EDU BOUND VOLUME 2012_IFRS 2_PART A_159.pdf

IFRS 2

© IFRS Foundation A85

International Financial Reporting Standard 2

Share-based Payment

In February 2004 the International Accounting Standards Board (IASB) issued IFRS 2Share-based Payment. The IASB amended IFRS 2 to clarify its scope in January 2008 and toincorporate the guidance contained in two related Interpretations (IFRIC 8 Scope of IFRS 2and IFRIC 11 IFRS 2—Group and Treasury Share Transactions) in June 2009.

Other IFRSs have made minor consequential amendments to IFRS 2. They include IFRS 3Business Combinations (as revised in January 2008), Improvements to IFRSs (issued April 2009)and IFRS 9 Financial Instruments (issued November 2009 and October 2010).

IFRS 2

A86 © IFRS Foundation

CONTENTSfrom paragraph

INTRODUCTION IN1

INTERNATIONAL FINANCIAL REPORTING STANDARD 2SHARE-BASED PAYMENTOBJECTIVE 1

SCOPE 2

RECOGNITION 7

EQUITY-SETTLED SHARE-BASED PAYMENT TRANSACTIONS 10

Overview 10

Transactions in which services are received 14

Transactions measured by reference to the fair value of the equity instruments granted 16

Determining the fair value of equity instruments granted 16

Treatment of vesting conditions 19

Treatment of non-vesting conditions 21A

Treatment of a reload feature 22

After vesting date 23

If the fair value of the equity instruments cannot be estimated reliably 24

Modifications to the terms and conditions on which equity instruments were granted, including cancellations and settlements 26

CASH-SETTLED SHARE-BASED PAYMENT TRANSACTIONS 30

SHARE-BASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVES 34

Share-based payment transactions in which the terms of the arrangement provide the counterparty with a choice of settlement 35

Share-based payment transactions in which the terms of the arrangement provide the entity with a choice of settlement 41

SHARE-BASED PAYMENT TRANSACTIONS AMONG GROUP ENTITIES 43A

DISCLOSURES 44

TRANSITIONAL PROVISIONS 53

EFFECTIVE DATE 60

WITHDRAWAL OF INTERPRETATIONS 64

APPENDICES

A Defined terms

B Application guidance

C Amendments to other IFRSs

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APPROVAL BY THE BOARD OF IFRS 2 ISSUED IN FEBRUARY 2004

APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 2:

Vesting Conditions and Cancellations issued in January 2008

Group Cash-settled Share-based Payment Transactions issued in June 2009

BASIS FOR CONCLUSIONS

IMPLEMENTATION GUIDANCE

TABLE OF CONCORDANCE

FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS EDITION

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International Financial Reporting Standard 2 Share-based Payment (IFRS 2) is set out inparagraphs 1–64 and Appendices A–C. All the paragraphs have equal authority.Paragraphs in bold type state the main principles. Terms defined in Appendix A are initalics the first time they appear in the Standard. Definitions of other terms are given inthe Glossary for International Financial Reporting Standards. IFRS 2 should be read inthe context of its objective and the Basis for Conclusions, the Preface to InternationalFinancial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selectingand applying accounting policies in the absence of explicit guidance. [Refer: IAS 8paragraphs 10–12]

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Introduction

Reasons for issuing the IFRS

IN1 Entities often grant shares or share options to employees or other parties. Shareplans and share option plans are a common feature of employee remuneration,for directors, senior executives and many other employees. Some entities issueshares or share options to pay suppliers, such as suppliers of professional services.

IN2 Until this IFRS was issued, there was no IFRS covering the recognition [Refer:paragraphs 7–9] and measurement [Refer: paragraphs 10–43] of these transactions.Concerns were raised about this gap in IFRSs, given the increasing prevalence ofshare-based payment transactions in many countries.

Reasons for amending IFRS 2 in June 2009

IN2A In June 2009 the International Accounting Standards Board amended IFRS 2 toclarify its scope and the accounting for group cash-settled share-based paymenttransactions in the separate or individual financial statements of the entityreceiving the goods or services when that entity has no obligation to settle theshare-based payment transaction. The amendments also incorporate theguidance contained in the following Interpretations:

• IFRIC 8 Scope of IFRS 2

• IFRIC 11 IFRS 2—Group and Treasury Share Transactions.

As a result, the Board withdrew IFRIC 8 and IFRIC 11.[Refer: paragraphs 2–3A, 13A, 43A–43D, 63 and 64, Appendix A (definitions of cash-settledshare-based payment transaction, equity-settled share-based payment transaction,share-based payment arrangement and share-based payment transaction) and paragraphsB45–B61Basis for Conclusions paragraphs BC6A, BC18A–BC18D, BC22A–BC22G, BC128A–BC128H,BC268A–BC268S and BC310AImplementation Guidance paragraphs IG5–IG5D (including IG example 1) and IG22A(including IG example 14)]

Main features of the IFRS

IN3 The IFRS requires an entity to recognise share-based payment transactions in itsfinancial statements, including transactions with employees or other parties tobe settled in cash, other assets, or equity instruments of the entity. There are noexceptions to the IFRS, other than for transactions to which other Standardsapply.[Refer: paragraphs 2–6]

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IN4 The IFRS sets out measurement principles and specific requirements for threetypes of share-based payment transactions:

(a) equity-settled share-based payment transactions, in which the entityreceives goods or services as consideration for equity instruments of theentity (including shares or share options); [Refer: Introduction paragraph IN5]

(b) cash-settled share-based payment transactions, in which the entity acquiresgoods or services by incurring liabilities to the supplier of those goods orservices for amounts that are based on the price (or value) of the entity’sshares or other equity instruments of the entity; [Refer: Introduction paragraphIN6] and

(c) transactions in which the entity receives or acquires goods or services andthe terms of the arrangement provide either the entity or the supplier ofthose goods or services with a choice of whether the entity settles thetransaction in cash or by issuing equity instruments. [Refer: Introductionparagraph IN7]

IN5 For equity-settled share-based payment transactions, the IFRS requires an entityto measure the goods or services received, and the corresponding increase inequity, directly, at the fair value of the goods or services received, unless that fairvalue cannot be estimated reliably. If the entity cannot estimate reliably the fairvalue of the goods or services received, the entity is required to measure theirvalue, and the corresponding increase in equity, indirectly, by reference to thefair value [Refer: paragraphs B1–B41] of the equity instruments granted.Furthermore:

(a) for transactions with employees and others providing similar services, theentity is required to measure the fair value of the equity instrumentsgranted, because it is typically not possible to estimate reliably the fairvalue of employee services received. [Refer: Basis for Conclusions paragraphsBC38 and BC92] The fair value of the equity instruments granted is measuredat grant date. [Refer: Basis for Conclusions paragraphs BC88–BC105 andImplementation Guidance paragraphs IG1–IG4]

(b) for transactions with parties other than employees (and those providingsimilar services), there is a rebuttable presumption that the fair value ofthe goods or services received can be estimated reliably. [Refer: paragraph13] That fair value is measured at the date the entity obtains the goods orthe counterparty renders service. [Refer: Basis for Conclusions paragraphsBC119–BC128] In rare cases, if the presumption is rebutted, the transactionis measured by reference to the fair value of the equity instrumentsgranted, measured at the date the entity obtains the goods or thecounterparty renders service.

(c) for goods or services measured by reference to the fair value of the equityinstruments granted, the IFRS specifies that all non-vesting conditions aretaken into account in the estimate of the fair value of the equityinstruments. However, vesting conditions that are not market conditionsare not taken into account when estimating the fair value of the shares oroptions at the relevant measurement date (as specified above). Instead,vesting conditions are taken into account by adjusting the number of

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equity instruments included in the measurement of the transactionamount so that, ultimately, the amount recognised for goods or servicesreceived as consideration for the equity instruments granted is based onthe number of equity instruments that eventually vest. [Refer: Basis forConclusions paragraphs BC170–BC184] Hence, on a cumulative basis, noamount is recognised for goods or services received if the equityinstruments granted do not vest because of failure to satisfy a vestingcondition [Refer: IG examples 1A–4] (other than a market condition).[Refer:paragraphs 19–21Basis for Conclusions paragraphs BC200–BC221]

(d) the IFRS requires the fair value of equity instruments granted to be basedon market prices, if available, and to take into account the terms andconditions upon which those equity instruments were granted. In theabsence of market prices, fair value is estimated, using a valuationtechnique to estimate what the price of those equity instruments wouldhave been on the measurement date in an arm’s length transactionbetween knowledgeable, willing parties. [Refer:paragraphs 16–18 and B1–B41Basis for Conclusions paragraphs BC129–BC199]

(e) the IFRS also sets out requirements if the terms and conditions of an optionor share grant are modified (eg an option is repriced) or if a grant iscancelled, repurchased or replaced with another grant of equityinstruments. For example, irrespective of any modification, cancellation orsettlement of a grant of equity instruments to employees, the IFRSgenerally requires the entity to recognise, as a minimum, the servicesreceived measured at the grant date fair value of the equity instrumentsgranted.[Refer:paragraphs 26–29 and B42–B44Basis for Conclusions paragraphs BC222–BC237BIG examples 7–9]

IN6 For cash-settled share-based payment transactions, the IFRS requires an entity tomeasure the goods or services acquired and the liability incurred at the fair valueof the liability. Until the liability is settled, the entity is required to remeasure thefair value of the liability at the end of each reporting period and at the date ofsettlement, with any changes in value recognised in profit or loss for the period.[Refer:paragraphs 30–33Basis for Conclusions paragraphs BC238–BC255IG example 12]

IN7 For share-based payment transactions in which the terms of the arrangementprovide either the entity or the supplier of goods or services with a choice ofwhether the entity settles the transaction in cash or by issuing equityinstruments, the entity is required to account for that transaction, or the

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components of that transaction, as a cash-settled share-based paymenttransaction if, and to the extent that, the entity has incurred a liability to settlein cash (or other assets), or as an equity-settled share-based payment transactionif, and to the extent that, no such liability has been incurred.[Refer:paragraphs 34–43Basis for Conclusions paragraphs BC256–BC268IG example 13]

IN8 The IFRS prescribes various disclosure requirements to enable users of financialstatements to understand:

(a) the nature and extent of share-based payment arrangements that existedduring the period [Refer: paragraphs 44, 45 and 52];

(b) how the fair value of the goods or services received, or the fair value of theequity instruments granted, during the period was determined [Refer:paragraphs 46–49 and 52]; and

(c) the effect of share-based payment transactions on the entity’s profit or lossfor the period and on its financial position [Refer: paragraphs 50–52].

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International Financial Reporting Standard 2 Share-based Payment

Objective

1 The objective of this IFRS is to specify the financial reporting by an entity when itundertakes a share-based payment transaction. In particular, it requires an entity toreflect in its profit or loss and financial position [Refer: Conceptual Frameworkparagraphs 4.4–4.7] the effects of share-based payment transactions, includingexpenses associated with transactions in which share options are granted toemployees.

Scope

[Refer: Basis for Conclusions paragraphs BC29–BC60]

2 An entity shall apply this IFRS in accounting for all share-based paymenttransactions, whether or not the entity can identify specifically some or all of thegoods or services received, including:

(a) equity-settled share-based payment transactions,

(b) cash-settled share-based payment transactions, and

(c) transactions in which the entity receives or acquires goods or services andthe terms of the arrangement provide either [Refer: paragraphs 41–43] theentity or the supplier of those goods or services [Refer: paragraphs 35–40]with a choice of whether the entity settles the transaction in cash (or otherassets) or by issuing equity instruments,E1

[Refer: paragraphs 34–43]

except as noted in paragraphs 3A–6. In the absence of specifically identifiablegoods or services, other circumstances may indicate that goods or services havebeen (or will be) received, in which case this IFRS applies. [Refer: Basis forConclusions paragraphs BC18A–BC18D][Refer also: Basis for Conclusions paragraphs BC8–BC18 for information on broad-basedemployee share plans]

3 [Deleted]

E1 [IFRIC Update—May 2006: Scope of IFRS 2: Share plans with cash alternatives at the discretion of the entityThe IFRIC considered whether an employee share plan in which the employer had the choice of settlement incash or in shares, and the amount of the settlement did not vary with changes in the share price of the entityshould be treated as a share-based payment transaction within the scope of IFRS 2. The IFRIC noted thatIFRS 2 defines a share-based payment transaction as a transaction in which the entity receives goods orservices as consideration for equity instruments of the entity or amounts that are based on the price of equityinstruments of the entity. The IFRIC further noted that the definition of a share-based payment transactiondoes not require the exposure of the entity to be linked to movements in the share price of the entity.Moreover, it is clear that IFRS 2 contemplates share-based payment transactions in which the terms of thearrangement provide the entity with a choice of settlement, since they are specifically addressed in paragraphs41–43 of IFRS 2. The IFRIC therefore believed that, although the amount of the settlement did not vary withchanges in the share price of the entity, such share plans are share-based payment transactions in accordancewith IFRS 2 since the consideration may be equity instruments of the entity. The IFRIC also believed that, evenin the extreme circumstances in which the entity was given a choice of settlement and the value of the sharesthat would be delivered was a fixed monetary amount, those share plans were still within the scope of IFRS 2.The IFRIC believed that, since the requirements of IFRS 2 were clear, the issue was not expected to createsignificant divergence in practice. The IFRIC therefore decided not to add the issue to the agenda.]

