IFRS 2 Quick-start best share-based payments

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IFRS 2 Quick-start best share-based payments – A share-based payment is accounted for under IFRS 2 if it meets the definition of a share-based payment transaction and the transaction is not specifically scoped out of the standard.

The standard does not contain a stand-alone definition of a share-based payment but provides a complex two-step definition using the terms ‘share-based payment arrangement’ and ‘share-based payment transaction’. The definitions are as follows. (IFRS 2 A Defined terms)

A ‘share-based payment arrangement’ is an agreement between the entity (or another group entity or any shareholder of any group entity) and another party, including an employee, that entitles the other party to receive:

  1. cash or other assets of the entity for amounts that are based on the price (or value) of equity instruments (including shares or share options) of the entity or another group entity; or
  2. equity instruments (including shares or share options) of the entity or another group entity, provided that the specified vesting conditions are met.

A ‘share-based payment transaction’ is a transaction in which the entity:

  1. receives goods or services from the supplier of those goods or services, including an employee, in a share-based payment arrangement; or
  2. incurs an obligation to settle the transaction with the supplier in a share-based payment arrangement when another group entity receives those goods or services.

In defining a share-based payment arrangement, a ‘group’ is defined as a parent and its subsidiaries as set out in IFRS 10 Consolidated Financial Statements. This determination is made from the perspective of the reporting entity’s ultimate parent. The requirement to treat transactions involving instruments of another entity as share-based payments applies only to transactions involving equity instruments of a group entity (IFRS 2 A Defined terms, IFRS 2 43A).

These definitions are complex because they include not only share-based payments that involve the reporting entity and the supplier, but also those that involve other group entities or shareholders. IFRS 2 Quick-start best share-based payments

FAQIFRS.com distinguishes between the following types of share-based payment transactions: IFRS 2 Quick-start best share-based payments

  1. share-based payment transactions that involve only the supplier of goods or services and the reporting entity – i.e. the reporting entity receives the goods or services and settles the transaction in its own equity instruments or in a payment based on its own equity instruments; and
  2. share-based payment transactions that involve the supplier, the reporting entity and at least one other group entity or a shareholder of any group entity (group share-based payment transactions).

Identify the share-based payment

The following flowchart illustrates the steps to analyse whether a transaction is a share-based payment transaction in the scope of IFRS 2. This analysis covers transactions that involve only the supplier of goods and services and the reporting entity – i.e. the reporting entity receives the goods or services and settles the transaction in its own equity instruments or a payment based on its own equity instruments. The reporting entity can be a group or a separate legal entity. IFRS 2 Quick-start best share-based payments

Does the reporting entity receive identifiable goods or services?

No

Do circumstances indicate that the reporting entity receives unidentifiable goods or services?

↓↓ Yes ↓↓

IFRS 2 Quick-start best share-based payments

Is the consideration ‘share-based’ – i.e. either in equity instruments of the reporting entity or in a payment in cash or other assets based on such equity instruments?

No

Yes, ↓ No

↓↓ Yes ↓↓

IFRS 2 Quick-start best share-based payments

Does the counterparty act in its capacity as a shareholder?

Yes

No

↓↓ No ↓↓

IFRS 2 Quick-start best share-based payments

Does the transaction meet the definition of a business combination?

Yes

No

↓↓ No ↓↓

IFRS 2 Quick-start best share-based payments

Are the goods or services acquired in a contract that is accounted for as a financial instrument?

Yes

No

↓↓ No ↓↓

IFRS 2 Quick-start best share-based payments

The transaction is a share-based payment transaction in the scope of IFRS 2.

The transaction is not a share-based payment transaction in the scope of IFRS 2.

If a transaction is a share-based payment transaction in the scope of IFRS 2, then the next step is to determine the classification of the transaction as either equity-settled, cash-settled or a transaction in which one party has the choice of settlement.

Further steps include determining whether the counterparty is an employee or a non-employee (see below).

If a transaction is in the scope of IFRS 2, then the requirements of the standard specify both the initial and the subsequent accounting for the equity instruments issued or liability incurred, including requirements for planned and unplanned repurchases of vested shares.

Sometimes arrangements involve entities that are outside the reporting entity.

IFRS 2 Quick-start best share-based payments

In this diagram, if Subsidiary S is the reporting entity and Parent P grants its own equity instruments to the employees of S or if S grants equity instruments of P to its own employees, then from the perspective of S’s financial statements this is a share-based payment arrangement involving an entity outside the reporting entity.

