Summary of IFRS 2

In June 2007, the Deloitte IFRS Global Office published an updated version of our IAS Plus Guide to IFRS
2 Share-based Payment 2007 (PDF 748k, 128 pages). The guide not only explains the detailed provisions
of IFRS 2 but also deals with its application in many practical situations. Because of the complexity and
variety of share-based payment awards in practice, it is not always possible to be definitive as to what is
the 'right' answer. However, in this guide Deloitte shares with you our approach to finding solutions that
we believe are in accordance with the objective of the Standard.

Special edition of our IAS Plus newsletter

You will find a four-page summary of IFRS 2 in a special edition of our IAS Plus newsletter (PDF 49k).

Definition of share-based payment

A share-based payment is a transaction in which the entity receives goods or services either as
consideration for its equity instruments or by incurring liabilities for amounts based on the price of the
entity's shares or other equity instruments of the entity. The accounting requirements for the share-
based payment depend on how the transaction will be settled, that is, by the issuance of (a) equity, (b)
cash, or (c) equity or cash.

Scope

The concept of share-based payments is broader than employee share options. IFRS 2 encompasses the
issuance of shares, or rights to shares, in return for services and goods. Examples of items included in
the scope of IFRS 2 are share appreciation rights, employee share purchase plans, employee share
ownership plans, share option plans and plans where the issuance of shares (or rights to shares) may
depend on market or non-market related conditions.

IFRS 2 applies to all entities. There is no exemption for private or smaller entities. Furthermore,
subsidiaries using their parent's or fellow subsidiary's equity as consideration for goods or services are
within the scope of the Standard.

There are two exemptions to the general scope principle:

First, the issuance of shares in a business combination should be accounted for under IFRS 3 Business
Combinations. However, care should be taken to distinguish share-based payments related to the
acquisition from those related to continuing employee services
Second, IFRS 2 does not address share-based payments within the scope of paragraphs 8-10 of IAS 32
Financial Instruments: Presentation, or paragraphs 5-7 of IAS 39 Financial Instruments: Recognition and
Measurement. Therefore, IAS 32 and IAS 39 should be applied for commodity-based derivative contracts
that may be settled in shares or rights to shares.

IFRS 2 does not apply to share-based payment transactions other than for the acquisition of goods and
services. Share dividends, the purchase of treasury shares, and the issuance of additional shares are
therefore outside its scope.

Recognition and measurement

The issuance of shares or rights to shares requires an increase in a component of equity. IFRS 2 requires
the offsetting debit entry to be expensed when the payment for goods or services does not represent an
asset. The expense should be recognised as the goods or services are consumed. For example, the
issuance of shares or rights to shares to purchase inventory would be presented as an increase in
inventory and would be expensed only once the inventory is sold or impaired.

The issuance of fully vested shares, or rights to shares, is presumed to relate to past service, requiring
the full amount of the grant-date fair value to be expensed immediately. The issuance of shares to
employees with, say, a three-year vesting period is considered to relate to services over the vesting
period. Therefore, the fair value of the share-based payment, determined at the grant date, should be
expensed over the vesting period.

As a general principle, the total expense related to equity-settled share-based payments will equal the
multiple of the total instruments that vest and the grant-date fair value of those instruments. In short,
there is truing up to reflect what happens during the vesting period. However, if the equity-settled
share-based payment has a market related performance condition, the expense would still be
recognised if all other vesting conditions are met. The following example provides an illustration of a
typical equity-settled share-based payment.

Illustration – Recognition of employee share option grant

Company grants a total of 100 share options to 10 members of its executive management team (10
options each) on 1 January 20X5. These options vest at the end of a three-year period. The company has
determined that each option has a fair value at the date of grant equal to 15. The company expects that
all 100 options will vest and therefore records the following entry at 30 June 20X5 - the end of its first
six-month interim reporting period.

