruments (including shares
or share options).

Cash-settled share-based payment transaction

A share-based payment transaction in which the entity acquires 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.

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 IFRS 2 – Class notes

RECOGNITION – General

When an entity obtains the goods or receive the services, it shall recognize the transaction:

Dr. Expense / Asset

Cr. Relevant equity account [in case of equity-settled share-based payment transaction]
Cr. Liability [in case of cash-settled share-based payment transaction]

Exam note:
IFRS 2 does not specifically mention which equity account is credited. It is better to use a separate
account e.g. “equity instruments granted” unless shares are eventually issued.

Equity instrument granted

The right (conditional or unconditional) to an equity instrument of the entity conferred by the entity on
another party, under a share-based payment transaction.

EQUITY-SETTLED SHARE-BASED PAYMENT TRANSACTION

Overview of measurement
An entity shall measure the goods or services received:

If fair value of goods or services received can be If fair value of goods or services cannot be
measured reliably: measured reliably (e.g. employee service)

at the fair value of the goods or services received at the fair value of equity instrument granted,
measured at grant date.

Fair value
The amount for which an asset could be exchanged, a liability settled, or an equity instrument granted
could be exchanged, between knowledgeable, willing parties in an arm’s length transaction.
(It is different from IFRS 13)

Grant date
The date at which the entity and another party (including an employee) agree to a share-based
payment arrangement. If that agreement is subject to an approval process (for example, by
shareholders), grant date is the date when that approval is obtained.

Example where fair value of goods or services cannot be measured reliably:

Background
An entity granted shares with a total fair value of Rs. 100,000 to parties other than employees who are
from a particular section of the community (historically disadvantaged individuals), as a means of
enhancing its image as a good corporate citizen. The economic benefits derived from enhancing its
corporate image could take a variety of forms, such as increasing its customer base, attracting or
retaining employees, or improving or maintaining its ability to tender successfully for business
contracts. The entity cannot identify the specific consideration received. For example, no cash was

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 IFRS 2 – Class notes

received and no service conditions were imposed. Therefore, the identifiable consideration (nil) is less
than the fair value of the equity instruments granted (Rs. 100,000).

Application of requirements
Although the entity cannot identify the specific goods or services received, the circumstances indicate
that goods or services have been (or will be) received, and therefore IFRS 2 applies. In this situation,
because the entity cannot identify the specific goods or services received, the rebuttable presumption
in paragraph 13 of IFRS 2, that the fair value of the goods or services received can be estimated reliably,
does not apply. The entity should instead measure the goods or services received by reference to the
fair value of the equity instruments granted.

Transactions in which services are received

[A detailed discussion on recognition]

Case I – If the equity instruments granted vests immediately [i.e. no vesting conditions]

In the absence of evidence to the contrary, the entity shall presume that services rendered by the
counterparty as consideration for the equity instruments have been received. In this case, on grant date
the entity shall recognize the services received in full, with a corresponding increase in equity.

Case II – If the equity instruments granted requires some vesting conditions

Vesting conditions
A condition that determines whether the entity receives the services that entitle the counterparty to
receive cash, other assets or equity instruments of the entity, under a share-based payment
arrangement. A vesting condition is either a service condition or a performance condition.
Service condition:
A vesting condition that requires the counterparty to complete a specified period of service during
which services are provided to the entity. If the counterparty, regardless of the reason, ceases to
provide service during the vesting period, it has failed to satisfy the condition. A service condition does
not require a performance target to be met.

Performance condition
A vesting condition that requires:
(a) the counterparty to complete a specified period of service (ie a service condition); the service
requirement can be explicit or implicit; and
(b) specified performance target(s) to be met while the counterparty is rendering the service required
in (a) [for example share price growth, profits growth].

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 IFRS 2 – Class notes

The entity shall presume that the services to be rendered by the counterparty as consideration for those
equity instruments will be received in the future, during the vesting period.

(a) Service condition

If equity instruments granted do not vest until the counterparty completes a service period, the entity
shall account for those services as they are rendered by the counterparty over the vesting period,
with a corresponding increase in equity. For example, if an employee is granted share options
conditional upon completing three years’ service, then the entity shall presume that the services to
be rendered by the employee as consideration for the share options will be received in the future,
over that three-year vesting period.

