IFRS 2 Share-Based Payment
Does your company remunerate its top management by granting them own shares? Or, do employees receive bonuses based on the increase of the company’s share price?
Transactions whereby companies pay for the goods or services received by issuing shares or similar instruments are very common in these days.
In fact, their volume is rapidly increasing, because many people (including top management members) regard having shares of the company as very exclusive and rewarding.
To address the issue of share-based payment reporting, the standard IFRS 2 Share-based Payment was issued. Every other benefit paid to employees is reported in line with the standard IAS 19 Employee Benefits.
Why IFRS 2?
In the past, companies often did not reflect granting share options in their financial statements. Why?
For very simple reason: the options had no intrinsic value, so there was nothing to record in the financial statements.
And what happens in such a case?
If company paid its management by cash, the transaction was recorded as an expense. But if company paid its management by share options, nothing was recorded.
Therefore, standard IFRS 2 Share-based Payment is here to remove this inconsistency.
What is the objective of IFRS 2?
The objective of IFRS 2 Share-based payment is to specify the financial reporting by an entity when it undertakes a share-based payment transaction.
IFRS 2 requires an entity to reflect the effect of share-based payment transactions (including share options to employees) in its profit or loss and statement of financial position.
What is a share-based payment transaction?
Share-based payment transaction is a transaction in which the entity:
- receives goods or services from the supplier (including employee) in a share-based payment arrangement; or
- 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.
Share-based payment arrangement is an agreement between the entity and another party (including an employee) whereby the other party receives:
- 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.
This type of arrangement is cash-settled share-based payment transaction.
Alternatively, the other party can receive - equity instruments (including shares or share options) of the entity or another group entity.
This type is called equity-settled share-based payment.
If there are some specified vesting conditions, these must be met before receiving any share-based payment.
There’s also the third type of share-based payment arrangements: transactions in which either the entity or the supplier has a choice of settlement (to receive equity instruments or cash / other assets).
Vesting condition
Some share-based payment transactions include vesting conditions that must be met before any payment is made.
IFRS 2 recognizes 2 types of vesting conditions:
- Service conditions:they require the counterparty to complete a specified period or service;
- Performance conditions: they require the counterparty to complete a specified period of services AND specified performance targets to be met.
A performance condition might include a market condition that is linked to the market price of shares in some way, for example, vesting might depend on achieving a minimum increase in the share price of the entity.
How to recognize share-based payments
The basic recognition principle is to recognize goods or services received in a share-based payment transaction when the goods are obtained or as the services are received.
Goods or services acquired should be recognized as expenses in profit or loss unless they qualify for recognition as assets. That’s the debit side of an accounting entry.
The credit side depends on the type of share-based payment arrangement:
- If the goods or services were acquired in an equity-settled share-based payment transaction, then the corresponding increase is recognized in equity.
- If the goods or services were acquired in a cash-settled share-based payment transaction, then the corresponding increase is recognized as a liability.
Recognition of equity-settled share-based payment transactions
How to measure equity-settled share-based payment?
The key principle in IFRS 2 is to measure the amount of transaction at fair value of the goods or services received. This is relatively easy when the transaction is with parties other than employees.
However, sometimes (for example, when transaction is with employees), the fair value of goods or services received cannot be measured reliably. In such a case, the entity should measure their value by reference to fair value of the equity instruments granted.
And specifically for employees, the entity should measure the services received from employees at the grant date (not at the date of their receipt).
How to determine the fair value of equity instruments granted?
There’s a whole guidance on how to determine the fair value of equity instruments granted in IFRS 2 and IFRS 13 Fair Value Measurement, too.
Basically, when possible, the fair value should be based on the market prices if available. If not, then it is acceptable to use some valuation technique (for example, share option pricing model).
How to deal with vesting conditions?
Here, the principal question is whether vesting condition exists or not.
- NO: If the share-based payment IS vested immediately, or there are no vesting conditions, then IFRS 2 regards this transaction as granted in return for the supplier’s (employee’s) service in the past.
Therefore, an entity needs to recognize the services received immediately in full at the grant date, with the corresponding increase in equity. - YES: If the share-based payment DOES NOT vest until the counterparty meets some vesting conditions, then IFRS 2 regards this transaction as granted in return for the supplier’s (employee’s) service rendered during the vesting period.
In this case, an entity should recognize 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.
How to deal with changes?
Sometimes, an entity might change the terms of the share-based payment transaction.