This is because P is not part of the reporting entity when S prepares its financial statements. Share-based payment arrangements that involve entities outside the reporting entity are referred to as ‘group share-based payment arrangements’ if the other entity is, from the perspective of Ultimate Parent UP, in the same group as the reporting entity.

Basic features of share-based payments

This chapter addresses only scope issues that arise in share-based payment transactions that do not involve other group entities or shareholders. Therefore, all transactions discussed in this narrative can be described as follows.

A transaction in which the entity receives goods or services in an arrangement that entitles the supplier to receive equity instruments of the entity, or cash or other assets of the entity, for amounts that are based on the price (or value) of equity instruments of the entity.

Goods or services

Definition of goods or services

The most common goods or services received in exchange for a share-based payment are employee services. However, services received can be provided by parties other than employees – e.g. consultancy services.

Goods can include inventories, consumables, property, plant and equipment, intangible assets and other non-financial assets.

Employee – Non-employee

Although the recognition requirements are similar for share-based payment transactions with employees and share-based payment transactions with non-employees, the measurement requirements differ in many respects. Therefore, it is important to determine the nature of the counterparty.

IFRS 2 does not define a non-employee. However, it does indicate what the term ‘employees or others providing similar services’ encompasses (see Chapter 6.1) and notes that this includes non-executive directors. All other counterparties – i.e. those who are not considered employees or others providing similar services – are considered non-employees.

When assessing whether an individual is rendering services in the capacity of an employee or a non-employee, in our view the substance of the relationship between the entity and the individual should be considered, rather than simply the legal form of the arrangement. For example, an entity may consider one or more of the following factors to determine whether an individual is rendering services in the capacity of an employee. This list is not intended to be exhaustive and the assessment requires judgement.

  • The entity is able to direct the individual’s services in the same way as those of individuals regarded as employees for legal or tax purposes.
  • The services rendered are similar to those rendered by employees.
  • The service provider is able to determine when and how the services are provided.

Counterparty classified as employee

  • Company B grants share options to Company Z, conditional on Z providing specified services to B. The services that Z is obliged to render are the services of an individual, W, who is covering for an employee on long-term leave. Z is a ‘one-person’ company set up by W for personal tax reasons. Although in this example Z is not an individual but a company, the services are similar to those rendered by employees, because the services comprise solely the personal services of W. Therefore, we believe that the counterparty (Z) should be classified as an employee.
  • Company C receives specialised computer services from Mr K, an individual. Mr K is not a legal employee but works under a contract for services under the direction of C in the same way as individuals regarded as employees for legal or tax purposes. Mr K works one day a week for C and provides similar services to other companies in the remainder of the week. As consideration for these services, C grants to Mr K a share-based payment. In this example, C has the ability to direct Mr K’s services in the same way as those of its employees. Therefore, we believe that the counterparty (Mr K) should be classified as an employee.

In the above cases, the recognition and measurement principles for employee transactions apply to the share-based payment

Counterparty classified as non-employee

  • In contrast to the above example, Company C grants share options to Company Z, conditional on Z providing specified services to C. The services that Z is obliged to render are to design C’s new logo. Z is a small company with multiple owners and several individuals are expected to work on the project. In this example, the services are not required from a specified individual, the services are not similar to those rendered by employees, Z can determine when and how the services are performed, and the share options are granted to Z (i.e. not to a specified individual). Therefore, the counterparty should be classified as a non-employee.

Identification of goods or services

Goods or services may be either received when a share-based payment is granted or expected to be received in the future.

An entity may grant a share-based payment without any specifically identifiable goods or services being received in return. In the absence of specifically identifiable goods or services, other circumstances may indicate that goods or services have been received or will be received (see 11.2.40).

An example in which no goods or services are identifiable but unidentifiable goods or services are received are many share-based payments made to historically disadvantaged individuals under South Africa’s Black Economic Empowerment (BEE) initiative.

Unidentifiable goods or services in a share-based payment under a South African BEE scheme

In response to the BEE government policy, Company S, a South African company, transfers shares to Company B, which is owned by historically disadvantaged individuals. The shares are issued for zero consideration.

S cannot identify any specific goods or services received in consideration for this transfer because B is not required to do anything in return for the shares. However, by meeting certain requirements of the BEE policy, S will benefit by improving its ability to tender for government contracts. IFRS 2 illustrates that these benefits represent unidentifiable goods or services received in exchange for the share-based payment and bring the arrangement into the scope of IFRS 2.

