IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

34 SHARE-BASED PAYMENTS (IFRS 2)

1. BACKGROUND AND INTRODUCTION 1.1 This Standard applies to situations where an entity acquires or receives goods and services for equity-based payment. These goods can include inventories; property, plant, and equipment; intan– gible assets; and other nonfinancial assets. However, there are two exemptions to the general scope of the Standard. First, the issue of shares to acquire the net assets in a business combination is ac– counted for under IFRS 3, Business Combinati ons. The IFRS does not apply to share-based pay– ment transactions that are covered by the scope of paragraphs 8 to 10 of lAS 32, Financial Instru– ments, Disclosure, and Presentation, or paragraphs 5 to 7 of lAS 39, Financial Instruments, Rec– ognition, and Measurement. Thus contrac ts for the purchase of goods that are within the scope of lAS 32 and lAS 39 are excluded from this Standard. 1.2 Similarly, IFRS 2 does not apply to those transactions that are carried out with employees in their capacity as holders of equity shares of the entity. Thus, if the entity purchases its own shares from employees at the fair value of those shares, this transaction would be dealt with as a purchase of treasury shares and would not fall within the scope of IFRS 2 unless the price paid was in excess of the fair value, in which case that excess would be considered to be remuneration. 1.3 Another exempt situation would be where the entity makes a rights issue of shares to all shareholders, and these include some of the entity' s employees. Examples of some of the share ar– rangements that would be accounted for under IFRS 2 are call options, share appreciation rights, share ownership schemes, and payments for services made to externa l consultants that are based on the entity' s equity capital. 2. DEFINITION OF KEY TERM (in accordance with IFRS 2) Share-based payment. One in which the entity receives or acquires goods and services for eq– uity instruments of the entity or incurs a liability for amounts that are based on the prices of the entity' s shares or other equity instruments of the entity. The accounting for the payment depends on how the transaction is settled. The main ways of set– tling the transaction will be through issuing equity shares or paying cash or where the third party has a choice of receiving either equity or cash. 3. RECOGNITION OF SHARE-BASED PAYMENT 3.1 IFRS 2 requires an expense to be recognized for the goods or services received by the entity. The corresponding entry in the accounting records will be either a liability or an increase in the eq– uity of the entity, depending on whether the transaction is to be settled in cash or equity shares. If the payment for the goods and services qualifies for recognition as an asset, then the expense will be charged to the income statements only once the asset is sold or impaired. 3.2 An example of this would be the purchase of inventory where the purchase cost is to be set– tled by the issuing of equ ity shares or rights to equity shares. In this instance the expense would only be recognized once the inventory is sold or written down. 3.3 Goods or services acquired in a share-based payment transaction should be recognized when they are received. In the case of goods, this will be obviously when this occurs. However, some– times it is more difficult to determine when services are received. In the case of goods, the vesting date is not really relevant; however, it is highly relevant for employee services. If shares are issued that vest immediately, there is a presumption that these are a consideration of past employee ser– vices. In this case, there should be immediate recognition of the expense for the employee services,