Dr. Share option expense 250

Cr. Equity 250

[(100 × 15) ÷ 6 periods] = 250 per period

If all 100 shares vest, the above entry would be made at the end of each 6-month reporting period.
However, if one member of the executive management team leaves during the second half of 20X6,
therefore forfeiting the entire amount of 10 options, the following entry at 31 December 20X6 would be
made:

Dr. Share option expense 150

Cr. Equity 150

[(90 × 15) ÷ 6 periods = 225 per period. [225 × 4] – [250+250+250] = 150

Measurement guidance

Depending on the type of share-based payment, fair value may be determined by the value of the
shares or rights to shares given up, or by the value of the goods or services received:

General fair value measurement principle. In principle, transactions in which goods or services are
received as consideration for equity instruments of the entity should be measured at the fair value of
the goods or services received. Only if the fair value of the goods or services cannot be measured
reliably would the fair value of the equity instruments granted be used.

Measuring employee share options. For transactions with employees and others providing similar
services, the entity is required to measure the fair value of the equity instruments granted, because it is
typically not possible to estimate reliably the fair value of employee services received.

When to measure fair value - options. For transactions measured at the fair value of the equity
instruments granted (such as transactions with employees), fair value should be estimated at grant date.

When to measure fair value - goods and services. For transactions measured at the fair value of the
goods or services received, fair value should be estimated at the date of receipt of those goods or
services.

Measurement guidance. For goods or services measured by reference to the fair value of the equity
instruments granted, IFRS 2 specifies that, in general, vesting conditions are not taken into account
when estimating the fair value of the shares or options at the relevant measurement date (as specified
above). Instead, vesting conditions are taken into account by adjusting the number of equity
instruments included in the measurement of the transaction amount so that, ultimately, the amount
recognised for goods or services received as consideration for the equity instruments granted is based
on the number of equity instruments that eventually vest.
More measurement guidance. IFRS 2 requires the fair value of equity instruments granted to be based
on market prices, if available, and to take into account the terms and conditions upon which those
equity instruments were granted. In the absence of market prices, fair value is estimated using a
valuation technique to estimate what the price of those equity instruments would have been on the
measurement date in an arm's length transaction between knowledgeable, willing parties. The standard
does not specify which particular model should be used.

If fair value cannot be reliably measured. IFRS 2 requires the share-based payment transaction to be
measured at fair value for both listed and unlisted entities. IFRS 2 permits the use of intrinsic value (that
is, fair value of the shares less exercise price) in those "rare cases" in which the fair value of the equity
instruments cannot be reliably measured. However this is not simply measured at the date of grant. An
entity would have to remeasure intrinsic value at each reporting date until final settlement.

Performance conditions. IFRS 2 makes a distinction between the handling of market based performance
conditions from non-market performance conditions. Market conditions are those related to the market
price of an entity's equity, such as achieving a specified share price or a specified target based on a
comparison of the entity's share price with an index of share prices of other entities. Market based
performance conditions are included in the grant-date fair value measurement (similarly, non-vesting
conditions are taken into account in the measurement). However, the fair value of the equity
instruments is not adjusted to take into consideration non-market based performance features - these
are instead taken into account by adjusting the number of equity instruments included in the
measurement of the share-based payment transaction, and are adjusted each period until such time as
the equity instruments vest.

Note: Annual Improvements to IFRSs 2010–2012 Cycle amends the definitions of 'vesting condition' and
'market condition' and adds definitions for 'performance condition' and 'service condition' (which were
previously part of the definition of 'vesting condition'). The amendments are effective for annual
periods beginning on or after 1 July 2014.

Modifications, cancellations, and settlements

The determination of whether a change in terms and conditions has an effect on the amount recognised
depends on whether the fair value of the new instruments is greater than the fair value of the original
instruments (both determined at the modification date).