In other cases, there may be specifically identifiable goods or services received in exchange for the share-based payment. If the identifiable consideration received appears to be less than the fair value of the equity instruments granted or liability incurred, then typically this indicates that other consideration (i.e. unidentifiable goods or services) has also been (or will be) received. This issue is relevant in share-based payment transactions with non-employees when the goods or services are measured directly at their fair value. (IFRS 2 13A)

Goods or services from a supplier

The goods or services received or to be received by the entity need to be provided by the counterparty in its capacity as a supplier of goods or services. If the goods or services are provided by a counterparty in its capacity as a shareholder, then the transaction is not a share-based payment transaction (IFRS 2 4).

Consideration in form of share-based payment

In its basic form, a share-based payment transaction requires the entity to settle the transaction by either transferring its own equity instruments or making a payment in cash or other assets for amounts that are based on the price (or value) of its equity instruments.

Depending on the type of consideration to be paid, the payment is referred to as either an equity-settled or a cash-settled share-based payment.

Equity instruments of the entity

The basic definition of a share-based payment arrangement refers to equity instruments of the entity.

What constitutes an equity instrument ‘of the entity’ is an issue of particular interest in consolidated financial statements. In the consolidated financial statements, equity instruments of the entity comprise the equity instruments of any entity that is included in the group – i.e. the parent and its subsidiaries.

Basis of cash payments

If the entity does not settle in its own equity instruments but in a payment of cash or other assets, then the amount is a share-based payment if it is based on the price (or value) of its equity instruments (or the equity instruments of another entity in the same group). IFRS 2 Quick-start best share-based payments

A common example of a cash payment based on the price (or value) of an equity instrument of the entity is when an entity grants SARs. SARs entitle the holder to receive a cash payment that equals the increase in value of the shares from a specified level over a specified period of time – e.g. from grant date to settlement date.

In this case, the counterparty directly participates in changes of the value of the underlying equity instrument and, accordingly, the cash payment is based on the price (or value) of the equity instrument. Another common example of a cash-settled share-based payment is a payment based on the value of an equity instrument at a specific date – e.g. vesting date or settlement date – rather than on the increase in value. IFRS 2 Quick-start best share-based payments

Sometimes it is difficult to assess whether the cash payment is based on the price or value of the equity instrument.

The following are basic scope examples that illustrate the analysis of the basic features of share-based payments in determining whether a transaction is in the scope of IFRS 2.

Scenario

In or out of IFRS 2?

Considerations

Entity B grants 10 shares to its employees provided that they remain in service for the next 12 months.

IFRS 2 Quick-start best share-based payments

In

IFRS 2 Quick-start best share-based payments

This is an equity-settled share-based payment.

The employees will receive the shares of B if they provide the required period of service to the entity.

Entity C grants employees a cash bonus equal to C’s share price growth provided that they remain in service over the next 12 months.

IFRS 2 Quick-start best share-based payments

IFRS 2 Quick-start best share-based payments

In

IFRS 2 Quick-start best share-based payments

This is a cash-settled share-based payment.

C has an obligation to pay cash based on the change in share price to the employees who provide the required service; this award is also known as an SAR.

Entity E’s share price is 120. E awards a cash bonus of 120 to employees, payable in one year to those who remain in service during the next 12 months.

IFRS 2 Quick-start best share-based payments

IFRS 2 Quick-start best share-based payments

IFRS 2 Quick-start best share-based payments

IFRS 2 Quick-start best share-based payments

Out

IFRS 2 Quick-start best share-based payments

IFRS 2 Quick-start best share-based payments

IFRS 2 Quick-start best share-based payments

This is not a share-based payment.

Although the payment to the employees is linked to the delivery of service from the employees, the payment is not based on the share price of E.

For example, if the share price increases or decreases over the period, the employees would still receive the 120. The award is considered an employee benefit in the scope of IAS 19 Employee

Benefits.

Entity D awards a cash bonus of 500 to employees, payable in one year to those who remain in service if D’s share price exceeds a price of 10 per share during the next 12 months.

IFRS 2 Quick-start best share-based payments

IFRS 2 Quick-start best share-based payments

Out

IFRS 2 Quick-start best share-based payments

IFRS 2 Quick-start best share-based payments

This is not a share-based payment.

Although D has an obligation if the share price-related target is met and the employees provide the required services, the amount of the payment is not based on the share price of D. The award is considered an employee benefit in the scope of IAS 19.

See also:

IFRS 2 Quick-start best share-based payments

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