The objective of this standard is to outline the reporting requirements that an entity who undertakes a share-based payment transaction should make in their financial statements. It outlines the requirements an entity is to reflect in its profit and loss account (statement of comprehensive income) and balance sheet (statement of financial position) the effects of share-based payments.
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 an 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, 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 states that:
- 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 transaction.
- IFRS 2 requires fair values are to be based on market prices, where these are available. Where market prices are not available, 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.
About the author:
Steve Collings FMAAT ACCA DipIFRS is Audit Manager at Leavitt Walmsley Associates www.lwaltd.com. Read all of Collings's analyses of the International Financial Reporting Standards.