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Share-based Payments:IFRS 2

Share-based Payments:IFRS 2

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General Recognition Principles of IFRS 2General Recognition Principles of IFRS 2

Recognize goods or services received at fair value when the goods are obtained or as services are received

When the goods or services do not qualify for recognition as assets, an expense is recognized

For equity-settled share-based payment transactions a corresponding increase in equity is recognized; and

For cash-settled share-based payment transactions a corresponding liability is incurred

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IFRS 2 contains specific requirements for:

Equity-settled (shares, share options, warrants)

Cash-settled (share appreciation rights)

Compound instrument containing both equity and cash-settled components (bifurcate)


Overview of Accounting Requirements of IFRS 2Overview of Accounting Requirements of IFRS 2

Equity-settled share-based payment transactionsMeasure goods/services and corresponding increase in equity at FV of goods/services received unless FV cannot be estimated reliably, then use FV of equity instruments (usually the case for employee awards)Use grant-date FV with no remeasurement in subsequent periods for employee awards, but estimate and true-up for forfeitures

Cash-settled share-based payment transactionsMeasure goods/services and the liability incurred at FV of the liabilityStart with grant-date FV, but liability is remeasured at FV through P&L until settlement (estimate and true-up for forfeitures)

Option of either equity-settled or cash-settled at holder’s electionAccount for as a cash-settled transaction (a compound financial instrument if settlement values differ) if entity has incurred a liability to settle in cash

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Recognition ExampleCash-settled TransactionRecognition ExampleCash-settled Transaction

Vesting conditions:Vesting conditions:

Three year continued employment (service condition)Three year continued employment (service condition)

Assumptions:Assumptions:

100 stock appreciation rights granted on January 1, 20X1100 stock appreciation rights granted on January 1, 20X1

Best estimate is that all employees remain in service over the Best estimate is that all employees remain in service over the vesting periodvesting period

Grant date fair value of each right is $3.00 Grant date fair value of each right is $3.00

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Subsequent estimates of: Subsequent estimates of: Fair valueFair value Intrinsic valueIntrinsic value

End year x1End year x1 $$4.00 4.00 $1$1.50 .50

End year x2End year x2 $$4.25 4.25 $$3.00 3.00

End year x3End year x3 $$4.504.50 $$4.254.25

Settlement dateSettlement date $$4.004.00 $4$4.00 .00


IFRS and U.S. GAAP Differences:Share-Based Payments: ClassificationIFRS and U.S. GAAP Differences:Share-Based Payments: Classification

IFRS 2Classification

Liability-classified if cash settled (including at employee’s option)

Puttable shares always liability-classified unless contingently puttable

Compound instrument if employee has choice of settlement:- liability component measured first- balance is equity component

FAS 123RClassification

Liability-classified if:Grantor can be compelled to deliver cash or other assetsNo equity holder relationship established (e.g., “other” conditions, fixed monetary amount awards)

Puttable shares equity-classified if (a) employee has made a substantial investment and bears risks and rewards of ownership for a “reasonable period” and (b) redemption price is at FV

Generally liability classified unless it is a tandem award

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Case Study 1: Choice of settlementCase Study 1: Choice of settlement


IFRS and U.S. GAAP Differences:Share-Based Payments: Grant date and ScopeIFRS and U.S. GAAP Differences:Share-Based Payments: Grant date and Scope

IFRS 2Grant date

Date the entity and employee agree to a share-based payment arrangement and have a shared understanding of the terms and conditions of the arrangement

ScopeApplies to all share-based payment arrangements

We would expect a high degree of correlation between the calculation of the award and the share price for a transaction to be classified a share-based payment

FAS 123RGrant date

Date the employer and employee have a mutual understanding of the terms and conditions of the award and the employee begins to benefit from or be adversely affected by changes in the employer’s share price

ScopeApplies to share-based payment arrangements with employees and is applied by analogy to share-based payment arrangements with non-employees

A transaction that is based, at least in part, on the price of an entity’s shares would be considered a share-based payment. This threshold does not require a high degree of correlation between the calculation of the award and the share price, unlike IFRSs

