A practical guide to share-based

payments
February 2011
Contents

Page
Introduction 2
Questions and answers 3
1. Scope of IFRS 2 6
2. Identifying share-based payments in a business combination or joint venture 12
3. Classification of share-based payment arrangements 17
4. Recognition and measurement of share-based payments 22
5. Modifications, cancellations and forfeitures of share-based payments 35
6. Group share-based payment arrangements 42
7. Share plan trusts 47
8. Tax and share-based payments 49

PricewaterhouseCoopers A practical guide to share-based payments | 1

 Introduction

This publication has been updated (in February 2011) since it was originally released in
November 2008 to reflect amendments to IFRS 2 in particular, guidance under Q&A 5.2
and Section 6 Group share-based payment arrangements.

IFRS 2, Share-based payment is a complex and challenging standard to apply specifically,

as almost no two share-based payment arrangements are alike.

A substantial amount of new guidance has been issued since IFRS 2 was published.
Specifically:
The standard was amended in 2008 by Amendments to IFRS 2 Vesting conditions
and cancellations (applicable to annual reporting periods beginning on or after
1 January 2009); and
The standard was amended in 2009 by Amendments to IFRS 2 Group cash-settled
share-based payment transactions (applicable to annual reporting periods beginning
on or after 1 January 2010). The amendments incorporate IFRIC 8, Scope of IFRS 2,
and IFRIC 11, IFRS 2 Group and treasury share transactions, into IFRS 2.

This publication contains practical examples to help management draw similarities between
the requirements in the standard and their own share-based payment arrangements. It
also shares PwC insight and experience from dealing with countless share-based payment
arrangements from around the world.

The publication aims to help manage many of the challenges in applying IFRS 2, such as:
Deciding whether an arrangement is a share-based payment under IFRS 2;
Classifying the share-based payment correctly (equity-settled or cash-settled);
Determining whether a share-based payment has been modified, cancelled or forfeited;
Accounting in individual group entities for group share-based payments and recharge
arrangements; and
Determining the accounting when a share-based payment occurs in a business
combination or a joint venture.
It also covers:
When to recognise a share-based payment expense in the income statement;
How to measure a share-based payment;
How to account for a trust that is set up to administer a share-based payment
arrangement; and
How to account for the tax effects of a share-based payment.

The publication takes into account all share-based payment guidance released up to
December 2010.

2 | PricewaterhouseCoopers A practical guide to share-based payments

Questions and answers

Section 1 Scope of IFRS 2 6

1.1 Does a share-based payment arrangement always involve an employer and
an employee? 6
1.2 What types of transaction with employees are not within the scope of IFRS 2? 7
1.3 What common features identify a transaction as being a share-based payment
arrangement with employees? 8
1.4 Can employee bonuses be considered share-based payments? 8
1.5 Can a share-based payment involve shares in a group entity other than the
employer entity? 9
1.6 Can a share-based payment involve the purchase of goods? 9
1.7 Are all share-based payments that involve the purchase of goods within the scope
of IFRS 2? 9
1.8 Is it a share-based payment if the entity is unclear what goods or services it
is receiving? 10
1.9 Does IFRS 2 apply if the entity can choose to deliver a fixed amount in either
shares or cash? 11

Section 2 Identifying share-based payments in a business combination

or joint venture 12
2.1 Is it a share-based payment if an acquirer makes a grant in connection with a
business combination? 12
2.2 An acquirer entity grants its shares to employees who are shareholders of the target
entity. Does IFRS 2 apply to the grant? 12
2.3 An acquirer is obliged to replace a grant that has vested in the acquiree entity.
Does IFRS 2 apply to the grant? 13
2.4 An acquirer entity is obliged to replace a grant that has not vested in the target entity.
Does IFRS 2 apply to the grant? 14
2.5 Can a share-based payment arise from the formation of a joint venture? 14
2.6 Can a share-based payment arise in an existing joint venture? 15

Section 3 Classification of share-based payment arrangements 17

3.1 What are the different types of share-based payments? 17
3.2 How does an entity that has a choice of settlement classify a share-based payment? 18
3.3 Does an entitys settlement practice affect the classification of its
share-based payments? 19
3.4 An entity buys equity instruments from a third party to give to an employee.
Does this make the share-based payment cash-settled? 19
3.5 How does an entity account for a change in the classification of a
share-based payment? 20
3.6 Do post-vesting conditions affect the classification of a share-based payment? 21

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 Section 4 Recognition and measurement of share-based payments 22
4.1 Does an entity recognise a share-based payment from its grant date? 22
4.2 What are vesting conditions and the vesting period in a share-based payment? 23
4.3 If the actual vesting period is shorter than originally estimated, is the
share-based payment expense recognised over the shortened period? 23
4.4 If shares vest in the event of an initial public offering (IPO), what is the vesting period? 24
4.5 What is the appropriate accounting when a share-based payment has more than
one vesting date? 24
4.6 How are share-based payments measured? 25
4.7 What assumptions and valuation methods are used when calculating the fair
value of a share-based payment? 26
4.8 Are dividends included in the grant date fair value of share-based payments? 27
4.9 Does the fair value of a share-based payment equal its intrinsic value? 27
4.10 Does fair value equal zero where no identifiable goods or services are received
in connection with the share-based payment? 28
4.11 How do service conditions affect the recognition and measurement of a
share-based payment? 28
4.12 How do performance conditions affect the recognition and measurement of
a share-based payment? 29
4.13 How do non-vesting conditions affect the recognition and measurement of a
share-based payment? 29
4.14 How are conditions that use indices accounted for? 31
4.15 How is a condition that is linked to a change in control accounted for? 31
4.16 What is the appropriate accounting when an award specifies that the number
of equity instruments that will vest is variable? 32
4.17 Where in equity is the credit entry recorded for an equity-settled
share-based payment? 32
4.18 Is there an expense to recognise if an employee pays fair value equity instruments? 33
4.19 How are limited-recourse loans provided to employees accounted for? 34
4.20 How does an entity account for a full-recourse loan given to employees? 34

Section 5 Modifications, cancellations and forfeitures of share-based payments 35

5.1 How does an entity account for a situation where it cancels a grant in anticipation
of an employee failing to meet a non-market performance condition? 35
5.2 On what basis does management determine how many of its share-based
payments are expected to vest? 36
5.3 Can an employee cancel a share-based payment arrangement? 37
5.4 How does an entity account for a modification to a share-based payment? 38
5.5 If a modification reduces the vesting period of a share-based payment, does the
adjustment to the expense occur from the modification date or the grant date? 39

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5.6 How does an acquiree entity treat any unvested grants where there is a change
in control that triggers changes to its unvested grants? 40
5.7 How does an entity treat the cash-settlement of an equity-settled share-based
payment arrangement? 41
5.8 How does an entity account for the forfeiture of a share-based payment? 41

Section 6 Group share-based payment arrangements 42

6.1 What is a group share-based payment arrangement arrangement? 42
6.2 How does an entity account for a group share-based payment arrangement? 42
6.3 How does an entity account for a recharge from a subsidiary to the parent entity? 45
6.4 When is recharge recognised? 46
6.5 What is the accounting by an entity interposed between a parent and subsidiary,
both of which are parties to a group share-based payment arrangement? 46
6.6 What disclosures are required in an entitys financial statements in relation to a
group share-based payment arrangement? 46

Section 7 Share plan trusts 47

7.1 Is a trust that is created by an entity to administer a share-based payment award
consolidated? 47
7.2 How are shares held by the trust accounted for by the consolidated group? 47
7.3 How is the entitys interest in the trust accounted for in its separate
financial statments? 48

Section 8 Tax and share-based payments 49

8.1 Does deferred tax arise from equity-settled share-based payment arrangements? 49
8.2 Does deferred tax arise from cash-settled share-based payment arrangements? 49

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 Section 1 Scope of IFRS 2

IFRS 2 should be applied to every share-based payment. The standard encompasses all
arrangements where an entity purchases goods or services in exchange for the issue of an
entitys equity instruments, or cash payments based on the fair value of the entitys equity
instruments. In practice, the identification of arrangements that fall within the scope of IFRS 2
is not always straightforward.

1.1 Does a share-based payment arrangement always involve an employer and

an employee?

No. Entities typically use share option plans for the purpose of employee remuneration, but
the scope of the standard is much broader than this. A share-based payment arrangement
only requires the exchange of equity instruments, or cash amounts based on the value of
these equity instruments, with another party in return for goods or services.

Insight
Common share-based payment arrangements between employers and
employees

Call options that give employees the right to purchase an entitys shares in
exchange for their services

Share appreciation rights that entitle employees to cash payments calculated

by reference to increases in the market price of an entitys shares

Share ownership plans where employees receive an entitys shares in

exchange for their services

Common share-based payment arrangements that are not between

employers and employees

An external consultant (not an employee) may provide services in return for

shares in the entity

A supplier may provide goods in return for shares in the entity (refer to
Q&A 1.6)

A shareholder (rather than an employer) may grant shares to an employee

(see example below)

6 | PricewaterhouseCoopers A practical guide to share-based payments

 Example
An individual with a 40% shareholding in entity A has awarded 2% of his
shareholding to a director of entity A. The shareholder of entity A has transferred
equity instruments of entity A to a party that has supplied services to the entity
(the director). Unless it is clear that the transaction is a result of some other
relationship between the shareholder and the director that is unrelated to his
employment, the award will be reflected as a share-based payment in entity As
financial statements.

An award is within the scope of IFRS 2 where either the entity or its shareholder
issues equity instruments in any group entity in return for goods or services
provided to the entity.

1.2 What types of transactions with employees are not within the scope
of IFRS 2?

A transaction with an employee is not within the scope of IFRS 2 if:

It is not related to the receipt of goods or services; or

The amount paid to the employee is not based on the market price of that entitys
equity instruments.

Examples
Share-based payments that are not related to employee services

An entity makes a rights issue of shares to all shareholders, including employees

who are shareholders. The transaction is an arrangement with employees in their
capacity as owners of equity instruments, not in their capacity as employees.
Therefore, the transaction is not within the scope of IFRS 2.

