Share-based payment transactions are transactions in which entities receive goods or services as consideration for either equity instruments of the entity (or the entity’s parent or another entity within the same group) (‘equity-settled share-based payment’) or for cash (or other assets), where the amount is based on the price or value of the entity’s shares (‘cash-settled share-based payment’). The most common application is to employee share schemes, such as share option schemes. However, entities sometimes also pay for other expenses such as professional fees, and for the purchase of assets, by means of share-based payment.
Under IFRS 2, ‘Share-based payment’, the accounting treatment is based on the fair value of the instruments. The accounting in this area can be difficult, due to the complex models that need to be used to calculate the fair value of options and also due to the variety and complexity of schemes. In addition, the standard requires extensive disclosures. The result generally is to reduce reported profits, especially in entities that use share-based payment extensively as part of their remuneration strategy.
All transactions involving share-based payment are recognized as expenses or assets, as appropriate, over any vesting period.
Equity-settled share-based payment transactions are measured at the grant date fair value for employee services; and, for non-employee transactions, at the fair value of the goods or services received at the date on which the entity recognizes the goods or services. If the fair value of the goods or services cannot be estimated reliably such as employee services or circumstances in which the goods or services cannot be specifically identified the entity uses the fair value of the equity instruments granted.
Since the publication of IFRIC 8, ‘Scope of IFRS 2’, in January 2006, management needs to consider if there are any unidentifiable goods or services received or to be received by the entity, as these also have to be measured in accordance with IFRS 2.
Once the grant date fair value has been determined, equity-settled share-based payment transactions are not re-measured. The treatment is different for cash-settled share-based payment transactions: cash-settled awards are measured at the fair value of the liability. The liability is re-measured at each balance sheet date and at the date of settlement, with changes in fair value recognized in the income statement.
You may want to read the other chapters as well:
IFRS-1: First Time Adoption of IFRS
IFRS-2: Share-based Payment
IFRS-3: Business Combination
IFRS-4: Insurance Contract
IFRS-5: Disposal of Subsidiaries, Business and Non-current Asset
IFRS-6: Extractive Industries
IFRS-7, IAS 32 & 39: Financial Instruments
IFRS-8: Segment Reporting