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Title
IFRS 2 Share Based Payments
Coverage
This session will cover IFRS 2 Share Based Payments,
considering both equity settled share based payments
and cash settled share based payments.

Exam context
This is a challenging accounting standard that is
introduced at SBR. When playing with the numbers
always remember that exam questions will ask for
explanations as well.

Tom Clendon
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Issue of shares for cash

When equity shares are issued for cash they are

recognised at the fair value less issue costs (the net
proceeds of issue) with the excess consideration
received over and above any nominal value to other
components of equity.

Q Morning Company

How would the Morning Company record the issue of

1,000 $1 equity shares for $3 cash each when it also
incurs issue costs of $20.

A Morning Company

Tom Clendon
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IFRS 2 Share based payments

A share-based payment is a transaction in which the

entity receives goods or services as consideration for
issuing its equity instruments.

The accounting for the share-based payment will

depend on how the transaction will be settled, that is, by
the issuance of equity, cash, or equity or cash.

1. Equity Settled 2. Cash settled

share based share based
payments payments

Options granted Share

to staff as a Appreciation
bonus Rights (SARs)

Equity Liabilities
Instrument

Measurement = Measurement =
Grant date Reporting date

Tom Clendon
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1. Equity settled share based payments

These are normally issued to staff; in which case these

are options to subscribe for the company’s own shares,
at a fixed price (the exercise price) in the future (say two
or three years), that are granted (given) to employees,
as part of their wages.

Why?

• Motivation
• Goal congruence
• Staff retention
• Cash flow

Tom Clendon
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But existing shareholders object if too many options are

issued.

Prior to the standard there was no accounting for such

equity settled share based payments; after all it was
argued that there was no cash out flow.

BUT……

• The options are issued as part of remuneration and

so represent an expense
• An equity instrument has been issued
• It is a transaction of value
• Faithful representation, completeness, relevant,
understandability.

Tom Clendon
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How options work

Vesting / Say 2
Qualifying or 3
period years

Grant Vesting
date date
Issue
date

Tom Clendon
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Accounting
1. Equity settled share based payments – options

When options are granted to staff as part of their

remuneration the expense charged to profit or loss is
based on

• the fair value of the options at the grant date

• the current estimate of the numbers of options
expected to vest (subject to qualifying conditions)
• spread over the qualifying period.

The increase in the equity required in the period will be

the expense of the period.

Dr Expense
Cr Equity (other components of equity)

Tom Clendon
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Q Mohammed

Mohammed has set up an employee option scheme to

motivate ten key sales people. Each sales person was
granted 1 million options exercisable at 10c, conditional
upon the employee remaining with the company during
the vesting period of 5 years.

At the end of year one, two sales people suggested that

they would be leaving the company during the second
year. However, although one did leave in year two, the
other recommitted to the company and the scheme. The
other employees have always been committed to the
scheme and stated their intention to stay with the
company during the 5 years. No staff left during year
three nor indicated their intention to.

Market values are as follows:

Share Market price of an equivalent

price marketable option
Grant date 10c 20c
End of Yr1 12c 24c
End of Yr2 14c 30c
End of Yr3 16c 35c

The share options will only vest once the share price
has reached 15c

Required
Show the accounting in the financial statements of
Mohammed in the second and third year.

Tom Clendon
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A Mohammed, 2nd year

Tom Clendon
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A Mohammed 3rd year

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Some further issues

• Valuation of the options at the grant date

• Performance conditions (market and non-market)
• Modifications
• Accounting after vesting date
• Paying for assets

Tom Clendon
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Valuation of the options at the grant date.

The fair value of the options at the grant date will be

given in the question.

The fair value of the option is not regulated by IFRS 13

Fair Value Measurement.

It is a complex valuation that will have been estimated

by actuary, perhaps by using the Black Scholes option
pricing model.

Tom Clendon
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Performance conditions

In addition to a requirement for continued employment

service, some schemes can have additional service
conditions that have to be satisfied before they vest.

Such conditions are either market conditions or non-

market conditions.

• Market conditions

A market condition is one that is related to the market

price of the entity’s equity instruments.

An example of a market condition is that the entity must

attain a minimum share price by the vesting date for
scheme members to be eligible to participate in the
share based payment scheme.

Market conditions are taken into account when the fair

value of the option is established at the grant date.

It does not affect the annual accounting for the share

based payment scheme during the vesting period.

• Non-market conditions

Examples include achieving sales targets or profit

targets.

Non-market conditions are taken into account.

Tom Clendon
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Modifications

An entity may alter the terms and conditions of share

option schemes during the vesting period.

For example, if the share price falls well below the

exercise price the options cease to work as an incentive.

In these circumstances the company can reduce the

exercise price of the options, which makes the scheme
more favourable to employees. This will in effect be
granting another benefit to the staff.

Accordingly the difference between the fair value of the

new arrangement and the fair value of the original
arrangement (the incremental fair value) must be
recognised as a charge to profit.

The extra cost is spread over the period from the date of
the change to the vesting date.