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3A A share-based payment transaction may be settled by another group entity (or ashareholder of any group entity) on behalf of the entity receiving or acquiring thegoods or services. Paragraph 2 also applies to an entity that

(a) receives goods or services when another entity in the same group (or ashareholder of any group entity) has the obligation to settle the share-basedpayment transaction, or

(b) has an obligation to settle a share-based payment transaction when anotherentity in the same group receives the goods or services

unless the transaction is clearly for a purpose other than payment for goods orservices supplied to the entity receiving them. [Refer: paragraphs 43A–43D, 63, 64 and B45–B61Basis for Conclusions paragraphs BC19–BC22G and BC268A–BC268S]

4 For the purposes of this IFRS, a transaction with an employee (or other party) inhis/her capacity as a holder of equity instruments of the entity is not a share-basedpayment transaction. For example, if an entity grants all holders of a particularclass of its equity instruments the right to acquire additional equity instrumentsof the entity at a price that is less than the fair value of those equity instruments,and an employee receives such a right because he/she is a holder of equityinstruments of that particular class, the granting or exercise of that right is notsubject to the requirements of this IFRS.

5 As noted in paragraph 2, this IFRS applies to share-based payment transactionsin which an entity acquires or receives goods or services. Goods includesinventories, consumables, property, plant and equipment, intangible assets andother non-financial assets. [Refer: Basis for Conclusions paragraphs BC18A–BC18D].However, an entity shall not apply this IFRS to transactions in which the entityacquires goods as part of the net assets acquired in a business combination asdefined by IFRS 3 Business Combinations (as revised in 2008), in a combination ofentities or businesses under common control as described in paragraphs B1–B4of IFRS 3, or the contribution of a business on the formation of a joint ventureas defined by IFRS 11 Joint Arrangements [Refer: Basis for Conclusions paragraphsBC24A–BC24D]. Hence, equity instruments issued in a business combination inexchange for control of the acquiree are not within the scope of this IFRS.However, equity instruments granted to employees of the acquiree in theircapacity as employees (eg in return for continued service) are within the scopeof this IFRS. Similarly, the cancellation, replacement or other modification[Refer: paragraphs 26–29] of share-based payment arrangements because of a businesscombination or other equity restructuring shall be accounted for in accordancewith this IFRS. IFRS 3 provides guidance on determining whether equityinstruments issued in a business combination are part of the considerationtransferred in exchange for control of the acquiree (and therefore within thescope of IFRS 3) or are in return for continued service to be recognised in thepost-combination period (and therefore within the scope of this IFRS). [Refer:IFRS 3 paragraphs 51–53 and B50–B62][Refer: Basis for Conclusions paragraphs BC23 and BC24D]

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6 This IFRS does not apply to share-based payment transactions in which the entityreceives or acquires goods or services under a contract within the scope ofparagraphs 8–10 of IAS 32 Financial Instruments: Presentation (as revised in 2003)1 orparagraphs 5–7 of IAS 39 Financial Instruments: Recognition and Measurement (asrevised in 2003). [Refer: Basis for Conclusions paragraphs BC25–BC28]

6A This IFRS uses the term ‘fair value’ in a way that differs in some respects from thedefinition of fair value in IFRS 13 Fair Value Measurement. Therefore, when applyingIFRS 2 an entity measures fair value in accordance with this IFRS, not IFRS 13.[Refer: IFRS 13 paragraph 6(a)]

RecognitionE2

[Refer: Basis for Conclusions paragraphs BC29–BC60, BC243–BC245, BC258, BC265 and BC287–BC310]

7 An entity shall recognise the goods or services received or acquired in ashare-based payment transaction when it obtains the goods or as the services arereceived. The entity shall recognise a corresponding increase in equity if thegoods or services were received in an equity-settled share-based paymenttransaction, or a liability if the goods or services were acquired in a cash-settledshare-based payment transaction.

8 When the goods or services received or acquired in a share-based paymenttransaction do not qualify for recognition as assets, they shall be recognised asexpenses.

9 Typically, an expense arises from the consumption of goods or services. Forexample, services are typically consumed immediately, in which case an expenseis recognised as the counterparty renders service. Goods might be consumed overa period of time or, in the case of inventories, sold at a later date, in which casean expense is recognised when the goods are consumed or sold. However,sometimes it is necessary to recognise an expense before the goods or services are

1 The title of IAS 32 was amended in 2005.

E2 [IFRIC Update—November 2006: Employee benefit trusts in the separate financial statements of the sponsorThe IFRIC discussed the application to separate financial statements of an issue that had been submitted inconnection with the amendment of SIC-12 Consolidation—Special Purpose Entities to include within its scopespecial purpose entities established in connection with equity compensation plans. The issue related to anemployee benefit trust (or similar entity) that has been set up by a sponsoring entity specifically to facilitate thetransfer of its equity instruments to its employees under a share-based payment arrangement. The trust holdsshares of the sponsoring entity that are acquired by the trust from the sponsoring entity or from the market.Acquisition of those shares is funded either by the sponsoring entity or by a bank loan, usually guaranteed bythe sponsoring entity. In most circumstances, the sponsoring entity controls the employee benefit trust. Insome circumstances, the sponsoring entity may also have a direct control of the shares held by the trust. Theissue is whether guidance should be developed on the accounting treatment for the sponsor’s equityinstruments held by the employee benefit trust in the sponsor’s separate financial statements. The IFRICdiscussed whether the employee benefit trust should be treated as an extension of the sponsoring entity, suchas a branch, or as a separate entity. The IFRIC noted that the notion of ‘entity’ is defined neither in theFramework nor in IAS 27 Consolidated and Separate Financial Statements. The IFRIC then discussed whetherthe sponsoring entity should, in its separate financial statements, account for the net investment according toIAS 27 or rather for the rights and obligations arising from the assets and liabilities of the trust. The IFRICnoted that, in some circumstances, the sponsoring entity may have direct control of the shares held by thetrust. The IFRIC also noted that the guidance included in the Framework and IAS 27 does not address theaccounting for the shares held by the trust in the sponsor’s separate financial statements. The IFRIC concludedthat it could not reach a consensus on this matter on a timely basis, given the different types of trusts and trustarrangements that exist. The IFRIC noted that this issue related to two active projects of the IASB: theConceptual Framework and the revision of IAS 27 in the course of the Consolidation project. For these reasons,the IFRIC decided not to add the issue to its agenda.]

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consumed or sold, because they do not qualify for recognition as assets. Forexample, an entity might acquire goods as part of the research phase [Refer: IAS 38paragraphs 54–56] of a project to develop a new product. Although those goodshave not been consumed, they might not qualify for recognition as assets underthe applicable IFRS.

Equity-settled share-based payment transactions

Overview

10 For equity-settled share-based payment transactions, the entity shall measure thegoods or services received, and the corresponding increase in equity, directly, atthe fair value [Refer: paragraphs B1–B41] of the goods or services received, unlessthat fair value cannot be estimated reliably. If the entity cannot estimate reliablythe fair value of the goods or services received, the entity shall measure theirvalue, and the corresponding increase in equity, indirectly, by reference to2 thefair value of the equity instruments granted.

11 To apply the requirements of paragraph 10 to transactions with employees andothers providing similar services,3 the entity shall measure the fair value [Refer:Appendix B and Basis for Conclusions paragraphs BC85–BC87] of the services received byreference to the fair value of the equity instruments granted, because typically itis not possible to estimate reliably the fair value of the services received, asexplained in paragraph 12. The fair value of those equity instruments shall bemeasured at grant date.[Refer: Basis for Conclusions paragraphs BC88–BC105]Implementation Guidance paragraphs IG1–IG4]

12 Typically, shares, share options or other equity instruments are granted toemployees as part of their remuneration package, in addition to a cash salary andother employment benefits. Usually, it is not possible to measure directly theservices received for particular components of the employee’s remunerationpackage. It might also not be possible to measure the fair value of the totalremuneration package independently, without measuring directly the fair valueof the equity instruments granted. Furthermore, shares or share options aresometimes granted as part of a bonus arrangement, rather than as a part of basicremuneration, eg as an incentive to the employees to remain in the entity’semploy or to reward them for their efforts in improving the entity’s performance.By granting shares or share options, in addition to other remuneration, the entityis paying additional remuneration to obtain additional benefits. Estimating the

2 This IFRS uses the phrase ‘by reference to’ rather than ‘at’, because the transaction is ultimatelymeasured by multiplying the fair value of the equity instruments granted, measured at the datespecified in paragraph 11 or 13 (whichever is applicable), by the number of equity instrumentsthat vest, as explained in paragraph 19.

3 In the remainder of this IFRS, all references to employees also include others providing similarservices.

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fair value of those additional benefits is likely to be difficult. Because of thedifficulty of measuring directly the fair value of the services received, the entityshall measure the fair value of the employee services received by reference to thefair value of the equity instruments granted.

13 To apply the requirements of paragraph 10 to transactions with parties other thanemployees, there shall be a rebuttable presumption that the fair value of thegoods or services received can be estimated reliably. That fair value shall bemeasured at the date the entity obtains the goods or the counterparty rendersservice [Refer: Basis for Conclusions paragraphs BC88–BC105 and Implementation Guidanceparagraphs IG5–IG7]. In rare cases, if the entity rebuts this presumption because itcannot estimate reliably the fair value of the goods or services received, the entityshall measure the goods or services received, and the corresponding increase inequity, indirectly, by reference to the fair value of the equity instruments [Refer:paragraph 13A and Basis for Conclusions paragraphs BC128D–BC128F] granted, measuredat the date the entity obtains the goods or the counterparty renders service [Refer:paragraphs 24 and 25]. [Refer: Basis for Conclusions paragraphs BC119–BC128]

13A In particular, if the identifiable consideration received (if any) by the entityappears to be less than the fair value of the equity instruments granted or liabilityincurred, typically this situation indicates that other consideration (ieunidentifiable goods or services) has been (or will be) received by the entity. Theentity shall measure the identifiable goods or services received in accordancewith this IFRS. The entity shall measure the unidentifiable goods or servicesreceived (or to be received) as the difference between the fair value of theshare-based payment and the fair value of any identifiable goods or servicesreceived (or to be received). The entity shall measure the unidentifiable goods orservices received at the grant date. However, for cash-settled transactions, theliability shall be remeasured at the end of each reporting period until it is settledin accordance with paragraphs 30–33.[Refer: Basis for Conclusions paragraphs BC128A–BC128HImplementation Guidance paragraphs IG5A–IG5D (including IG example 1)]

Transactions in which services are received

14 If the equity instruments granted vest immediately, the counterparty is notrequired to complete a specified period of service before becomingunconditionally entitled to those equity instruments. In the absence of evidenceto the contrary, the entity shall presume that services rendered by thecounterparty as consideration for the equity instruments have been received.[Refer: Basis for Conclusions paragraphs BC200–BC202] In this case, on grant date theentity shall recognise the services received in full, with a corresponding increasein equity.

