IFRIC 8, or the International Financial Reporting Interpretations Committee 8, provides guidance on the scope of International Financial Reporting Standard (IFRS) 2 Share-based Payment. IFRS 2 sets out the accounting requirements for share-based payment transactions, such as equity-settled and cash-settled share-based payments, and employee share purchase plans. IFRIC 8 clarifies the application of IFRS 2 to specific share-based payment transactions.
Definitions:
Share-based payment: A transaction in which an entity receives goods or services in exchange for its equity instruments or liabilities that are based on the price of its equity instruments.
Equity-settled share-based payment: A share-based payment transaction in which the entity receives goods or services in exchange for equity instruments, and the fair value of the equity instruments is used to measure the transaction.
Cash-settled share-based payment: A share-based payment transaction in which the entity receives goods or services in exchange for cash or other assets that are based on the price of its equity instruments.
Employee share purchase plan: A plan that allows employees to purchase equity instruments of the entity at a discounted price.
Explanations:
IFRIC 8 provides guidance on the application of IFRS 2 to the following specific share-based payment transactions:
Share-based payments to non-employees: IFRS 2 applies to share-based payment transactions with non-employees if the goods or services received are related to the entity’s business activities. The fair value of the goods or services received is used to measure the transaction, and the accounting treatment is similar to that for equity-settled share-based payments to employees.
Equity instruments granted in a business combination: If an entity grants equity instruments as part of a business combination, the fair value of the equity instruments is recognized as part of the consideration transferred for the business combination. The accounting treatment is similar to that for equity-settled share-based payments to employees.
Modification of a share-based payment transaction: If the terms of a share-based payment transaction are modified, the entity must account for the modification as a new grant, unless the fair value of the modified transaction is the same as the fair value of the original transaction. If the fair value of the modified transaction is less than the fair value of the original transaction, the entity must account for the difference as an expense.
Cash-settled share-based payment with an employee tax withholding obligation: If an entity is required to withhold tax on a cash-settled share-based payment, the entity must recognize a liability for the tax withholding obligation, and the amount withheld must be reflected as a cash outflow.
Examples:
Example 1: A company grants 1,000 share options to its employees, with a fair value of $10 per option. The vesting period is 3 years, and the exercise price is $12 per share. At the end of the vesting period, the market price of the shares is $15 per share. The total expense recognized by the company is:
Expense per year = (Fair value per option / Vesting period) x Number of options granted
Expense per year = ($10 / 3) x 1,000 = $3,333.33
Total expense = Expense per year x Vesting period
Total expense = $3,333.33 x 3 = $10,000
Example 2:
A company grants 1,000 share options to a non-employee consultant, with a fair value of $8 per option. The vesting period is 2 years, and the exercise price is $10 per share. At the end of the vesting period, the market price of the shares is $12 per share. The total expense recognized by the company is:
Expense per year = (Fair value per option / Vesting period) x Number of options granted
Expense per year = ($8 / 2) x 1,000 = $4,000
Total expense = Expense per year x Vesting period
Total expense = $4,000 x 2 = $8,000
Example 3: A company grants 1,000 share options to its employees, with a fair value of $10 per option. After one year, the company modifies the terms of the share options, and the exercise price is reduced to $8 per share. The fair value of the modified share options is $11 per option. The total expense recognized by the company is:
Original expense per year = (Fair value per option / Vesting period) x Number of options granted
Original expense per year = ($10 / 3) x 1,000 = $3,333.33
Original total expense = Original expense per year x Vesting period
Original total expense = $3,333.33 x 3 = $10,000
New expense per year = (Fair value per option / Vesting period) x Number of options granted
New expense per year = ($11 / 3) x 1,000 = $3,666.67
New total expense = New expense per year x Vesting period
New total expense = $3,666.67 x 3 = $11,000
Difference in expense = New total expense – Original total expense
Difference in expense = $11,000 – $10,000 = $1,000
The company must recognize the $1,000 difference in expense as an expense in the period of the modification.
Case studies:
XYZ Corporation granted share options to its employees. The fair value of the options was $20 per option, and the exercise price was $25 per share. The vesting period was 3 years. At the end of the vesting period, the market price of the shares was $30 per share. XYZ Corporation recognized an expense of $20,000 per year for the share options, for a total expense of $60,000 over the vesting period.
ABC Company granted share options to a consultant. The fair value of the options was $15 per option, and the exercise price was $20 per share. The vesting period was 2 years. At the end of the vesting period, the market price of the shares was $25 per share. ABC Company recognized an expense of $7,500 per year for the share options, for a total expense of $15,000 over the vesting period.
DEF Inc. granted share options to its employees. After one year, DEF Inc. modified the terms of the share options, and the exercise price was reduced to $18 per share. The fair value of the modified share options was $22 per option. The original fair value of the options was $20 per option. The vesting period was 3 years. DEF Inc. recognized an expense of $20,000 per year for the original share options, for a total expense of $60,000 over the vesting period. DEF Inc. recognized an additional expense of $6,000 for the modified share options, for a total expense of $66,000 over the vesting period.