IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Chapter 34/ Share-Based Paymen ts (IFRS 2)

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as they are deemed to have been received in full on the date on which the shares or share options are granted. 3.4 Alternatively , if the share options do not vest for a period of time then it is considered that the equity instruments relate to services which are to be provid ed over this period which is called the vesting period. 4. EQUITY-SETTLED TRANSACTIONS 4.1 Equity- sett led transactions with employees and directors would normally be expensed on the basis of their fair value at the grant date. Fair value should be based on market prices whereve r possible. Many shares and share options will not be traded on an active market. In this case, valua– tion techniques, such as the option pricing model , would be used . The purpose of the technique is to arrive at an estimate of the price of the equity instrument at the measurement date that would be paid in an arm' s-length transaction between knowledgeable parties. IFRS 2 does not set out which pricing model should be used but describes the factors that should be taken into account. 4.2 IFRS 2's objective for equity-base d transactions with employees is to dete rmine and recog– nize compensation costs over the period in which the serv ices are rendered . For example, if an en– tity grants to employees share options that vest in three years ' time on the condition that they re– main in the entity 's employ for that period, these steps will be taken : • The fair value of the options will be determined at the date on which they were granted. • Thi s fair value will be charged to the income statement equally over the three-year vesting period with adj ustments made at each accounting date to reflect the best estimate of the num– ber of options that eventually will vest. • Shareholders' equity will be increased by an amount equal to the income statement charge. The charge in the income statement reflec ts the number of options that are veste d, not the number of option s granted or the number of options are exerc ised . If employees decide not to exe rcise their options because the share price is lower than the exe rcise price, then no ad– ju stment is made to the income statement. 4.3 Many employee share option schemes contain conditions that must be met before the em– ployee becomes entitled to the shares or options. These are called vesti ng conditions and could re– quire, for example , an increase in profit or growth in the enti ty' s share price before the shares are invested in the employees. 4.4 The treatment of such performance conditions is determined by whet her they are market con– ditions, that is, whether the conditions are specifica lly related to the market price of the entity' s shares. Such conditions are ignored for the purposes of estimating the number of equity shares that will vest, as IFRS 2 feels that these conditions are taken into account when determining the fair value of the equity instruments granted. An entity grants an employee a share option on the condition that the emp loyee remains in employment for four years and that the share price at the end of that four year period exceeds $ 10. Required How will these conditions affect the accounting for the share-based payment ? Solution IFRS 2 says that the share price condition will be effectively reflected in the initial valuation of the op– tion and that if the empl oyee remains in employment for four years, the options will be considered to have vested irrespective of what the share price actually is. The employee will have to be still employed for the shares to vest. 4.5 If the performance condition is not based on the market and is based on, for example, the growth in profit or earnings per share, it is not deemed to have been taken into account in estimat– ing the fair value of the option at the grant date. Thu s the condition is taken into account at each accounting date, when assess ing the number of share options or shares that will vest. Case Study 1