IFRS 2 Share-based Payment requires a company to account for share-based payment transactions in its financial statements, including payments to employees or other parties in cash, other assets, or equity instruments of the entity.
Specific criteria apply to equity- and cash-settled share-based payment transactions, as well as to transactions in which the entity or supplier may choose between cash and stock instruments.
IFRS 2 was initially published in February 2004 and became effective for fiscal years beginning on or after 1 January 2005.
Definition of share-based payment
A share-based payment is a transaction in which an entity receives goods or services in exchange for its equity instruments or incurs liabilities depending on the price of the entity’s shares or other equity instruments.
Accounting requirements for share-based payments vary according to how the transaction will be paid, namely through the issuing of
- cash, or
- a combination of equity and cash.
Share-based payments are a broader concept than employee stock options. IFRS 2 is applicable to the issuance of shares or rights to shares in exchange for services or goods.
IFRS 2 encompasses a variety of items, including share appreciation rights, employee stock purchase plans, employee stock ownership plans, share option plans, and plans in which the issuance of shares (or rights to shares) is contingent upon market or non-market conditions.
IFRS 2 is mandatory for all entities. Private or smaller entities are not exempt. Additionally, subsidiaries that accept equity from their parent or another subsidiary in exchange for goods or services are covered by the Standard.
There are two exemptions to the general scope principle:
- First, shares issued in a business combination should be accounted for in accordance with IFRS 3 Business Combinations. However, care should be taken to distinguish between share-based payments made in connection with the purchase and those made in connection with continued employee services.
- Second, IFRS 2 excludes share-based payments from the scope of IAS 32 Financial Instruments: Presentation, or IAS 39 Financial Instruments: Recognition and Measurement, paragraphs 8-10. As a result, IAS 32 and IAS 39 should be applied to commodity-based derivative transactions with the possibility of settlement in shares or rights to shares.
Aside from transactions involving the procurement of goods and services, IFRS 2 does not apply to share-based payment transactions. As a result, dividends on the common stock, the purchase of treasury shares, and the issue of additional shares are all excluded.
Recognition and measurement
The issuing of shares or warrants to purchase shares necessitates growth in an equity component. When payment for goods or services does not represent an asset, IFRS 2 requires that the offsetting debit entry be expensed. The expense should be recognised concurrently with the consumption of the products or services.
For instance, the issuance of shares or rights to shares to purchase inventory would be recorded as an increase in inventory and would be expensed only upon sale or impairment of the inventory.
Fully vested shares, or rights to shares, are presumed to correspond to prior service, necessitating prompt expense of the grant-date fair value in its entirety. The issuing of shares to employees with a vesting time of, say, three years is regarded to be related to services performed during the vesting period. As a result, the grant date fair value of the share-based payment should be expensed during the vesting period.
As a general rule, the total expense associated with equity-settled share-based payments will equal the product of the total vesting instruments and their grant-date fair value. In summary, there is a recalculation to account for what occurs during the vesting period.
However, if the equity-settled share-based payment includes a market-related performance requirement, the expense is recognised even if all other vesting conditions are met. The following example illustrates a typical equity-settled share-based payment arrangement.