CHAPTER TWO

Share-based payment
 CONT…
 A share-based payment is a transaction in which an entity
receives goods or services in exchange for equity instruments
(e.g., shares or share options), or incurs liabilities based on the
value of its shares.
 Objective and scope
 IFRS 2 requires an entity to reflect the effects of share-based payment
transactions in its profit or loss and financial position.
 IFRS 2 applies to all share-based payment transactions.

There are three types.

(a) Equity-settled share-based payment transactions, in which the entity
receives goods or services in exchange for equity instruments of the entity
(including shares or share options)
(b) Cash-settled share-based payment transactions, in which the entity
receives goods or services in exchange for amounts of cash that are based
on the price (or value) of the entity's shares or other equity instruments of
the entity
(c) share-based payment transactions with a cash or equity settlement choice:-
are transactions where an entity receives goods or services, and either the
entity or the supplier can choose to settle the payment in cash (or other
assets) or by issuing shares (equity instruments).
 Objective and scope
 IFRS 2 was amended in 2009 to address situations
in those parts of the world where, for public
policy or other reasons, companies give their
shares or rights to shares to individuals,
organizations or groups that have not provided
goods or services to the company.
 An example is the issue of shares to a charitable
organization for less than fair value, where the
benefits are more intangible than usual goods or
services.
Share-based payment among group entities
 Payment for goods or services received by an
entity within a group may be made in the form
of granting equity instruments of the parent
company, or equity instruments of another
group company.
 IFRS 2 states that this type of transaction
qualifies as a share-based payment transaction
within the scope of IFRS 2.
 Share-based payment among group
entities
 In 2009, the standard was amended to clarify that it applies to
the following arrangements:
(a) Where the entity's suppliers (including employees) will receive
cash payments that are linked to the price of the equity
instruments of the entity
(b) Where the entity's suppliers (including employees) will receive
cash payments that are linked to the price of the equity
instruments of the entity's parent
 Under either arrangement, the entity's parent had an obligation
to make the required cash payments to the entity's suppliers.
The entity itself did not have any obligation to make such
payments. IFRS 2 applies to arrangements such as those
described above even if the entity that receives goods or
services from its suppliers has no obligation to make the
 Transactions outside the scope of IFRS 2
Certain transactions are outside the scope of the IFRS:

(a) Transactions with employees and others in their

capacity as a holder of equity instruments of the
entity (for example, where an employee receives
additional shares in a rights issue to all shareholders)