Note: If the entity issued shares to the shareholders who are employees at a
discounted price, the arrangement would be within the scope of IFRS 2. The
favourable terms indicate that the entity is dealing with these shareholders as
employees, rather than in their capacity as equity holders.

Cash payments that are not based on the market price of equity instruments

An entity makes a cash payment to an employee that is based on a fixed multiple

of the entitys earnings, such as earnings before interest, tax, depreciation and
amortisation (EBITDA).

The cash payment is not based on the entitys share price, so it is not within the
scope of IFRS 2. The cash payment is an employee benefit, which is accounted
for under IAS 19, Employee benefits.

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 1.3 What common features identify a transaction as being a share-based
payment arrangement with employees?

The following are examples of features frequently found in a share-based payment

arrangement with employees.

1. Employees that are shareholders are granted additional benefits.

2. The arrangement incorporates leaver conditions.
3. The arrangement involves a trust.
Each of these features is described below.

1. Employees that are shareholders are granted additional benefits

Additional benefits indicate the entity is dealing with the individuals as employees or
providers of services rather than as investors or equity holders.

Examples of additional benefits include:

Employees have the right to additional shares if the business performs well (often
referred to as a ratchet mechanism).
Employees rights depend on whether the entity floats or is sold through a trade sale
(ie, in the event of a trade sale an employee may automatically get a cash payment
or a number of shares).

2. The arrangement incorporates leaver conditions

Such conditions indicate the entity is dealing with the individuals as employees or
providers of services rather than as investors or equity holders. For example, the
employee only receives the shares if they remain an employee or if they are required to
sell their shares back to the entity when they resign.

3. The arrangement involves a trust

The existence of an employee benefit trust that buys back shares from employees
suggests that the shares are being used to obtain employee services.

Insight
Employees who have paid for shares or share rights may have a right to a refund in
certain circumstances. For example, if they resign before a certain minimum time
period, they can (or must) surrender their shares or share rights and receive their
cash back. In this case, the entity recognises the liability for the refund under IFRS 2.

1.4 Can employee bonuses be considered share-based payments?

It depends. If the bonus is calculated by reference to an entitys share price (also known
as share appreciation rights), it is accounted for as a cash-settled share-based payment
under IFRS 2. This applies even if the payment is made under a bonus or profit-sharing
plan.

If the bonus is:

not calculated by reference to an entitys share price (such as those based on the
revenue or profits of the employer entity), or
not settled using equity instruments of the group,
then it is accounted for as an employee benefit under IAS 19, Employee benefits.

8 | PricewaterhouseCoopers A practical guide to share-based payments

 Example
A non-quoted or unlisted entity issues share appreciation rights to employees.
Employees can use 50% of their bonus payment to purchase these rights. The share
appreciation rights entitle the employees to a cash payment from the entity. The
arrangements terms and conditions define the share price to calculate the payments
to employees as five times EBITDA divided by the number of shares.

IFRS 2 does not apply to the arrangement because a fixed multiple of EBITDA is not
likely to reflect the fair value of the entitys share price. Therefore, management should
apply IAS 19, Employee benefits to account for the arrangement.

Note: For some entities, an earnings multiple could reflect the fair value of the
entity. The entity will therefore need to determine whether the cash payments are
linked to the underlying value of the business. In which case, the arrangement
would be within the scope of IFRS 2.

1.5 Can a share-based payment involve shares in a group entity other than the
employer entity?

Yes, because it involves equity of another entity within the same group.

Note: For more guidance, refer to Section 6, Group share-based payment

arrangements.

1.6 Can a share-based payment involve the purchase of goods?

Yes. Share-based payments are used to procure goods in addition to being used with
employees and other parties to purchase services.

Example
Entity B is developing a new product and purchases a patent from entity C. The
parties agree a purchase price of 1,000 of entity Bs shares. These shares will
be issued to entity C within 60 days of finalising the legal documentation that
transfers the patent from entity C to entity B.

This is an equity-settled share-based payment under IFRS 2. The goods to which

IFRS 2 applies include inventories, consumables, property, plant and equipment,
intangible assets and other non-financial assets.

Note: Measurement of the transaction is discussed in Q&A 4.6.

1.7 Are all share-based payments that involve the purchase of goods within the
scope of IFRS 2?

No. Contracts for the purchase of goods that are within the scope of IAS 39, Financial
instruments: Recognition and measurement (paragraphs 5-7) (or IFRS 9, Financial
instruments) are outside the scope of IFRS 2. For example, a commodity contract
that is entered into for speculative purposes (other than to satisfy the entitys expected
purchase or usage requirements) is not within the scope of IFRS 2. In addition, contracts
for the purchase of goods as part of a business combination in accordance with IFRS 3,
Business combinations, are outside the scope of IFRS 2.

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 Example
Entity D enters into a contract with a producer to purchase 100 tonnes of cocoa
beans. The purchase price will be settled in cash at an amount equal to the value
of 1,000 of entity Ds shares.

Entity D may settle the contract at any time by paying the producer an amount
equal to the current market value of 1,000 of its shares, less the market value of 100
tonnes of cocoa beans. Entity D has entered into the contract as part of its hedging
strategy and has no intention of taking physical delivery of the cocoa beans.

The arrangement is not within the scope of IFRS 2 because the contract may be
settled net and has not been entered into in order to satisfy entity Ds expected
purchase, sale or usage requirements. Entity D has not purchased the cocoa
beans; rather, it has entered into a financial contract to pay or receive a cash
amount.

The arrangement should be dealt with in accordance with financial instruments

standards IAS 32 and IAS 39 (or IFRS 9).

1.8 Is it a share-based payment if the entity is unclear what goods or services it

is receiving?

Yes. IFRS 2 applies where:

Entities cannot specifically determine what consideration (goods or services) they

are receiving in return for their shares; or

The value of the identifiable consideration (goods or services) to be received by

the entity is less than the fair value of the equity instruments granted or the liability
incurred.

Insight
Sometimes entities grant shares or share rights to a not-for-profit entity or charity.
Typically the entity receives intangible benefits that can be difficult to identify,
such as improved corporate image or likely favourable publicity. Despite this,
these benefits count as consideration and are measured and recognised using the
guidance in IFRS 2.

10 | PricewaterhouseCoopers A practical guide to share-based payments

1.9 Does IFRS 2 apply if the entity can choose to deliver a fixed amount in
either shares or cash?

Yes.

Insight
At its May 2006 meeting, the IFRIC confirmed that the above scenario is within the
scope of IFRS 2. It based its decision on the following:

IFRS 2 contemplates a share-based payment where the terms of the

arrangement provide the entity with a choice of settlement; and

The definition of share-based in the context of a share-based payment does

not require the exposure of the entity to be linked to movements in the share
price of the entity.

Example
An entity grants its employees an award. The terms of the award require the
employees to remain as employees of the entity until the end of the year. At this
time, the entity will either pay the employees C100 cash, or shares in the entity
equivalent to the value of C100.

This is an award in the scope of IFRS 2 where the entity has choice of settlement
(see Q&A 3.2).

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 Section 2 Identifying share-based payments in a
business combination or joint venture

There is additional guidance on accounting for share-based payments in the business

combinations standard. IFRS 3, Business combinations, provides guidance to determine
whether replacement share awards are part of the consideration for the business combination
or post-combination services.

2.1 Is it a share-based payment if an acquirer makes a grant in connection

with a business combination?

It depends on what the acquirer receives in return for the shares:

If the acquirer receives control of the acquired entity, the arrangement is
excluded from the scope of IFRS 2. Instead, the shares form part of the purchase
consideration for the acquired entity and are accounted for under IFRS 3.
IFRS 3 requires the acquirer to measure the shares at their fair value at the date
of exchange. The best evidence of their fair value is usually the published price.

If the acquirer issues shares to employees in return for post-combination employee

services, IFRS 2 applies.

Insight
It may be difficult to determine in practice whether shares have been issued in return
for control of the acquired entity (IFRS 3) or for future employee service (IFRS 2).

The terms and conditions of the business combination grant might suggest that the
grant is a mixture of both, which means that IFRS 3 and IFRS 2 will apply to portions
of the grant. The examples below illustrate this.

2.2 An acquirer entity grants its shares to employees who are shareholders of
the target entity. Does IFRS 2 apply to the grant?

It depends. If the grant is made to employees in their capacity as equity holders, it forms
part of the cost of the business combination and is outside the scope of IFRS 2. Where
the grant requires the provision of post-combination services, IFRS 2 applies.

12 | PricewaterhouseCoopers A practical guide to share-based payments

2.3 An acquirer is obliged to replace a grant that has vested in the acquiree
entity. Does IFRS 2 apply to the grant?

Usually a combination of IFRS 2 and IFRS 3 applies. The answer is explained in the
example below.

Example
Entity E acquires 100% of the share capital of entity F in a business combination.
Entity F had previously granted a share-based payment to its employees with a
four-year vesting period. Its employees have rendered the required service for the
award at the acquisition date but have not yet exercised their options. The fair
value of the award at acquisition date is C100.

No post-combination services are required

Entity E issues a replacement award that does not require post-combination

services. The fair value of the replacement award at the acquisition date is C120.

A portion of the fair value of the award granted by entity E is accounted for under
IFRS 3 and a portion under IFRS 2, even though no post-combination services are
required. The amount included in the cost of the business combination is the fair
value of Fs award at the acquisition date (C100). Any additional amount, which in
this case is C20, is accounted for as a post-combination expense under IFRS 2.
This amount is recognised immediately as a post-combination expense because
no additional post-combination services are required.

Post-combination services are required

Now assume that one year of additional employee services is required after the
acquisition date and that the fair value of entity Es replacement award is C150.

A portion of the fair value of the acquirees award is accounted for under IFRS 3
and a portion under IFRS 2. The portion of the acquisition date fair value of Fs
award attributed to the cost of the combination (under IFRS 3) and the portion
attributed to post-combination services is determined by the ratio of the pre-
combination vesting period (four years) to the total vesting period (five years).
C80 is therefore recorded under IFRS 3, and C20 under IFRS 2. The excess of
C50 (C150-C100) of the fair value of the acquirers award over the acquirees
award is accounted for under IFRS 2 and so C70 in total is recognised over the
one-year vesting period post-combination.

