IFRS 2: Share-based payment transactions

IFRS 2 pertains to creation of rights or options in shares of the company to employees or others. Grant of shares or share options to employees and directors is a common feature with most companies. Besides, companies may sometimes issue share options to creditors as well. Transactions where is granting of shares or share options may generically be referred to as “share-based payment transactions”. These transactions mostly involve the company receiving employment services, directorial services, or other goods or services, and the company in turn settling the supply of goods or services in form of shares or share warrants. The shares are mostly equities of the company (note that the meaning of “equity” under accounting standards is not the same as legal meaning of equity).

The key consideration in share-based payment transactions is the valuation of the equity component, initial recognition of such transactions, and the allocation of the cost of goods/services over accounting periods. The main objective of the standard is to ensure expensing of the cost of shares or share options granted in share-based payment transactions, on the assumption that such shares/share options have been issued at less than their fair value. That is to say, if shares/share options have been issued at their fair value, then the question of determination of the expenditure for acquisition of goods/services is quite simple – such fair value is the expenditure. Also, it is important to note that the Standard applies only where shares/share options have been granted for acquisition of goods/services. That is, issue of shares to existing shareholders, either without or with inadequate consideration, is a transaction with shareholders (that is, bonus shares, or issue of shares with a bonus component, see notes under IAS 33) and does not come under this standard.

Share-based payment transactions are of 3 types – equity-settled, cash-settled, and optionally-settled.

• A transaction is equity-settled where the entity receives goods/services that are settled by issuing equity instruments (that is, shares or share options).
• A transaction is cash-settled where the entity receives goods/services, at a value which is based on the price of the entity’s equity instruments. That is to say, it is almost as if the entity was to issue equity instruments for cash, but instead of getting cash in lieu, it gets goods/services. It may not be difficult to understand that as the value of goods/services obtained is equal to the fair value of equity instruments, the issue of equity instruments is only a mode of payment. Hence, under the cash-settled option, the issue of equity instruments is only a way of settling a financial obligation.
• The transaction is said to be optionally equity or cash settled, if either the entity or the counterparty has the option of settling it either in equity, or cash.

Where the entity has issued equity-settled instruments, it shall recognize a credit to relevant equity account, and:

• An asset where the goods/services being acquired for such issue qualify to be treated as an asset;
• An expense where goods/services being acquired for such issue do not qualify to be treated as an asset.

For instance, equity instruments issued to employees will give rise to an expense, but one issued for purchase of machinery will give rise to an asset.

In case of cash-settled instruments, if the entity has acquired goods/services, there is creation of a liability. Note that since cash-settled instruments are merely a mode of settling a liability, if the goods/services have been acquired, it would lead to creation of a financial liability rather than equity instrument.

Para 12 provides that the fair value of goods/services received in lieu of equity instruments may be difficult to measure, particularly in case of employee stock options. Hence, the fair value of goods/services in case of such transactions is measured by reference to the fair value of equity instruments.

In case of equity-settled instruments, particularly those issued to employees, there is most commonly a grant date, a vesting date, and an exercise date. The vesting date is the date when the equity instrument gets vested, that is, the employee becomes entitled to the equity instrument. Typically, an employee has to complete a certain number of years after the grant date before being entitled to the equity instrument, that is, before the vesting date. If the vesting happens immediately, then it is presumed that the services pertinent to the equity instrument have been received, resulting into booking of an expense and corresponding credit to the equity account immediately. If the vesting happens in future, then the services will be deemed to be received over the vesting period, that is, the period from the grant date to the vesting date when the vesting conditions are satisfied, for example, the specified tenure of employment is completed.

Paras 16-18 contain guidance as to how and when to ascertain the fair value of the equity instruments. The fair value of equity instruments is measured, in case of employee stock options, on the grant date, and in case of equity instruments issued to others, on the date of acquisition of the goods/services in question. Para 24 provides that in rare cases where fair value of equity instruments cannot be measured reliably, the intrinsic value of the equity instruments may be treated as the fair value.

There are detailed provisions in the Standard on modification of vesting conditions, reload features, etc.

In case of cash-settled instruments, it is the fair value of the goods/services that is important, and the same is booked as a liability.

In case of optionally-settled share-based payment plans, the entity shall treat is as a cash-settled plan, to the extent a liability for payment for the goods/services has been incurred, and as a equity-settled plan, for the remaining portion. Para 34-40 pertain to optionally-settled payment plans.