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15 If the equity instruments granted do not vest until the counterparty completes aspecified period of service, the entity shall presume that the services to berendered by the counterparty as consideration for those equity instruments willbe received in the future, during the vesting period. [Refer: Basis for Conclusionsparagraphs BC200–BC202] The entity shall account for those services as they arerendered by the counterparty during the vesting period, with a correspondingincrease in equity. For example:

(a) if an employee is granted share options conditional upon completing threeyears’ service, then the entity shall presume that the services to berendered by the employee as consideration for the share options will bereceived in the future, over that three-year vesting period. [Refer: IG example 1A]

(b) if an employee is granted share options conditional upon the achievementof a performance condition and remaining in the entity’s employ until thatperformance condition is satisfied, and the length of the vesting periodvaries depending on when that performance condition is satisfied, theentity shall presume that the services to be rendered by the employee asconsideration for the share options will be received in the future, over theexpected vesting period. The entity shall estimate the length of theexpected vesting period at grant date, based on the most likely outcome ofthe performance condition. [Refer: IG examples 2 and 6] If the performancecondition is a market condition, the estimate of the length of the expectedvesting period shall be consistent with the assumptions used in estimatingthe fair value of the options granted, and shall not be subsequently revised.[Refer: IG example 6] If the performance condition is not a market condition,the entity shall revise its estimate of the length of the vesting period, ifnecessary, if subsequent information indicates that the length of thevesting period differs from previous estimates. [Refer: Basis for Conclusionsparagraph BC184 and IG example 2]

Transactions measured by reference to the fair value of the equity instruments granted

Determining the fair value of equity instruments granted [Refer: paragraphs B1–B41]

16 For transactions measured by reference to the fair value of the equity instrumentsgranted, an entity shall measure the fair value of equity instruments granted atthe measurement date, [Refer: Basis for Conclusions paragraphs BC88–BC128] based onmarket prices if available, taking into account the terms and conditions uponwhich those equity instruments were granted (subject to the requirements ofparagraphs 19–22).

17 If market prices are not available, the entity shall estimate the fair value of theequity instruments granted using a valuation technique to estimate what theprice of those equity instruments would have been on the measurement date inan arm’s length transaction between knowledgeable, willing parties. Thevaluation technique shall be consistent with generally accepted valuation

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methodologies for pricing financial instruments, and shall incorporate all factorsand assumptions that knowledgeable, willing market participants wouldconsider in setting the price (subject to the requirements of paragraphs 19–22).[Refer: Basis for Conclusions paragraphs BC129–BC199]

18 Appendix B [Refer: paragraphs B2–B41] contains further guidance on themeasurement of the fair value of shares and share options, focusing on thespecific terms and conditions that are common features of a grant of shares orshare options to employees.E3

Treatment of vesting conditions [Refer: Basis for Conclusions paragraphs BC200–BC221 and Implementation Guidanceparagraphs IG9–IG11]

19 A grant of equity instruments might be conditional upon satisfying specifiedvesting conditions. For example, a grant of shares or share options to an employeeis typically conditional on the employee remaining in the entity’s employ for aspecified period of time. There might be performance conditions that must besatisfied, such as the entity achieving a specified growth in profit or a specifiedincrease in the entity’s share price. Vesting conditions, other than marketconditions, shall not be taken into account when estimating the fair value of theshares or share options at the measurement date. Instead, vesting conditionsshall be taken into account by adjusting the number of equity instrumentsincluded in the measurement of the transaction amount so that, ultimately, theamount recognised for goods or services received as consideration for the equityinstruments granted shall be based on the number of equity instruments thateventually vest. Hence, on a cumulative basis, no amount is recognised for goodsor services received if the equity instruments granted do not vest because offailure to satisfy a vesting condition, eg the counterparty fails to complete aspecified service period, or a performance condition is not satisfied, subject to therequirements of paragraph 21. [Refer: IG examples 1A–3]

20 To apply the requirements of paragraph 19, the entity shall recognise an amountfor the goods or services received during the vesting period based on the bestavailable estimate of the number of equity instruments expected to vest [Refer:IG example 1A scenario 1] and shall revise that estimate, if necessary, if subsequent

E3 [IFRIC Update—November 2006: Fair value measurement of post-vesting transfer restrictions The IFRIC wasasked whether the estimated value of shares issued only to employees and subject to post-vesting restrictionscould be based on an approach that would look solely or primarily to an actual or synthetic market that consistedonly of transactions between an entity and its employees and in which prices, for example, reflected anemployee’s personal borrowing rate. The IFRIC was asked whether this approach was consistent with therequirements under IFRS 2. The IFRIC noted the requirements in paragraph B3 of Appendix B to IFRS 2, whichstates that ‘if the shares are subject to restrictions on transfer after vesting date, that factor shall be taken intoaccount, but only to the extent that the post-vesting restrictions affect the price that a knowledgeable, willingmarket participant would pay for that share. For example, if the shares are actively traded in a deep and liquidmarket, post-vesting transfer restrictions may have little, if any, effect on the price that a knowledgeable, willingmarket participant would pay for those shares.’ Paragraph BC168 of the Basis for Conclusions on IFRS 2 notesthat ‘the objective is to estimate the fair value of the share option, not the value from the employee’sperspective.’ Furthermore, paragraph B10 of Appendix B to IFRS 2 states that ‘factors that affect the value of theoption from the individual employee’s perspective only are not relevant to estimating the price that would be setby a knowledgeable, willing market participant.’ The IFRIC noted that these paragraphs require consideration ofactual or hypothetical transactions, not only with employees, but rather with all actual or potential marketparticipants willing to invest in restricted shares that had been or might be offered to them. The IFRIC believedthat the issue was not expected to create significant divergence in practice and that the requirements of IFRS 2were clear. The IFRIC therefore decided not to add the issue to the agenda.]

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information indicates that the number of equity instruments expected to vestdiffers from previous estimates. [Refer: IG example 1A scenario 2 and example 3] Onvesting date, the entity shall revise the estimate to equal the number of equityinstruments that ultimately vested, subject to the requirements of paragraph 21.

21 Market conditions, such as a target share price upon which vesting (orexercisability) is conditioned, shall be taken into account when estimating thefair value of the equity instruments granted. Therefore, for grants of equityinstruments with market conditions, the entity shall recognise the goods orservices received from a counterparty who satisfies all other vesting conditions(eg services received from an employee who remains in service for the specifiedperiod of service), irrespective of whether that market condition is satisfied.[Refer: IG example 5]

Treatment of non-vesting conditions

21A Similarly, an entity shall take into account all non-vesting conditions whenestimating the fair value of the equity instruments granted. Therefore, for grantsof equity instruments with non-vesting conditions, the entity shall recognise thegoods or services received from a counterparty that satisfies all vesting conditionsthat are not market conditions (eg services received from an employee whoremains in service for the specified period of service), irrespective of whetherthose non-vesting conditions are satisfied.

Treatment of a reload feature [Refer: Basis for Conclusions paragraphs BC188–BC192]

22 For options with a reload feature, the reload feature shall not be taken into accountwhen estimating the fair value of options granted at the measurement date.Instead, a reload option shall be accounted for as a new option grant, if and when areload option is subsequently granted.

After vesting date[Refer: Basis for Conclusions paragraphs BC218–BC221]

23 Having recognised the goods or services received in accordance with paragraphs10–22, and a corresponding increase in equity, the entity shall make nosubsequent adjustment to total equity after vesting date. For example, the entityshall not subsequently reverse the amount recognised for services received froman employee if the vested equity instruments are later forfeited or, in the case ofshare options, the options are not exercised. However, this requirement does notpreclude the entity from recognising a transfer within equity, ie a transfer fromone component of equity to another.

If the fair value of the equity instruments cannot be estimated reliably[Refer: paragraph 13, Implementation Guidance paragraph IG16 and IG example 10]

24 The requirements in paragraphs 16–23 apply when the entity is required tomeasure a share-based payment transaction by reference to the fair value of theequity instruments granted. In rare cases, the entity may be unable to estimatereliably the fair value of the equity instruments granted at the measurementdate, in accordance with the requirements in paragraphs 16–22. In these rarecases only, the entity shall instead:

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(a) measure the equity instruments at their intrinsic value, initially at the datethe entity obtains the goods or the counterparty renders service andsubsequently at the end of each reporting period and at the date of finalsettlement, with any change in intrinsic value recognised in profit or loss.For a grant of share options, the share-based payment arrangement isfinally settled when the options are exercised, are forfeited (eg uponcessation of employment) or lapse (eg at the end of the option’s life).

(b) recognise the goods or services received based on the number of equityinstruments that ultimately vest or (where applicable) are ultimatelyexercised. To apply this requirement to share options, for example, theentity shall recognise the goods or services received during the vestingperiod, if any, in accordance with paragraphs 14 and 15, except that therequirements in paragraph 15(b) concerning a market condition do notapply. The amount recognised for goods or services received during thevesting period shall be based on the number of share options expected tovest. The entity shall revise that estimate, if necessary, if subsequentinformation indicates that the number of share options expected to vestdiffers from previous estimates. On vesting date, the entity shall revise theestimate to equal the number of equity instruments that ultimately vested.After vesting date, the entity shall reverse the amount recognised for goodsor services received if the share options are later forfeited, or lapse at theend of the share option’s life. [Refer: Basis for Conclusions paragraph BC144]

25 If an entity applies paragraph 24, it is not necessary to apply paragraphs 26–29,because any modifications to the terms and conditions on which the equityinstruments were granted will be taken into account when applying the intrinsicvalue method set out in paragraph 24. However, if an entity settles a grant ofequity instruments to which paragraph 24 has been applied:

(a) if the settlement occurs during the vesting period, the entity shall accountfor the settlement as an acceleration of vesting, and shall thereforerecognise immediately the amount that would otherwise have beenrecognised for services received over the remainder of the vesting period.

(b) any payment made on settlement shall be accounted for as the repurchaseof equity instruments, ie as a deduction from equity, except to the extentthat the payment exceeds the intrinsic value of the equity instruments,measured at the repurchase date. Any such excess shall be recognised as anexpense.

Modifications to the terms and conditions on which equity instruments were granted, including cancellations and settlements[Refer: Basis for Conclusions paragraphs BC222–BC237B]

26 An entity might modify the terms and conditions on which the equityinstruments were granted. For example, it might reduce the exercise price ofoptions granted to employees (ie reprice the options), which increases the fairvalue of those options. [Refer: Implementation Guidance paragraph IG15 and IG example 7]The requirements in paragraphs 27–29 to account for the effects of modificationsare expressed in the context of share-based payment transactions with employees.

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However, the requirements shall also be applied to share-based paymenttransactions with parties other than employees that are measured by reference tothe fair value of the equity instruments granted. In the latter case, any referencesin paragraphs 27–29 to grant date shall instead refer to the date the entity obtainsthe goods or the counterparty renders service.

27 The entity shall recognise, as a minimum, the services received measured at thegrant date fair value of the equity instruments granted, unless those equityinstruments do not vest because of failure to satisfy a vesting condition (otherthan a market condition) that was specified at grant date. This appliesirrespective of any modifications to the terms and conditions on which the equityinstruments were granted, or a cancellation or settlement of that grant of equityinstruments. [Refer: IG example 8] In addition, the entity shall recognise the effectsof modifications that increase the total fair value of the share-based paymentarrangement or are otherwise beneficial to the employee. Guidance on applyingthis requirement is given in Appendix B. [Refer: paragraphs B42–B44]

28 If a grant of equity instruments is cancelled or settled during the vesting period(other than a grant cancelled by forfeiture when the vesting conditions are notsatisfied):

(a) the entity shall account for the cancellation or settlement as anacceleration of vesting, and shall therefore recognise immediately theamount that otherwise would have been recognised for services receivedover the remainder of the vesting period.

(b) any payment made to the employee on the cancellation or settlement of thegrant shall be accounted for as the repurchase of an equity interest, ie as adeduction from equity, except to the extent that the payment exceeds thefair value of the equity instruments granted, measured at the repurchasedate. Any such excess shall be recognised as an expense. However, if theshare-based payment arrangement included liability components, theentity shall remeasure the fair value of the liability at the date ofcancellation or settlement. Any payment made to settle the liabilitycomponent shall be accounted for as an extinguishment of the liability.

(c) if new equity instruments are granted to the employee and, on the datewhen those new equity instruments are granted, the entity identifies thenew equity instruments granted as replacement equity instruments for thecancelled equity instruments, the entity shall account for the granting ofreplacement equity instruments in the same way as a modification of theoriginal grant of equity instruments, in accordance with paragraph 27 andthe guidance in Appendix B. [Refer: paragraphs B42–B44 and IG examples 7–9].The incremental fair value granted is the difference between the fair valueof the replacement equity instruments and the net fair value of thecancelled equity instruments, at the date the replacement equityinstruments are granted. The net fair value of the cancelled equityinstruments is their fair value, immediately before the cancellation, lessthe amount of any payment made to the employee on cancellation of theequity instruments that is accounted for as a deduction from equity inaccordance with (b) above. If the entity does not identify new equity

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instruments granted as replacement equity instruments for the cancelledequity instruments, the entity shall account for those new equityinstruments as a new grant of equity instruments.

