Overview
While cash may be king, it’s not the only form of compensation out there! One common type of alternative compensation would be a share-based payment award, which is granted under a share-based payment arrangement. Share-based payment arrangements are defined under IFRS 2 as:
an agreement between an entity and another party (including an employee) that entitles the other party to receive: (a) cash or other assets of the entity for amounts that are based on the price (or value) of the equity instruments (including shares or share options) of the entity or another group entity OR (b) equity instruments (including shares or share options) of the entity or another group entity provided the specified vesting conditions, if any, are met.
Share-based payment awards have been used as common forms of compensation for a variety of types of employees (such as directors, executives, and “regular” employees) and nonemployees. For instance, a start-up company may not have a lot of cash to pay its vendors or supplier. So, it may issue share-based payment awards as a form of vendor compensation. Common share-based payment awards include share options or stock appreciation rights.
The general principal of accounting for share-based payments under IFRS 2 is that an entity should recognize an expense or asset for goods or services, with the credit entry recognized in equity or as a liability (depending on how the share-based payment award is required to be settled). While this may seem relatively straightforward, the application of IFRS 2 is complex, judgmental, and involves valuation issues. Additionally, the guidance in IFRS 2 may differ from guidance in other standards. For instance, IFRS 2 has a different definition of fair value than IFRS 13 Fair Value Measurement. In this post, we’ll explore the basic requirements of IFRS 2 and I’ll point you to some helpful guidance should you wish to learn more about this complex topic!
Scope of IFRS 2
Generally speaking, IFRS 2 applies to the following types of share-based payment transactions:
- Equity-settled share-based payment transactions
- Cash-settled share-based payment transactions
- Transactions in which either the entity or the supplier of goods or services has a choice of whether the entity settles the transaction in cash (or other assets) or by issuing equity instruments
Please note that there are exceptions to this scope and other special considerations found within IFRS 2!
Recognition and Measurement:
To determine the proper accounting for share-based payment awards, they entity must determine whether the award issued as part of the share-based payment transaction is equity-settled or cash-settled. This can be a judgmental decision and is absolutely critical to ensuring the correct accounting! Once the entity has made that determination, there are a few other key inputs the entity will need before they can go forth and account for the transaction:
- Grant Date:
This is defined in IFRS 2 as “the date at which an entity and another party (including an employee) agree to a share-based payment arrangement, beginning when the entity and the counterparty have a shared understanding of the terms and conditions of the arrangement. At grant date, the entity confers on the counterparty the right to cash, other assets, or equity instruments of the entity, provided the specified vesting conditions, if any, are met. If that agreement is subject to an approval process (e.g., by shareholders), the grant date is the date when that approval is obtained.”
Why is the grant date important? This is the date all the accounting magic happens! Awards, whether equity-settled or cash-settled are measured initially at their grant-date fair value (remember, fair value under IFRS 2, not IFRS 13). - Vesting Conditions:
IFRS 2 defines vesting conditions as “a condition that determines whether an entity receives the services that entitle the counterparty to receive cash, other assets or equity instruments of the entity under a share-based payment arrangement. A vesting condition is either a service condition or a performance condition.” An award can also have non-vesting conditions, such as a non-compete clause or a target based on a commodity index.
Knowing the vesting conditions is important under IFRS 2 because it determines the point at which the expense is recognized the award and could even impact the measurement of the expense. - Vesting Period:
The vesting period is the period of time over which all of the vesting conditions of an award must be satisfied. This is not the same thing as the exercise period or the life of the option. Entity’s will recognize expense associated with an award over the vesting period, if it has a vesting period. If there is no vesting period, the entity will recognize expense immediately. - Fair Value:
IFRS 2 defines fair value as “The amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length transaction.” Remember, this definition is different from the definition of fair value in IFRS 13.
The fair value of the award under IFRS 2 must be determined for each award at the grant date. Depending upon classification as either equity-settled or cash-settled, this valuation may need to be remeasured each reporting period and at settlement.
Equity-settled Awards
For equity-settled awards (such as share options), IFRS 2 generally requires that an entity measures the fair value of goods obtained or services received and recognizes a corresponding increase in equity. If an entity cannot reliably estimate the fair value of the goods obtained or services received, it must measure their value indirectly using the fair value of the equity instruments granted. Expense is recognized over the vesting period, if any, or immediately if there is no vesting period. While this may sound straightforward in theory, this is very subjective and complex in practice, often involving the use of valuation specialists and option pricing models.
Liability-settled Awards
For cash-settled awards (such as a share appreciation right), IFRS 2 requires that an entity measures the fair value of the goods or services received based on the fair value of the liability. An entity will remeasure the fair value of the award at each reporting date and on settlement. The ultimate cost of a cash-settled award is the cash paid to the counterparty, which is also the fair value at settlement date.
Our Share-Based Payment Course Collection
Do you want to learn more about accounting for share-based payment awards under IFRS 2? You’re in luck! We recently released two CPE-eligible eLearning courses covering all the details you need to know about IFRS 2 Share-based Payments. Want to take both courses? Purchase our IFRS 2 Course Collection and save almost 40% off the retail price!
Share-Based Payments (Part One): IFRS 2 (1.0 CPE)
Share-based payment arrangements can take many forms and the accounting can vary significantly depending on whether the arrangement is liability or equity classified. In this CPE-eligible eLearning course, you will learn to identify what is in the scope of IFRS 2 and how the share-based payment arrangement should be accounted for using the measurement and recognition principles outlined in IFRS 2.
Share-Based Payments (Part Two): IFRS 2 (1.5 CPE)
In this CPE-eligible eLearning course, you will learn how to recognize compensation expense, including understanding the impact of different conditions on recognition. An introduction to other areas related to the accounting for share-based payment arrangements under IFRS 2 such as modifications, cancellations, settlements, replacements, arrangements with non-employees, and group share-based payment arrangement will also be provided.
Have questions about the courses? Interested in group discounts for your team? Let’s talk!
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Disclaimer
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