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IFRS 2 - Share-Based Payment
IFRS 2 - Share-Based Payment
IFRS 2 - Share-Based Payment
Overview
IFRS 2 Share-based Payment requires an entity to recognise share-based payment transactions (such as granted shares, share
options, or share appreciation rights) in its financial statements, including transactions with employees or other parties to be set-
tled in cash, other assets, or equity instruments of the entity. Specific requirements are included for equity-settled and cash-settled
share-based payment transactions, as well as those where the entity or supplier has a choice of cash or equity instruments.
IFRS 2 was originally issued in February 2004 and first applied to annual periods beginning on or after 1 January 2005.
History of IFRS 2
Date Development Comments
July 2000 G4+1 Discussion Paper Accounting for Share-Based
Comment
Payments published deadline
31 October
2000
July 2001 Project added to IASB agenda History of
the project
20 September 2001 IASB invites comments on G4+1 Discussion Paper Comment
(https://www.iasplus.com/en/news/2001/September/news283)Accounting for Share-Based Payments deadline
15
December
2001
7 November 2002 Exposure Draft ED 2 Share-Based Payment published Comment
(https://www.iasplus.com/en/news/2002/November/news615) deadline 7
March
2003
19 February 2004 IFRS 2 Share-based Payment issued Effective
(https://www.iasplus.com/en/news/2004/February/news1316) for annual
periods
beginning
on or after
1 January
2005
2 February 2006 Exposure Draft Vesting Conditions and Cancellations Comment
(https://www.iasplus.com/en/news/2006/February/news2676) published deadline 2
June 2006
17 January 2008 Amended by Vesting Conditions and Cancellations Effective
(https://www.iasplus.com/en/news/2008/January/news4064) (Amendments to IFRS 2) for annual
periods
beginning
on or after
1 January
2009
16 April 2009 Amended by Improvements to IFRSs Effective
(https://www.iasplus.com/en/news/2009/April/news4603) (https://www.iasplus.com/en/projects/completed/aip/annual-for annual
improvements-2007-2009) (scope of IFRS 2 and revised periods
IFRS 3) beginning
on or after
1 July 2009
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18 June 2009 Amended by Group Cash-settled Share-based Payment Effective
(https://www.iasplus.com/en/news/2009/June/news5018) Transactions for annual
periods
beginning
on or after
1 January
2010
12 December 2013 Amended by Annual Improvements to IFRSs 2010–2012 Effective
(https://www.iasplus.com/en/news/2013/12/aip-2010-2012) Cycle for annual
(https://www.iasplus.com/en/projects/completed/aip/annual-periods
improvements-2010-2012) (definition of vesting condition) beginning
on or after
1 July 2014
20 June 2016 (https://www.iasplus.com/en/news/2016/06/ifrs- Amended by Classification and Measurement of Share- Effective
2) based Payment Transactions (Amendments to IFRS 2) for annual
periods
beginning
on or after
1 January
2018
Related Interpretations
None
Summary of IFRS 2
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
(https://www.iasplus.com/en/publications/global/ifrs-in-focus/2004/ifrs-2) (PDF 49k).
Defin
it ion 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 instru-
ments 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.
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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.
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 pre-
sented 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 instru-
ments 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.
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 fol-
lowing 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 consid-
eration 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
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account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ul-
timately, 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 report-
ing 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 mea-
surement (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 pay-
ment transaction, and are adjusted each period until such time as the equity instruments vest.
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 in-
struments 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 replace-
ment 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
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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 instru-
ments 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 earn-
ings 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.
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 (https://www.iasplus.com/en/binary/usa/0412fasbprfas123r.pdf) (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 (https://www.iasplus.com/en/binary/usa/headsup/headsup11-10.pdf) (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:
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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 instru-
ments 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 histori-
cal 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 pur-
poses, IFRS 2 requires that no deferred tax asset be recognized for the compensation cost related to the time value com-
ponent 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 sub-
sequent 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 avail-
able 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 deter-
mining 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.
On 29 March 2005, the staff of the US Securities and Exchange Commission issued Staff Accounting Bulletin 107 dealing with val-
uations 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 non-
public 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 inter-
pretations in SAB 107 is whether there are differences between Statement 123R and IFRS 2 that would result in a reconciling
item:
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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 (https://www.iasplus.com/en/binary/usa/0503secpr.pdf) (PDF 30k)
Staff Accounting Bulletin 107 (https://www.iasplus.com/en/binary/usa/0503sab107.pdf) (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 (https://www.iasplus.com/en/binary/resource/0503bearstearns.pdf) (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 ana-
lysts who ignore option expensing. The report emphasises that:
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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 for-
ward estimates. It includes all of its electronic products.... The investment community benefits when it has clear and consistent in-
formation 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 environ-
ment.
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 proce-
dures. 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.
On 17 January 2008, the IASB published final amendments to IFRS 2 Share-based Payment to clarify the terms 'vesting condi-
tions' 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 con-
ditions.
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 un-
recognised 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.
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-set-
tled 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 ser-
vices 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 ser-
vices 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 effec-
tive for annual periods beginning on or after 1 January 2010 and must be applied retrospectively. Earlier application is permitted.
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Click for IASB press release (https://www.iasplus.com/en/binary/pressrel/0906ifrs2amendment.pdf) (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.
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 eq-
uity-settled had it not included the net settlement feature.
Accounting for modif ications 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 derecog-
nised 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.
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