28A If an entity or counterparty can choose whether to meet a non-vesting condition,the entity shall treat the entity’s or counterparty’s failure to meet thatnon-vesting condition during the vesting period as a cancellation.

29 If an entity repurchases vested equity instruments, the payment made to theemployee shall be accounted for as a deduction from equity, except to the extentthat the payment exceeds the fair value of the equity instruments repurchased,measured at the repurchase date. Any such excess shall be recognised as anexpense.

Cash-settled share-based payment transactions

[Refer: Basis for Conclusions paragraphs BC238–BC255 and Implementation Guidance paragraphs IG18and IG19 (including IG example 12)]

30 For cash-settled share-based payment transactions, the entity shall measure thegoods or services acquired and the liability incurred at the fair value of theliability. Until the liability is settled, the entity shall remeasure the fair value ofthe liability at the end of each reporting period and at the date of settlement, withany changes in fair value recognised in profit or loss for the period.

31 For example, an entity might grant share appreciation rights to employees as partof their remuneration package, whereby the employees will become entitled to afuture cash payment (rather than an equity instrument), based on the increase inthe entity’s share price from a specified level over a specified period of time. Oran entity might grant to its employees a right to receive a future cash payment bygranting to them a right to shares (including shares to be issued upon the exerciseof share options [Refer: IG example 12]) that are redeemable, either mandatorily (egupon cessation of employment) or at the employee’s option.

32 The entity shall recognise the services received, and a liability to pay for thoseservices, as the employees render service. For example, some share appreciationrights vest immediately, and the employees are therefore not required tocomplete a specified period of service to become entitled to the cash payment. Inthe absence of evidence to the contrary, the entity shall presume that the servicesrendered by the employees in exchange for the share appreciation rights havebeen received. Thus, the entity shall recognise immediately the services receivedand a liability to pay for them. If the share appreciation rights do not vest untilthe employees have completed a specified period of service, the entity shallrecognise the services received, and a liability to pay for them, as the employeesrender service during that period. [Refer: IG example 12]

33 The liability shall be measured, initially and at the end of each reporting perioduntil settled, at the fair value of the share appreciation rights, by applying anoption pricing model, [Refer: paragraphs B11–B41] taking into account the termsand conditions on which the share appreciation rights were granted, and theextent to which the employees have rendered service to date.

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Share-based payment transactions with cash alternativesE4

34 For share-based payment transactions in which the terms of the arrangementprovide either the entity or the counterparty with the choice of whether the entitysettles the transaction in cash (or other assets) or by issuing equity instruments,the entity shall account for that transaction, or the components of thattransaction, as a cash-settled share-based payment transaction [Refer: paragraphs30–33] if, and to the extent that, the entity has incurred a liability to settle in cashor other assets, or as an equity-settled share-based payment transaction [Refer:paragraphs 10–29] if, and to the extent that, no such liability has been incurred.

Share-based payment transactions in which the terms of the arrangement provide the counterparty with a choice of settlementE5[Refer: Basis for Conclusions paragraphs BC258–BC264 and Implementation Guidanceparagraphs IG20–IG22 (including IG example 13)]

35 If an entity has granted the counterparty the right to choose whether ashare-based payment transaction is settled in cash4 or by issuing equityinstruments, the entity has granted a compound financial instrument, [Refer: IAS 32paragraphs 28–32] which includes a debt component (ie the counterparty’s right todemand payment in cash) and an equity component (ie the counterparty’s rightto demand settlement in equity instruments rather than in cash). For

E4 [IFRIC Update—January 2010: Transactions in which the manner of settlement is contingent on future eventsThe IFRIC received a request to clarify the classification and measurement of share-based payment transactionsfor which the manner of settlement is contingent on either: (i) a future event that is outside the control of boththe entity and the counterparty; or (ii) a future event that is within the control of the counterparty. The IFRICnoted that paragraphs 34–43 of IFRS 2 provide guidance only on share-based payment transactions in whichthe terms of the arrangement provide the counterparty or the entity with a choice of settlement. The IFRIC notedthat IFRS 2 does not provide guidance on share-based payment transactions for which the manner of settlementis contingent on a future event that is outside the control of both the entity and the counterparty. The IFRICnoted that many other issues have been raised concerning the classification and measurement of share-basedpayments as cash-settled or equity-settled. The IFRIC therefore noted that it would be more appropriate forthese issues to be considered collectively as part of a post-implementation review of IFRS 2. Therefore, theIFRIC decided not to add these issues to its agenda and recommended that those issues be dealt with by theIASB in a post-implementation review of IFRS 2.]

E5 [IFRIC Update—May 2006: Share plans with cash alternatives at the discretion of employees: grant date andvesting periods The IFRIC considered an employee share plan in which employees were given a choice of havingcash at one date or shares at a later date. At the date the transactions were entered into, the parties involvedunderstood the terms and conditions of the plans including the formula that would be used to determine theamount of cash to be paid to each individual employee (or the number of shares to be delivered to eachindividual employee) but the exact amount of cash or number of shares would be known only at a future date.The IFRIC was asked to confirm the grant date and vesting period for such share plans. The IFRIC noted thatIFRS 2 defines grant date as the date when there is a shared understanding of the terms and conditions.Moreover, IFRS 2 does not require grant date to be the date when the exact amount of cash to be paid (or theexact number of shares to be delivered) is known to the parties involved. The IFRIC further noted thatshare-based payment transactions with cash alternatives at the discretion of the counterparty are addressed inparagraphs 34–40 of IFRS 2. Paragraph 35 of IFRS 2 states that, if an entity has granted the counterparty theright to choose whether a share-based payment transaction is settled in cash or by issuing equity instruments,the entity has granted a compound financial instrument, which includes a debt component (ie the counterparty’sright to demand cash payment) and an equity component (ie the counterparty’s right to demand settlement inequity instruments). Paragraph 38 of IFRS 2 states that the entity shall account separately for goods or servicesreceived or acquired in respect of each component of the compound financial instrument. The IFRIC thereforebelieved that the vesting period of the equity component and that of the debt component should be determinedseparately and the vesting period of each component might be different. The IFRIC believed that, since ‘grantdate’ is defined in IFRS 2 and the requirements set out in paragraphs 34–40 of IFRS 2 were clear, the issueswere not expected to create significant divergence in practice. The IFRIC therefore decided that the issuesshould not be added to the agenda.]

4 In paragraphs 35–43, all references to cash also include other assets of the entity.

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transactions with parties other than employees, in which the fair value of thegoods or services received is measured directly, the entity shall measure theequity component of the compound financial instrument as the differencebetween the fair value of the goods or services received and the fair value of thedebt component, at the date when the goods or services are received.

36 For other transactions, including transactions with employees, the entity shallmeasure the fair value of the compound financial instrument at themeasurement date, taking into account the terms and conditions on which therights to cash or equity instruments were granted.

37 To apply paragraph 36, the entity shall first measure the fair value of the debtcomponent, and then measure the fair value of the equity component—takinginto account that the counterparty must forfeit the right to receive cash in orderto receive the equity instrument. [Refer: Implementation Guidance paragraphs IG20–IG22and IG example 13] The fair value of the compound financial instrument is the sumof the fair values of the two components. However, share-based paymenttransactions in which the counterparty has the choice of settlement are oftenstructured so that the fair value of one settlement alternative is the same as theother. For example, the counterparty might have the choice of receiving shareoptions or cash-settled share appreciation rights. In such cases, the fair value ofthe equity component is zero, and hence the fair value of the compound financialinstrument is the same as the fair value of the debt component. Conversely, if thefair values of the settlement alternatives differ, the fair value of the equitycomponent usually will be greater than zero, in which case the fair value of thecompound financial instrument will be greater than the fair value of the debtcomponent.

38 The entity shall account separately for the goods or services received or acquiredin respect of each component of the compound financial instrument. For thedebt component, the entity shall recognise the goods or services acquired, and aliability to pay for those goods or services, as the counterparty supplies goods orrenders service, in accordance with the requirements applying to cash-settledshare-based payment transactions (paragraphs 30–33). For the equity component(if any), the entity shall recognise the goods or services received, and an increasein equity, as the counterparty supplies goods or renders service, in accordancewith the requirements applying to equity-settled share-based paymenttransactions (paragraphs 10–29).

39 At the date of settlement, the entity shall remeasure the liability to its fair value.If the entity issues equity instruments on settlement rather than paying cash, theliability shall be transferred direct to equity, as the consideration for the equityinstruments issued. [Refer: Implementation Guidance example 13 (scenario 2)]

40 If the entity pays in cash on settlement rather than issuing equity instruments,that payment shall be applied to settle the liability in full. Any equity componentpreviously recognised shall remain within equity. By electing to receive cash onsettlement, the counterparty forfeited the right to receive equity instruments.However, this requirement does not preclude the entity from recognising atransfer within equity, ie a transfer from one component of equity to another.[Refer: Implementation Guidance example 13 (scenario 1)]

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Share-based payment transactions in which the terms of the arrangement provide the entity with a choice of settlementE6[Refer: Basis for Conclusions paragraphs BC265–BC268]

41 For a share-based payment transaction in which the terms of the arrangementprovide an entity with the choice of whether to settle in cash or by issuing equityinstruments, the entity shall determine whether it has a present obligation tosettle in cash and account for the share-based payment transaction accordingly.The entity has a present obligation to settle in cash if the choice of settlement inequity instruments has no commercial substance (eg because the entity is legallyprohibited from issuing shares), or the entity has a past practice or a stated policyof settling in cash, or generally settles in cash whenever the counterparty asks forcash settlement.

42 If the entity has a present obligation to settle in cash, it shall account for thetransaction in accordance with the requirements applying to cash-settledshare-based payment transactions, in paragraphs 30–33.

43 If no such obligation exists, the entity shall account for the transaction inaccordance with the requirements applying to equity-settled share-basedpayment transactions, in paragraphs 10–29. Upon settlement:

(a) if the entity elects to settle in cash, the cash payment shall be accounted foras the repurchase of an equity interest, ie as a deduction from equity,except as noted in (c) below.

(b) if the entity elects to settle by issuing equity instruments, no furtheraccounting is required (other than a transfer from one component of equityto another, if necessary), except as noted in (c) below.

(c) if the entity elects the settlement alternative with the higher fair value, asat the date of settlement, the entity shall recognise an additional expensefor the excess value given, ie the difference between the cash paid and thefair value of the equity instruments that would otherwise have been issued,or the difference between the fair value of the equity instruments issuedand the amount of cash that would otherwise have been paid, whichever isapplicable.

E6 [IFRIC Update—May 2006: Scope of IFRS 2: Share plans with cash alternatives at the discretion of the entityThe IFRIC considered whether an employee share plan in which the employer had the choice of settlement incash or in shares, and the amount of the settlement did not vary with changes in the share price of the entityshould be treated as a share-based payment transaction within the scope of IFRS 2. The IFRIC noted thatIFRS 2 defines a share-based payment transaction as a transaction in which the entity receives goods orservices as consideration for equity instruments of the entity or amounts that are based on the price of equityinstruments of the entity. The IFRIC further noted that the definition of a share-based payment transaction doesnot require the exposure of the entity to be linked to movements in the share price of the entity. Moreover, it isclear that IFRS 2 contemplates share-based payment transactions in which the terms of the arrangementprovide the entity with a choice of settlement, since they are specifically addressed in paragraphs 41–43 ofIFRS 2. The IFRIC therefore believed that, although the amount of the settlement did not vary with changes inthe share price of the entity, such share plans are share-based payment transactions in accordance with IFRS 2since the consideration may be equity instruments of the entity. The IFRIC also believed that, even in theextreme circumstances in which the entity was given a choice of settlement and the value of the shares thatwould be delivered was a fixed monetary amount, those share plans were still within the scope of IFRS 2. TheIFRIC believed that, since the requirements of IFRS 2 were clear, the issue was not expected to create significantdivergence in practice. The IFRIC therefore decided not to add the issue to the agenda.]

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Share-based payment transactions among group entities (2009 amendments)

[Refer: paragraphs B45–B61]

43A For share-based payment transactions among group entities, in its separate orindividual financial statements, the entity receiving the goods or services shallmeasure the goods or services received as either an equity-settled or a cash-settledshare-based payment transaction by assessing:

(a) the nature of the awards granted, and

(b) its own rights and obligations.