If the change reduces the amount that the employee will

receive, there is no reduction in the expense recognised
in profit or loss.

Tom Clendon
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Q White

On 1st January 20X4 White granted 200 share options

exercisable at $10 to each of its 20 employees, subject
to the qualifying condition that they remain in service
over the next three years. The fair value of each option
at the grant date is $12. It was not expected that any
employees would leave during the qualifying period.
However in fact one employee did leave the
employment of the company in March 20X5.

Subsequent to the issue of the share options the share

price of the company fell resulting in the options having
no value to the employees. As a result on 1st July 20X5
White repriced the existing options which gave the
employees a further benefit value of $6 per option.

Required
Explain and illustrate the accounting treatment of
the equity settled share based payments in the
financial statements year end 31 December 20X5.

Tom Clendon
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A White

Tom Clendon
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A White

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Accounting after vesting date

The standard states that no further adjustments to total

equity should be made after vesting date.

If the options are exercised then there is a receipt of

cash and a normal issue of shares. The balance in other
components of equity no longer relates to the option but
to the premium on the shares issued.

If the options lapse unexercised then balance in other

components of equity no longer relates to the option and
can be transferred to retained earnings.

Tom Clendon
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Payment for assets

Where the equity instruments granted vest immediately

meaning that the holder is unconditionally entitled to the
instruments (e.g. when they are used to buy assets),
then the transaction should be accounted for in full on
the grant date.

The transaction should be measured at the fair value of

the asset, rather than the equity instrument.

Q The Afternoon Company

How would The Afternoon Company record the

purchase of an asset with a normal retail price of
$20,000 if it pays for it with the issue of 10,000 options
which it values at $2.5 each.

A The Afternoon Company

Tom Clendon
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Q Ant

Ant has just acquired 100% of the share capital of Dec

in a business combination. As part of the business
combination Ant issues two lots of instruments to the
employees of Dec to subscribe to Ant shares.

Dec had previously granted an equity settled share-

based payment to its employees. The employees have
rendered the required service for the award at the
acquisition date but have not yet exercised their options.
Ant replaces the share-based payment awards of Dec
with equity instruments in Ant. This replacement award
does not require any further post-combination services
and has a fair value at the acquisition date of $22
million.

In addition Ant makes a further award of equity settled

share-based payments to the employees of Dec with a
fair value at the acquisition date of $30 million. These
are options will only vest three years after the business
combination subject to the continuation of employment.

Required
Advice Ant how to account for both equity settled
share-based payments.

Tom Clendon
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A Ant

Tom Clendon
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2. Cash settled share based payment transactions –

share appreciation rights (SARs).

This is where the company incurs liabilities for cash

payments based on its share price.

No equity instruments are issued, instead the employer

grants staff a bonus in the future linked to the share
price.

This creates the need to account for a liability and an

expense.

The expense charged to profit or loss is based on

• the liability based on the fair value of the share

appreciation right at the reporting date
• the current estimate of the numbers of share
appreciation rights expected to vest (subject to
qualifying conditions)
• spread over the qualifying period

The expense recognised in each accounting period is

the increase in the liability in the period.

When SARs are exercised they are accounted for at

their intrinsic value.

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Q Widberg - share appreciation rights / cash settled

At the start of year one Widberg granted 200 share

appreciation rights to each of its 100 employees. All of
the rights vest after two years’ service and the staff will
be paid one month after the vesting date. It was not
anticipated that any staff would leave during the vesting
period. In fact during the second year ten staff did leave.
The fair value of each share appreciation right was as
follows:

Fair value at year-end

Year one $10
Year two $15

Required
Compute the liability and expense in the financial
statements for the two years of the scheme.

Tom Clendon
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A Widberg

Tom Clendon
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Q Parrott – share appreciation rights / cash settled

On 1 June 20X1 Parrott granted 500 share appreciation

rights to each of its 20 managers. All of the rights vest
after two years’ service and they can be exercised
during the following two years up to 31 May 20X5. The
fair value of the right at the grant date was $22. It was
thought that four managers would leave over the initial
two-year period and they did so. The fair value of each
right was as follows:

Year Fair value at year-end

31 May 20X2 $23
31 May 20X3 $15
31 May 20X4 $25

During the current year five managers exercised their

rights when the intrinsic value of the share appreciation
right was $20.

Required
Compute the liability and expense in the financial
statements for the year ended 31 May 20X4.

Tom Clendon
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A Parrott

Tom Clendon
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3. Equity or cash settled payments

If the choice of settlement of settling in cash or by
issuing equity instruments is with the issuer (the
reporting company's choice) there is no simple answer
as to how the company should account for the issue.

The standard requires that it is up to the entity to

determine whether it has a present obligation to settle in
cash and account for the transaction as cash-settled or if
no such obligation exists, account for the transaction as
equity-settled.

Presumably it would look at any patterns of past

practice.

If the option is with the holder (not the reporting

company's choice) then it will be treated as a compound
financial instrument. The initial value of the liability would
be the cash settlement value on the issue date. The
difference between the equity settled and cash settled
option would be the value of the equity on initial
recognition.