(b) The issue of equity instruments in exchange for

control of another entity in a business combination
 Key term
Share-based payment transaction. A transaction in which the
entity receives goods or services as consideration for equity
instruments of the entity (including shares or share options),
or acquires goods or services by incurring liabilities to the
supplier of those goods or services for amounts that are
based on the price of the entity's shares or other equity
instruments of the entity.
Share-based payment arrangement. An agreement between
the entity and another party (including an employee) to
enter into a share-based payment transaction, which
thereby entitles the other party to receive cash or other
assets of the entity for amounts that are based on the price
of the entity's shares or other equity instruments of the
entity, or to receive equity instruments of the entity,
 Key term
Equity instrument. A contract that evidences a
residual interest in the assets of an entity after
deducting all of its liabilities.
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 arrangement.
Share option. A contract that gives the holder the
right, but not the obligation, to subscribe to the
entity's shares at a fixed or determinable price for a
specified period of time.
 Key term
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. (Note that this definition is different from that in IFRS 13
Fair value measurement, but the IFRS 2 definition applies.)
Grant date. The date at which the entity and another party (including
an employee) agree to a share-based payment arrangement, being
when the entity and the other party have a shared understanding of
the terms and conditions of the arrangement.
 At grant date the entity confers on the other party (the
counterparty) the right to cash, other assets, or equity instruments
of the entity, provided the specified vesting conditions, if any, are
met.
 If that agreement is subject to an approval process (for example,
by shareholders), grant date is the date when that approval is
obtained.
 Key term
Intrinsic value. The difference between the fair value of the shares
to which the counterparty has the (conditional or unconditional)
right to subscribe or which it has the right to receive, and the price
(if any) the other party is (or will be) required to pay for those
shares. For example, a share option with an exercise price of $15 on
a share with a fair value of $20, has an intrinsic value of $5.
Measurement date. The date at which the fair value of the equity
instruments granted is measured. For transactions with employees
and others providing similar services, the measurement date is the
grant date. For transactions with parties other than employees (and
those providing similar services), the measurement date is the date
the entity obtains the goods or the counterparty renders service.
 Key term
Vest. To become an entitlement. Under a share-based payment
arrangement, a counterparty's right to receive cash, 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.
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).
Vesting period. The period during which all the specified vesting
conditions of a share-based payment arrangement are to be
 Vesting conditions
 IFRS 2 recognizes two types of vesting conditions: Non-
market based vesting conditions
 These are conditions other than those relating to the
market value of the entity's shares.
Examples include vesting dependent on:
 The employee completing a minimum period of service
(also referred to as a service condition)
 Achievement of minimum sales or earnings target
 Achievement of a specific increase in profit or earnings
per share
 Successful completion of a flotation
 Completion of a particular project
 Market based vesting conditions
 Market-based performance or vesting conditions are
conditions linked to the market price of the shares in some
way.
Examples include vesting dependent on achieving:
 A minimum increase in the share price of the entity
 A minimum increase in shareholder return
 A specified target share price relative to an index of market
prices
The definition of vesting conditions is:
 Restricted to service conditions and performance conditions,
and
 Excludes other features such as a requirement for employees
to make regular contributions into a savings scheme.
 Recognition: the basic principle
 An entity should recognize goods or services received or
acquired in a share-based payment transaction when it obtains
the goods or as the services are received.
 Goods or services received or acquired in a share-based
payment transaction should be recognized as expenses unless
they qualify for recognition as assets. For example, services
are normally recognized as expenses (because they are normally
rendered immediately), while goods are recognized as assets.
 If the goods or services were received or acquired in an equity-
settled share-based payment transaction the entity should
recognize a corresponding increase in equity (reserves).
 If the goods or services were received or acquired in a cash-
settled share-based payment transaction the entity should
recognize a liability.
 Equity-settled share-based payment transactions
Measurement
 The issue here is how to measure the 'cost' of the
goods and services received and the equity
instruments (eg the share options) granted in return.
 The general principle in IFRS 2 is that when an entity
recognizes the goods or services received and the
corresponding increase in equity, it should measure
these at the fair value of the goods or services
received.
 Where the transaction is with parties other than
employees, there is a rebuttable presumption that the
fair value of the goods or services received can be
 Cont…
 If the fair value of the goods or services received cannot be
measured reliably, the entity should measure their value by
reference to the fair value of the equity instruments granted.
 Where the transaction is with a party other than an employee
fair value should be measured at the date the entity obtains
the goods or the counterparty renders service.
 Where shares, share options or other equity instruments are
granted to employees as part of their remuneration
package, it is not normally possible to measure directly the
services received. For this reason, the entity should measure
the fair value of the employee services received by reference
to the fair value of the equity instruments granted. The fair
value of those equity instruments should be measured at the
grant date.
Determining the fair value of equity instruments
granted
 Where a transaction is measured by reference