The amount recognised by the entity receiving the goods or services may differfrom the amount recognised by the consolidated group or by another groupentity settling the share-based payment transaction.[Refer: Basis for Conclusions paragraphs BC268A–BC268L]

43B The entity receiving the goods or services shall measure the goods or servicesreceived as an equity-settled share-based payment transaction when:

(a) the awards granted are its own equity instruments, or[Refer: paragraphs B48, B49 and B59]

(b) the entity has no obligation to settle the share-based payment transaction.[Refer: paragraphs B53 and B57]

The entity shall subsequently remeasure such an equity-settled share-basedpayment transaction only for changes in non-market vesting conditions inaccordance with paragraphs 19–21. [Refer: Implementation Guidance paragraph IG22A(including IG example 14)] In all other circumstances, the entity receiving the goodsor services shall measure the goods or services received as a cash-settledshare-based payment transaction. [Refer: paragraphs B55 and B60][Refer: Basis for Conclusions paragraphs BC268M–BC268O]

43C The entity settling a share-based payment transaction when another entity in thegroup receives the goods or services shall recognise the transaction as anequity-settled share-based payment transaction only if it is settled in the entity’sown equity instruments. Otherwise, the transaction shall be recognised as acash-settled share-based payment transaction.[Refer: paragraphs B50, B54 and B58Basis for Conclusions paragraphs BC268M–BC268O]

43D Some group transactions involve repayment arrangements that require onegroup entity to pay another group entity for the provision of the share-basedpayments to the suppliers of goods or services. In such cases, the entity thatreceives the goods or services shall account for the share-based paymenttransaction in accordance with paragraph 43B regardless of intragrouprepayment arrangements.

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Disclosures

[Refer: Implementation Guidance paragraph IG23]

44 An entity shall disclose information that enables users [Refer: Conceptual Frameworkparagraphs OB2–OB10 and QC32] of the financial statements [Refer: IAS 1 paragraph 10]to understand the nature and extent of share-based payment arrangements thatexisted during the period.

45 To give effect to the principle in paragraph 44, the entity shall disclose at least thefollowing:

(a) a description of each type of share-based payment arrangement that existedat any time during the period, including the general terms and conditionsof each arrangement, such as vesting requirements, the maximum term ofoptions granted, and the method of settlement (eg whether in cash orequity). An entity with substantially similar types of share-based paymentarrangements may aggregate this information, unless separate disclosureof each arrangement is necessary to satisfy the principle in paragraph 44.

(b) the number and weighted average exercise prices of share options for eachof the following groups of options:

(i) outstanding at the beginning of the period;

(ii) granted during the period;

(iii) forfeited during the period;

(iv) exercised during the period;

(v) expired during the period;

(vi) outstanding at the end of the period; and

(vii) exercisable at the end of the period.

(c) for share options exercised during the period, the weighted average shareprice at the date of exercise. If options were exercised on a regular basisthroughout the period, the entity may instead disclose the weightedaverage share price during the period.

(d) for share options outstanding at the end of the period, the range of exerciseprices and weighted average remaining contractual life. If the range ofexercise prices is wide, the outstanding options shall be divided into rangesthat are meaningful for assessing the number and timing of additionalshares that may be issued and the cash that may be received upon exerciseof those options.

46 An entity shall disclose information that enables users of the financial statements[Refer: IAS 1 paragraph 10] to understand how the fair value of the goods or servicesreceived, or the fair value of the equity instruments granted, during the periodwas determined.

47 If the entity has measured the fair value of goods or services received asconsideration for equity instruments of the entity indirectly, by reference to thefair value of the equity instruments granted, to give effect to the principle inparagraph 46, the entity shall disclose at least the following:

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(a) for share options granted during the period, the weighted average fairvalue of those options at the measurement date and information on howthat fair value was measured, including:

(i) the option pricing model used [Refer: paragraph B5] and the inputs[Refer: paragraphs B6–B15] to that model, including the weightedaverage share price, exercise price, expected volatility, [Refer:paragraphs B22–B30] option life, expected dividends, [Refer: paragraphsB31–B36] the risk-free interest rate [Refer: paragraph B37] and any otherinputs to the model, [Refer: paragraphs B7–B10 and B38–B41] includingthe method used and the assumptions made to incorporate the effectsof expected early exercise; [Refer: paragraphs B16–B21]

(ii) how expected volatility was determined, including an explanation ofthe extent to which expected volatility was based on historicalvolatility; and

(iii) whether and how any other features of the option grant wereincorporated into the measurement of fair value, such as a marketcondition.

(b) for other equity instruments granted during the period (ie other than shareoptions), the number and weighted average fair value of those equityinstruments at the measurement date, and information on how that fairvalue was measured, [Refer: paragraphs B2 and B3] including:

(i) if fair value was not measured on the basis of an observable marketprice, how it was determined;

(ii) whether and how expected dividends [Refer: paragraphs B31–B36] wereincorporated into the measurement of fair value; and

(iii) whether and how any other features of the equity instrumentsgranted were incorporated into the measurement of fair value.

(c) for share-based payment arrangements that were modified during theperiod: [Refer: paragraphs 26–29 and B42–B44]

(i) an explanation of those modifications;

(ii) the incremental fair value granted (as a result of those modifications);and

(iii) information on how the incremental fair value granted wasmeasured, consistently with the requirements set out in (a) and (b)above, where applicable.

48 If the entity has measured directly the fair value of goods or services receivedduring the period, the entity shall disclose how that fair value was determined, egwhether fair value was measured at a market price for those goods or services.

49 If the entity has rebutted [Refer: paragraph 13A and Basis for Conclusions paragraphsBC128D–BC128F] the presumption in paragraph 13, [Refer: paragraphs 24 and 25] itshall disclose that fact, and give an explanation of why the presumption wasrebutted.

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50 An entity shall disclose information that enables users [Refer: Conceptual Frameworkparagraphs OB2–OB10 and QC32] of the financial statements [Refer: IAS 1 paragraph 10]to understand the effect of share-based payment transactions on the entity’sprofit or loss for the period and on its financial position [Refer: ConceptualFramework paragraphs 4.4–4.7].

51 To give effect to the principle in paragraph 50, the entity shall disclose at least thefollowing:

(a) the total expense recognised for the period arising from share-basedpayment transactions in which the goods or services received did notqualify for recognition as assets and hence were recognised immediately asan expense, including separate disclosure of that portion of the totalexpense that arises from transactions accounted for as equity-settledshare-based payment transactions;

(b) for liabilities arising from share-based payment transactions:

(i) the total carrying amount at the end of the period; and

(ii) the total intrinsic value at the end of the period of liabilities forwhich the counterparty’s right to cash or other assets had vested bythe end of the period (eg vested share appreciation rights).

52 If the information required to be disclosed by this IFRS does not satisfy theprinciples in paragraphs 44, 46 and 50, the entity shall disclose such additionalinformation as is necessary to satisfy them.

Transitional provisions

53 For equity-settled share-based payment transactions, the entity shall apply thisIFRS to grants of shares, share options or other equity instruments that weregranted after 7 November 2002 and had not yet vested at the effective date of thisIFRS.

54 The entity is encouraged, but not required, to apply this IFRS to other grants ofequity instruments if the entity has disclosed publicly the fair value of thoseequity instruments, determined at the measurement date. [Refer: Implementation Guidance paragraph IG8]

55 For all grants of equity instruments to which this IFRS is applied, the entity shallrestate comparative information and, where applicable, adjust the openingbalance of retained earnings for the earliest period presented.

56 For all grants of equity instruments to which this IFRS has not been applied (egequity instruments granted on or before 7 November 2002), the entity shallnevertheless disclose the information required by paragraphs 44 and 45.

57 If, after the IFRS becomes effective, an entity modifies the terms or conditions ofa grant of equity instruments to which this IFRS has not been applied, the entityshall nevertheless apply paragraphs 26–29 to account for any such modifications.

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58 For liabilities arising from share-based payment transactions existing at theeffective date of this IFRS, the entity shall apply the IFRS retrospectively. [Refer:IAS 8 paragraph 5 (definition of retrospective application)] For these liabilities, the entityshall restate comparative information, [Refer: IAS 1 paragraphs 38–44] includingadjusting the opening balance of retained earnings in the earliest periodpresented for which comparative information has been restated, except that theentity is not required to restate comparative information to the extent that theinformation relates to a period or date that is earlier than 7 November 2002.

59 The entity is encouraged, but not required, to apply retrospectively the IFRS toother liabilities arising from share-based payment transactions, for example, toliabilities that were settled during a period for which comparative information[Refer: IAS 1 paragraphs 38–44] is presented.

Effective date

60 An entity shall apply this IFRS for annual periods beginning on or after 1 January2005. Earlier application is encouraged. If an entity applies the IFRS for a periodbeginning before 1 January 2005, it shall disclose that fact.

61 IFRS 3 (as revised in 2008) and Improvements to IFRSs issued in April 2009 amendedparagraph 5. An entity shall apply those amendments for annual periodsbeginning on or after 1 July 2009. Earlier application is permitted. If an entityapplies IFRS 3 (revised 2008) for an earlier period, the amendments shall also beapplied for that earlier period.

62 An entity shall apply the following amendments retrospectively in annual periodsbeginning on or after 1 January 2009:

(a) the requirements in paragraph 21A in respect of the treatment ofnon-vesting conditions;

(b) the revised definitions of ‘vest’ and ‘vesting conditions’ in Appendix A;

(c) the amendments in paragraphs 28 and 28A in respect of cancellations.

Earlier application is permitted. If an entity applies these amendments for aperiod beginning before 1 January 2009, it shall disclose that fact.

63 An entity shall apply the following amendments made by Group Cash-settledShare-based Payment Transactions issued in June 2009 retrospectively, subject to thetransitional provisions in paragraphs 53–59, in accordance with IAS 8 AccountingPolicies, Changes in Accounting Estimates and Errors for annual periods beginning on orafter 1 January 2010:

(a) the amendment of paragraph 2, the deletion of paragraph 3 and theaddition of paragraphs 3A and 43A–43D and of paragraphs B45, B47, B50,B54, B56–B58 and B60 in Appendix B in respect of the accounting fortransactions among group entities.

(b) the revised definitions in Appendix A of the following terms:

• cash-settled share-based payment transaction,

• equity-settled share-based payment transaction,

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• share-based payment arrangement, and

• share-based payment transaction.

If the information necessary for retrospective application is not available, anentity shall reflect in its separate or individual financial statements the amountspreviously recognised in the group’s consolidated financial statements. Earlierapplication is permitted. If an entity applies the amendments for a periodbeginning before 1 January 2010, it shall disclose that fact.[Refer: Basis for Conclusions paragraph BC310A]

63A IFRS 10 Consolidated Financial Statements and IFRS 11, issued in May 2011, amendedparagraph 5 and Appendix A. An entity shall apply those amendments when itapplies IFRS 10 and IFRS 11.

Withdrawal of Interpretations

64 Group Cash-settled Share-based Payment Transactions issued in June 2009 supersedesIFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2—Group and Treasury Share Transactions. Theamendments made by that document incorporated the previous requirements setout in IFRIC 8 and IFRIC 11 as follows:

(a) amended paragraph 2 and added paragraph 13A in respect of theaccounting for transactions in which the entity cannot identify specificallysome or all of the goods or services received. Those requirements wereeffective for annual periods beginning on or after 1 May 2006.

(b) added paragraphs B46, B48, B49, B51–B53, B55, B59 and B61 in Appendix Bin respect of the accounting for transactions among group entities. Thoserequirements were effective for annual periods beginning on or after1 March 2007.

Those requirements were applied retrospectively in accordance with therequirements of IAS 8, subject to the transitional provisions of IFRS 2.

IFRS 2


Appendix ADefined terms

This appendix is an integral part of the IFRS.

cash-settled share-based payment transactionE7

A share-based payment transaction in which the entity acquiresgoods or services by incurring a liability to transfer cash or otherassets to the supplier of those goods or services for amounts that arebased on the price (or value) of equity instruments (including sharesor share options) of the entity or another group entity.[Refer: paragraphs 30–33]

employees and others providing similar services

Individuals who render personal services to the entity and either (a)the individuals are regarded as employees for legal or tax purposes,(b) the individuals work for the entity under its direction in the sameway as individuals who are regarded as employees for legal or taxpurposes, or (c) the services rendered are similar to those rendered byemployees. For example, the term encompasses all managementpersonnel, ie those persons having authority and responsibility forplanning, directing and controlling the activities of the entity,including non-executive directors.

equity instrument A contract that evidences a residual interest in the assets of an entityafter deducting all of its liabilities.5

equity instrument granted

The right (conditional or unconditional) to an equity instrument ofthe entity conferred by the entity on another party, under ashare-based payment arrangement.