Note: The above example is based on the application of IFRS 3 in Es group

consolidated financial statements and not Fs stand-alone financial statements.

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 2.4 An acquirer entity is obliged to replace a grant that has not vested in the
target entity. Does IFRS 2 apply to the grant?

Usually a combination of IFRS 2 and IFRS 3 applies. The answer is explained in the
example below.

Example
Entity G acquires 100% of the share capital of entity H in a business combination.
Entity G issues a replacement award (to replace Hs award) that requires one year
of post-combination service. Entity H had an outstanding grant that required four
years service. Hs employees had rendered two years service at the acquisition
date. The IFRS 2 fair value of both awards is C100 at acquisition date.

A portion of the fair value of the award granted by entity G will be accounted for
under IFRS 3 and a portion under IFRS 2. The amount included in the cost of the
business combination is the ratio of the pre-combination service (two years) to the
higher of the original (four years) and the revised (three years) vesting period (2/4),
ie, C50. The remaining amount is accounted for as post-combination expense
under IFRS 2 over the remaining one-year vesting period.

2.5 Can a share-based payment arise from the formation of a joint venture?

It depends. When a joint venture entity issues shares in return for a business, it is
excluded from the scope of IFRS 2. This is best explained in the example below.

Example
Entity J and entity K are brought together to form a joint venture.

Joint ventures are outside the scope of IFRS 3. This transaction does not meet
the definition of a business combination because two separate entities are being
brought together into one reporting entity without either entity gaining control; the
scope exclusion in IFRS 2 therefore applies.

The combination of separate businesses to form a joint venture involves the issue
of shares for the purpose of forming a joint venture, not the acquisition of goods or
services. The transaction is therefore outside IFRS 2s scope.

14 | PricewaterhouseCoopers A practical guide to share-based payments

2.6 Can a share-based payment arise in an existing joint venture?

Yes. The answer is explained in the example below.

Example
Entity J is a 50:50 joint venture between entity K and entity L. Entity K grants the
senior employees of entity J options over its own shares and does not make any
charge to entity J. Entity L does not provide any contribution to the joint venture
to compensate K. K applies the equity method to investments in joint ventures in
its consolidated financial statements and the cost method in its separate financial
statements.

Entity Js financial statements

IFRS 2 includes within its scope transfers of equity instruments of an entitys

parent or of an entity in the same group in return for goods or services. However,
entity K is a joint venture investor and is not entity Js parent, nor is it in the same
group (defined in IAS 27 as being a parent and all its subsidiaries) as entity J.
Therefore, on initial consideration, from entity Js perspective, the award in entity J
of share options in entity K is not within IFRS 2s scope.

The arrangement also falls outside the scope of IAS 19, Employee benefits; the
arrangement does not meet the IAS 19 definition of an employee benefit because
no consideration is given by entity J.

IAS 8, Accounting policies, changes in accounting estimates and errors, requires

entities to apply a hierarchy when determining their accounting polices. Where
there is no IFRS that governs a particular transaction, IAS 8 requires
management to look for guidance to another pronouncement that deals with
similar or related issues.

We believe the most appropriate accounting is for entity J to apply the principles
of IFRS 2 to the equity-settled share-based payment. This is further supported by
the treatment where a parent entity grants options over its own shares to those
of its subsidiary. Entity K does not meet the definition of a parent entity, but in the
absence of any other guidance, this is an acceptable approach (see Section 6,
Group share-based payment arrangements). The disclosure requirements of
IAS 24, Related party disclosures, should be applied if any of the employees are
key management personnel.

Note: The transaction would be within the scope of IAS 19 if compensation was
given by entity J for the share-based payment, perhaps in the form of a recharge
payment to entity K.

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 Entity K (the investor)s financial statements

Entity K has an equity-settled share-based payment arrangement and should

measure the goods and services received in accordance with IFRS 2. In its separate
financial statements, K would capitalise the IFRS 2 grant date fair value of the award
to the cost of its investment in the joint venture and consider whether there were any
impairment indicators.

Entity Ks consolidated financial statements should apply the principles of IAS 31,
Interests in joint ventures. To the extent that J has accounted for the share-based
payment, 50% of this would be recorded by K when the equity method is applied. In
addition, as entity L did not provide an equivalent contribution into the joint venture,
entity K would record an additional cost resulting in 100% of the share-based
payment charge recorded in K. If the equity method for J did not account for the
share-based payment, K would need to record an additional cost of 100%.

Entity L (the investor)s financial statements

The share-based payment has no impact on entity Ls separate financial statements.

To the extent that entity J has accounted for the share-based payment, the
proportional share (that is, 50%) of the charge that is recorded by entity L on
consolidation would be eliminated against the gain recorded on application of IAS 31
paragraph 48; there is therefore no impact on consolidation.

16 | PricewaterhouseCoopers A practical guide to share-based payments

Section 3 Classification of share-based payment
arrangements

The classification of a share-based payment will determine its recognition and measurement.
The measurement of a share-based payment expense depends on how the arrangement
is classified. Correct classification is critical to determining the appropriate accounting and
understanding the impact of share-based payments on an entitys financial statements.
Determining the classification of some share-based payment arrangements is not always
straightforward.

3.1 What are the different types of share-based payment?

There are three types of share-based payment arrangements:

Equity-settled share-based payments transactions in which the entity

(a) receives goods or services as consideration for its own equity instruments
(including shares or share options); or (b) receives goods or services but has no
obligation to settle the transaction with the supplier.

Cash-settled share-based payments transactions in which the entity acquires

goods or services by incurring a liability to transfer cash or other assets to the supplier
of those goods or services for amounts that are based on the price (or value) of equity
instruments (including shares or share options) of the entity or another group entity.

Choice of settlement transactions in which the entity receives or acquires goods

or services, and the terms of the arrangement provide either the entity or the supplier
of those goods or services with a choice of whether the entity settles the transaction
in cash (or other assets) or by issuing equity instruments.

Example
Equity-settled share-based payment

The issue to employees of options that give them the right to purchase the entitys
shares at a discounted price in exchange for their services.

A cash-settled share-based payment

Share appreciation rights that entitle employees to cash payments based on the
increase in the employer entitys share price.

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 3.2 How should an entity classify a share-based payment that has a choice
of settlement?

The table below summarises the appropriate accounting treatment.

Choice of settlement Type of share-based payment and appropriate

accounting treatment

At the option of the entity The terms of a share-based payment may provide an
entity with the choice to settle in cash or by the issue
of equity instruments. The share-based payment is
cash-settled if the entity has a present obligation (legal
or constructive) to settle in cash. The entity has a present
obligation if the choice of settlement has no commercial
substance or if the entity has a past practice or stated
policy of settling in cash.

At the option of the employee This is a compound instrument that is similar to

convertible debt because it has both a debt and equity
component. An example of a compound instrument is
where an employee has the choice of receiving share
options or cash-settled share appreciation rights.

In accounting for this type of share-based payment,

management should:

Measure the fair value of the debt component

(accounted for as a cash-settled liability); and
Measure the fair value of the equity component,
taking into account that the counterparty must forfeit
the right to receive cash in order to receive the
equity instrument.
For example, an employee may have the right to choose
whether he or she receives C100 in cash or C100
worth of shares. In this case the fair value of the equity
component is zero because the employee will have
to forego the C100 of cash to receive C100 worth of
shares.

Many share-based payment arrangements are structured

so that the fair value of the settlement options is the
same. If the fair values of the settlement alternatives
differ, the fair value of the equity component will usually
be greater than zero.

18 | PricewaterhouseCoopers A practical guide to share-based payments

3.3 Does an entitys settlement practice affect the classification of its share-
based payments?

Yes. If an entity has a past practice of settling its share-based payment arrangements in
cash, it is assumed it will settle future share-based payment arrangements in cash.

Management should review its share-based payment arrangements at each balance

sheet date (including previous grants that are outstanding) to ensure the classification
remains correct. The determination of past practice should be fact-specific, and
judgement should be used. If the classification has a material impact on the financial
statements, it should be disclosed as a critical judgement.

Example
Entity M in year 1 grants its employees options that can be settled in cash or
shares. At the grant date, the entity stated in its financial statements that it
expected to settle the options by issuing shares. As explained in Q&A 3.2, M
treats these awards as equity-settled. After three years, the options vest, and M
decides to settle the options in cash.

As M chose to settle in cash, in the absence of any other evidence, this may act
as a precedent for other arrangements that give the entity a choice of settlement.
If it is determined that M has created a past practice of settling in cash, all
arrangements that give the entity a choice of settlement are treated as cash-
settled. M will need to revisit the classification of any similar grants it has made in
the past and re-classify them to cash-settled, as discussed in Q&A 3.5.

Insight
A key difference between IFRS 2 and IAS 32 is that, where an entity intends to pay
out cash but has no contractual obligation to do so, IFRS 2 requires a liability to
be recorded; IAS 32 does not.

3.4 An entity buys equity instruments from a third party to give to an employee.
Does this make the share-based payment cash-settled?

No. It would be an equity-settled share-based payment even though the entity will
pay cash to acquire the shares on the market. The entity is still providing equity to the
employee, and the employee will always receive shares if he or she meets the vesting
conditions. How the entity acquires the shares that will be used to settle the award is
a separate transaction, even if the entity will be forced to purchase shares because it
cannot issue new shares.

Example
An entity grants employees rights to its shares subject to certain performance
conditions. The entity purchases the shares on the market at the date that its
employees satisfy those performance conditions.

When the entity purchases the shares on the market, the transaction is recognised
in equity as a treasury share transaction to reflect the purchase of the entitys own
shares. This does not affect the share-based payment accounting.

PricewaterhouseCoopers A practical guide to share-based payments | 19

 3.5 How does an entity account for a change in the classification of a
share-based payment?

It depends.
On reclassification from cash-settled to equity-settled
The entity immediately reclassifies the amount recognised as a liability, up to the
modification date, to equity. The expense for the remainder of the vesting period is
based on the fair value of the award, measured at the modification date and not the
original grant date.
On reclassification from equity-settled to cash-settled
The entity measures the liability initially using the reclassification date fair value of
the equity award based on the elapsed portion of the vesting period. This amount is
recognised as a credit to the liability and a debit to equity. The entity then re-measures
the liability at each subsequent reporting date and recognises any additional expense
from increases in the liability. The example below illustrates this.