Modification of the terms on which equity instruments were granted may have an effect on the expense
that will be recorded. IFRS 2 clarifies that the guidance on modifications also applies to instruments
modified after their vesting date. If the fair value of the new instruments is more than the fair value of
the old instruments (e.g. by reduction of the exercise price or issuance of additional instruments), the
incremental amount is recognised over the remaining vesting period in a manner similar to the original
amount. If the modification occurs after the vesting period, the incremental amount is recognised
immediately. If the fair value of the new instruments is less 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.

The cancellation or settlement of equity instruments is accounted for as an acceleration of the vesting
period and therefore any amount unrecognised that would otherwise have been charged should be
recognised immediately. Any payments made with the cancellation or settlement (up to the fair value of
the equity instruments) should be accounted for as the repurchase of an equity interest. Any payment in
excess of the fair value of the equity instruments granted is recognised as an expense

New equity instruments granted may be identified as a replacement of cancelled equity instruments. In
those cases, the replacement equity instruments are accounted for as a modification. The fair value of
the replacement equity instruments is determined at grant date, while the fair value of the cancelled
instruments is determined at the date of cancellation, less any cash payments on cancellation that is
accounted for as a deduction from equity.

Disclosure

Required disclosures include:

the nature and extent of share-based payment arrangements that existed during the period

how the fair value of the goods or services received, or the fair value of the equity instruments granted,
during the period was determined

the effect of share-based payment transactions on the entity's profit or loss for the period and on its
financial position.

Effective date

IFRS 2 is effective for annual periods beginning on or after 1 January 2005. Earlier application is
encouraged.

Transition

All equity-settled share-based payments granted after 7 November 2002, that are not yet vested at the
effective date of IFRS 2 shall be accounted for using the provisions of IFRS 2. Entities are allowed and
encouraged, but not required, to apply this IFRS to other grants of equity instruments if (and only if) the
entity has previously disclosed publicly the fair value of those equity instruments determined in
accordance with IFRS 2.
The comparative information presented in accordance with IAS 1 shall be restated for all grants of
equity instruments to which the requirements of IFRS 2 are applied. The adjustment to reflect this
change is presented in the opening balance of retained earnings for the earliest period presented.

IFRS 2 amends paragraph 13 of IFRS 1 First-time Adoption of International Financial Reporting Standards
to add an exemption for share-based payment transactions. Similar to entities already applying IFRS,
first-time adopters will have to apply IFRS 2 for share-based payment transactions on or after 7
November 2002. Additionally, a first-time adopter is not required to apply IFRS 2 to share-based
payments granted after 7 November 2002 that vested before the later of (a) the date of transition to
IFRS and (b) 1 January 2005. A first-time adopter may elect to apply IFRS 2 earlier only if it has publicly
disclosed the fair value of the share-based payments determined at the measurement date in
accordance with IFRS 2.

Differences with FASB Statement 123 Revised 2004

In December 2004, the US FASB published FASB Statement 123 (revised 2004) Share-Based Payment.
Statement 123(R) requires that the compensation cost relating to share-based payment transactions be
recognised in financial statements. Click for FASB Press Release (PDF 17k). Deloitte (USA) has published a
special issue of its Heads Up newsletter summarising the key concepts of FASB Statement No. 123(R).
Click to download the Heads Up Newsletter (PDF 292k). While Statement 123(R) is largely consistent
with IFRS 2, some differences remain, as described in a Q&A document FASB issued along with the new
Statement:

Q22. Is the Statement convergent with International Financial Reporting Standards?

The Statement is largely convergent with International Financial Reporting Standard (IFRS) 2, Share-
based Payment. The Statement and IFRS 2 have the potential to differ in only a few areas. The more
significant areas are briefly described below.

IFRS 2 requires the use of the modified grant-date method for share-based payment arrangements with
nonemployees. In contrast, Issue 96-18 requires that grants of share options and other equity
instruments to nonemployees be measured at the earlier of (1) the date at which a commitment for
performance by the counterparty to earn the equity instruments is reached or (2) the date at which the
counterparty's performance is complete.