E7 [IFRIC Update—March 2011: Share-based payment awards settled net of tax withholding The InterpretationsCommittee received a request to consider the classification of a share based payment transaction in which the entitywithholds a specified portion of the shares that would otherwise be issued to the counterparty upon exercise (orvesting) of the share-based payment award. The shares are withheld by the entity in return for settling thecounterparty’s tax withholding obligation associated with the share-based payment. The request received by theCommittee asked whether the portion of the share-based payment that is withheld should be classified ascash-settled or equity settled. The Committee identified a number of issues arising from the submission for whichthe application of the requirements of IFRS 2 caused concern, such as separately classifying components of a singleaward. The Committee decided not to add the issue to its agenda because addressing these concerns would requirean amendment to IFRS 2. Instead, the Committee decided to recommend to the Board that this issue should beincluded in a future agenda proposal for IFRS 2.]

5 The Conceptual Framework for Financial Reporting defines a liability as a present obligation of theentity arising from past events, the settlement of which is expected to result in an outflow fromthe entity of resources embodying economic benefits (ie an outflow of cash or other assets of theentity).

IFRS 2


equity-settled share-based payment transactionE8

A share-based payment transaction in which the entity

(a) receives goods or services as consideration for its own equityinstruments (including shares or share options), or

(b) receives goods or services but has no obligation to settle thetransaction with the supplier.

fair value The amount for which an asset could be exchanged, a liabilitysettled, or an equity instrument granted could be exchanged,between knowledgeable, willing parties in an arm’s lengthtransaction.

grant date The date at which the entity and another party (including anemployee) agree to a share-based payment arrangement, being whenthe entity and the counterparty have a shared understanding of theterms and conditions of the arrangement. At grant date the entityconfers on the counterparty the right to cash, other assets, or equityinstruments of the entity, provided the specified vesting conditions,if any, are met. If that agreement is subject to an approval process(for example, by shareholders), grant date is the date when thatapproval is obtained. [Refer: Implementation Guidance paragraphs IG1–IG4]

intrinsic value The difference between the fair value of the shares to which thecounterparty has the (conditional or unconditional) right tosubscribe or which it has the right to receive, and the price (if any) thecounterparty is (or will be) required to pay for those shares. Forexample, a share option with an exercise price of CU15,6 on a sharewith a fair value of CU20, has an intrinsic value of CU5. [Refer: IG example 10]

market condition A condition upon which the exercise price, vesting or exercisabilityof an equity instrument depends that is related to the market priceof the entity’s equity instruments, such as attaining a specified shareprice or a specified amount of intrinsic value of a share option, orachieving a specified target that is based on the market price of theentity’s equity instruments relative to an index of market prices ofequity instruments of other entities.[Refer: IG example 5]

E8 [IFRIC Update—March 2011: Share-based payment awards settled net of tax withholding The InterpretationsCommittee received a request to consider the classification of a share based payment transaction in which the entitywithholds a specified portion of the shares that would otherwise be issued to the counterparty upon exercise (orvesting) of the share-based payment award. The shares are withheld by the entity in return for settling thecounterparty’s tax withholding obligation associated with the share-based payment. The request received by theCommittee asked whether the portion of the share-based payment that is withheld should be classified ascash-settled or equity settled. The Committee identified a number of issues arising from the submission for whichthe application of the requirements of IFRS 2 caused concern, such as separately classifying components of a singleaward. The Committee decided not to add the issue to its agenda because addressing these concerns would requirean amendment to IFRS 2. Instead, the Committee decided to recommend to the Board that this issue should beincluded in a future agenda proposal for IFRS 2.]

6 In this appendix, monetary amounts are denominated in ‘currency units (CU)’.

IFRS 2


measurement date The date at which the fair value of the equity instruments granted ismeasured for the purposes of this IFRS. For transactions withemployees and others providing similar services, the measurementdate is grant date. For transactions with parties other than employees(and those providing similar services), the measurement date is thedate the entity obtains the goods or the counterparty renders service.[Refer: Implementation Guidance paragraphs IG5–IG7]

reload feature A feature that provides for an automatic grant of additional shareoptions whenever the option holder exercises previously grantedoptions using the entity’s shares, rather than cash, to satisfy theexercise price.[Refer: paragraph 22 and Basis for Conclusions paragraphs BC188–BC192]

reload option A new share option granted when a share is used to satisfy theexercise price of a previous share option.

share-based payment arrangement

An agreement between the entity (or another group7 entity or anyshareholder of any group entity) and another party (including anemployee) that entitles the other party to receive

(a) cash or other assets of the entity for amounts that are based onthe price (or value) of equity instruments (including shares orshare options) of the entity or another group entity, or

(b) equity instruments (including shares or share options) of theentity or another group entity,

provided the specified vesting conditions, if any, are met.

share-based payment transaction

A transaction in which the entity

(a) receives goods or services from the supplier of those goods orservices (including an employee) in a share-based paymentarrangement, or

(b) incurs an obligation to settle the transaction with the supplierin a share-based payment arrangement when another groupentity receives those goods or services.E9

[Refer: paragraphs 2–6]

7 A ‘group’ is defined in Appendix A of IFRS 10 Consolidated Financial Statements as ‘a parent and itssubsidiaries’ from the perspective of the reporting entity’s ultimate parent. [Refer: Basis forConclusions paragraph BC22E]

E9 [IFRIC Update—May 2006: Scope of IFRS 2: Share plans with cash alternatives at the discretion of the entity TheIFRIC considered whether an employee share plan in which the employer had the choice of settlement in cash or inshares, and the amount of the settlement did not vary with changes in the share price of the entity should be treated asa share-based payment transaction within the scope of IFRS 2. The IFRIC noted that IFRS 2 defines a share-basedpayment transaction as a transaction in which the entity receives goods or services as consideration for equityinstruments of the entity or amounts that are based on the price of equity instruments of the entity. The IFRIC furthernoted that the definition of a share-based payment transaction does not require the exposure of the entity to be linkedto movements in the share price of the entity. Moreover, it is clear that IFRS 2 contemplates share-based paymenttransactions in which the terms of the arrangement provide the entity with a choice of settlement, since they arespecifically addressed in paragraphs 41–43 of IFRS 2. The IFRIC therefore believed that, although the amount of thesettlement did not vary with changes in the share price of the entity, such share plans are share-based paymenttransactions in accordance with IFRS 2 since the consideration may be equity instruments of the entity. The IFRICalso believed that, even in the extreme circumstances in which the entity was given a choice of settlement and thevalue of the shares that would be delivered was a fixed monetary amount, those share plans were still within the scopeof IFRS 2. The IFRIC believed that, since the requirements of IFRS 2 were clear, the issue was not expected to createsignificant divergence in practice. The IFRIC therefore decided not to add the issue to the agenda.]

IFRS 2


share option A contract that gives the holder the right, but not the obligation, tosubscribe to the entity’s shares at a fixed or determinable price for aspecified period of time.E10

vest To become an entitlement. Under a share-based paymentarrangement, a counterparty’s right to receive cash, other assets orequity instruments of the entity vests when the counterparty’sentitlement is no longer conditional on the satisfaction of anyvesting conditions.

vesting conditions The conditions that determine whether the entity receives theservices that entitle the counterparty to receive cash, other assets orequity instruments of the entity, under a share-based paymentarrangement. Vesting conditions are either service conditions orperformance conditions. Service conditions require thecounterparty to complete a specified period of service. Performanceconditions require the counterparty to complete a specified period ofservice and specified performance targets to be met (such as aspecified increase in the entity’s profit over a specified period oftime). A performance condition might include a market condition.[Refer: paragraphs 19–21]

vesting period The period during which all the specified vesting conditions of ashare-based payment arrangement are to be satisfied.

E10 [IFRIC Update—November 2005: Employee share loan plans The IFRIC was asked to consider the accountingtreatment of employee share loan plans. Under many such plans, employee share purchases are facilitated bymeans of a loan from the issuer with recourse only to the shares. The IFRIC was asked whether the loan shouldbe considered part of the potential share-based payment, with the entire arrangement treated as an option, orwhether the loan should be accounted for separately as a financial asset. The IFRIC noted that the issue of sharesusing the proceeds of a loan made by the share issuer, when the loan is recourse only to the shares, would betreated as an option grant in which options were exercised on the date or dates when the loan was repaid. TheIFRIC decided it would not expect diversity in practice and would not add this item to its agenda.]

IFRS 2


Appendix BApplication guidance

This appendix is an integral part of the IFRS.

Estimating the fair value of equity instruments granted

B1 Paragraphs B2–B41 of this appendix discuss measurement of the fair value ofshares and share options granted, focusing on the specific terms and conditionsthat are common features of a grant of shares or share options to employees.Therefore, it is not exhaustive. Furthermore, because the valuation issuesdiscussed below focus on shares and share options granted to employees, it isassumed that the fair value of the shares or share options is measured at grantdate. However, many of the valuation issues discussed below (eg determiningexpected volatility) also apply in the context of estimating the fair value of sharesor share options granted to parties other than employees at the date the entityobtains the goods or the counterparty renders service.

Shares

B2 For shares granted to employees, the fair value of the shares shall be measured atthe market price of the entity’s shares (or an estimated market price, if theentity’s shares are not publicly traded), adjusted to take into account the termsand conditions upon which the shares were granted (except for vesting conditionsthat are excluded from the measurement of fair value in accordance withparagraphs 19–21).

B3 For example, if the employee is not entitled to receive dividends during thevesting period, this factor shall be taken into account when estimating the fairvalue of the shares granted. Similarly, if the shares are subject to restrictions ontransfer after vesting date, that factor shall be taken into account, but only to theextent that the post-vesting restrictions affect the price that a knowledgeable,willing market participant would pay for that share. For example, if the sharesare actively traded in a deep and liquid market, post-vesting transfer restrictionsmay have little, if any, effect on the price that a knowledgeable, willing marketparticipant would pay for those shares. [Refer: IG example 11] Restrictions ontransfer or other restrictions that exist during the vesting period shall not betaken into account when estimating the grant date fair value of the sharesgranted, because those restrictions stem from the existence of vesting conditions,which are accounted for in accordance with paragraphs 19–21.

Share options

B4 For share options granted to employees, in many cases market prices are notavailable, because the options granted are subject to terms and conditions that donot apply to traded options. If traded options with similar terms and conditionsdo not exist, the fair value of the options granted shall be estimated by applyingan option pricing model.

IFRS 2


B5 The entity shall consider factors that knowledgeable, willing market participantswould consider in selecting the option pricing model to apply. For example,many employee options have long lives, are usually exercisable during the periodbetween vesting date and the end of the options’ life, and are often exercisedearly. These factors should be considered when estimating the grant date fairvalue of the options. For many entities, this might preclude the use of theBlack-Scholes-Merton formula, which does not allow for the possibility of exercisebefore the end of the option’s life and may not adequately reflect the effects ofexpected early exercise. It also does not allow for the possibility that expectedvolatility and other model inputs [Refer: paragraphs B11–B15] might vary over theoption’s life. However, for share options with relatively short contractual lives, orthat must be exercised within a short period of time after vesting date, the factorsidentified above may not apply. In these instances, the Black-Scholes-Mertonformula may produce a value that is substantially the same as a more flexibleoption pricing model.

B6 All option pricing models take into account, as a minimum, the following factors:

(a) the exercise price of the option;

(b) the life of the option;

(c) the current price of the underlying shares;

(d) the expected volatility of the share price;

(e) the dividends expected on the shares (if appropriate); and

(f) the risk-free interest rate for the life of the option.

B7 Other factors that knowledgeable, willing market participants would consider insetting the price shall also be taken into account (except for vesting conditionsand reload features that are excluded from the measurement of fair value inaccordance with paragraphs 19–22).

B8 For example, a share option granted to an employee typically cannot be exercisedduring specified periods (eg during the vesting period or during periods specifiedby securities regulators). This factor shall be taken into account if the optionpricing model applied would otherwise assume that the option could be exercisedat any time during its life. However, if an entity uses an option pricing model thatvalues options that can be exercised only at the end of the options’ life, noadjustment is required for the inability to exercise them during the vestingperiod (or other periods during the options’ life), because the model assumes thatthe options cannot be exercised during those periods.