The accounting for modifications from an equity award to a cash-settled award becomes
more complicated if the fair value of the award on the modification date is less than the
grant date fair value.

Example
Entity N has an equity-settled share-based payment that will vest when employees
provide four years of continuous service. The grant date fair value is C10; the
vesting period is four years. At the end of year 2, a cumulative charge of C5 has
been recognised in the income statement with a corresponding increase in equity.

N decides to change the share-based payment award from equity-settled to cash-

settled. The employees will now receive a cash payment based on the fair value of
the shares at the end of year 4.

The accounting is illustrated by two scenarios, in which immediately before the

change in classification, the fair value of the grant:

(a) Has increased:

Assume the fair value immediately before modification is C20. At the start of year
3, a liability of C10 (20/2) is recognised with a corresponding debit to equity of
C10. The subsequent measurement of the liability would follow the requirements
for cash-settled share-based payments.

(b) Has decreased:

IFRS 2 requires an entity to recognise a charge in the income statement for the
services received of at least the grant date fair value, regardless of any modifications
or cancellations of the grant. The only exception to this is where a non-market
vesting condition is not satisfied.

Assume that the fair value immediately before the modification has decreased
to C5 and there are no further movements in the fair value in years 3 and 4. The
accounting would be:

Years 1 and 2: a total expense and increase in equity of C5, is recognised.

At the start of year 3: a liability of C2.5 is recognised with a corresponding

decrease to equity. The fair value of the grant has decreased to C5.

20 | PricewaterhouseCoopers A practical guide to share-based payments

 Years 3 and 4: an expense of C2.5 is recognised each year with a
corresponding increase in the liability of C1.25 and equity of C1.25. The
C1.25 expense and increase in equity recognised each year ensures that
the income statement expense is at least equal to the grant date fair value.

At the end of the vesting period the total expense is C10 (of which C5 was a credit
to equity and C5 a credit to liability). The total expense is equal to the grant date
fair value of C10.

If the fair value was to change in years 3 and 4, the entity would need to
recalculate the amounts to expense in these years as follows:

Record the expense based on the grant date fair value and allocate this
expense between debt and equity based on the ratio of debt to equity on the
date of modification; and then

Re-measure the value of the liability based on movements in the share price.

To illustrate, assume that at the end of year 3, the fair value of the award has
decreased to C4. The entity:

Records an expense, based on the grant date fair value, of C2.5 with a
corresponding increase in the liability and equity of C1.25 (based on the
ratio of equity to cash on the date of modification); and then

Re-measures the value of the liability through the income statement from
C3.75 to C3 (representing three-quarters of the fair value of the liability of C4
as we are three years through the four-year vesting period).

Insight
Re-classification of a share-based payment award may occur because:

An entity is de-listing. To provide greater liquidity to employees the entity

might change the share-based payment from equity-settled to cash-settled.

The entity has changed its settlement practice (refer to Q&A 3.3).

3.6 Do post-vesting conditions affect the classification of a share-based payment?

Yes. IFRS 2 requires entities to consider the post-vesting terms and conditions of a
share-based payment.

Example
A post-vesting restriction might be a pre-emption right. For example, an employee
receives shares in the entity upon vesting, but he or she must offer them for sale
to the entity if they resign or otherwise terminate their employment. Where the
entity has an intention or established practice of exercising the pre-emption right,
it would indicate that the award is in fact cash-settled.

PricewaterhouseCoopers A practical guide to share-based payments | 21

 Section 4 Recognition and measurement of
share-based payments

IFRS 2 provides detailed guidance for the recognition and measurement of share-based
payments. Management must determine the fair value of a share-based payment at the grant
date, the period over which this fair value should be recognised (the vesting period), and the
charge that should be recognised in each reporting period.

Management needs to understand the conditions of the share-based payments with

employees and other parties to properly apply this guidance. This may prove challenging in
practice because almost no two share-based payment arrangements are the same.

The goods or services received or acquired in a share-based payment are recognised when
the goods are obtained or as the services are received. A corresponding increase in equity is
recognised if the goods or services are received in an equity-settled transaction. A liability is
recognised if the goods or services are acquired in a cash-settled transaction.

4.1 Does an entity recognise a share-based payment from its grant date?

Not necessarily. IFRS 2 requires the expense to be recognised on the date that services
are provided.

Example
The terms of the award are not finalised

An employee may have commenced employment before the employer has

finalised the terms of a share-based payment.

The award is subject to shareholder approval

If the issue of the equity instruments is subject to shareholder approval, the grant
date might occur some months after the employees have begun rendering the
services given in exchange for that grant.

In both cases, the entity estimates the grant date fair value of the equity
instruments for the purpose of recording an income statement charge for
the services received prior to the grant date. Once the date of grant has been
established, the entity trues up the expense so that it is based on the grant date
fair value of the awards.

Insight
The grant date is the date that the entity and the counterparty have a shared
understanding of the terms and conditions of the arrangement and all required
approvals have been obtained. The initial measurement of the share-based
payment is at the grant date. In some cases, the grant date might occur after the
employees have begun rendering services.

22 | PricewaterhouseCoopers A practical guide to share-based payments

4.2 What are vesting conditions and the vesting period in a share-based payment?

Vesting conditions affect the measurement and recognition of a share-based payment.

IFRS 2 defines vesting conditions as the criteria that determine whether the entity
receives the services that entitle the counterparty to receive cash, other assets or equity
instruments of the entity under a share-based payment arrangement.

Vesting conditions include:

Service conditions, which require the other party (such as an employee) to

complete a specified period of service; and

Performance conditions, which require that specified performance conditions are

met before the counterparty becomes entitled to the grant. Performance conditions
can be market-based (such as those that relate to the market price of the entitys
equity) or non-market-based (such as those that relate to the entitys profit).

Other conditions attached to the award are referred to as non-vesting conditions, which
are discussed in Q&A 4.13.

The vesting period is the period during which all the specified vesting conditions of a
share-based payment are satisfied. The vesting period is generally specified in the terms
and conditions of an arrangement. However, the vesting period should be estimated
when an employee must stay in service until a particular event occurs (such as an initial
public offering). The services are accounted for as they are rendered by the counterparty
during the vesting period. The expense is recognised over the vesting period with a
corresponding increase in either equity or a liability.

4.3 If the actual vesting period is shorter than originally estimated, is the
share-based payment expense recognised over the shortened period?

Yes. When the actual vesting period is shorter than originally estimated, the grant date
fair value should be accelerated and recognised as an expense over the shorter period.

Where the vesting period is linked to a non-market performance condition, an entity

should recognise the goods and services it has acquired during the vesting period based
on the best available estimate of the number of equity instruments expected to vest.
The estimate should be reconsidered at each reporting date based on factors such as a
shortened vesting period, and the cumulative expense should be trued up for both the
change in the number expected to vest and any change in the expected vesting period.

In our view, where the vesting period is linked to a market performance condition, an
entity should estimate the expected vesting period. If the actual vesting period is shorter
than estimated, the charge should be accelerated in the period that the entity delivers
the cash or equity instruments to the counterparty. When the vesting period is longer, the
expense is recognised over the originally estimated vesting period.

PricewaterhouseCoopers A practical guide to share-based payments | 23

 Example
Vesting period is linked to market performance condition

An entity grants 100 options to an employee at a fair value of C1 each. The

options vest upon meeting a particular market condition (such as the entitys
share price reaching C3), provided the employee has remained in the entitys
service until that time. The terms and conditions of the options are that the market
condition can be met in either year 3, 4 or 5 of the employees service.

At grant date, the entity estimates the expected vesting period (consistent with
the assumptions used in estimating the fair value of the options granted). The fair
value cannot subsequently be revised.

The entity expects the market condition to be met in year 4, so the entity has the
following expense profile: year 1: C25; year 2: C25; year 3: C25; year 4: C25.

If the market condition is met in year 3, the entity should accelerate the remaining
expense in year 3. The expense profile would be year 1: C25; year 2: C25; year
3: C50. This occurs despite the vesting period being shorter than that originally
estimated in the fair value calculation.

Note: If the market condition was actually met in year 5, the expense would still
be recognised over the original vesting period of 4 years.

4.4 If shares vest in the event of an initial public offering (IPO), what is the
vesting period?

It depends on when management assumes the IPO will occur. Management should
determine at the grant date the probability of the IPO occurring and use the period until
the assumed date of the IPO as the vesting period. Management should re-estimate the
vesting period and probability of the IPO at each balance sheet date.

Insight
Usually entities do not have to estimate the vesting period because the vesting
period is determined by the conditions included in the share-based payment.
However, when a condition is based on an IPO or when an entitys shares are
likely to float on the stock market, an estimate of the vesting period is required.

4.5 What is the appropriate accounting when a share-based payment has more
than one vesting date?

It depends. Management should determine whether it has made one grant that has a
number of possible vesting dates, or a series of grants that each have their own vesting date.

If there are a number of possible vesting dates associated with the same grant, the entity
will need to make an estimate of the vesting period. The example in Q&A 4.4 involving an
IPO is an example of this.

24 | PricewaterhouseCoopers A practical guide to share-based payments

 Insight
If an entity makes more than one grant, there will be more than one vesting period
(refer to the example below). In all but exceptional cases, the vesting periods will
begin in year 1, which will result in an expense for each tranche being recorded in
that year (this is known as tranched vesting).

Example
Entity P makes a share-based payment to employees. The conditions of the award
are that employees will receive 40 options per annum over a three-year period.
The employees need to be employed by the entity at the end of each year.

The options vest in the following tranches:

Tranche 1: year 1 if the share price reaches C1

Tranche 2: year 2 if the share price reaches C2

Tranche 3: year 3 if the share price reaches C3

This will result in three different grants (three tranches) and three vesting periods.
The fair value of tranche 1 is recognised over the vesting period of year 1. The
fair value of tranche 2 is recognised over the vesting period of years 1 and 2. The
fair value of tranche 3 is recognised over the vesting period of years 1, 2 and 3.
Note that, as there is a market condition, an expense is recognised provided the
employee remains in service, regardless of the actual price of the shares.