IFRS 2 contains more stringent criteria for determining whether an employee share purchase plan is
compensatory or not. As a result, some employee share purchase plans for which IFRS 2 requires
recognition of compensation cost will not be considered to give rise to compensation cost under the
Statement.
IFRS 2 applies the same measurement requirements to employee share options regardless of whether
the issuer is a public or a nonpublic entity. The Statement requires that a nonpublic entity account for its
options and similar equity instruments based on their fair value unless it is not practicable to estimate
the expected volatility of the entity's share price. In that situation, the entity is required to measure its
equity share options and similar instruments at a value using the historical volatility of an appropriate
industry sector index.

In tax jurisdictions such as the United States, where the time value of share options generally is not
deductible for tax purposes, IFRS 2 requires that no deferred tax asset be recognized for the
compensation cost related to the time value component of the fair value of an award. A deferred tax
asset is recognized only if and when the share options have intrinsic value that could be deductible for
tax purposes. Therefore, an entity that grants an at-the-money share option to an employee in exchange
for services will not recognize tax effects until that award is in-the-money. In contrast, the Statement
requires recognition of a deferred tax asset based on the grant-date fair value of the award. The effects
of subsequent decreases in the share price (or lack of an increase) are not reflected in accounting for the
deferred tax asset until the related compensation cost is recognized for tax purposes. The effects of
subsequent increases that generate excess tax benefits are recognized when they affect taxes payable.

The Statement requires a portfolio approach in determining excess tax benefits of equity awards in paid-
in capital available to offset write-offs of deferred tax assets, whereas IFRS 2 requires an individual
instrument approach. Thus, some write-offs of deferred tax assets that will be recognized in paid-in
capital under the Statement will be recognized in determining net income under IFRS 2.

Differences between the Statement and IFRS 2 may be further reduced in the future when the IASB and
FASB consider whether to undertake additional work to further converge their respective accounting
standards on share-based payment.

March 2005: SEC Staff Accounting Bulletin 107

On 29 March 2005, the staff of the US Securities and Exchange Commission issued Staff Accounting
Bulletin 107 dealing with valuations and other accounting issues for share-based payment arrangements
by public companies under FASB Statement 123R Share-Based Payment. For public companies,
valuations under Statement 123R are similar to those under IFRS 2 Share-based Payment. SAB 107
provides guidance related to share-based payment transactions with nonemployees, the transition from
nonpublic to public entity status, valuation methods (including assumptions such as expected volatility
and expected term), the accounting for certain redeemable financial instruments issued under share-
based payment arrangements, the classification of compensation expense, non-GAAP financial
measures, first-time adoption of Statement 123R in an interim period, capitalisation of compensation
cost related to share-based payment arrangements, accounting for the income tax effects of share-
based payment arrangements on adoption of Statement 123R, the modification of employee share
options prior to adoption of Statement 123R, and disclosures in Management's Discussion and Analysis
(MD&A) subsequent to adoption of Statement 123R. One of the interpretations in SAB 107 is whether
there are differences between Statement 123R and IFRS 2 that would result in a reconciling item:
Question: Does the staff believe there are differences in the measurement provisions for share-based
payment arrangements with employees under International Accounting Standards Board International
Financial Reporting Standard 2, Share-based Payment ('IFRS 2') and Statement 123R that would result in
a reconciling item under Item 17 or 18 of Form 20-F?