to the fair value of the equity instruments
granted, fair value is based on market prices if
available, taking into account the terms and
conditions upon which those equity instruments
were granted.
 If market prices are not available, the entity
should estimate the fair value of the equity
instruments granted using a valuation
technique.
 Transactions in which services are received
 The issue here is when to recognize the transaction.
 When equity instruments are granted they may vest immediately,
but often the counterparty has to meet specified conditions first.
For example, an employee may have to complete a specified period of
service. This means that the effect of the transaction normally has to
be allocated over more than one accounting period.
 If the equity instruments granted vest immediately, (ie the
counterparty is not required to complete a specified period of
service before becoming unconditionally entitled to the equity
instruments) it is presumed that the services have already been
received (in the absence of evidence to the contrary).
 The entity should recognise the services received in full, with a
corresponding increase in equity, on the grant date.
 Cont…
 If the equity instruments granted do not vest
until the counterparty completes a specified
period of service, the entity should account for
those services as they are rendered by the
counterparty during the vesting period.
 For example if an employee is granted share
options on condition that he or she completes
three years' service, then 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.
 Cont…
 The entity should recognise an amount for the goods or
services received during the vesting period based on the
best available estimate of the number of equity
instruments expected to vest.
 It should revise that estimate if subsequent information
indicates that the number of equity instruments
expected to vest differs from previous estimates.
 On vesting date, the entity should revise the estimate to
equal the number of equity instruments that actually
vest.
 Once the goods and services received and the
corresponding increase in equity have been recognised,
the entity should make no subsequent adjustment to
total equity after vesting date.
Example: Equity-settled share-based payment transaction
 On 1 January 20X1 an entity grants 100 share
options to each of its 400 employees. Each grant is
conditional upon the employee working for the
entity until 31 December 20X3. The fair value of
each share option is $20.
 During 20X1 20 employees leave and the entity
estimates that 20% of the employees will leave
during the three-year period.
 During 20X2 a further 25 employees leave and the
entity now estimates that 25% of its employees will
leave during the three-year period.
 During 20X3 a further 10 employees leave.
Example: Equity-settled share-based payment transaction
Required
 Calculate the remuneration expense that will be recognized
in respect of the share-based payment transaction for each
of the three years ended 31 December 20X3.
Solution
 IFRS 2 requires the entity to recognize the remuneration
expense, based on the fair value of the share options
granted, as the services are received during the three-year
vesting period.
 In 20X1 and 20X2 the entity estimates the number of options
expected to vest (by estimating the number of employees
likely to leave) and bases the amount that it recognizes for
the year on this estimate.
 Example: Equity-settled share-based payment
transaction
Solution
 In 20X3 it recognizes an amount based on the number
of options that actually vest. A total of 55 employees
left during the three-year period and therefore 34,500
options ((400 – 55) x 100) vested. The amount
recognized as an expense for each of the three years is
calculated as follows:
 Cash-settled share-based payment
transactions
Examples of this type of transaction include:
(a) Share appreciation rights granted to employees:
the employees become entitled to a future cash
payment (rather than an equity instrument), based on
the increase in the entity's share price from a specified
level over a specified period of time, or
(b) An entity might grant to its employees a right to
receive a future cash payment by granting to them a
right to shares that are redeemable.
 The basic principle is that the entity measures the
goods or services acquired and the liability incurred
at the fair value of the liability.
 Cash-settled share-based payment
transactions
 The entity should remeasure the fair value of the
liability at each reporting date until the liability is
settled and at the date of settlement.
 Any changes in fair value are recognised in profit or
loss for the period.
 The entity should recognise the services received, and
a liability to pay for those services, as the employees
render service.
 For example, if share appreciation rights do not vest
until the employees have completed a specified period
of service, the entity should recognise the services
received and the related liability, over that period.
 Example: Cash-settled share-based payment
transaction
 On 1 January 20X1 an entity grants 100 cash share
appreciation rights (SARS) to each of its 500
employees, on condition that the employees
continue to work for the entity until 31 December
20X3.
 During 20X1 35 employees leave. The entity
estimates that a further 60 will leave during 20X2
and 20X3.
 During 20X2 40 employees leave and the entity
estimates that a further 25 will leave during 20X3.
 During 20X3 22 employees leave.
 Example: Cash-settled share-based payment
transaction
 At 31 December 20X3 150 employees exercise their
SARs. Another 140 employees exercise their SARs at 31
December 20X4 and the remaining 113 employees
exercise their SARs at the end of 20X5.
 The fair values of the SARs for each year in which a
liability exists are shown below, together with the
intrinsic values at the dates of exercise.
 Example: Cash-settled share-based payment
transaction
Required
 Calculate the amount to be recognised in the profit or loss for
each of the five years ended 31 December 20X5 and the liability
to be recognised in the statement of financial position at 31
December for each of the five years.
Solution
 For the three years to the vesting date of 31 December 20X3
the expense is based on the entity's estimate of the number of
SARs that will actually vest (as for an equity-settled transaction).
 However, the fair value of the liability is re-measured at each
year-end.
 The intrinsic value of the SARs at the date of exercise is the
amount of cash actually paid.
Solution
Solution Cont…