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IFRIC 11 – Group and Treasury Share TransactionsIFRIC 11 – Group and Treasury Share Transactions

IFRIC 11 addresses the following:IFRIC 11 addresses the following:Classification of “group” SBP transactions in Classification of “group” SBP transactions in financial statements of entity that receives the financial statements of entity that receives the servicesservicesTransfer of employees between group entitiesTransfer of employees between group entitiesTransactions involving an entity’s own equity Transactions involving an entity’s own equity instrumentsinstruments

Applies to awards granted to employee and non-Applies to awards granted to employee and non-employeesemployeesConfirms that the accounting for the acquisition of Confirms that the accounting for the acquisition of shares is separate from the classification of the shares is separate from the classification of the SBPSBP

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IFRIC 8 – Scope of IFRSIFRIC 8 – Scope of IFRS

IFRIC 8 applies to transactions where the entity cannot IFRIC 8 applies to transactions where the entity cannot identify specifically the goods or services received in identify specifically the goods or services received in return for a share-based paymentreturn for a share-based payment

Unidentifiable goods or services received should be Unidentifiable goods or services received should be measured as difference between fair value of the measured as difference between fair value of the share-based payment and fair value of identifiable share-based payment and fair value of identifiable consideration receivedconsideration received

Potential application to schemes put in place by Potential application to schemes put in place by entities to comply with government policies e.g., Black entities to comply with government policies e.g., Black Economic Employment (BEE) schemes in South AfricaEconomic Employment (BEE) schemes in South Africa

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IFRS and U.S. GAAP Differences:Share-Based Payments: AttributionIFRS and U.S. GAAP Differences:Share-Based Payments: Attribution

IFRS 2Service inception prior to grant date (shareholder approval)

Recognize cost based on estimated FV Revise FV through grant date

Graded vestingEach tranche is considered separate awardResults in front-loading recognition (FIN 28)

FAS 123RService inception date can never occur before shareholder approval received (unless perfunctory). Service inception date can precede grant date

Graded vestingAccounting policy decision (if vests based on service) to use either (a) straight-line method or (b) FIN 28 approach

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Case Study 2: Income taxes and share-based payment transactionsCase Study 2: Income taxes and share-based payment transactions


IFRS and U.S. GAAP Differences:Share-Based Payments: Attribution (Cont’d)IFRS and U.S. GAAP Differences:Share-Based Payments: Attribution (Cont’d)

IFRS 2

Changes in requisite service period

Recognize with cumulative effect in current period

FAS 123R

Changes in requisite service period

If no change in total compensation cost, unrecognized compensation cost recognized prospectively from date of change based on revised estimate of requisite service period

If change in total compensation cost, recognize cumulative effect in current period

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IFRS and U.S. GAAP Differences:Share-Based Payments: ModificationsIFRS and U.S. GAAP Differences:Share-Based Payments: Modifications

IFRS 2Improbable Probable modifications

Modification of terms applied to original and incremental grant date FVFloor = FV at original grant date

No guidance provided when No guidance provided when modification changes modification changes classification from cash-classification from cash-settled to equitysettled to equity

FAS 123RImprobable Probable modifications (Type III)

Treat original award as though would not have vestedNo floor

For modifications from cash-settled to equity:

Compare the fair value of the instrument immediately before modification to the fair value of the modified award and recognize any incremental compensation cost

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IFRS and U.S. GAAP Differences:Share-Based Payments: Deferred TaxesIFRS and U.S. GAAP Differences:Share-Based Payments: Deferred Taxes

IFRS 2

Deferred tax assets measured based on amount for which deduction is expected (intrinsic value of awards in U.S.)

Remeasure deferred tax asset based on share price (intrinsic value) at each reporting date

If intrinsic value at settlement is less than grant-date fair value, cumulative tax benefit recognized is based on intrinsic value

FAS 123R

Deferred tax assets measured based on fair value of awards

Do not remeasure deferred tax asset. Assess for recoverability using more-likely-than not framework in FAS 109

If intrinsic value at settlement is less than grant-date fair value, deficiency can be offset against prior excess amounts within APIC

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