Interpretive Response: The staff believes that application of the guidance provided by IFRS 2 regarding
the measurement of employee share options would generally result in a fair value measurement that is
consistent with the fair value objective stated in Statement 123R. Accordingly, the staff believes that
application of Statement 123R's measurement guidance would not generally result in a reconciling item
required to be reported under Item 17 or 18 of Form 20-F for a foreign private issuer that has complied
with the provisions of IFRS 2 for share-based payment transactions with employees. However, the staff
reminds foreign private issuers that there are certain differences between the guidance in IFRS 2 and
Statement 123R that may result in reconciling items. [Footnotes omitted]

Click to download:

SEC Press Release (PDF 30k)

Staff Accounting Bulletin 107 (PDF 362k)

March 2005: Bear, Stearns Study on Impact of Expensing Stock Options in the United States

If US public companies had been required to expense employee stock options in 2004, as will be
required under FASB Statement 123R Share-Based Payment starting in third-quarter 2005:

the reported 2004 post-tax net income from continuing operations of the S&P 500 companies would
have been reduced by 5%, and

2004 NASDAQ 100 post-tax net income from continuing operations would have been reduced by 22%.

Those are key findings of a study conducted by the Equity Research group at Bear, Stearns & Co. Inc. The
purpose of the study is to help investors gauge the impact that expensing employee stock options will
have on the 2005 earnings of US public companies. The Bear, Stearns analysis was based on the 2004
stock option disclosures in the most recently filed 10Ks of companies that were S&P 500 and NASDAQ
100 constituents as of 31 December 2004. Exhibits to the study present the results by company, by
sector, and by industry. Visitors to IAS Plus are likely to find the study of interest because the
requirements of FAS 123R for public companies are very similar to those of IFRS 2. We are grateful to
Bear, Stearns for giving us permission to post the study on IAS Plus. The report remains copyright Bear,
Stears & Co. Inc., all rights reserved. Click to download 2004 Earnings Impact of Stock Options on the
S&P 500 & NASDAQ 100 Earnings (PDF 486k).
November 2005: Standard & Poor's Study on Impact of Expensing Stock Options

In November 2005 Standard & Poor's published a report of the impact of expensing stock options on the
S&P 500 companies. FAS 123(R) requires expensing of stock options (mandatory for most SEC registrants
in 2006). IFRS 2 is nearly identical to FAS 123(R). S&P found:

Option expense will reduce S&P 500 earnings by 4.2%. Information Technology is affected the most,
reducing earnings by 18%.... P/E ratios for all sectors will be increased, but will remain below historical
averages.

The impact of option expensing on the Standard & Poor's 500 will be noticeable, but in an environment
of record earnings, high margins and historically low operating price-to-earnings ratios, the index is in its
best position in decades to absorb the additional expense.

S&P takes issue with those companies that try to emphasise earnings before deducting stock option
expense and with those analysts who ignore option expensing. The report emphasises that:

Standard & Poor's will include and report option expense in all of its earnings values, across all of its
business lines. This includes Operating, As Reported and Core, and applies to its analytical work in the
S&P Domestic Indices, Stock Reports, as well as its forward estimates. It includes all of its electronic
products.... The investment community benefits when it has clear and consistent information and
analyses. A consistent earnings methodology that builds on accepted accounting standards and
procedures is a vital component of investing. By supporting this definition, Standard & Poor's is
contributing to a more reliable investment environment.

The current debate as to the presentation by companies of earnings that exclude option expense,
generally being referred to as non-GAAP earnings, speaks to the heart of corporate governance.
Additionally, many equity analysts are being encouraged to base their estimates on non-GAAP earnings.
While we do not expect a repeat of the EBBS (Earnings Before Bad Stuff) pro-forma earnings of 2001,
the ability to compare issues and sectors depends on an accepted set of accounting rules observed by
all. In order to make informed investment decisions, the investing community requires data that
conform to accepted accounting procedures. Of even more concern is the impact that such alternative
presentation and calculations could have on the reduced level of faith and trust investors put into
company reporting. The corporate governance events of the last two-years have eroded the trust of
many investors, trust that will take years to earn back. In an era of instant access and carefully scripted
investor releases, trust is now a major issue.