This will result in the largest expense being recognised in year 1.

However, if the facts are different, the accounting will also be different. For
example, assume the grant of 120 options is received at the end of year 3 if the
share price reaches C3. There is one grant and one vesting period, which means
that the one grant has a three-year vesting period.

Alternatively, if the employees receive the shares when the share price reaches
C3, there is a variable vesting period that should be estimated and fixed at the
grant date, as explained in Q&A 4.3.

4.6 How are share-based payments measured?

The fair value of goods or services received in exchange for a share-based payment
is measured directly unless the fair value cannot be estimated reliably. In this case, the
fair value is measured by reference to the fair value of the equity instruments granted as
consideration. Services provided by employees are always measured by reference to the fair
value of the equity instruments granted.

The measurement date for equity settled share-based payments depends on the other party
to the transaction. For example, if the share-based payment is between the entity and:

Employees or others providing similar services, the expense is measured at fair

value at the grant date.

Parties other than employees (and those providing similar services), the measurement
date is the date that the entity obtains the goods or the counterparty renders the
service.

For cash-settled share-based payments, the goods or services acquired and the liability
incurred is measured at the fair value of the liability. Only cash-settled awards are
subsequently re-measured.

PricewaterhouseCoopers A practical guide to share-based payments | 25

 4.7 What assumptions and valuation methods are used when calculating the
fair value of a share-based payment?

It depends on the terms of the arrangement.

Calculating the fair value of shares of listed entities is straightforward, the quoted share
price is used. If the shares are not quoted on an active market, the share price should be
estimated by a valuations expert.

Options are often valued using the Black-Scholes model. However, many entities use
a binomial methodology (also known as a lattice-based approach), or a Monte-Carlo
simulation.

All of these models have their strengths and weaknesses, but management should
remember that:

If the same assumptions are input into these models, the same answer will
be given.

All models are based on the same underlying principles.

The answers given by the models are only as good as the assumptions used

The models require six inputs as a minimum:

1. The share price;

2. The exercise price;
3. The risk free rate of return;
4. The expected dividends or dividend yield;
5. The life of the option; and
6. The volatility of the expected return.
The first three inputs are normally, but not always, straightforward. The last three involve
greater judgement and have the greatest impact on the fair value.

The application guidance in IFRS 2 (Appendix B) provides guidance on the assumption-

setting process.

Insight
When choosing an appropriate model, management should consider whether the
award:

Includes a market condition or a non-vesting condition. If it does, this

is incorporated into the fair value of the award. The Black-Scholes model
cannot accommodate this adjustment.

Has a long post-vesting exercise period and exercise behaviours that

vary between employees. If it does, it may be possible to incorporate a
pattern of exercise behaviour into a binomial or Monte-Carlo model. The
Black-Scholes model can only accommodate refinements that segment the
employees and include a range of expected lives.

26 | PricewaterhouseCoopers A practical guide to share-based payments

4.8 Are dividends included in the grant date fair value of share-based payments?

It depends on whether the employee (or other provider of goods or services) is entitled
to dividends during the vesting period.

If the employee (or other provider of goods or services) is not entitled to receive
dividends, the fair value of the award will be reduced by the dividends these parties have
effectively lost.

If the employee (or other provider of goods or services) is entitled to receive dividends,
we believe that there are two acceptable treatments.

Either no adjustment to the fair value is required for expected dividends. The share-
based payment expense will include an expense relating to the dividend payments;
or

The grant is considered to be a compound instrument, as the employee will receive

both cash over the vesting period and an equity instrument if the award vests. The
entity would account for each element separately.

Insight
The difference between the two treatments, where dividends are received during
the vesting period, can be summarised as follows:

Where the expected dividends are included in the calculation of the grant
date fair value, any dividends paid during the vesting period are recognised
in equity and not the income statement. If the expected dividends included
in the grant date fair value are not equal to the actual dividends paid, no
adjustment is made for this ie, the expected dividends are estimated only
once.

Where the expected dividends are treated as the debt portion of a compound
instrument, any dividends paid during the vesting period are recognised in
the income statement as an employee expense. The actual dividends paid
therefore are recognised as an expense.

4.9 Does the fair value of a share-based payment equal its intrinsic value?

No. Intrinsic value is the difference between the share price and the exercise price. Fair
value takes into account additional factors, such as the expected dividends, the life of
any option, the volatility of the expected return and market performance conditions.

Only in rare circumstances does IFRS 2 allow intrinsic value to be used as a proxy for fair
value when the fair value cannot be reliably obtained. However, in almost all cases, the
fair value can be determined reliably.

Insight
The fair value of options over unlisted shares can almost always be reliably
estimated. A price history has been established if the shares have been valued at
any point in time and actual transactions provide some data points to establish
volatility.

The guidance in IFRS 2 suggests looking at similar listed entities to obtain a share
price estimate. The range of supportable volatility assumptions will be wider for an
unlisted entity than for a listed one, but this does not mean that an estimate of the
grant date fair value is unreliable.

PricewaterhouseCoopers A practical guide to share-based payments | 27

 4.10 Does fair value equal zero where no identifiable goods or services are
received in connection with the share-based payment?

No. IFRS 2 still applies to the share-based payment and its fair value should be determined.

Example
Entity Q is a mutual entity and its shares are held by members. However, Q plans
to demutualise and list on the local exchange and it will convert the existing
member shares to ordinary equity capital in a listed entity. As part of the process,
Q will issue free shares to its customers (those customers that are not members).

The appropriate accounting for the share-based payment is determined by

separately considering the shares issued to existing members and customers.

Existing members

This arrangement is not a share-based payment as it is with members in their

capacity as existing equity holders. Refer to the guidance in Q&A 1.2.

Customers (that are not members)

The entity has issued shares for nil consideration, and it is not possible to identify
the specific goods and services received in return for the shares. Q accounts for
this arrangement under IFRS 2 para 13A.

Q measures the unidentifiable goods and services that have been received in
accordance with IFRS 2 by using the fair value of the equity instrument granted.

4.11 How do service conditions affect the recognition and measurement of a

share-based payment?

Service conditions are not considered when estimating the fair value of a share-based
payment. However, when the awards can be exercised only after the completion of the
service condition, the entity should presume that services are to be rendered over that
period. This is referred to as the vesting period.

Example
Entity R grants share options to employees with service conditions that need to be
satisfied over a three-year period. The vesting period is therefore three years.

R should recognise the services it has acquired during the vesting period based on
the best estimate of the number of equity instruments expected to vest. R should
subsequently revise that estimate if necessary. On the vesting date, R should revise
the estimate to equal the number of equity instruments that ultimately vest.

28 | PricewaterhouseCoopers A practical guide to share-based payments

4.12 How do performance conditions affect the recognition and
measurement of a share-based payment?

It depends on whether the performance condition is a market condition or a

non-market condition.

Market conditions
Market conditions are performance conditions that relate to the market price of
the entitys equity instruments. Examples include where an entitys share price must
outperform the market, achieve a minimum price in a specific period, or achieve a
total shareholder return target. These conditions are included in the estimate of
the fair value of a share-based payment. They should not be taken into account for
the purpose of estimating the number of equity instruments that will vest.
Non-market conditions
Non-market conditions are performance conditions that are not related to the market
price of the entitys equity instruments. An example of a non-market condition is an
earnings per share or a profit target. They should not be considered when estimating
the fair value of a share-based payment. They should be taken into account for the
purpose of estimating the number of equity instruments that will vest.

4.13 How do non-vesting conditions affect the recognition and measurement of

a share-based payment?

Non-vesting conditions are conditions other than service and performance conditions.
Non-vesting conditions are often wholly within the control of the employee; they do not
therefore determine whether the entity receives the services that entitle the counterparty
to receive cash, other assets or equity instruments in a share-based payment
arrangement.

Non-vesting conditions should only be taken into account when determining the fair
value of the equity instruments granted. They are ignored for the purpose of estimating
the number of equity instruments that will vest.

Example
An entity enters into a share-based payment with employees. Each employee is
entitled to 1,000 free shares at the end of a three-year period, provided the employee:

Completes the three-year service period with the entity from the date of the
grant of the award; and

Buys 1,000 shares at fair value on the date of the grant of the award and holds
them for the three-year period (restricted shares).

If the employee leaves the entity prior to the end of the three-year period, or sells his
or her restricted shares within the three-year period, the employee will no longer be
eligible to receive the matching shares.

The requirement to hold the restricted shares for three years is not a vesting condition.
Although the requirement occurs during the service period, it is wholly within the
control of the employee and does not determine whether the entity receives the
services that are linked to the matching shares. Non-vesting conditions are part of the
inputs needed when determining the fair value of the share-based payment.

PricewaterhouseCoopers A practical guide to share-based payments | 29

 The appropriate accounting treatment for vesting conditions (taken from guidance
included in IFRS 2)

The following table, taken from the guidance in IFRS 2, summarises the implications of vesting
and non-vesting conditions on accounting for share-based payments.

Vesting conditions
Non-vesting conditions
Performance conditions

Performance Other Neither the Counterparty Entity can

Service conditions performance entity nor the can choose choose
Conditions that are conditions counterparty whether to whether to
market can choose meet the meet the
conditions whether the condition condition
condition
is met

Example Requirement Target based Initial public Employee Paying Continuation

conditions to remain in on the market offering with will receive contributions of the plan by
service for price of the a specified shares if a towards the the entity
three years entitys equity service commodity exercise
instruments requirement index price of a
increases by share-based
a minimum payment
percentage.
(eg, 50%)

Include in
grant date No Yes No Yes Yes Yes *
fair value?

Accounting Forfeiture. No change to Forfeiture. The No change to Cancellation. Cancellation.

treatment if The entity accounting. entity revises accounting. The entity The entity
the condition revises the The entity the expense The entity recognises recognises
is not met expense to continues to to reflect the continues to immediately immediately
after the grant reflect the recognise the best available recognise the the amount of the amount of
date and best available expense over estimate of expense over the expense the expense
during the estimate of the remainder the number the remainder that would that would
vesting period the number of the vesting of equity of the vesting otherwise otherwise
of equity period instruments period have been have been
instruments (paragraph expected (paragraph recognised recognised
expected 21). to vest 21A). over the over the
to vest (paragraph remainder of remainder of
(paragraph 19). the vesting the vesting
19). period period
(paragraph (paragraph
28A). 28A).

