IFRS 2

Share-based Payment

1Objective and scope

IFRS 2 specifies the financial reporting for an entity when it undertakes a share-based payment transaction, including issuing share options to employees. It requires the entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions where share options are granted to employees.

2Key definitions

Equity-settled share-based payment transaction

One in which the entity receives goods or services as consideration for its own equity instruments (including options).

Cash-settled share-based payment transaction

One in which the entity acquires goods or services by incurring a liability to transfer cash or other assets for amounts based on the price of its equity instruments (e.g. share appreciation rights).

Grant date

The date at which the entity and the counterparty have a shared understanding of the terms and conditions of the arrangement.

Vesting conditions

Conditions that determine whether the entity receives services entitling the counterparty to receive the share-based payment - service conditions and performance conditions (split further into market and non-market conditions).

3Measurement

For equity-settled transactions with employees, the fair value of the equity instruments granted is measured at grant date, using an option pricing model where relevant, and is not subsequently remeasured. The total expense is spread over the vesting period, with a corresponding increase in equity.

Equity-settled expense with a graded vesting estimate

Fair value per option at grant date: 20. Options granted: 1,000 to 100 employees (10 each). Vesting period: 3 years.

Year 1: expect 90 employees to remain -> expense = (90 x 10 x 20) x 1/3 = 6,000

Year 2: revise to expect 85 employees to remain -> cumulative expense = (85 x 10 x 20) x 2/3 = 11,333; charge for the year = 11,333 - 6,000 = 5,333

Year 3: 82 employees actually vest -> cumulative expense = 82 x 10 x 20 = 16,400; charge for the year = 16,400 - 11,333 = 5,067

The number of instruments expected to vest is re-estimated at each reporting date for service and non-market performance conditions (so the cumulative expense is trued up, as above), but a market condition (e.g. a share price target) is built into the grant-date fair value itself and is NOT revised later, even if the market condition is ultimately not met. Cash-settled transactions are measured at fair value at each reporting date until settlement, with all changes in fair value recognised in profit or loss - unlike the equity-settled case, this is remeasured every period.

4Presentation and disclosure

The nature and extent of share-based payment arrangements that existed during the period
How the fair value of the goods or services received, or the equity instruments granted, was determined
The effect of share-based payment transactions on the entity's profit or loss for the period and on its financial position

5Examinable focus

What KASNEB tests

The graded-vesting expense computation above, with a mid-scheme revision to the number of employees expected to stay, is the standard numerical question. Distinguishing a market condition (never revised) from a non-market performance or service condition (re-estimated every period) is the recurring written trap.