B9 Similarly, another factor common to employee share options is the possibility ofearly exercise of the option, for example, because the option is not freelytransferable, or because the employee must exercise all vested options uponcessation of employment. The effects of expected early exercise shall be takeninto account, as discussed in paragraphs B16–B21.

IFRS 2


B10 Factors that a knowledgeable, willing market participant would not consider insetting the price of a share option (or other equity instrument) shall not be takeninto account when estimating the fair value of share options (or other equityinstruments) granted. For example, for share options granted to employees,factors that affect the value of the option from the individual employee’sperspective only are not relevant to estimating the price that would be set by aknowledgeable, willing market participant.

Inputs to option pricing models

B11 In estimating the expected volatility of and dividends on the underlying shares,the objective is to approximate the expectations that would be reflected in acurrent market or negotiated exchange price for the option. Similarly, whenestimating the effects of early exercise of employee share options, the objective isto approximate the expectations that an outside party with access to detailedinformation about employees’ exercise behaviour would develop based oninformation available at the grant date.

B12 Often, there is likely to be a range of reasonable expectations about futurevolatility, dividends and exercise behaviour. If so, an expected value should becalculated, by weighting each amount within the range by its associatedprobability of occurrence.

B13 Expectations about the future are generally based on experience, modified if thefuture is reasonably expected to differ from the past. In some circumstances,identifiable factors may indicate that unadjusted historical experience is arelatively poor predictor of future experience. For example, if an entity with twodistinctly different lines of business disposes of the one that was significantly lessrisky than the other, historical volatility may not be the best information onwhich to base reasonable expectations for the future.

B14 In other circumstances, historical information may not be available. Forexample, a newly listed entity will have little, if any, historical data on thevolatility of its share price. Unlisted and newly listed entities are discussedfurther below.

B15 In summary, an entity should not simply base estimates of volatility, exercisebehaviour and dividends on historical information without considering theextent to which the past experience is expected to be reasonably predictive offuture experience.

Expected early exercise

B16 Employees often exercise share options early, for a variety of reasons. Forexample, employee share options are typically non-transferable. This often causesemployees to exercise their share options early, because that is the only way forthe employees to liquidate their position. Also, employees who ceaseemployment are usually required to exercise any vested options within a shortperiod of time, otherwise the share options are forfeited. This factor also causesthe early exercise of employee share options. Other factors causing early exerciseare risk aversion and lack of wealth diversification.

IFRS 2


B17 The means by which the effects of expected early exercise are taken into accountdepends upon the type of option pricing model applied. For example, expectedearly exercise could be taken into account by using an estimate of the option’sexpected life (which, for an employee share option, is the period of time fromgrant date to the date on which the option is expected to be exercised) as an inputinto an option pricing model (eg the Black-Scholes-Merton formula).Alternatively, expected early exercise could be modelled in a binomial or similaroption pricing model that uses contractual life as an input.

B18 Factors to consider in estimating early exercise include:

(a) the length of the vesting period, because the share option typically cannotbe exercised until the end of the vesting period. Hence, determining thevaluation implications of expected early exercise is based on theassumption that the options will vest. The implications of vestingconditions are discussed in paragraphs 19–21.

(b) the average length of time similar options have remained outstanding inthe past.

(c) the price of the underlying shares. Experience may indicate that theemployees tend to exercise options when the share price reaches a specifiedlevel above the exercise price.

(d) the employee’s level within the organisation. For example, experiencemight indicate that higher-level employees tend to exercise options laterthan lower-level employees (discussed further in paragraph B21).

(e) expected volatility of the underlying shares. On average, employees mighttend to exercise options on highly volatile shares earlier than on shareswith low volatility.

B19 As noted in paragraph B17, the effects of early exercise could be taken intoaccount by using an estimate of the option’s expected life as an input into anoption pricing model. When estimating the expected life of share optionsgranted to a group of employees, the entity could base that estimate on anappropriately weighted average expected life for the entire employee group or onappropriately weighted average lives for subgroups of employees within thegroup, based on more detailed data about employees’ exercise behaviour(discussed further below).

B20 Separating an option grant into groups for employees with relativelyhomogeneous exercise behaviour is likely to be important. Option value is not alinear function of option term; value increases at a decreasing rate as the termlengthens. For example, if all other assumptions are equal, although a two-yearoption is worth more than a one-year option, it is not worth twice as much. Thatmeans that calculating estimated option value on the basis of a single weightedaverage life that includes widely differing individual lives would overstate thetotal fair value of the share options granted. Separating options granted intoseveral groups, each of which has a relatively narrow range of lives included in itsweighted average life, reduces that overstatement.

IFRS 2


B21 Similar considerations apply when using a binomial or similar model. Forexample, the experience of an entity that grants options broadly to all levels ofemployees might indicate that top-level executives tend to hold their optionslonger than middle-management employees hold theirs and that lower-levelemployees tend to exercise their options earlier than any other group. Inaddition, employees who are encouraged or required to hold a minimum amountof their employer’s equity instruments, including options, might on averageexercise options later than employees not subject to that provision. In thosesituations, separating options by groups of recipients with relativelyhomogeneous exercise behaviour will result in a more accurate estimate of thetotal fair value of the share options granted.

Expected volatility

B22 Expected volatility is a measure of the amount by which a price is expected tofluctuate during a period. The measure of volatility used in option pricing modelsis the annualised standard deviation of the continuously compounded rates ofreturn on the share over a period of time. Volatility is typically expressed inannualised terms that are comparable regardless of the time period used in thecalculation, for example, daily, weekly or monthly price observations.

B23 The rate of return (which may be positive or negative) on a share for a periodmeasures how much a shareholder has benefited from dividends andappreciation (or depreciation) of the share price.

B24 The expected annualised volatility of a share is the range within which thecontinuously compounded annual rate of return is expected to fall approximatelytwo-thirds of the time. For example, to say that a share with an expectedcontinuously compounded rate of return of 12 per cent has a volatility of 30 percent means that the probability that the rate of return on the share for one yearwill be between –18 per cent (12% – 30%) and 42 per cent (12% + 30%) isapproximately two-thirds. If the share price is CU100 at the beginning of the yearand no dividends are paid, the year-end share price would be expected to bebetween CU83.53 (CU100 × e–0.18) and CU152.20 (CU100 × e0.42) approximatelytwo-thirds of the time.

B25 Factors to consider in estimating expected volatility include:

(a) implied volatility from traded share options on the entity’s shares, or othertraded instruments of the entity that include option features (such asconvertible debt), if any.

(b) the historical volatility of the share price over the most recent period thatis generally commensurate with the expected term of the option (takinginto account the remaining contractual life of the option and the effects ofexpected early exercise).

(c) the length of time an entity’s shares have been publicly traded. A newlylisted entity might have a high historical volatility, compared with similarentities that have been listed longer. Further guidance for newly listedentities is given below.

(d) the tendency of volatility to revert to its mean, ie its long-term averagelevel, and other factors indicating that expected future volatility might

IFRS 2


differ from past volatility. For example, if an entity’s share price wasextraordinarily volatile for some identifiable period of time because of afailed takeover bid or a major restructuring, that period could bedisregarded in computing historical average annual volatility.

(e) appropriate and regular intervals for price observations. The priceobservations should be consistent from period to period. For example, anentity might use the closing price for each week or the highest price for theweek, but it should not use the closing price for some weeks and thehighest price for other weeks. Also, the price observations should beexpressed in the same currency as the exercise price.

Newly listed entities [Refer: Basis for Conclusions paragraphs BC137–BC144]

B26 As noted in paragraph B25, an entity should consider historical volatility of theshare price over the most recent period that is generally commensurate with theexpected option term. If a newly listed entity does not have sufficientinformation on historical volatility, it should nevertheless compute historicalvolatility for the longest period for which trading activity is available. It couldalso consider the historical volatility of similar entities following a comparableperiod in their lives. For example, an entity that has been listed for only one yearand grants options with an average expected life of five years might consider thepattern and level of historical volatility of entities in the same industry for thefirst six years in which the shares of those entities were publicly traded.

Unlisted entities [Refer: Basis for Conclusions paragraphs BC137–BC144]

B27 An unlisted entity will not have historical information to consider whenestimating expected volatility. Some factors to consider instead are set out below.

B28 In some cases, an unlisted entity that regularly issues options or shares toemployees (or other parties) might have set up an internal market for its shares.The volatility of those share prices could be considered when estimating expectedvolatility.

B29 Alternatively, the entity could consider the historical or implied volatility ofsimilar listed entities, for which share price or option price information isavailable, to use when estimating expected volatility. This would be appropriateif the entity has based the value of its shares on the share prices of similar listedentities.

B30 If the entity has not based its estimate of the value of its shares on the share pricesof similar listed entities, and has instead used another valuation methodology tovalue its shares, the entity could derive an estimate of expected volatilityconsistent with that valuation methodology. For example, the entity might valueits shares on a net asset or earnings basis. It could consider the expected volatilityof those net asset values or earnings.

Expected dividends

B31 Whether expected dividends should be taken into account when measuring thefair value of shares or options granted depends on whether the counterparty isentitled to dividends or dividend equivalents.

IFRS 2


B32 For example, if employees were granted options and are entitled to dividends onthe underlying shares or dividend equivalents (which might be paid in cash orapplied to reduce the exercise price) between grant date and exercise date, theoptions granted should be valued as if no dividends will be paid on the underlyingshares, ie the input for expected dividends should be zero.

B33 Similarly, when the grant date fair value of shares granted to employees isestimated, no adjustment is required for expected dividends if the employee isentitled to receive dividends paid during the vesting period.

B34 Conversely, if the employees are not entitled to dividends or dividend equivalentsduring the vesting period (or before exercise, in the case of an option), the grantdate valuation of the rights to shares or options should take expected dividendsinto account. That is to say, when the fair value of an option grant is estimated,expected dividends should be included in the application of an option pricingmodel. When the fair value of a share grant is estimated, that valuation shouldbe reduced by the present value of dividends expected to be paid during thevesting period.

B35 Option pricing models generally call for expected dividend yield. However, themodels may be modified to use an expected dividend amount rather than a yield.An entity may use either its expected yield or its expected payments. If the entityuses the latter, it should consider its historical pattern of increases in dividends.For example, if an entity’s policy has generally been to increase dividends byapproximately 3 per cent per year, its estimated option value should not assumea fixed dividend amount throughout the option’s life unless there is evidence thatsupports that assumption.

B36 Generally, the assumption about expected dividends should be based on publiclyavailable information. An entity that does not pay dividends and has no plans todo so should assume an expected dividend yield of zero. However, an emergingentity with no history of paying dividends might expect to begin paying dividendsduring the expected lives of its employee share options. Those entities could usean average of their past dividend yield (zero) and the mean dividend yield of anappropriately comparable peer group.

Risk-free interest rate

B37 Typically, the risk-free interest rate is the implied yield currently available onzero-coupon government issues of the country in whose currency the exerciseprice is expressed, with a remaining term equal to the expected term of the optionbeing valued (based on the option’s remaining contractual life and taking intoaccount the effects of expected early exercise). It may be necessary to use anappropriate substitute, if no such government issues exist or circumstancesindicate that the implied yield on zero-coupon government issues is notrepresentative of the risk-free interest rate (for example, in high inflationeconomies). Also, an appropriate substitute should be used if market participantswould typically determine the risk-free interest rate by using that substitute,rather than the implied yield of zero-coupon government issues, when estimatingthe fair value of an option with a life equal to the expected term of the optionbeing valued.

IFRS 2


Capital structure effectsE11

B38 Typically, third parties, not the entity, write traded share options. When theseshare options are exercised, the writer delivers shares to the option holder. Thoseshares are acquired from existing shareholders. Hence the exercise of tradedshare options has no dilutive effect.

B39 In contrast, if share options are written by the entity, new shares are issued whenthose share options are exercised (either actually issued or issued in substance, ifshares previously repurchased and held in treasury are used). Given that theshares will be issued at the exercise price rather than the current market price atthe date of exercise, this actual or potential dilution might reduce the share price,so that the option holder does not make as large a gain on exercise as onexercising an otherwise similar traded option that does not dilute the share price.

B40 Whether this has a significant effect on the value of the share options granteddepends on various factors, such as the number of new shares that will be issuedon exercise of the options compared with the number of shares already issued.Also, if the market already expects that the option grant will take place, themarket may have already factored the potential dilution into the share price atthe date of grant.