Modification of the terms on which equity instruments were granted depends on the fair value of the new equity instruments:
- If the fair value of the new instruments is greater than the fair value of the old instruments, then the incremental amount is recognized over the remaining vesting period (or immediately if modification happens after the vesting period).
- If the fair value of the new instruments is lower than the fair value of the old instruments, the original fair value of the equity instruments granted should be expensed as if the modification never occurred.
If an entity cancels or settles the equity instruments, then it is recognized as an acceleration of the vesting period and any remaining unrecognized amount is recognized immediately.
Recognition of cash-settled share-based payment transactions
Typical examples of cash-settled share-based payment transactions are:
- Share appreciation rights: employee is entitled to the cash payment in the future based on the increase of entity’s share price over specified period of time from a specified level;
- Rights to redeemable shares: employee will receive the shares in the future that are redeemable in cash.
Similarly as in the equity-settled share-based payment transaction, the goods or services received are measured at the fair value of the liability.
The fair value of the liability has to be remeasured at each reporting date until this liability is settled and any changes of fair value are recognized in profit or loss.
Vesting conditions are treated in the similar manner as in the equity-settled share-based payment transactions.
Please watch the following video with the summary of IFRS 2 here:
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83 Comments
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We grants shares to the staff with vesting period accordingly.
In between the grant date and vesting date, we account for the accelerated amortization under FRS 102. When the staff resigned before the vesting date, it means the shares get forfeited.
Does that mean we have to reverse the amount accounted for under the accelerated amortization previously booked for this shares, right?
Hi Silvia,
Thanks for this useful articles, it is always helpful
I have a question on the modification clause: “If an entity cancels or settles the equity instruments, then it is recognized as an acceleration of the vesting period and any remaining unrecognized amount is recognized immediately.”
Is this applicable if a service condition is broken (for example if an employee had to be in service for 3 years before the shares vests and they leave within 1) will the acceleration also apply and all unrecognized shares recognized immediately or how would that work?
Hello Silvia, thank you so much for this useful article well done as usual.
But please i need to clarify something here when the equity settlement module used we calculate the fair value of the equity in the grant date and multiplied by the best estimate for the option will be vested.
but if the vesting condition is market condition i didn’t get it what will be the difference in the calculation and please if you can give us a numeric example.
Hi Silvia, If an entity have a share in another entity how can we classify it?
In most cases that’s a financial asset, but based on control or significant influence, it could be the investment in a subsidiary, associate, joint arrangement, too.
IFRS2 -Share option are granted to employees with vesting period of 5 years and fair value is Cu 100. Do we expense immediately in the year of the grant, or do we amortise the Cu 100 over 5 years?
Hy silvia
Suppose fair value on grant date of share options was 8 CU. Entity granted 100 options to each of its 3 directors. Vesting period was of 2 years. In middle of next year, entity decides to cancel this scheme. But at the cancellation date the FV of original instruments was 9 CU and the entity settles the scheme by paying employees 10 CU for each option.
Now the first entry on cancellation would be to recognise the expense of original FV. i.e 8 CU in SOPL. Now the balance in equity reserves is 100*8*3 = 2400
But when the final settlement entry is made we do
DR. Equity 2700 (100*9*3)
DR. SOPL 300 (100*1*3)
CR. CASH 3000 (10*100*3)
My ques is .. How can we debit equity reserves by 2700 when the existing balance we have is only of 2400 (3*100*8) expensed in the vesting period ?
Where do we get the excess 300 (2700-2400) to debit from equity ?
What if my vesting date is conditioned upon time (ie director in employent with the company or group company at vesting date which is a year later. So, at grant date, the director is granted 2100 shares to be vested over next 3 years. In the accounts, do i recognise the full amount for the 3 years at grant date or apportioned over 3 years and recognised at vesting date?
These shares are forfeited if the director resigns or terminated.
Hi dear,
Your efforts are highly appreciated!
I just cant understand this point. Could you please clarify it with numbers?
Modification
If the fair value of the new instruments is lower than the fair value of the old instruments, the original fair value of the equity instruments granted should be expensed as if the modification never occurred.
Hi silvia,
First of all i would like to thank you for all your efforts that you have put in these standards preparation for the public.
Moving forward i have some questions regarding share based payment transaction where the setllement is in cash:
As in above it is stated that the liability is remeasured till the date of maturity than at what value we will remeasure the liability? Either it is of difference of fair value of 2 share prices or updated on new shre price?