(b) Performance condition

1. If equity instrument granted is conditional upon the achievement of a performance condition and
remaining in the entity’s employ/service until that performance condition is satisfied, the entity
shall account for the service expense with a corresponding increase in equity over the expected
vesting period.

2. An entity shall estimate the length of the expected vesting period at the grant date, based on
most likely outcome of the performance condition. If performance condition is:

a market condition: not a market condition:

the estimate of the length of the vesting the entity shall revise its estimate of the
period shall be consistent with the length of the vesting period, if necessary, if
assumptions used in estimating the fair value subsequent information indicates that the
of the options granted, and shall not be length of the vesting period differs from
subsequently revised. previous estimates.

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 IFRS 2 – Class notes

Market condition
A performance condition, upon which the exercise price, vesting or exercisability of an equity
instrument depends, that is related to market price of the entity’s equity instruments for
example attaining a specified share price or a specified amount of intrinsic value of share option
or a specified % of total shareholders return.

Exam note:
Discussion about vesting period above can be summarized as follows:
In case of service condition:
Vesting period is the conditional period specifically agreed.

In case of performance condition (other than market condition):

Vesting period is the period estimated by the management for completion of conditions. This
estimate is subsequently reviewed and revised if needed.

In case of market condition:

Vesting period is the period estimated by the management initially while estimating the fair
value of the instrument granted. This estimate is not revised subsequently.

Transactions measured at fair value of equity instrument granted

[A detailed discussion on measurement]

Case I – Fair value of equity instrument granted can be measured reliably

Determining the fair value of equity instrument granted:

An entity shall measure the fair value of equity instrument granted at measurement date based on:
- Market prices [if market prices are available]
- Other generally accepted valuation techniques [if market prices are not available]
Measurement date:
It is the date at which fair value of the equity instrument granted is measured. Measurement date:
For transactions with employees – is the grant date
For transactions with other parties – is the date when goods or services are received

Exam note:
Fair value of “equity instrument granted (i.e. right to get shares)” is by default equal to the fair value of
the related “equity instrument (i.e. share itself)”.

Treatment of vesting conditions:

Market condition: Any other condition:

- Market condition (e.g. target share price) shall - Vesting conditions shall not be taken into
be taken into account when estimating the fair account when estimating the fair value of
value of the equity instrument granted. equity instruments

- The entity shall recognize the goods or services - Instead these conditions shall be taken into
when other vesting conditions are met, account by adjusting the number of equity

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 IFRS 2 – Class notes

irrespective of whether that market condition instruments included in the measurement of

is satisfied. the transaction amount.

- The entity shall recognize the amount of goods

or services over the vesting period on the best
available estimate of the number of equity
instruments expected to vest and shall revise
that estimate subsequently, if necessary, so
that ultimately the amount recognized for
goods and services shall be based on the
number of equity instruments that eventually
vest.

- Hence on a cumulative basis, no amount is

recognized for goods or services received if
the equity instruments granted do no vest
because of failure to satisfy a vesting
condition.

Exam note:
Amount is calculated at end of every year (till vesting date) on cumulative basis as follows:

= Best estimate of no. of equity instruments expected to eventually vest x fair value of instrument
granted at measurement date x reporting year*/ Vesting period

Here, in case of employees, best estimate of no. of equity instruments can be further split into:
= Number of persons x number of instruments per person

It is considered as closing balance of equity and any change in equity balance is:
Dr. Employee cost
Cr. Equity instrument granted

* Do not forget to pro-rate it in months if transaction occurs during the year.

After vesting date:

The entity shall not subsequently reverse the amount recognized for goods or services received if the
vested equity instruments are later forfeited or expired without exercise. However, entity may transfer
the amount within equity (e.g. transferred to retained earnings).
Case II – Fair value of equity instrument granted cannot be measured reliably

1. The entity shall measure the equity instruments (generally share options) initially at measurement
date at intrinsic value. This intrinsic value is remeasured subsequently on every year end and finally
on the date of settlement (e.g. exercise, forfeiture, lapse). Any changes on this remeasurement are
recognized in P&L.
Intrinsic value of share option
= Fair value of shares – exercise price

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 IFRS 2 – Class notes

2. The entity shall recognize the goods or services received based on the number of instruments that are
expected to ultimately vest or ultimately be exercised. The entity shall revise that estimate, if
necessary, if subsequent information indicates that the number of instruments expected to vest
differs from previous estimates. [as studied earlier in “treatment of other vesting conditions”]

3. After vesting date, the entity shall reverse the amount recognized for goods or services received if
the share options are later forfeited, or lapse at the end of the share option’s life.

