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IFRS 2 Share-Based Payments

Equity-settled, in which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options). Cash-settled, in which the entity receives goods or services by incurring a liability to the supplier that is based on the price (or value) of the entity’s shares or other equity instruments of the entity

CA Chandan Kumar Jha

1. IFRS 2 applies to all share-based payment transactions, which are defined as follows:

♠ Equity-settled, in which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options)

♠ Cash-settled, in which the entity receives goods or services by incurring a liability to the supplier that is based on the price (or value) of the entity’s shares or other equity instruments of the entity

Transactions in which the entity receives goods or services and either the entity or the supplier of those goods or services have a choice of settling the transaction in cash (or other assets) or equity instrument.

2. Outside the scope

  • Cash/assets provided in terms of a Long Term Incentive which are not based on the fair value of group equity instruments are outside IFRS 2 scope –they are typically IAS 19 ‘Other long-term employee benefits’
  • Transactions in which the entity acquires goods as part of the net assets acquired in a business combination to which IFRS 3 Business Combinations applies

3. RECOGNITION

  • Recognise the goods or services received or acquired in a share-based payment transaction when the goods are obtained or as the services are received.
  • Recognise an increase in equity for an equity settled share-based payment transaction.
  • Recognise a liability for a cash-settled share based payment transaction.
  • When the goods or services received or acquired do not qualify for recognition as assets, recognise an expense.

4. Grant Date

IFRS 2: “the date at which the entity and another party (including an employee) agree to a share-based payment arrangement, being when the entity and the counterparty have a shared understanding of the terms and conditions of the arrangement”

5. CLASSIFICATION

Equity settled: settled in equity instruments of the entity (or another entity in the group)

Cash settled: settled in cash, based on the price (or value) of the entity’s shares

Settlement alternatives:

– Counterparty (e.g. LTI participant) has choice:

  • Treat as compound instrument
  • Measure debt and equity as separate parts

– Company has choice:

  • Treat as equity-settled unless past practice or policy is to settle in cash.

6. MEASUREMENT

A. Equity Settled

Transaction with employees

  • Measure fair value at grant date of equity instrument
  • Fair value is never measured
  • Recognised Assets or Expenses over vesting period

Transaction with non-employee

  • Measured at fair value of goods or services which are obtained or received.
  • If the fair value of the goods or services received cannot be estimated reliably, measure by reference to the fair value of the equity instruments granted.

B. Cash Settled

  • Measure the liability at the fair value at grant date.
  • Fair value shall be re measure at each reporting date, if any differences transfer to Profit and loss account.
  • Liability is recognized over the vesting period.

C. Choice of Settlement

Counterparty (e.g. LTI participant) has choice:

  • Treat as compound instrument
  • Measure debt and equity as separate parts

Company has choice:

  • Treat as equity-settled unless past practice or policy is to settle in cash.

7. Valuation

Equity settled: – Measured at fair value at grant date.

Cash settled: – Fair value of Liability incurred.

8. Group settled share-based payments (IFRS Para 43C)

The entity receiving the goods or services will recognise the transaction as equity-settled only if:

  • The awards granted are its own equity instruments; or
  • It has no obligation to settle the transaction

In all other circumstances, the entity will measure the transaction as cash-settled.

9. Practical application

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