Hi Silvia – Is the term “AWARDED” same as “GRANTED”
Hi Silvia,
My Holding company has granted shares (as dividend) for unvested RSU and Options granted to the Employees. Could you please discuss what would be the accounting treatment in the books of subsidiary, Considering the original shares are issued with dividend rights. Also help us to know if the treatment would be different if the shares do not carry dividend rights?
Hi Silvia,
A bit of a complex scenario. If a company has an employee share purchase plan where the company matches the percentage the employee is putting in by providing cash into the employee’s account with a third party, and that third party buys the company’s shares on the market. There are no other options, the money is used to only purchase the company’s shares. There are no new shares issued. There is no vesting period. If the employee quits they get to keep it all.
Would this be considered a short term employee benefit or a cash-settled share based payment. The reason why I would think it is a short term employee benefit is because this is similar to an RRSP contribution that an employer would make to their employee’s account.
Can you provide more cash-settled share based payment examples, the typical ones that I have come across are the SARs and where an employer would buy back the shares. This scenario doesn’t fall under either category. However, the employee is providing a service to the company and the company is in turn rewarding them by giving them this matched contribution. But the money goes to purchase the company shares from the market.
Dear Monica,
thank you for your question – however, I would kindly recommend you “my Helpline” service – our dedicated consultant would carefully revise your question and give his opinion within 2 working days. Thank you for your understanding. S.
Could you please tell me what account will be debited when shares are issued to promoters for their services to company
If options are exercised, do we need to Debit Share based reserve and credit shares capital relating to those options exercised.
You don’t have to but you can – look at paragraph 23 in IFRS2
If an employee receives an award that vests in 3 years which contains both a market and nonmarket condition, will you have to calculate 2 fair values and effectively treat it as two separate awards?
Hi Silvia,
I like your web page. I had not seen it before but seems to be very educative.
I have a question for you. Thanks so much in advance for helping!
Under IFRS, it is my understanding that employees and non employees doing employee type work are valued the same. However, it seems that for non-employees vendors (a company rather than an individual consultant), the valuation is different from the non-employee (individual consultant). Would you mind clarifying what’s different on the valuation for non-employees (company)
Hi Silivia,
How to decide the nos. of employees for share based payment under IFRS 2 under different plan like equity based or Cash Settled/ Stock appreciation rights
Hi Silivia
Your articles has eased in the learning IFRS.
While going through this article and other reference material regarding IFRS 2, I have a few questions in my mind. First is how fair value in case of market condition considers the changes in market price and if the entity knows that target market price will not be achieved then why it continues to record the expense and then eventually transfers it to other equity. Why the entity records the expense at the first place itself.?
Looking forward to hear from you.
Hi Silivia,
After a vasting period how the cash and share based payment should be settled in Accounts what entries should we make.please explain it
thanks
Thanks for your effort and making IFRS simple and easy to learn 🙂
Infect i missed a very important lecture related to IFRS 2.After watching this video and reading this article things are much better now. Thank you 🙂
If the share scheme is classified as equity settled on a group level, but cash settled on a subsidiary level, what will the journals between the group and subsidiary be?
Depending on the specific scheme, you would have to eliminate all subsidiary’s entries and recognize entries as per group classification. S.
Your articles are very informative and easy to understand keep it up your good work
Sylvia in recognition criteria you mentioned that when goods or services received shall be recognised as expense unless they qualify to be recognised as assets what does that mean
Thanks for sharing us z summary of IFRS 2. Share based mode of payment is a common practice in vountry
i need practical question on share based settlement. Thank you
Dear Silva,
If a company acquires 100% of share capital of another company for CU10m cash and CU5m CU1 Ordinary Shares at a price of CU1.60 per share.
1) Is the settlement of consideration by equity allowable on the acquisition under IFRS?
2) As there is no vesting period the entry in parent company would be:
DR Investments 18m
CR Cash 10M
CR Equity 5m
CR Share Premium 3m
Thanks Daympn
Hi Silvia,
Above article is fabulous and well explained.
Could you please help me to understand why we will recognize option expenses and simultaneously increase Equity when company already cancelled it.
“If an entity cancels or settles the equity instruments, then it is recognized as an acceleration of the vesting period and any remaining unrecognized amount is recognized immediately.”
Hi Silvia,
I Need help on this question. What should be the accounting entries as on 31/3/14 and 31/3/15 along with amounts.