4. If an entity settles a grant, it shall account for it as an acceleration of vesting and shall therefore
recognize immediately the amount that would otherwise would have been recognized over the
remaining vesting period. Moreover, any payment made to counterparty on settlement of the grant
shall be accounted for:

Upto the amount of fair value of equity instruments granted measured at cancellation date:
as the repurchase of equity (i.e. deduction from equity)

Any payment in excess of the fair value:

as an expense immediately in P&L

Modification to the terms and conditions of grant (including cancellations and settlements)
[For example, a downturn in the equity market may mean that the original option exercise price set is no
longer attractive, therefore, the exercise price is reduced]

This guidance is relevant for share-based payment transactions with employees as well as transactions
with other parties that are measured by at the fair value of the equity instruments granted. This guidance
is technically not necessary when equity instrument granted is measured at intrinsic value.

Case I – Modification is beneficial for counterparties (e.g. employees)

Examples – reduction in exercise price, increase in equity instruments granted, reduction in vesting
period, reduction in performance condition (other than market condition)

Steps for application of modification:

1. Continue to recognize the original fair value of measurement date of the original equity instruments
granted over the original vesting period. (i.e. same as was done before modification)

2. Any increase in total fair value at the date of modification (either due to increase in fair value or due
to increase in number of equity instruments granted) shall be recognized:

If modification occurs before vesting date If modification occurs after vesting period
Over the remaining period from the Immediately OR
modification date until the date when the Over the remaining vesting period if employee
modified equity instruments vest. is required to complete an additional vesting
period.

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 IFRS 2 – Class notes

Increase in total fair value of equity instruments

If fair value of equity instrument is increased (e.g. by reducing the exercise price)

Rs.
Fair value of instruments measured immediately after modification XXX
Less Fair value of instruments measured immediately before modification (XXX)
Total increase in fair value XXX

If number of equity instruments is increased

Total increase in fair value

= Total fair value of additional equity instruments granted measured at the date of modification

3. If the entity modifies the vesting conditions in a manner that is beneficial to the counterparty, the
entity shall consider the modified vesting conditions for “treatment of vesting conditions” as studied
earlier.

Case II – Modification is not beneficial for counterparties (e.g. employees)

Examples – increase in exercise price, decrease in equity instruments granted, increase in vesting period,
addition in performance condition (other than market condition)

Steps for application of modification:

1. If the modification decreases the fair value of equity instruments granted (e.g. due to increase in
exercise price), the entity shall not account for this decrease in fair value rather it shall continue to
recognize the original fair value of measurement date of the original equity instruments granted over
the original vesting period. (i.e. same as was done before modification)

2. If modification reduces the number of equity instruments granted, that reduction shall be accounted
for as a cancellation in accordance with Case III below.

3. If the entity modifies the vesting conditions in a manner that is not beneficial to the counterparty, the
entity shall not consider the modified vesting conditions for “treatment of vesting conditions” as
studied earlier.

Case III – Cancellation (other than cancellation by failure of vesting conditions)

(a) Cancellation and settlement

1. The entity shall account for the cancellation as an acceleration of vesting and shall therefore
recognize immediately the amount that would otherwise would have been recognized over the
remaining vesting period.

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 IFRS 2 – Class notes

2. Any payment made to counterparty on settlement of the grant shall be accounted for:

Upto the amount of fair value of equity instruments granted measured at cancellation date:
as the repurchase of equity (i.e. deduction from equity)

Any payment in excess of the fair value:

as an expense immediately in P&L

3. If share-based payment arrangement included liability components, the entity shall remeasure
the fair value of the liability at the date of cancellation. Any payment made to settle the liability
component shall be accounted for as a repayment of the liability.

(b) Cancellation and replacement with new equity instruments

The entity shall account for the grant of new equity instruments as replacement for the cancelled
equity instruments in the same way as a modification of original grant as studied in Case I and II above.
Except here the increase in total fair value is determined as follows:

Rs. Rs.
Fair value replacement equity instruments at replacement date X
Less:
Fair value of cancelled equity instruments immediately before cancellation X
Less: Payment made to counterparty [i.e. debited to equity as studied in (a)] (X) (X)
Increase in total fair value to be accounted for X

If new grant cannot be identified as a replacement reward

Then original grant shall be accounted for as “cancelled” and new grant shall be accounted in a
normal way as a new grant of equity instruments.