* In the calculation of the fair value of the share-based payment, the probability of continuation of the plan by the entity
is assumed to be 100%.

30 | PricewaterhouseCoopers A practical guide to share-based payments

4.14 How are conditions that use indices accounted for?

These are usually performance vesting conditions.

Example
An entity grants shares to an employee on the condition that:

The employee remains in employment for three years; and

Over that period the entitys earnings per share (EPS) increases by 5% per
annum more than a share price index.

The award is based on a three-year service condition and a non-market-based

performance condition (ie, the earnings per share condition).

Note: Where the condition is purely based on an index, with no link to service, it
would be a non-vesting condition.

4.15 How is a condition that is linked to a change in control accounted for?

It depends on whether the change of control condition occurs within the vesting period
or after the vesting period.

A post-vesting restriction might require an employee to sell their vested shares to an

acquirer in the event of a change in control of the employer entity. This condition is taken
into account in measuring the fair value of the grant.

If the change in control occurs during the vesting period, it is a non-market

performance condition as it is not related to the market price of the entitys equity
instruments. This condition is taken into account for the purpose of estimating the
number of equity instruments that will vest (see example below).

Example
An entity enters into an equity-settled share-based payment with employees. Each
employee is entitled to 1,000 free shares, provided:

There is a change in control of the entity (for example, the majority of

shareholders change). The condition is not within the control of either the entity
or the employees.

The employee is employed by the entity on the date that the change in
control occurs.

The change in control is a non-market performance condition. This condition exists

during the service period and is not wholly within the control of the counterparty or
the entity. The entity therefore estimates at the grant date and at each reporting
period the number of awards that are expected to vest based on the number
of employees who are expected to achieve the service period. The entity also
determines whether the change in control is probable.

If the assessment of the change in control condition changes from probable to

improbable, the cumulative charge would be fully reversed through the income
statement. In contrast, for a cash-settled share-based payment, the change would
reduce the fair value of the liability, as the measurement of the liability would
reflect all possible outcomes on a weighted-average basis.

Further information on the appropriate accounting treatment can be found

in Q&A 5.6.

PricewaterhouseCoopers A practical guide to share-based payments | 31

 4.16 What is the appropriate accounting when an award specifies that the
number of equity instruments that will vest is variable?

It depends on the type of condition that is included in the award.

A non-market performance condition will be taken into account at each balance

sheet date in the estimation of the number of equity instruments that are expected to
vest (refer to the example below).

A market performance condition will be taken into account in the calculation of the
grant date fair value. For example, an employee may receive 50 shares at the end of
year 1 if the share price reaches C1 or 75 shares if the share price reaches C1.50.

A non-vesting condition will be taken into account in the calculation of the grant date
fair value. For example, an employee may receive 100 shares at the end of year 1 if a
commodity index reaches C3 or 150 shares if the index reaches C4.

Example
A grant might specify that the number of equity instruments that will vest to
employees at the end of year 5 will depend on a sales target. This is a non-market
performance condition.

Therefore:

If sales exceed C5 million, 100 shares will vest

If sales exceed C10 million, 150 shares will vest

If sales exceed C15 million, 200 shares will vest

At each balance sheet date, the entity estimates the number of equity instruments
that are expected to vest.

4.17 Where in equity is the credit entry recorded for an equity-settled

share-based payment?

IFRS 2 is not prescriptive on the accounting required for the credit to equity in respect
of an equity-settled share-based payment. Practice varies depending on local regulatory
requirements. One approach that is common in some countries is to put the credit
to a share-based payment reserve until the award has been settled and then make a
transfer to share capital (although this is not permitted in some countries), other reserves
or retained earnings. In other countries, the credit entry may be directly to retained
earnings. This is a complicated area; management may need to take legal advice to
comply with local legislation.

32 | PricewaterhouseCoopers A practical guide to share-based payments

4.18 Is there an expense to recognise if an employee pays fair value for
equity instruments?

Management should first determine whether the right to own the share is linked to
the employment and then whether the employee has paid fair value for the equity
instruments under IFRS 2.

The following are indicators that the fair value hasnt been calculated in accordance
with IFRS 2:

The award price is its intrinsic value rather than its fair value;

Market price is not available for the award, and the entity has not applied the option
pricing valuation requirements in IFRS 2; and

The entity has factored into the price of the award at grant date the applicable
vesting conditions (other than market performance conditions).

If the employee has paid fair value for the equity instruments under IFRS 2 and does not
have to surrender them if he or she leaves employment, the award would be fully vested
on grant date. There would be no expense to recognise, but the disclosure requirements
of IFRS 2 would need to be satisfied. For example, disclosure of how the fair value was
determined and the assumptions for an option pricing model if one was used.

In contrast, if the employee has paid fair value for the equity instruments under IFRS 2
and has to surrender the shares if he or she leaves employment there will be a vesting
period to consider.

Although there may be no initial IFRS 2 expense, there may be consequences if the
employee leaves employment (for example, the employer must repurchase the shares
at fair value when the employee resigns). If the shares must be bought back by the
entity when the employee leaves, the entity has entered into a cash-settled share-based
payment, which is measured at fair value at each reporting period.

Insight
Entities often overlook the detailed guidance in IFRS 2 concerning the calculation of
fair value for rights such as options. Where the options and shares are not listed in a
public market, it is not sufficient for management to state that fair value is what they
have estimated if that estimate was created without following the guidance on option
pricing models contained in IFRS 2. In this case, managements estimate may be
very different from the fair value calculated using IFRS 2.

PricewaterhouseCoopers A practical guide to share-based payments | 33

 4.19 How are limited-recourse loans provided to employees accounted for?

These loans are recognised under IFRS 2 as the grant of an option.

Limited-recourse loans give the borrower (usually an employee) the ability to walk away
from the loan by surrendering shares in the entity that were acquired with the loan
proceeds.

Insight
At its November 2005 meeting, the IFRIC explained that because the employee
can give the shares back (or not exercise its options) if their value is less than the
outstanding loan, there is no downside risk to the employee. In substance, the
employer has issued an option (or shares) and not a loan and equity instruments.
No loan receivable should be recognised by the entity; however, the share option
should be accounted for under IFRS 2. The limited-recourse loan does not satisfy
the definition of a financial instrument.

4.20 How does an entity account for a full-recourse loan given to employees?
The employee is unconditionally bound to repay a full-recourse loan. The entity records a
receivable for the loan balance with a corresponding adjustment to equity.

However, if the terms of the loan with the entity were such that a preferential interest rate
was given to employees, a fair value adjustment to the loan balance is recognised as an
employee remuneration expense over the period of the related service (under IFRS 2 or
IAS 19). This is because the fair value of the loan has been reduced through a
preferential rate and a benefit has been provided to the employee. In all other cases, if
the amount paid for the shares is not based on their fair value, there will be an IFRS 2
expense to record.

Insight
It is rare for entities to have a full-recourse loan based on arms length conditions.
Of those that do arise, the following is an example of a typical loans terms:

Shares are granted to employees at market price at the date of grant

Employees have a contractual obligation to repay the loan even if the loan is
greater than the value of the shares

The loan is interest-free or bears an interest rate that is below the market rate

Dividends are applied to reduce the loan balance

The arrangements vest immediately

34 | PricewaterhouseCoopers A practical guide to share-based payments

Section 5 Modifications, cancellations and
forfeitures of share-based payments

Entities often make changes to their share-based payment arrangements. Common examples
include:

Where the share price falls, an entity might modify the terms and conditions on which
equity instruments were granted to maintain an incentive to the employee.

Where entities or employees cancel and settle a grant of equity instruments during a
vesting period.

Where employees leave their employment with an entity and forfeit their rights to share-
based payments.

Entities may find the share-based payment requirements around modifications, cancellations
and forfeitures to be counter-intuitive. Management have often been surprised by the
accounting result.

5.1 How does an entity account for a situation where it cancels a grant
in anticipation of an employee failing to meet a non-market
performance condition?

If the award is forfeited because of failure to meet a non-market performance condition,

the cumulative expense recorded is reversed because no equity instruments will have
vested. Cumulatively, no expense will be recorded by the entity.

If the entity knows in advance that the employee will not meet the non-market
performance condition, it should not pre-empt this by cancelling the award ahead of
time because it will be treated as a cancellation under IFRS 2. The entity will have to
immediately recognise the amount of the expense that would otherwise have been
recognised over the remainder of the vesting period (refer to Q&A 5.2).

Insight
The IFRS 2 requirements relating to cancellations were implemented by the IASB
as an anti-avoidance measure. These requirements aim to stop entities reducing
a share-based payment expense by decreasing the number of equity instruments
granted.

PricewaterhouseCoopers A practical guide to share-based payments | 35

 5.2 When cancelling an award, on what basis does management determine
how many of its share-based payments are expected to vest?

This question is not clearly answered in the IFRS 2 guidance. However, IFRS 2 para
28(a) requires a cancellation of a share-based payment to be treated as an acceleration
of vesting. It is recognised immediately at the amount that otherwise would have been
recognised for services received over the remainder of the vesting period.

Opinions are divided on the amount that should be recognised at the date of cancellation.
We believe that the charge should reflect all awards that are outstanding at the date of
cancellation, without adjusting for any estimate of the number of awards that are not
expected to vest. This is because the cancellation results in early vesting (satisfaction of a
non-market performance condition) and thus accelerated recognition of the grant date
fair value.

There is an alternative interpretation that focuses on the words ... the amount that
otherwise would have been recognised for services received over the remainder of the
vesting period and recognises a charge that reflects the number of awards that were
expected to achieve the performance condition just prior to the award being cancelled.

Either interpretation could be applied, but we believe that the first more faithfully reflects
the principles of IFRS 2.

