Examples of IFRS 2: Share-Based Payment

Employee Stock Option Plans

• Scenario: A company grants stock options to its employees as part of their compensation package. The options allow employees to purchase shares at a set price in the future.
• Accounting Treatment: Under IFRS 2, the company must recognize an expense for the options over the vesting period. The expense is measured based on the fair value of the options at the grant date, estimated using valuation models like the Black-Scholes model or binomial models.
• Journal Entry: During the vesting period, the company records the expense in the income statement and a corresponding increase in equity (share-based payment reserve).

Equity-Settled Transactions with Suppliers

• Scenario: A company issues shares to a supplier in exchange for goods or services. This is common in startup companies that might not have sufficient cash flow but have valuable equity to offer.
• Accounting Treatment: The company must measure the transaction at the fair value of the goods or services received, or the fair value of the equity instruments issued, whichever is more reliably measurable.
• Journal Entry: The company records the value of the goods or services received as an expense or asset, depending on the nature of the transaction, and credits equity for the value of the shares issued.

Cash-Settled Share-Based Payments

• Scenario: A company grants a share-based payment that is settled in cash. For example, the company grants a performance-based cash bonus that is linked to the value of its shares.
• Accounting Treatment: The company must recognize a liability for the fair value of the cash payment at the end of each reporting period. The fair value is re-measured at each reporting date until the liability is settled.
• Journal Entry: The company records the expense in the income statement and increases the liability on the balance sheet. Changes in fair value are adjusted through the income statement.

Modification of Share-Based Payment Awards

• Scenario: A company modifies the terms of an existing share-based payment arrangement. For example, the exercise price of stock options is reduced or the vesting conditions are altered.
• Accounting Treatment: The company must account for the modification by recognizing any incremental fair value resulting from the modification. The expense is recognized over the remaining vesting period.
• Journal Entry: The company recognizes the incremental expense resulting from the modification, adjusting the expense previously recorded and reflecting the new fair value in equity or liability, as appropriate.

Share-Based Payments with Non-Employees

• Scenario: A company grants share options to consultants as payment for advisory services. The options are typically granted with certain vesting conditions.
• Accounting Treatment: The company recognizes the fair value of the services received over the vesting period. The measurement of the fair value of the equity instruments issued is based on the services provided.
• Journal Entry: The company records an expense for the services received and a corresponding increase in equity.

Performance-Based Share Awards

• Scenario: A company awards shares to executives contingent upon achieving specific performance targets. The targets may include financial metrics or strategic goals.
• Accounting Treatment: The company estimates the fair value of the awards at the grant date, incorporating the probability of achieving the performance targets. The expense is recognized over the performance period.
• Journal Entry: The company records an expense in the income statement and a corresponding increase in equity, adjusting for any changes in the likelihood of meeting performance targets.

International Considerations

• Scenario: A multinational corporation has subsidiaries in various countries with different tax and legal environments affecting share-based payments.
• Accounting Treatment: The parent company consolidates the share-based payments of its subsidiaries according to IFRS 2. Any differences in local regulations or tax implications are accounted for separately but consolidated in the group financial statements.
• Journal Entry: The parent company records the share-based payment expenses of its subsidiaries, adjusting for any differences in accounting treatments or currency translations.