IFRS 02 – SHARE BASED PAYMENTS

This includes three types of payments:

1 Equity settled payments: Entity pay for goods and services by issuing equity instruments (e.g. share or share options).
2 Cash settled payments: Settlement amount of goods or services is based on entity’s equity instruments.
3 Choice between both: Entity or the supplier is provided a choice to opt between both of the above-mentioned options.

Recognition:

Equity settled payments Cash settled payments

Debit Expense / Asset Expense / Asset

Credit Equity Cash Liability

Methods of measurements:
1 Direct method:
FV of the goods or services is used.
Estimated reliably.

2 Indirect method:
FV of the equity instruments is used.

Transactions with suppliers Transactions with employees

Method of measurement Direct method Indirect method

Measurement date When goods or services are received When equity instruments are granted

Equity-settled share-based payment transactions: expense recognition

Vesting conditions
Performance based Non-vesting conditions
Services based
Market based Non-market based

These require the counterparty to

Any condition that relates to share It is based on the entity’s operations or
complete a specified period of service Other than vesting conditions.
price. activities.
before the option vests

E.g. payments after three years of E.g. Payments if share price increase E.g. Payment after entity achieve E.g. Restrictions on sale of shares for
service to certain level. specific sale or EPS target. further two years.

Probability of meeting the condition is Probability of meeting the condition is Probability of meeting the condition is Probability of meeting the condition is
not taken into account when taken into account when measuring not taken into account when taken into account when measuring
measuring the fair value of the the fair value of the instrument at the measuring the fair value of the the fair value of the instrument at the
instrument at the grant date. grant date. instrument at the grant date. grant date.
Subsequent changes in the probability
Subsequent changes in the probability
Subsequent changes in the probability of meeting the condition are taken into Subsequent changes in the probability
of meeting the condition are taken into
of meeting the condition have no account in estimating the FV of the of meeting the condition have no
account in estimating the expense to
impact and are ignored. instrument and expense to be impact and are ignored.
be recognized.
recognized.

Treatment: Expense will be

Treatment: FV of the equity recognized based on the probability of Treatment: FV of the equity
Treatment: Over the year based on instruments will be adjusted meeting the conditions. FV of the instruments will be adjusted
number of years given. accordingly only at grant date. (will be equity instrument can also be changed accordingly only at grant date. (will be
given in paper) subsequently based on a non-market given in paper)
conditions.

Reversal of expense already recorded:

During vesting period / during measurement:

If the total expense relating to the vesting period to date is smaller than that previously recognized than the previously recognized expense is reversed as
follows:

Debit Equity
Credit Statement of P/L

subsequent to vesting period:

Further, subsequently after the vesting period, equity already recorded will not be increased or reversed based on some event ( e.g. when shares are forfeited
or failure of vesting condition). However, it can be transferred to other components of equity like retained earnings.
Intrinsic value:

If FV of the equity instruments / share options is not given than intrinsic value will be used instead. (Intrinsic value = FV of shares - exercise price)
Further, the intrinsic value will be revised at the end of each vesting period with the change in shares price, till the share options are exercised and equity is
adjusted accordingly. Any change will be recognized to profit and loss.

Vesting Period:

Vesting period (the period at which expense is recognized) may vary depending on the following conditions:

Non-market conditions:
If the period depends on a non-market condition that it can be changed subsequently and expense will be adjusted accordingly.

Market conditions:
If the period depends on a market condition that it can not be changed subsequently and expense will be recoded on the basis of the period assessed at grant
date.

Modifications:

There are two types of modifications:

Modifications that decreases the expense:

If a modification results in decrease of the expense like decrease in FV of the arrangement, than it will be ignored and will not be accounted.

Modifications that increases the expense:

If a modification results in increase of the expense than it will accounted for as follows:

Modifications that increase the fair value of the equity instruments granted

Any modifications that increase the FV of equity instruments will be accounted for as a separate expense in addition to the original expense before
modification and will be expensed out on the remaining vesting period. The new FV of the equity instrument will be the difference of FVs immediately before
and after modification.

Modification that increase the number of equity instruments granted

This additional equity instruments will also be treated as a separate expense in addition to the original expense before modification and will be expensed out
on the remaining vesting period. The FV of the new equity instrument will be the FV of these instruments when they are granted i.e. modification date.

Modification that change the vesting period

Expense recognition is accelerated or decelerate over the new vesting period.

Cancellation

All of the expense that would other wise be recognized over the vesting period will be recognized immediately on the cancellation date.

Cancellation with cash compensation

All of the expense that would other wise be recognized over the vesting period will be recognized immediately on the cancellation date. Further, the cash
payment will be adjusted against the equity recognized. Any cash in addition to the equity recognized will be expensed out.

Dr. Equity
Dr. Expense (in case cash given is more than the equity)
Cr. Cash

Cancellation with new grant identified as a replacement award

Exactly the same treatment as Modifications that increase the fair value of the equity instruments granted i.e. will be accounted for as a separate expense in
addition to the original expense before modification and will be expensed out on the remaining vesting period. The FV of the new equity instrument granted
will be the difference of FVs of the old instruments immediately before and after modification.