B41 However, the entity should consider whether the possible dilutive effect of thefuture exercise of the share options granted might have an impact on theirestimated fair value at grant date. Option pricing models can be adapted to takeinto account this potential dilutive effect.

Modifications to equity-settled share-based payment arrangements

B42 Paragraph 27 requires that, irrespective of any modifications to the terms andconditions on which the equity instruments were granted, or a cancellation orsettlement of that grant of equity instruments, the entity should recognise, as aminimum, the services received measured at the grant date fair value of theequity instruments granted, unless those equity instruments do not vest becauseof failure to satisfy a vesting condition (other than a market condition) that wasspecified at grant date. In addition, the entity should recognise the effects ofmodifications that increase the total fair value of the share-based paymentarrangement or are otherwise beneficial to the employee.

B43 To apply the requirements of paragraph 27:

(a) if the modification increases the fair value of the equity instrumentsgranted (eg by reducing the exercise price), measured immediately beforeand after the modification, the entity shall include the incremental fair

E11 [IFRIC Update—November 2006: Incremental fair value to employees as a result of unexpected capitalrestructurings The IFRIC was asked to consider a situation in which the fair value of the equity instrumentsgranted to the employees of an entity increased after the sponsoring entity undertook a capital restructuring thatwas not anticipated at the date of grant of the equity instruments. The original share-based payment plancontained neither specific nor more general requirements for adjustments to the grant in the event of a capitalrestructuring. As a result, the equity instruments previously granted to the employees became more valuable asa consequence of the restructuring. The issue was whether the incremental value should be accounted for in thesame way as a modification to the terms and conditions of the plan in accordance with IFRS 2. The IFRICbelieved that the specific case presented was not a normal commercial occurrence and was unlikely to havewidespread significance. The IFRIC therefore decided not to add the issue to its agenda.]

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value granted in the measurement of the amount recognised for servicesreceived as consideration for the equity instruments granted. Theincremental fair value granted is the difference between the fair value ofthe modified equity instrument and that of the original equity instrument,both estimated as at the date of the modification. If the modificationoccurs during the vesting period, the incremental fair value granted isincluded in the measurement of the amount recognised for servicesreceived over the period from the modification date until the date whenthe modified equity instruments vest, in addition to the amount based onthe grant date fair value of the original equity instruments, which isrecognised over the remainder of the original vesting period. If themodification occurs after vesting date, the incremental fair value grantedis recognised immediately, or over the vesting period [Refer: IG example 7] ifthe employee is required to complete an additional period of service beforebecoming unconditionally entitled to those modified equity instruments.

(b) similarly, if the modification increases the number of equity instrumentsgranted, the entity shall include the fair value of the additional equityinstruments granted, measured at the date of the modification, in themeasurement of the amount recognised for services received asconsideration for the equity instruments granted, consistently with therequirements in (a) above. For example, if the modification occurs duringthe vesting period, the fair value of the additional equity instrumentsgranted is included in the measurement of the amount recognised forservices received over the period from the modification date until the datewhen the additional equity instruments vest, in addition to the amountbased on the grant date fair value of the equity instruments originallygranted, which is recognised over the remainder of the original vestingperiod.

(c) if the entity modifies the vesting conditions in a manner that is beneficialto the employee, for example, by reducing the vesting period or bymodifying or eliminating a performance condition (other than a marketcondition, changes to which are accounted for in accordance with (a)above), the entity shall take the modified vesting conditions into accountwhen applying the requirements of paragraphs 19–21.

B44 Furthermore, if the entity modifies the terms or conditions of the equityinstruments granted in a manner that reduces the total fair value of theshare-based payment arrangement, or is not otherwise beneficial to the employee,the entity shall nevertheless continue to account for the services received asconsideration for the equity instruments granted as if that modification had notoccurred (other than a cancellation of some or all the equity instruments granted,which shall be accounted for in accordance with paragraph 28). For example:

(a) if the modification reduces the fair value of the equity instrumentsgranted, measured immediately before and after the modification, theentity shall not take into account that decrease in fair value and shallcontinue to measure the amount recognised for services received asconsideration for the equity instruments based on the grant date fair valueof the equity instruments granted.

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(b) if the modification reduces the number of equity instruments granted toan employee, that reduction shall be accounted for as a cancellation of thatportion of the grant, in accordance with the requirements of paragraph 28.

(c) if the entity modifies the vesting conditions in a manner that is notbeneficial to the employee, for example, by increasing the vesting period[Refer: IG example 8] or by modifying or adding a performance condition(other than a market condition, changes to which are accounted for inaccordance with (a) above), the entity shall not take the modified vestingconditions into account when applying the requirements of paragraphs 19–21.

Share-based payment transactions among group entities (2009 amendments)

B45 Paragraphs 43A–43C address the accounting for share-based paymenttransactions among group entities in each entity’s separate or individualfinancial statements. Paragraphs B46–B61 discuss how to apply the requirementsin paragraphs 43A–43C. As noted in paragraph 43D, share-based paymenttransactions among group entities may take place for a variety of reasonsdepending on facts and circumstances. Therefore, this discussion is notexhaustive and assumes that when the entity receiving the goods or services hasno obligation to settle the transaction, the transaction is a parent’s equitycontribution to the subsidiary, regardless of any intragroup repaymentarrangements.

B46 Although the discussion below focuses on transactions with employees, it alsoapplies to similar share-based payment transactions with suppliers of goods orservices other than employees. An arrangement between a parent and itssubsidiary may require the subsidiary to pay the parent for the provision of theequity instruments to the employees. The discussion below does not address howto account for such an intragroup payment arrangement.

B47 Four issues are commonly encountered in share-based payment transactionsamong group entities. For convenience, the examples below discuss the issues interms of a parent and its subsidiary.

Share-based payment arrangements involving an entity’s own equity instruments

B48 The first issue is whether the following transactions involving an entity’s ownequity instruments should be accounted for as equity-settled or as cash-settled inaccordance with the requirements of this IFRS:

(a) an entity grants to its employees rights to equity instruments of the entity(eg share options), and either chooses or is required to buy equityinstruments (ie treasury shares) from another party, to satisfy itsobligations to its employees; and

(b) an entity’s employees are granted rights to equity instruments of the entity(eg share options), either by the entity itself or by its shareholders, and theshareholders of the entity provide the equity instruments needed.

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B49 The entity shall account for share-based payment transactions in which it receivesservices as consideration for its own equity instruments as equity-settled. Thisapplies regardless of whether the entity chooses or is required to buy those equityinstruments from another party to satisfy its obligations to its employees underthe share-based payment arrangement. It also applies regardless of whether:

(a) the employee’s rights to the entity’s equity instruments were granted bythe entity itself or by its shareholder(s); or

(b) the share-based payment arrangement was settled by the entity itself or byits shareholder(s).

B50 If the shareholder has an obligation to settle the transaction with its investee’semployees, it provides equity instruments of its investee rather than its own.Therefore, if its investee is in the same group as the shareholder, in accordancewith paragraph 43C, the shareholder shall measure its obligation in accordancewith the requirements applicable to cash-settled share-based paymenttransactions in the shareholder’s separate financial statements and thoseapplicable to equity-settled share-based payment transactions in theshareholder’s consolidated financial statements.

Share-based payment arrangements involving equity instruments of the parent

B51 The second issue concerns share-based payment transactions between two ormore entities within the same group involving an equity instrument of anothergroup entity. For example, employees of a subsidiary are granted rights to equityinstruments of its parent as consideration for the services provided to thesubsidiary.

B52 Therefore, the second issue concerns the following share-based paymentarrangements:

(a) a parent grants rights to its equity instruments directly to the employees ofits subsidiary: the parent (not the subsidiary) has the obligation to providethe employees of the subsidiary with the equity instruments; and [Refer: paragraph B53]

(b) a subsidiary grants rights to equity instruments of its parent to itsemployees: the subsidiary has the obligation to provide its employees withthe equity instruments.[Refer: paragraph B55]

A parent grants rights to its equity instruments to the employees of its subsidiary (paragraph B52(a))

B53 The subsidiary does not have an obligation to provide its parent’s equityinstruments to the subsidiary’s employees. Therefore, in accordance withparagraph 43B, the subsidiary shall measure the services received from itsemployees in accordance with the requirements applicable to equity-settledshare-based payment transactions, and recognise a corresponding increase inequity as a contribution from the parent.[Refer: Implementation Guidance paragraph IG22A (including IG example 14)]

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B54 The parent has an obligation to settle the transaction with the subsidiary’semployees by providing the parent’s own equity instruments. Therefore, inaccordance with paragraph 43C, the parent shall measure its obligation inaccordance with the requirements applicable to equity-settled share-basedpayment transactions.

A subsidiary grants rights to equity instruments of its parent to its employees (paragraph B52(b))

B55 Because the subsidiary does not meet either of the conditions in paragraph 43B,it shall account for the transaction with its employees as cash-settled. Thisrequirement applies irrespective of how the subsidiary obtains the equityinstruments to satisfy its obligations to its employees.

Share-based payment arrangements involving cash-settled payments to employees

B56 The third issue is how an entity that receives goods or services from its suppliers(including employees) should account for share-based arrangements that arecash-settled when the entity itself does not have any obligation to make therequired payments to its suppliers. For example, consider the followingarrangements in which the parent (not the entity itself) has an obligation to makethe required cash payments to the employees of the entity:

(a) the employees of the entity will receive cash payments that are linked tothe price of its equity instruments.

(b) the employees of the entity will receive cash payments that are linked tothe price of its parent’s equity instruments.

B57 The subsidiary does not have an obligation to settle the transaction with itsemployees. Therefore, the subsidiary shall account for the transaction with itsemployees as equity-settled,[Refer: paragraph 43B] and recognise a correspondingincrease in equity as a contribution from its parent. The subsidiary shallremeasure the cost of the transaction subsequently for any changes resultingfrom non-market vesting conditions not being met in accordance withparagraphs 19–21. This differs from the measurement of the transaction ascash-settled in the consolidated financial statements of the group.

B58 Because the parent has an obligation to settle the transaction with the employees,and the consideration is cash, the parent (and the consolidated group) shallmeasure its obligation in accordance with the requirements applicable tocash-settled share-based payment transactions in paragraph 43C.

Transfer of employees between group entities[Refer: Basis for Conclusions paragraphs BC268P–BC268S]

B59 The fourth issue relates to group share-based payment arrangements that involveemployees of more than one group entity. For example, a parent might grantrights to its equity instruments to the employees of its subsidiaries, conditionalupon the completion of continuing service with the group for a specified period.An employee of one subsidiary might transfer employment to another subsidiaryduring the specified vesting period without the employee’s rights to equity

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instruments of the parent under the original share-based payment arrangementbeing affected. If the subsidiaries have no obligation to settle the share-basedpayment transaction with their employees, they account for it as an equity-settledtransaction. [Refer: paragraph 43B] Each subsidiary shall measure the servicesreceived from the employee by reference to the fair value of the equityinstruments at the date the rights to those equity instruments were originallygranted by the parent as defined in Appendix A, and the proportion of the vestingperiod the employee served with each subsidiary.

B60 If the subsidiary has an obligation to settle the transaction with its employees inits parent’s equity instruments, it accounts for the transaction as cash-settled.[Refer: paragraph 43B] Each subsidiary shall measure the services received on thebasis of grant date fair value of the equity instruments for the proportion of thevesting period the employee served with each subsidiary. In addition, eachsubsidiary shall recognise any change in the fair value of the equity instrumentsduring the employee’s service period with each subsidiary.

B61 Such an employee, after transferring between group entities, may fail to satisfy avesting condition other than a market condition as defined in Appendix A, eg theemployee leaves the group before completing the service period. In this case,because the vesting condition is service to the group, each subsidiary shall adjustthe amount previously recognised in respect of the services received from theemployee in accordance with the principles in paragraph 19. Hence, if the rightsto the equity instruments granted by the parent do not vest because of anemployee’s failure to meet a vesting condition other than a market condition, noamount is recognised on a cumulative basis for the services received from thatemployee in the financial statements of any group entity.

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Appendix CAmendments to other IFRSs

The amendments in this appendix become effective for annual financial statements covering periodsbeginning on or after 1 January 2005. If an entity applies this IFRS for an earlier period, theseamendments become effective for that earlier period.

The amendments contained in this appendix when this Standard was issued in 2004 have beenincorporated into the relevant IFRSs published in this volume.

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EDU BOUND VOLUME 2012_IFRS 2_PART A_159.pdf

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