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Recap

1. Equity Settled 2. Cash settled

share based share based
payments payments

Options granted Share

to staff as a Appreciation
bonus Rights (SARs)

Equity Liabilities
Instrument

Measurement = Measurement =
Grant date Reporting date

Tom Clendon
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A. The morning company and its issue of shares for cash.

Dr Cash (($3 x 1,000) - $20) $2,980
Cr Share Capital $1,000
Cr Other Components of Equity $1.980

A. Mohammed
Year 2
Value of the options The current estimate of Time lapse in
granted (20 cents x the numbers expected the five year
1,000,000 x 10 to qualify at the vesting scheme
persons) date

$2,000,000 x 90% x 2/5 = $720,000 Year-end

equity
reserve
Year 1
$2,000,000 x 80% x 1/5 = $320,000 b/f reserve
$400,000 Expense to
profit

The suggestion that the options will not vest until the share price reaches a certain price is a
market condition and not a qualifying condition and as such is ignored in accounting for the
options.

Year 3
Value of the options The current estimate Time lapse in
granted (20 cents x of the numbers the five year
1,000,000 x 10 expected to qualify at scheme
persons) the vesting date

$2,000,000 x 90% x 3/5 = $1,080,000 Year-end

equity
reserve

Year 2 See above $720,000 b/f reserve

$360,000 Expense to
profit

Tom Clendon
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A White

White has altered the terms and conditions of share option scheme during the vesting
period. It has repriced the options to make the scheme more favourable to employees.
Alternatively it might also change the vesting conditions, to make it more likely or less likely
that the options will vest.

The rule is that the White must always recognise at least the amount that would have been
recognised if the terms and conditions had not been modified (that is, if the original terms
had remained in force).

If the change reduces the amount that the employee will receive, there is no reduction in the
expense recognised in profit or loss.

If the change increases the amount that the employee will receive, the difference between
the fair value of the new arrangement and the fair value of the original arrangement (the
incremental fair value) must be recognised as a charge to profit. The extra cost is spread
over the period from the date of the change to the vesting date.

Year 2 Value of The current estimate Time lapse in

the options of the numbers the three
granted expected to qualify at year scheme
the vesting date

Original ($12 x 200) X 19 X 2/3 30,400

value
Value ($6 x 200) X 19 X 6/18 7,600
granted on
the repricing
38,000 Year-end
equity
reserve
Year 1 ($12 x 200) X 20 X 1/3 16,000 b/f reserve
22,000 Expense to
profit

Tom Clendon
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A The Afternoon company

Options are difficult to value. When issued they should be recorded at the fair value of
consideration received which here can be reliably measured at $20,000. With staff offering
services / when used as a bonus then we have use an option pricing model to value the
options because it is not possible t value the staff services.

Dr Asset $20,000
Cr Equity (other components of equity) $20,000

A. Ant and Dec

The equity instruments / shares issued to the employees with a value of $22 million were
issued in their capacity as shareholders and not in exchange for their services. The
employees were not required to complete a period of service in exchange for the shares.
Thus the transaction is outside the scope of IFRS 2. This forms part of the parent's
consideration for the investment in the subsidiary.

The equity instruments / options issued to the employees with a value of $30 million were
issued in their capacity as employees, in exchange for their continued employment. As such
they do fall within the scope of IFRS2 and will be charged through the statement profit or
loss over the vesting period. Assuming that no employees are expected to leave (and none
subsequently leave) this will result in an annual expense of ($30 million x 1/3) $10 million.

A. Widberg

With share appreciation rights (SARs) which are cash settled share based payments until
the liability is settled, the entity remeasures the fair value of the liability at each reporting
date until the liability is settled up to the date of settlement. The changes in the fair value of
the liability are recognised in profit or loss for the period.

Fair Value of the SAR Current estimate of the Time $

at the reporting date numbers expected to vest lapse
Yr 1 ($10 x 200) x 100 x 1/2 100,000 Year end
liability
B/F Nil
100,000 Charge to
profit

Yr 2 ($15 x 200) x (100 - 10) x 2/2 270,000 Year end

liability
B/F 100,000
170,000 Charge to
profit

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A. Parrott

At 31 May 20X4 the rights have all vested. The liability has to be measured at the reporting
date based on the fair value of the SAR at that date i.e. $25.

At the reporting date, of the original twenty, eleven managers have yet to be paid their 500
rights as some have left and others cashed in (been paid) (20 - 4 - 5 = 11).

Thus the year end liability is - $25 x 11 x 500 = $137,500.

The charge to profit will be the increase in the liability from the opening balance. At the start
of the year the fair value of the SAR was $15 with at that time 16 managers awaiting
payment as

The opening liability is - $15 x 16 x 500 = $120,000

However during the year 5 managers were paid out at $20 which reduced the liability by $20
x 5 x 500 = $50,000.
$ $
Year-end liability 137,500
Opening liability 120,000
Less paid (50,000) 70,000
Expense charged to profit 67,500

Tom Clendon