Example
Entity S has an equity-settled share-based payment arrangement with 120
employees. It decides to cancel the arrangement during the reporting period.
Immediately prior to the cancellation, entity S estimated there is a 90% chance of
the employees meeting a non-market performance condition (a profit target) and
that 80 of the employees will meet a service condition (to remain in employment
for three years).

Should the expense that is recognised be calculated based on:

a) 120 employees and 100% of the award;

b) 120 employees and 90% of the award; or

c) 80 employees and 90% of the award?

We believe the cancellation charge should be based on (a) 120 employees and
100% of the award. This is because at the date of cancellation, managements
expectations are no longer relevant.

However, the answer could also be (c) based on the alternative interpretation that
the charge should reflect the number of awards that were expected to vest.

36 | PricewaterhouseCoopers A practical guide to share-based payments

5.3 Can an employee cancel a share-based payment arrangement?

Yes. As a result of the 2008 amendment, IFRS 2 requires consistent treatment

regardless of which party cancels the arrangement.

Cancellations can be made by the entity (such as the employer), the counterparty (such
as the employee) or a third party (such as a shareholder). All cancellations receive the
same accounting treatment, which is to accelerate the vesting period and the related
expense (see also Q&A 5.2 above).

Example
Entity T enters into a save as you earn (SAYE) plan with its employees.

The employees contribute C250 per month to the SAYE plan over a five-year
period. After this time, the employee has a choice: to receive either their cash
back, plus accrued interest, or use the cash to acquire shares at a 20% discount
to their market price at the grant date.

If an employee stops contributing to the share trust before the end of the five-year
period, they receive a reimbursement of the amounts saved to date, plus interest.
However, they must withdraw from the plan and forfeit their right to acquire shares.

Entity T should account for the employees failure to save as a cancellation of the
share-based payment. The savings requirement does not meet the definition of a
service or performance condition and is therefore a non-vesting condition.

This results in the acceleration of any unvested portion of the share-based

payment on the date that the employee elects to stop contributing to the plan and
instead opts to receive their cash. The fair value of the award will take account of
the probability of employees continuing to save and the correlation between any
decision to stop saving and movements in the share price.

PricewaterhouseCoopers A practical guide to share-based payments | 37

 5.4 How does an entity account for a modification to a share-based payment?

When a share-based payment is modified, management should determine whether

the modification:

Affects the fair value of the instruments granted;

Affects the number of equity instruments granted; or

Is otherwise beneficial to the employee.

Each of these possible impacts is detailed below.

Does the modification affect the fair value of the equity instruments granted?

An entity might reduce the exercise price of options granted to employees. If it does,
the entity should recognise the incremental change in fair value (along with the original
fair value determined at grant date) over the remaining vesting period as an expense
and an increase in equity. Decreases in the fair value are not considered. To determine
if an increase has occurred, management should compare the fair value of the modified
award with the fair value of the original award at the modification date.

Example
Entity U makes an award to employees on 1 January 20X7. Employees will
receive 500 shares in U at the end of three years subject to a service condition
(remain employed for three years) and a market condition (share price reaches C5).
After grant date, there has been a decline in the market value of the shares of U.

To ensure the award continues to incentivise employees, during year 2 on 12 April

20X8, U modifies the market condition to a share price target of C3.

The fair values are as follows:

1 January 20X7 at grant date: C20

12 April 20X8 immediately before modification: C10

12 April 20X8 immediately after modification: C30

Under IFRS 2, the incremental fair value is C20, which is the difference in the fair
value immediately before and after the modification. The C20 will be recognised as
an expense over the remainder of the vesting period in addition to the grant date
fair value.

Insight
In the example above, a common error is to account for the incremental fair value
at C10. This is the difference in the fair value from the grant date to immediately
after the modification (30-20). Incremental fair value arises from the effect of the
change rather than the market movement since the grant date.

Does the modification affect the number of equity instruments granted?

Management should determine the fair value of the additional equity instruments
granted, measured at the date of the modification, which is then included in the expense
recognised for services received over the period from the modification date until the date
when the additional equity instruments vest.

38 | PricewaterhouseCoopers A practical guide to share-based payments

 Note: Entities should consider whether the modification has decreased the number
of equity instruments granted. If it has, the reduction is treated as a cancellation of
that portion of the grant (that is, the remaining unrecognised grant date fair value is
recognised as an expense for the instruments that the employee has lost).

Is the modification otherwise beneficial to the employee?

For example, the employee may benefit from the entity reducing the vesting period or
modifying or eliminating a non-market performance condition so that 100% of the award
vests rather than 50%. Any benefit to the employee should be taken into account in
estimating the number of equity instruments that are expected to vest.

5.5 If a modification reduces the vesting period of a share-based payment,

does the adjustment to the expense occur from the modification date
(prospectively) or the grant date (retrospectively)?

There are two acceptable approaches. They are explained in the example below.

Example
On 1 July 20X7, entity V made an award of 100 share options to an employee. The
only condition associated with the award is that the employee must remain in the
employment of V for three years, hence the vesting period is three years. At 1 July
20X7, the fair value of each option is C6.

On 1 June 20X8, V decides to reduce the service requirement from three years to
two years, thereby reducing the vesting period to two years.

Does the expense calculated for the year ended 30 June 20X8 take into account
the reduced vesting period (and so increased pro-rata expense) from 1 July 20X7
or 1 June 20X8?

IFRS 2 does not specify whether the change in the vesting period is accounted for
prospectively from the date of modification or retrospectively in the case where
modification occurs in a reporting period earlier than the one in which the award
vests. In our view, both approaches are acceptable.

PricewaterhouseCoopers A practical guide to share-based payments | 39

 5.6 How does an acquiree entity treat any unvested grants where there is a
change in control that triggers changes to its unvested grants?

The entity should consider whether the terms relating to a change in control were
included in the original grant.

Insight
We see many different conditions in practice that apply in the event of a change
of control. For example, an award may specify that in the event of a change
in control, part or all of the award will be withdrawn. Management should look
closely at the terms in their share-based payment arrangements to determine the
accounting treatment.

If the terms concerning a change in control were:

Set in the original terms of the grant, the entity should consider whether there
is any change in the number of equity instruments expected to vest. If there is a
change, the accumulated expense for the number of shares that actually vested
should be trued up.

Not set in the original terms of the grant, any changes to unvested grants should
be treated as a modification because the terms of the original grant have changed.
This might occur where the terms have been subsequently determined by the
remuneration committee (or other body responsible for setting and revising the
terms of the grant). If the effect has been to waive a market performance condition,
there will be additional fair value to be recognised as an expense. For more
information refer to Q&A 5.4.

Example
Entity W acquires 90% of the share capital of entity X in a business combination.
Entity W has previously granted share options to employees. These options will
vest if a service condition of four years continuous employment is met. The date
of the business combination occurs half-way through the vesting period (that is,
two years after the grant date). The terms of the original award by entity X specify
that in the event of a change in control all unvested awards immediately vest
(accelerated vesting) because the service condition has been removed.

In this case, the terms concerning a change in control were included in the
original terms of the award. Therefore, entity X should true up the accumulated
expense for the additional shares that will vest upon the change of control and the
shortening of the vesting period. From Ws perspective, the true up occurs pre-
acquisition. Further guidance on IFRS 2 and business combinations is provided
in Section 2, Identifying share-based payment arrangements in a business
combination or joint venture.

40 | PricewaterhouseCoopers A practical guide to share-based payments

5.7 How does an entity treat the cash-settlement of an equity-settled share-
based payment arrangement?

Any cash payment made to an employee upon the cancellation or settlement of an

award that has been classified as equity-settled should be accounted for as the
repurchase of an equity interest (that is, a deduction from equity).

Management should remember that IFRS 2 requires any excess of the settlement over
the grant date fair value to be treated as a deduction from equity and not an expense
provided the settlement is not greater than the fair value of the equity instruments
granted when measured at the settlement date. Any excess payment over the fair value
of the award at the settlement date is recognised as an expense.

5.8 How does management account for the forfeiture of a share-based

payment?

It depends what is meant by forfeiture. An award can fail to pay out for the following
reasons:

A service condition is not met;

A non-market performance condition is not met;

A market performance condition is not met;

A non-vesting condition is not met; and

It is cancelled.

A forfeiture occurs when either a service or a non-market performance condition is not

met, as this affects the number of awards that vest; failing to meet a market or non-
vesting condition are not forfeitures, as these are already taken into account when
determining the grant date fair value. Cancellations result in an immediate acceleration of
any remaining expense.

Forfeiture of a vested award has no accounting implications.

Where awards are forfeited, the expense is revised to reflect the best available estimate
of the number of equity instruments expected to vest. Hence, on a cumulative basis, no
expense is recognised for goods or services received if the equity instruments do not vest
(for example, if the employee or counterparty fails to complete a specified service period).

PricewaterhouseCoopers A practical guide to share-based payments | 41

 Section 6 Group share-based payment
arrangements

It is common for employees of an entity to receive shares or rights to shares in another entity
within the consolidated group. Usually this is shares or rights to shares in the parent entity.
For example, within a multinational group, shares in the listed parent entity may be granted
to the employees of various subsidiary entities located around the world. IFRS 2 is clear that
these transactions are share-based payments.

IFRS 2 now provides a clear basis to determine the classification of share-based

payment transactions in both consolidated and separate financial statements with the
issuance of Amendments to IFRS 2 Group cash-settled share-based payment
transactions. The amendments apply to entities with annual reporting periods beginning on
or after 1 January 2010.

6.1 What is a group share-based payment arrangement?

A group share-based payment arrangement is an arrangement that involves two or more

entities within the same group. For example, employees of a subsidiary are granted rights
to equity instruments of its parent entity for services provided to the subsidiary.

6.2 How does an entity account for a group share-based payment

arrangement?

The standard provides a clear basis to determine the classification of awards in both
consolidated and separate financial statements by setting out the circumstances in which
group share-based payment transactions are treated as equity-settled and cash-settled.
The entity receiving goods or services should assess its own rights and obligations, as
well as the nature of awards granted, in order to determine the accounting treatment.
The amount recognised by the subsidiary entity receiving the goods or services will
not necessarily be consistent with the amount recognised in the consolidated financial
statements.