January 2008: Amendment of IFRS 2 to clarify vesting conditions and cancellations

On 17 January 2008, the IASB published final amendments to IFRS 2 Share-based Payment to clarify the
terms 'vesting conditions' and 'cancellations' as follows:
Vesting conditions are service conditions and performance conditions only. Other features of a share-
based payment are not vesting conditions. Under IFRS 2, features of a share-based payment that are not
vesting conditions should be included in the grant date fair value of the share-based payment. The fair
value also includes market-related vesting conditions.

All cancellations, whether by the entity or by other parties, should receive the same accounting
treatment. Under IFRS 2, a cancellation of equity instruments is accounted for as an acceleration of the
vesting period. Therefore any amount unrecognised that would otherwise have been charged is
recognised immediately. Any payments made with the cancellation (up to the fair value of the equity
instruments) is accounted for as the repurchase of an equity interest. Any payment in excess of the fair
value of the equity instruments granted is recognised as an expense.

The Board had proposed the amendment in an exposure draft on 2 February 2006. The amendment is
effective for annual periods beginning on or after 1 January 2009, with earlier application permitted.

Click for Press Release (PDF 47k).

Deloitte has published a Special Edition of our IAS Plus Newsletter explaining the amendments to IFRS 2
for vesting conditions and cancellations (PDF 126k).

June 2009: IASB amends IFRS 2 for group cash-settled share-based payment transactions, withdraws
IFRICs 8 and 11

On 18 June 2009, the IASB issued amendments to IFRS 2 Share-based Payment that clarify the
accounting for group cash-settled share-based payment transactions. The amendments clarify how an
individual subsidiary in a group should account for some share-based payment arrangements in its own
financial statements. In these arrangements, the subsidiary receives goods or services from employees
or suppliers but its parent or another entity in the group must pay those suppliers. The amendments
make clear that:

An entity that receives goods or services in a share-based payment arrangement must account for those
goods or services no matter which entity in the group settles the transaction, and no matter whether
the transaction is settled in shares or cash.

In IFRS 2 a 'group' has the same meaning as in IAS 27 Consolidated and Separate Financial Statements,
that is, it includes only a parent and its subsidiaries.

The amendments to IFRS 2 also incorporate guidance previously included in IFRIC 8 Scope of IFRS 2 and
IFRIC 11 IFRS 2–Group and Treasury Share Transactions. As a result, the IASB has withdrawn IFRIC 8 and
IFRIC 11. The amendments are effective for annual periods beginning on or after 1 January 2010 and
must be applied retrospectively. Earlier application is permitted. Click for IASB press release (PDF 103k).

June 2016: IASB clarifies the classification and measurement of share-based payment transactions

On 20 June 2016, the International Accounting Standards Board (IASB) published final amendments to
IFRS 2 that clarify the classification and measurement of share-based payment transactions:

Accounting for cash-settled share-based payment transactions that include a performance condition

Until now, IFRS 2 contained no guidance on how vesting conditions affect the fair value of liabilities for
cash-settled share-based payments. IASB has now added guidance that introduces accounting
requirements for cash-settled share-based payments that follows the same approach as used for equity-
settled share-based payments.

Classification of share-based payment transactions with net settlement features

IASB has introduced an exception into IFRS 2 so that a share-based payment where the entity settles the
share-based payment arrangement net is classified as equity-settled in its entirety provided the share-
based payment would have been classified as equity-settled had it not included the net settlement
feature.

Accounting for modifications of share-based payment transactions from cash-settled to equity-settled

Until now, IFRS 2 did not specifically address situations where a cash-settled share-based payment
changes to an equity-settled share-based payment because of modifications of the terms and
conditions. The IASB has intoduced the following clarifications:

On such modifications, the original liability recognised in respect of the cash-settled share-based
payment is derecognised and the equity-settled share-based payment is recognised at the modification
date fair value to the extent services have been rendered up to the modification date.

Any difference between the carrying amount of the liability as at the modification date and the amount
recognised in equity at the same date would be recognised in profit and loss immediately.