Share-based

Payment
Introduction to IFRS 2
Why IFRS 2?
Consider the following situation:
• Company A issued share options to 500 employees
• Right to buy 1 000 Company A shares each
• Exercise value = R2/share
• Fair value is R60/share
• What happens when the options are exercised?
Dr. Bank 1 000 000
Cr. Share capital 1 000 000
(1000 shares x R2/share x 500 employees)
• But the shares are worth R30 million?!?
• 1 000 x 500 x R60/share
• R29 million of the transaction not recorded
• Enter: IFRS 2
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SBP Overview
• One of the most widely used ways to compensate employees
• Advantages:
• Cheap / free for company
• Aligns employee and owner incentives
• Agency problem
• Incentive to stay at the company
• Employees can get very rich
• Before 2005, hardly had to be accounted for!
• IFRS 2 issued to reflect a charge in profit or loss related to
share-based payment schemes

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SBP Overview (cont.)
Essential elements:
 Share-based payment
• Payment that is based on value of entity
 In return for goods and services (.2 & .5)
• Not cash
• Not for:
• Raising capital (.4)
• IAS 32 & 39 own shares (.6)
• Shares issued in business combinations (.5)
• Debt for equity swap – IFRIC 19
• Most commonly to employees

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Types of SBP
① Issues shares, share options or other equity instruments
• Either new issue or buyback to provide shares
• “Equity-settled share-based payment”
② Transfer cash based on value of company
• Could be phantom shares, share appreciation rights, etc.
• “Cash-settled share-based payment”
③ Choice of settlement at option of counterparty
• Awareness level

• IFRS 2 applied to all types

Accounting for SBP
• Accounting depends on how settled (.2)
 Equity-settled SBP
• Dr P/L
• Cr Equity
• Typically, Share-based Payment Reserve
 Cash-settled SBP
• Dr P/L
• Cr Liability
• Controversy around accounting for equity-settled SBP
• Expense where entity will never have to pay cash
• No change to net asset value
• Is this an expense to the company?
• Who really bares this expense?
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Questions
Basic Equity-Settled
SBP Principles
Equity-Settled SBP (.10 – .15)
• Journal entry: Dr P/L; Cr Equity
• Debit could also be to an asset (.8 & .9)
Measurement:
• FV of goods and services received
• Unless FV can’t be estimated reliably
• Then FV of equity instruments issued
• Goods and other services
• Can usually estimate FV
• Employee services
• Often granted shares or share options
• Can’t measure value of service received
• Use FV of equity instruments issued
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Equity-Settled SBP (cont.)
Timing of measurement of FV
• Critical when measuring equity
• Measured once, not remeasured
• Goods and other services
• When received / rendered
• Employee services
• On grant date (App A definition)
• A shared understanding of the terms
• If subject to approval, once approval obtained

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Equity-Settled SBP (cont.)
Recognition of expense
• Non-employee services: when goods or services received
• Employee services
• If no conditions attached: recognise in full on grant date
• Usually employers grant shares and options expecting future
services
• i.e. apply service condition
• Gives rise to vesting period
• e.g. Employee required to work 3 years before option
vests (i.e. unconditional entitlement)
• 3 year vesting period
• Recognise expense over the vesting period

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Performance Conditions
and Determining Fair Value
Types of Vesting Conditions
• Usually employers require certain outcomes in order for shares
and options to vest
• i.e. apply “vesting conditions”
• Vesting conditions
•  Service condition
• Period required to work
•  Performance condition
• ① Market performance condition
• Related to share price
• E.g. target share price
• ② Non-market performance condition
• Other condition, not related to share price
• E.g. target earnings
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IFRS 2 Fair Value
• IFRS 2 FV ≠ IFRS 13 FV (.6A)
• Factors that affect share option value (B6)
• General
•  Current share price
•  Exercise price
•  Time value
•  Expected volatility of share
•  Expected dividends
• Post-Vesting conditions
•  Restrictions on exercising
• Option pricing models
• E.g. Binomial, Black-Scholes-Merton
• Awareness level for PGDA and ITC
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Vesting Conditions and Fair Value
• IFRS 2 FV incorporates all factors ( – ) that market
participants would include in valuation (.17, .21 and .21A)
• Except non-market vesting conditions (.19)
• Account for these by using best estimate of number
expected to vest (.20)
• Service condition: Estimate how many employees will
work for the required period
• Non-market performance condition: Estimate
whether the performance target will be met
• i.e. Market vesting conditions are built into the IFRS 2 FV
Cancellations and Modifications
Changes After Grant Date (.26 - .29)
• Changes made to terms after grant date:
• Modifications
• E.g. Change in exercise price of option, number of options,
length of vesting period, etc.
• Cancellations
• Principle:
• Minimum expense recognised based on grant date fair value
• i.e. Modifications and cancellations cannot decrease or
decelerate expense recognised if no change had occurred
• Can increase or accelerate expense
• Cancellations:
• Recognise full remaining expense immediately
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Modifications
• Awareness level for PGDA and ITC
• If detrimental/unfavourable to employees
• E.g. increase exercise price / extend vesting period
• Ignore and account for SBP as though no change
• If beneficial/favourable to employees
• E.g. decrease exercise price / shorten vesting period
• Continue to recognise existing expense
• Recognise additional beneficial expense as a new SBP
scheme
Cash-settled SBP
Cash-settled SBP (.30 - .33D)
• For example:
• Share appreciation rights
• Phantom shares
• Payments based on value of company
• e.g. Agree to pay 4 times the amount by which the share
price exceeds R60 in 2 years time
• Journal entry: Dr P/L; Cr Liability

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Cash-settled SBP (cont.)
• Liability adjusted each reporting date to fair value
• Take vesting conditions into account as before
• Market and non-vesting conditions → affect fair value
• Non-market vesting conditions → affect number of awards
• Continue to remeasure until settled
• i.e. even after vesting date
• Liability at settlement is equal to cash paid
• Remeasurements to P/L
 CA TB TD DT(SFP)
Cash-settled SBP liability 4 000 - 4 000 (1 120) dr
SBP within a Group
SBP in Group Scenarios (.43A - .43D)
• E.g. Parent is listed and employees of sub have SBP scheme
entitling them to parent’s shares
• Perspectives to consider:
• Receiving entity
• Receives goods or services in SBP transaction
• Therefore, recognises expense in P/L
• Settling entity
• Bears obligation to settle SBP
• Group
• Only considered equity-settled SBP if equity instruments
of parent granted to employees
• Treatment may differ from different perspectives
• Use PFJEs to correct in group
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Group Scenarios (cont.)
• In separates:
• Equity-settled if:
• No obligation to settle OR
• Settling in own equity instruments
• Can only be cash-settled if entity has obligation to settle
• Intragroup repayment terms not taken into account
• Accounted for separately

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Activity
Accounting for Group SBP in the
Entity’s Separate Financial Statements

Equity‐
No
settled SBP
Recognise Q2: Settling
Yes Equity‐
expense entity? Yes
settled SBP
Q3: Own
Q1: Yes
instruments?
Receiving Cash‐settled
No
entity? SBP
Yes
Q2: Settling
No No expense
entity? Not part of
No
arrangement