On 1 April 2013, Kappa granted options to 500 employees to subscribe for 400 shares each in Kappa on
31 March 2017, providing the employees still worked for Kappa at that time. On 1 April 2013, the fair value
of each option was $1·50.
In the year ended 31 March 2014, ten of these employees left Kappa and at 31 March 2014, Kappa
expected that 20 more would leave in the three-year period from 1 April 2014 to 31 March 2017. Kappa’s
results for the year ended 31 March 2014 were below expectations and at 31 March 2014 the fair value
of each option had fallen to 25 cents. Therefore, on 1 April 2014 Kappa amended the exercise price of the
original options. This amendment caused the fair value of these options to rise from 25 cents to $1·45.
Thank you, Sylvia for the explicit article.
🙂
Thank a mil for making IFRS 2 so simple to understand!
Please assist:
If a company issues say 200 employees on 1 Dec 2016 shares as a bonus for past services with no further vesting conditions.
My understanding is “full recognition” but what will the fair value be?
Dear Sharon,
in the case of employees, the fair value of services received is not readily determinable in most cases. Therefore, you should use the fair value of shares granted at the grant date. And, to set the fair value of shares granted, there are various pricing models, market value (if available), and other methods depending on your own circumstances. S.
Silvia
Could you give an outline on how to account for SBP in group consolidation
E.G. Outline how to account for SBP in parent’s books, sub’s books and individual books with DR and CR
Thanks
Hi Shoj,
well, this is quite a difficult topic and I can’t explain it well in one comment – I’ll try to do so in one of my future articles. Maybe if you ask more specifically, I would be able to give a quick reply. S.
Do we take impact of favorable modifications in the option scheme if a performance market condition is attached or is it only for non market performance and service condition
Hi Asad, you did not give me enough information on this one. Can you be more precise?
Suppose a plant is acquired with fair value of cu 50 million, value of liability at acquisition date calculated based on share based is:
1. Cu 52 milliont
2. Cu 48 million
What would be treatment of differencs in above cases at the trane date. Please be informed the vendor has both the options i.e to receive shares (equity settled) or to receive cash based on shares price (cash settled) after four months.
Hi,
Thanks for sharing useful information. I have a question regarding IFRS 2 , please share your views.
An entity enters into a transaction with another party for purchase of asset involving a share based payment in which counterparty has a choice of settlement either in cash or shares. In such a case there are two issues as follows for your guidance.
1. If the value of the liability based on share price at the time of transaction is less than the fair value of asset, what would be treatment of difference?
2. If the value of liability based on share price at the time of transaction is more than fair value of asset then what would be treatment of difference??
Please clarify.
Ziafat Satti
Auditor PwC
Dear Ziafat,
are you sure that this transaction is a share-based payment? And also, whose perspective are we solving here – buyer’s or seller’s one? Because if you’re asking for the buyer of that asset, then well, IFRS 2 does not apply. IFRS 2 applies only for “debtors” who pay for the services or goods with some equity-linked rights or so. S.
Yes it is a share based payment. Definitely buyer will be paying how IFRS does not apply?
Oh, I see now. I did not get your question for the first time – it seemed for me that a buyer is buying an asset involving some “share-based payment”.
But now I understand that the buyer is buying an asset and pays with share-based payment, is that right?
If this is the case, let me tell you that subsequently, it does not matter whether the FV of a liability is greater or lower than an asset purchased with share-based payment. You treat an asset under IFRS 9 and the liability/share-based payment under IFRS 2. Maybe there are some other conditions in the contract that link these 2 things together – it would be different then.
Maybe you should clarify your question further. S.
HI Silvia,
IFRS BOX is a blessing to us! Could you provide with some practical questions related to all the standards. It will be very useful to us.
Hi Chhaya, thank you!
Actually, I’m working on in. I plan to issue “Questions and Answers” or so. Just stay tuned! S.
Hi Silvia, I have seen it for the first time its a good website.
.can i get the questions with answers or examples on any topic say IFRS 2? Kindly respond and once again I really appreciate your efforts, thanks
Regards,
Faisal
BDO Auditor
Faisal,
I try to respond, but it’s really not in my capacity to respond to everything. But I try. S.
Hello,
I have a question. When a parent grants an option to its equity instruments to the employees of its subsidiary the subsidiary will treat it as an equity settled share based payment transaction (as the liability of the award rests with the parent) and will record the following entry:
Dr Expense
Cr Equity
(with fair value of the options vested or estimated to vest)
the parent will also treat the transaction as equity settled share based payment transaction and will recognise the fair value of options vested in its equity. The question is that what will be the corresponding debit entry in the books of the parent?
