IFRS 2 - Share Based Payments

IFRS 2 Share Based Payments
1
Scope
• All share-based payment transactions to be recognised – to be settled
in
– Cash / Other assets equity instruments of the entity
– With employees or other parties
Outside the scope IFRS 2:
 Shares issued to an employee or others as additional shares in a rights

issue
 The issue of shares in a business combination

Main Features
Measurement principles and specific

requirements for three types of share-based
payment transactions
 equity-settled
 cash-settled
 “share-based with cash alternative” (not examinable).

4
Timeline of a share option award

Vesting period - the period
during which all the specified
vesting conditions are to be
Vesting period satisfied
Year 1 Year 2 Year 3

Time
Grant Vesting Exercise
date date date
Grant date - the date at

which the entity and Vesting date – the date
the counter party have a when the vesting conditions Exercise date is the date
shared understanding of for entitlement are satisfied when awards
the terms and conditions
of the arrangement
5
General recognition principles
• Debit
– Recognise goods / services received when goods are
obtained or services are received
– When the goods / services do not qualify for
recognition as assets, an expense is recognised
• Credit
– For equity-settled share-based payment transactions
a corresponding increase in equity is recognised; and
– For cash-settled share-based payment transactions a
corresponding liability is recognised
Measurement
• measured at fair value of goods or

services received Or
Equity settled • Measured at FV of shares on the
grant date
• Measured at the fair value of the

liability recognised
Cash settled • Re-measured at each reporting
date with changes recognised in
profit or loss, until settled
7
General measurement principles
General measurement principles
Equity-settled Cash-settled
share-based share-based
payments payments
Non-
Employees
employees
Goods/services Goods/services Goods/services Goods/services
are measured are measured are measured at are measured at
directly, based on indirectly, by the intrinsic value the grant date fair
fair value of reference to fair of the equity value of the
goods/services value of equity instruments. liability.
received. instruments Liability is
granted. remeasured.
If not reliably If not reliably

measurable measurable
(only in rare cases) (only in rare cases)
Vesting conditions
Non-market based vesting conditions Market based vesting conditions
• The employee completing a • A minimum increase in the share

minimum period of service (also price of the entity
referred to as a service condition) • A minimum increase in shareholder
• Achievement of minimum sales or return
earnings target • A specified target share price
• Achievement of a specific increase relative to an index of market prices
in profit or earnings per share
• Successful completion of a flotation
• Completion of a particular project
8
Valuation technique
• If similar traded options do not exist then

estimate FV using option pricing model
• As a minimum, all models reflect
– Exercise price of option
– Life of option
– Current price of underlying
– Expected volatility of share price
– Expected dividends
– Risk free interest rate over life of option.
Models in use
• Black-Scholes-Merton, but not the preferred

model of IFRS 2 due to:
– Early exercise
– Volatility of options.
• Bi-nomial option pricing model
• Monte-Carlo simulation
WE 1 – Share-based payments
On 1 January 20X1 an entity grants 100 share options to each of its 400 employees.
Each grant is conditional upon the employee working for the entity until 31 December
20X3. The fair value of each share
option is $20.
During 20X1 20 employees leave and the entity estimates that 20% of the employees
will leave during the three-year period.
During 20X2 a further 25 employees leave and the entity now estimates that 25% of
its employees will leave during the three-year period.
During 20X3 a further 10 employees leave.
Required
Calculate the remuneration expense that will be recognised in respect of the share-
based payment transaction for each of the three years ended 31 December 20X3.
Answer
12
Performance condition (ex price)
• Beginning year 1, 1,000 options granted to

employees, conditional on employment for 3
years. Exercise price is $35, but falls to $25 if
earnings increase by average of 12% over 3-year
period.
• On grant date the estimated FV of an option is
– $12 for an exercise price of $25
– $9 if the exercise price is $35.
Case study – Performance condition
• Year 1 earnings increase by 14%. This increase is

expected over the next 2 years, giving expected
exercise price of $25.
• Year 2 earnings increase by 13%. The earnings
target is still expected to be achieved.
• Year 3 earnings increase by only 7%. The
earnings target is not achieved.
• Rights to the 1,000 options are now vested at an
exercise price of $35.
Performance condition – Solution
Remuneration expense
Year Calculation Period Cumulative$
$
1 1,000 options × $12 4,000 4,000
× 1/3 years
2 (1,000 options × $12 4,000 8,000
× 2/3 years)  $4,000
3 (1,000 options × $9) 1,000 9,000
 $8,000
Question
16
Share appreciation rights (SARs)
• Granted to employees giving entitlement to future cash

payment based on increase in entity’s share price
• Entity will be required to make payment in future and
will need to recognise liability for future cash flow
• Liability will be re-measured each reporting date and
any change will be taken to profit or loss
• When rights settled any difference between liability
recognised and cash flow will be taken to profit or loss.
Example
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IFRS 2 - Share Based Payments

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IFRS 2 Share Based Payments

Outside the scope IFRS 2:

 Shares issued to an employee or others as additional shares in a rights

 The issue of shares in a business combination

Measurement principles and specific

 “share-based with cash alternative” (not examinable).

Timeline of a share option award

Year 1 Year 2 Year 3

Grant date - the date at

General recognition principles

• measured at fair value of goods or

• Measured at the fair value of the

General measurement principles

General measurement principles

If not reliably If not reliably

Non-market based vesting conditions Market based vesting conditions

• The employee completing a • A minimum increase in the share

• If similar traded options do not exist then

• Black-Scholes-Merton, but not the preferred

During 20X3 a further 10 employees leave.

• Beginning year 1, 1,000 options granted to

• Year 1 earnings increase by 14%. This increase is

• Granted to employees giving entitlement to future cash

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