The International Accounting Standards Board (IASB) last week issued International Financial Reporting Standard 2 Share-based Payment (IFRS 2) on accounting for share-based payment transactions, including grants of share options to employees.
Recent events have emphasised the importance of high quality financial statements that provide neutral, transparent and comparable information to help users make economic decisions. However, before the issue of IFRS 2, there was no international accounting standard covering the recognition or measurement of share-based payment, the use of which has expanded greatly in recent years. In particular, the omission of expenses arising from share-based payment transactions with employees has been highlighted by investors, other users of financial statements and other commentators as causing economic distortions and corporate governance concerns. The issue of IFRS 2 fills this gap in international standards.
The objective of IFRS 2 is to specify the financial reporting by an entity when it undertakes a share-based payment transaction. In particular, the IFRS requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees.
Introducing the exposure draft, Sir David Tweedie, IASB Chairman, said:
“This standard addresses an area of accounting that has been a concern to users of financial statements for some time. Recently, those concerns increased substantially, when major corporate failures demonstrated the importance of transparent, unbiased and complete financial statements. In particular, investors and others have highlighted the need for proper accounting for employee share options. Typically, transactions in which share options are granted to employees are not recognised in an entity’s financial statements. As a result, the entity’s expenses are understated and its profits are overstated, which is potentially misleading to users of financial statements. The objective of IFRS 2 is to require that, no matter what form of remuneration is used, the entity recognises the associated expenses. In this way, IFRS 2 will improve the quality of financial reporting by giving a clearer and more complete picture of an entity’s activities, which will assist investors and other users of financial statements to make informed economic decisions.”