Share Based Payments
In this article, Steve Collings outlines the requirements of IFRS 2 ‘Share-Based Payment’ and considers the implications on the financial statements of an entity entering into such a transactions.
The objective of IFRS 2 is to outline the financial reporting requirements that an entity who engages in share-based payment transactions should comply with in their financial statements. It outlines the requirements an entity is to reflect in both its profit and loss account (statement of comprehensive income) and its balance sheet (statement of financial position) that the effects of share-based payments has on the entity’s financial statements.
IFRS 2 covers three types of share-based payment transactions:
Equity-settled share-based payment transactions where the entity receives goods or services as consideration for equity instruments of the entity, including shares or share options.
Cash-settled share-based payment transactions where the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts which are based on the price or value of the entity’s shares or other equity instruments of the entity.
Transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in either cash or by issuing equity instruments.
Where the entity has equity-settled share-based payment transactions, an entity should measure the goods or services received together with any corresponding increase in equity, directly at the fair value of the goods or services received. Where the fair value cannot be reliably estimated, then the entity is required to measure their value, together with the corresponding increase in equity, indirectly by reference to the fair value of the equity instruments granted.
IFRS 2 also requires:
Transactions with employees and third parties providing similar services should be measured at the fair value of the equity instruments granted at the grant date.
Transactions with parties other than employees have a rebuttable presumption (which is rarely rebutted) that the fair value of the goods or services received can be reliably estimated. The fair value is measured at the date the entity receives the goods or services.
Where goods or services are measured at fair value of the equity instruments granted, IFRS 2 specifies that vesting conditions, other than market conditions, are not taken into account when estimating the fair values of the shares or options at the measurement date. Vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transactions.
IFRS 2 requires fair values are to be based on market prices, where these are available. Where market prices are not available, then fair value is estimated by using a valuation technique to arrive at a valuation that estimates what the value of the equity instruments would be at the measurement date in an arm’s length transaction with knowledgeable and willing persons.
Where cash-settled share-based payments are made, these must be measured by the entity at the fair value of the liability. An entity is also required under the provisions of IFRS 2 to remeasure the fair value of the liability at each reporting date until the liability is settled.
Where an entity enters into a share-based payment transaction where the terms of the arrangement allow the entity to settle the transaction in cash or equity instruments, the entity should account for these as a cash-settled share-based payment transaction.
Worked Example
The Facts
Lucas Inc grants two thousand share options to each of its 3 directors on 1 January 2008. The terms of the option are that the directors must still be in the employment of Lucas Inc on 31 December 2010 when the options vest. The fair value of each option as at 1 January 2008 is $10 and all of the options are expected to vest. The options will only vest if Lucas Inc share price reaches $16 per share. As at 31 December 2008, the share price was only $7 per share and it is not expected to rise in the next two years. Further, it is expected that only two directors will be employed by Lucas Inc as at 31 December 2010.
Solution
The increase in the share price should be ignored for the purposes of calculating the value of the share options as at 31 December 2008. The fact that only two directors will be employed as at 31 December 2010 must, however, be taken into account, therefore:
2,000 options x 2 directors x $10 x 1 year / 3 years = $13,333
The journals required are:
Debit statement of comprehensive income (income statement)
Credit equity
About the Author
Steve Collings FMAAT ACCA DipIFRS is the Audit and Technical Manager at Leavitt Walmsley Associates Ltd and a partner in AccountancyStudents.co.uk. He is also a freelance Technical Author on financial reporting and auditing. Steve is also the author of ‘The Core Aspects of IFRS and IAS’ which can be purchased from Amazon.co.uk from which this article has been extracted
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