Financial Reporting FR

IFRS 2 Share-based Payment

IFRS 2 Share-based Payment
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Introduction:

IFRS 2, Share-based Payment, provides guidance on accounting for equity-settled and cash-settled share-based payment transactions. Share-based payments are a form of compensation where an entity issues its equity instruments to employees or other parties in exchange for goods or services. This standard aims to ensure that entities account for share-based payment transactions consistently and fairly. In this article, we will discuss the rules, descriptions, examples, case studies, and new developments related to IFRS 2.

 

Rules and Descriptions:

IFRS 2 applies to all share-based payment transactions, including those with employees, non-employees, and transactions in which an entity pays for goods or services with equity instruments. The standard distinguishes between equity-settled and cash-settled share-based payment transactions.

 

Equity-settled share-based payment transactions:

Equity-settled share-based payment transactions are those in which an entity receives goods or services from its employees or other parties in exchange for equity instruments of the entity. Under IFRS 2, the fair value of the equity instruments granted is recognized as an expense over the vesting period of the equity instruments. The vesting period is the period over which the employees become entitled to the equity instruments granted. The fair value of the equity instruments granted is determined at the grant date, and the expense is recognized based on the fair value of the equity instruments at each reporting date until the equity instruments are fully vested.

 

Cash-settled share-based payment transactions:

Cash-settled share-based payment transactions are those in which an entity receives goods or services from its employees or other parties in exchange for cash payments based on the price or value of the entity’s equity instruments. Under IFRS 2, the entity recognizes the liability and the corresponding expense at the fair value of the liability on the grant date and revises the fair value of the liability at each reporting date until the liability is settled. The fair value of the liability is determined at the grant date, and the expense is recognized based on the fair value of the liability at each reporting date until the liability is settled.

 

Examples:

 

Equity-settled share-based payment transaction:

XYZ Ltd grants its employees 100,000 share options, with a vesting period of three years. The fair value of each option is $5. The fair value of the options granted is $500,000 ($5 x 100,000). The expense recognized by XYZ Ltd each year for three years is $166,667 ($500,000 / 3).

 

Cash-settled share-based payment transaction:

ABC Ltd grants a cash bonus of $100,000 to its employees based on the increase in its share price over the next two years. The fair value of the liability on the grant date is $80,000. At the end of the first year, the fair value of the liability is $90,000, and at the end of the second year, the fair value of the liability is $70,000. ABC Ltd recognizes an expense of $80,000 at the grant date, $10,000 at the end of the first year, and reverses $20,000 at the end of the second year, resulting in a total expense of $70,000 over the two-year period.