Cancellation with new grant not identified as a replacement award

If the new grant is not identified as a replacement award the first grant is accounted for as a cancellation and the new grant accounted for in the usual way i.e.
it will be treated as a new equity instruments in replace of the services is granted.

Modification that changes type of share-based transaction

If a modification results in change in type of share-based transaction (e.g. from equity to cash or equity with cash alternative), than it will be taken as the
revised conditions exists from the grant date and adjustment will be made accordingly.) Example 9.
 Cash-settled share-based payment transactions: expense recognition
Cash liability is recorded instead of equity. FV of the cash liability is adjusted based on FV of share appreciation rights (equity instruments). Basic rules are as
follows:

1 The liability incurred is measured at its fair value at each reporting date until it is settled. (There is no locking of fair value at grant date).
2 Any change in the fair value of the liability is recognized in profit or loss.
3 Cash liability will be recorded extent to which the employees have rendered service to date if service or vesting condition is included. E.g. If the share
appreciation rights granted are conditional upon the employees’ remaining in the entity’s employ for the next three years and the employees have completed
only one year’s service at the reporting date, the entity must measure the fair value of the liability at the reporting date and multiplying the resulting amount
by one-third.

Note: Treatment for all the conditions like service, market based, non market based and non vesting conditions are the same as for equity-settled share-based
payments.

Accounting for share-based payment transactions with cash alternatives

There are two possibilities:

Employee / supplier has a choice:

It will treated as the company has issued a compound financial instrument (i.e. a financial instrument that includes both debt and equity components).

Incase of supplier:

Compound Financial instrument is equals to the FV of the goods or services received.

Equity component will calculated as difference between cash liability and FV of goods or services received.
Equity = FV of goods/services - Cash Liability

If Cash liability is greater than the FV of goods or services, than the excess will be treated as an expense.

Incase of employee:

Equity component will be calculated separately as calculated when equity settled payments are granted.

Cash liability is calculated separately as cash settled payments are granted

Compound financial instrument will equals to the sum of cash liability and equity component to the extent which is greater than cash liability.
CFI = Cash Liability + (Equity component - Cash liability)

Settlement:

In both of the above cases at settlement date following entry will be posted:

If other party choses cash-settled payment:

Dr. Cash Liability

Cr. Cash

No change / adjustment will be posted in equity portion and it will stay recorded as it is.

If other party choses Equity-settled payment:

Dr. Cash Liability

Cr. Equity

Dr. Equity
Cr. Share capital & share premium
 Entity has a choice:
Present obligation of paying in cash:

If there is a present obligation on entity to pay in cash than only cash liability will be recorded using the rules of cash-settled share-based payments. There will
be no equity. Present obligation will be assessed on the basis of following conditions:

1 choice of settlement in equity instruments has no commercial substance; or

2 if the entity has a past practice or a stated policy of settling in cash.

Settlement:

If entity choses cash-settled payment:

Dr. Cash Liability

Cr. Cash

If other party choses Equity-settled payment:

Dr. Cash Liability

Cr. Equity

Dr. Equity
Cr. Share capital & share premium

No Present obligation of paying in cash:

If there is no present obligation on entity to pay in cash than only equity will be recorded using the rules of equity-settled share-based payments. There will be
no cash liability.

Settlement:

If other party choses Equity-settled payment:

Dr. Equity
Cr. Share capital & share premium

If entity choses cash-settled payment:

Dr. Equity
Retained earnings (if equity recorded
Cr.
is greater than cash given)

Cr. Cash

Important note: If at the end entity elects the settlement alternative with the higher fair value, Than the entity must recognize an additional expense for the
excess value given to Profit and loss instead of retained earnings.

Share-based transaction among group entities:

If employees or suppliers of a group are awarded equity instruments than an entity in a group will recognize equity only if the following conditions are met:

1 The award granted are its own equity; or

2 The entity has no obligation to settle the share based transactions.

Accounting in case of condition one is met:

The entity granting the equity will treat it as equity-settled share-based transaction. There will be no obligation on any other entity i.e. parent to settle so it
will not record any transaction.

Accounting in case of condition two is met:

The entity whose employee or suppliers are granted the share-based transaction has no obligation to settle so it will treat it as equity-settled share-based
transaction and equity will be treated as contribution from the parent. There will an obligation on other entity i.e. parent to settle so it will record it according
to the term of the transaction i.e. equity-settled share-based transaction or cash-settled share-based transaction.

Entries:
Debit Credit
In case of equity-settled

In subsidiary FS Expense Cr. Equity

In parent FS Investment in subsidiary Cr. Equity
In consolidated FS Expense Cr. Equity

In case of cash-settled

In subsidiary FS Expense Cr. Equity

In parent FS Investment in subsidiary Cr. Liability
In consolidated FS Expense Cr. Liability

If none of the two conditions are met:

If none of the both conditions are met, than entity will recognized it as cash-settled share-based transaction and no other entity in the group i.e. parent will
record any transactions.