Hello Raja Wahab, the Debit entry in the books of the parent will be recorded as “Investment in Subsidiary” – an asset.
Hi Silvia,
Thank you very much for your articles, always presented in the most simplistic way. I have a question I was hopping to get your views on. If a company grants shares to senior management that are at a very deep discount, i.e. issues and allots shares (to management) at a very very low price, do these fall under IFRS2?
Also I must add that the company has a call option to buy these share back say in the next 5 to 6 year.
May thanks
Kirsty
This is very helpful! I am on my way to the office to have my presentation and your illustrations and summary must be shared to the team. It simplifies everything. Perfect! Very good job!
Dear Sylvia
Can rights issue to the employees is a share based payment? if all the employees are share holders
If not why?
Hiras,
IFRS 2 does not apply to transactions with employees purely in their capacity as shareholders. So if the company raises funds through rights issue whereby all shareholders (including employees) can acquire additional shares for less than the current fair value of the shares – this is not a share-based payment transaction.
But if the company grants rights to all the employees regardless whether they are shareholders or not, then this is a share-based payment because the rights were granted in return for the employee’s service. You need to assess carefully. S.
thanks sylvia
Hi Silvia, thank you for this information.
I would like to ask why you mention that its hard to measure the value of services of the employees since they have their salary rates?
🙂 Nice question 🙂 But let me tell you that the salaries often do not reflect the fair value of the service by an employee, but other things – e.g. salary levels in that country, etc.
Salvia but FV of anything is the amount paid or received.
I simply disagree with it. E.g. let’s take cleaning service. It can be done by external company for 1000 CU per month, or by your internal employee for 800 CU per month. It’s the same service, right? What’s the fair value?
Also, the transaction between companies in the group often do not happen at fair value. S.
Hi Silvia,
Thanks for such a simple explanation. Can you please also share some insight on equity settled SBP with cash alternative. How to report them in financial statement and how to measure them.
Hi Saurav,
yes, I will, in some future article, as it’s very broad to cover in the comments. S.
This is such a great website. Does anyone know if there is a site like this but for ASPE in Canada?
*if they cancel it after 2 years
Hi Silvia,
Thank you very much for this. One quick question.
“If an entity cancels or settles the equity instruments, then it is recognized as an acceleration of the vesting period and any remaining unrecognized amount is recognized immediately”
For example if the company has a 3-year equity settled share base payment plan that vests at end of yr-3 and decides to cancel it after 3 years, do you still record the total expense? any idea what the logic behind this is?
hi silvia,
i really appreciate your efforts.all articles are very useful to me.can u plz elaborate ‘GRANT DATE MODEL’ and ‘OPTION PRICING MODEL’ terminologies.i am having problem in these 2 terminologies.
Hello, Singh,
well, sorry for the confusion, I try to clarify:
Grant date model is not a model (I mentioned only “grant date”). Grant date is simply a date when the entity granted future payments to employees, suppliers (whomever). When I write about grant date, I am referring to WHEN an entity should recognize share based payment or whatever is necessary.
Option pricing model is a method of measuring the option’s fair value and it’s not that simple to explain here. Option pricing model uses many variables such as current share price, days to maturity etc. and they try to estimate the current value of the option. If you’re a student or an accountant, you should not worry about details of option pricing models and I would leave that to experts. You should not be examined to apply option pricing model.
Dear Silvia,
These two points are confusing me. 🙁
please help me out.
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.
This type of arrangement is cash-settled share-based payment transaction
The key principle in IFRS 2 is to measure the amount of transaction at fair value of the goods or services received. This is relatively easy when the transaction is with parties other than employees.
these both talk about the values I didnot understood at which to record in accounts , a cash settled transaction.
Hi Snowia, please could you rearrange your question? I did not understand the last sentence. Are you asking me how to record cash-settled SBP with employees? Or how to measure that?
Because in measurement you’re right – you measure these transactions at FV of the goods or services received and when this is not possible (like “employees”), then you look at the FV of the share options / appreciation rights granted. IFRS 13 sets how to measure fair value, but in this case, some option pricing models will be OK. S.
Nice one, very easy to understand
All articles of IFRSbox is very useful , easy to understand and presnted in a very constuctive way
Thank you! I really appreciate your feedback! S.