CASH-SETTLED SHARE-BASED PAYMENT TRANSACTION

Examples – share appreciation rights, granting shares that are redeemable

Measurement
The entity shall measure the goods and services received and the related liability at the fair value of the
liability. This fair value of liability is remeasured subsequently on every year end and finally on the date
of settlement. Any changes on this remeasurement are recognized in P&L.

Recognition
Case I – If the counterparty’s right to receive cash vests immediately [i.e. no vesting conditions]

In the absence of evidence to the contrary, the entity shall presume that services rendered by the
counterparty have been received. In this case, the entity shall recognize the services received in full, with
a corresponding increase in liability.

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 IFRS 2 – Class notes

Case II – If the transaction requires some vesting conditions

The entity shall presume that the services to be rendered by the counterparty will be received in the
future, during the expected vesting period.

Treatment of vesting conditions:

Market condition: Any other condition:

- Market condition (e.g. target share price) shall - Vesting conditions shall not be taken into
be taken into account when estimating the fair account when estimating the fair value of the
value of the liability. liability.

- Instead these conditions shall be taken into

account by adjusting the number of awards
included in the measurement of the
transaction amount.

- The entity shall recognize the amount of goods

or services over the vesting period on the best
available estimate of the number of awards
expected to vest and shall revise that estimate
subsequently, if necessary, so that ultimately
the amount recognized for goods and services
shall be based on the number of awards that
eventually vest.

- Hence on a cumulative basis, the amount

recognized for goods or services received is
equal to the cash that is paid.

SHARE-BASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVE

Counterparty has a choice of settlement

If entity has granted the counterparty the right to choose whether to settle a share-based payment
transaction in cash or issuance of equity instruments, the entity has granted compound financial
instruments thus it includes a debt component and an equity component.

Case I – If the fair value of goods or services can be measured reliably

When an entity obtains the goods or receive the services, it shall recognize the transaction:

Dr. Expense / Asset [at the fair value of goods or services]

Cr. Liability [at the fair value of debt component i.e. fair value of liability for a cash-settled transaction]
Cr. Equity [balancing figure]

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 IFRS 2 – Class notes

Case II – If the fair value of goods or services cannot be measured [e.g. services of employees]

When an entity obtains the goods or receive the services, it shall recognize the transaction:

Dr. Expense/Asset [at the fair value of share alternative]

Cr. Liability [at the fair value of cash alternative]
Cr. Equity [balancing figure]

Subsequent treatment
1. After initial recognition, “liability component” and “equity component” are accounted for as studied
earlier for “cash-settled share-based payment transactions” and “equity-settled share-based payment
transaction” respectively and corresponding increase/decrease is charged to the related expense for
goods or services received.

2. At the settlement date, liability component shall be remeasured to its fair value with corresponding
increase/decrease in P&L.

3. If at settlement:
(a) Entity pays in cash rather than issuing equity instruments then:
- Payment is applied to settle the liability in full
- Equity component is transferred to any other reserve (e.g. retained earnings)

(b) Entity issues equity instruments rather than paying cash then:
- Liability shall be transferred to equity as the consideration of the equity instruments issued

Entity has a choice of settlement

If entity has a choice of whether to settle in cash or by issuing equity instruments, the entity shall
determine whether it has a present obligation to settle in cash or not.

Case I – If the entity has a present obligation to settle in cash

1. It may happen if:
- Entity is legally prohibited from issuing shares
- Entity has a past practice or stated policy to settle in cash
- Entity generally settles in cash whenever counterparty asks for cash settlement

2. It shall account for the transaction as “cash-settled share-based payment transaction”

Case II – If the entity has no such obligation to settle in cash

1. It shall account for the transaction as “equity-settled share-based payment transaction”
2. Upon settlement if:
(i) Entity selects to settle in cash, the payment shall be accounted for as the repurchase of equity
(i.e. deduction from equity.)
(ii) Entity elects to settle by issuing equity instruments, it is normally accounted for as studied earlier
for equity-settled share-based payment transaction
(iii) Entity selects out of (i) or (ii) which have higher fair value (as settlement date) then the difference
between (i) and (ii) shall be recognized as expense.

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