In group share-based payment transactions, the entity receiving the goods or services
should account for awards as equity-settled when:

the awards granted are the entitys own equity instruments; or

the entity has no obligation to settle the share-based payment transaction.

In all other situations, the entity receiving the goods or services should account for the
award as cash settled.

The following flowchart summarises the classification of both cash-settled and equity-
settled share-based payment transactions in group situations.

42 | PricewaterhouseCoopers A practical guide to share-based payments

Classification of share-based payment transactions in group arrangements

Does counterparty get my equity instruments? (Notes 1 and 2)

YES
NO
Equity-settled expense
Does counterparty get equity instruments
of another entity in the same group?
Do I have to provide YES (Note 2)
those instruments
NO
(that is, am I the settler)?
Does counterparty get cash (or other assets) based
YES NO on the value of either my equity instruments or NO Not in scope
equity instruments of another group entity? of IFRS 2
Cash-settled Equity-settled (Note 2)
expense expense
YES

Cash-settled YES Do I have to settle

expense the obligation?

NO

Equity-settled expense
(Note 3)

Notes:
1. My equity instruments include equity instruments of my subsidiaries (non-controlling interests) in
consolidated financial statements, but not when equity instruments are accounted for as an investment in
individual financial statements.
2. Counterparty includes employees and other suppliers of goods or services even where the goods or
services are unidentifiable.
3. For the entity that settles the obligation, treatment will be as equity settled only if the transaction is settled
in equity instruments of that entity (including equity instruments of a subsidiary of that entity). For the entity
receiving the goods or services, treatment will be as equity settled unless there is an obligation to settle in
cash or other assets.

Example 1
A group scheme awards shares in the parent entity to employees in a subsidiary.
The share-based payment is equity-settled on consolidation and it is the parent
entity that has the obligation to deliver the shares.

In the consolidated financial statements, the transaction is treated as an equity-

settled share-based payment, as the group has received services in consideration
for the groups equity instruments. An expense is recognised in the group income
statement for the grant date fair value of the share-based payment over the
vesting period, with a credit recognised in equity.

In the subsidiaries financial statements, the award is treated as an equity-settled

share-based payment, as the subsidiaries do not have an obligation to settle the
award. An expense for the grant date fair value of the award is recognised over the
vesting period, with a credit recognised in equity. The credit to equity is treated as
a capital contribution, as the parent is compensating the subsidiaries employees
with no cost to the subsidiaries. In this example, the shares vest immediately;
therefore, an expense is recognised in the subsidiaries income statement in full
based on the grant date fair value and a credit to equity.

In the parents separate financial statements, there is no share-based payment

charge, as no employees are providing services to the parent. The parent
would therefore record a debit, recognising an increase in the investment in the
subsidiaries as a capital contribution from the parent and a credit to equity.

PricewaterhouseCoopers A practical guide to share-based payments | 43

 The grant date fair value is C1,200. The journal entries recorded over the vesting
period will be as follows:

Consolidated Parent Subsidiary

DR Expense 1,200 DR Investment in subsidiary 1,200 DR Expense 1,200
CR Equity 1,200 CR Equity 1,200 CR Equity* 1,200

* Contribution from parent entity

Example 2
In a group scheme, the parent entity awards share appreciation rights to
employees in a subsidiary. At the end of two years, the parent will pay cash to
the subsidiarys employees equivalent to the difference between the share price
on vesting and the share price at grant date. The share-based payment is cash-
settled on consolidation, as the parent entity has an obligation to pay cash.

In the consolidated financial statements, the transaction is treated as a cash-

settled share-based payment, as the group has received services in consideration
for cash payments based on the price of the groups equity instruments. An
expense is recognised in the group income statement for the fair value of the
share-based payment over the vesting period, with a liability being recorded as
the other side of the entry. This liability is re-measured at each reporting date until
settlement.

In the subsidiarys financial statements, IFRS 2 requires the award to be treated

as equity-settled, because the subsidiary does not have an obligation to settle the
award. An expense would be recognised in the subsidiarys income statement over
the vesting period based on grant date fair value, with a credit recognised in equity.
The credit to equity is treated as a capital contribution from the parent, as the
parent is compensating the subsidiarys employees at no cost to the subsidiary.

In the parents financial statements, there is no share-based payment expense

recorded, as the employees are not providing services to the parent. Rather, the
share-based payment transaction results in a debit to investment in subsidiary,
with a corresponding liability recorded at fair value at each reporting period end.

To illustrate this example, the grant date fair value is C1,200, and the fair value at
settlement is 1,500. The journal entries recorded over the vesting period will be as
follows:

Consolidated Subsidiary Parent

DR Expense 1,500 DR Expense 1,200 DR Investment in subsidiary 1,500
CR Liability 1,500 CR Equity* 1,200 CR Liability 1,500

* Contribution from parent entity

Note: Measurement could vary between the two sets of accounts because the fair
value is subsequently re-measured in group consolidated financial statements but
not in the subsidiarys financial statements.

44 | PricewaterhouseCoopers A practical guide to share-based payments

6.3 How does an entity account for a recharge from a subsidiary to the
parent entity?

Many group share-based payment arrangements include a recharge where the parent
charges the subsidiary for the equity or cash it provides to the employees (or other
providers of goods or services) of the subsidiary. This scenario is not addressed under
IFRS 2 or any of the related guidance.

In our view, where there is a clear link between the recharge and the share-based
payment, it is appropriate to offset the recharge against the capital contribution in the
separate financial statements of the subsidiary and the parent entity. There would, for
example, be a clear link where the recharge is based on the intrinsic value or market
value of the shares when they vest. When the inter-company charge exceeds the
capital contribution, the excess should be treated as a distribution from the subsidiary
to its parent entity. This is consistent with the principles applied to other shareholder
contributions.

When there is no clear link between the recharge and the share-based payment, we
believe the payment between the subsidiary and its parent entity should be recognised
as an expense in the same way as other management recharges. However, management
should be aware that this will result in a double debit to the income statement, as the
subsidiary would have already recorded an expense for services received under IFRS 2.

Example
A parent entity recharges a subsidiary for an award. It is equity-settled on
consolidation and it is the parent entity who has the obligation.

The subsidiary has charged the grant date fair value of C1,200 (Dr Expense Cr
Capital contribution) in the income statement. The parent entitys recharge is
based on the market value at exercise date, which is C1,500.

The journal entries recorded for the recharge will be as follows:

Parent Subsidiary
DR Cash 1,500 DR Capital contribution 1,200

CR Investment in subsidiary 1,200 DR Distribution 300

CR Dividend 300 CR Cash 1,500

Note: Although there is no authoritative guidance that covers recharge

arrangements, IFRIC considered this issue in its draft interpretation D17, IFRS 2,
Group and treasury share transactions. The example above reflects IFRICs draft
proposals, which were not included in the final interpretation.

PricewaterhouseCoopers A practical guide to share-based payments | 45

 6.4 When is a recharge recognised?

Typically a recharge is only due to be paid to the parent entity when the award vests or
the employees exercise their options. The question that arises in practice is whether the
obligation to the parent entity should be accrued before that date (ie, as the employees
provide service), or not.

In our view, it is unlikely that the obligation arises with the provision of employee service.
Therefore, the subsidiary should recognise the obligation on the earlier of the vesting
date for a share award or the exercise date for an option and when the recharge is due
to the parent entity.

Insight
In most cases, we believe that a subsidiary entity would account for a recharge
when the payment is made to the parent. The recharge would be disclosed as a
contingent liability during the time that the recharge payment is not recognised as
a liability. It may be appropriate to recognise a liability for a recharge before the
payment is made for example, once an award has vested and the options to
be exercised are deeply in the money. However, there is an alternative view that
the subsidiary entity would spread the recharge over the vesting period, as the
recharge payment arises from the share-based payment arrangement. This view
may also be acceptable in practice, as there is no specific guidance on the recharge
arrangement in IFRS.

6.5 What is the accounting by an intermediate entity between a parent and

subsidiary, both of which are parties to a group share-based payment
arrangement?

In our view, there is no need to cascade journal entries through the intermediate
entities. Only the ultimate parent entity and the subsidiary need to recognise the
transaction.

6.6 What disclosures are required in an entitys financial statements in relation

to a group share-based payment arrangement?

Where a subsidiary entity accounts for a share-based payment transaction in group

situations as discussed above in Q&As 6.1 and 6.2, the disclosures prescribed by IFRS 2
are required in full. The subsidiary entitys financial statements should be stand-alone; it
is not possible, for example, to cross-refer to share-based payment disclosures given in
the parents (or groups) financial statements.

46 | PricewaterhouseCoopers A practical guide to share-based payments

Section 7 Share plan trusts

Share plan trusts are often created by a sponsoring entity for employees. They are designed
to facilitate employee shareholding and are often used as a vehicle for distributing shares to
employees under remuneration schemes.

Entities usually engage in one of two methods to fund share-based payments either they
will make a fresh issue of shares or buy their own shares on the market. The latter method is
more common for commercial reasons, because it does not add to the share base or dilute the
interests of existing shareholders. However, this method poses problems for some entities.

The legal requirements in some jurisdictions state that entities are not allowed to own their own
shares. Therefore, many entities set up special purpose share plan trusts to hold entity shares
on behalf of the plan participants.

7.1 Is a trust that is created by an entity to administer a share-based payment

award consolidated?

Yes. In all but very rare circumstances, the trust should be consolidated into the financial
statements of the group receiving the goods or services.

Insight
In 2004, IFRIC concluded that the scope of SIC-12, Special purpose entities,
should be amended to remove the scope exclusion for equity compensation
plans. Hence, the trust should be consolidated where the activities of the trust are
being conducted on behalf of the entity according to its specific business needs
so that the entity obtains benefits from the trusts operations.

Where the trust is administering an award to employees of several entities within

the same group, our view is that the trust should be consolidated into the group
financial statements.

7.2 How are shares held by the trust accounted for by the consolidated group?

As the trust is consolidated, the shares are treated as treasury shares in the
consolidated financial statements (that is, as a deduction from equity).

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 7.3 How is the entitys interest in the trust accounted for in its separate
financial statements?

There is no guidance in IFRS 2 concerning the accounting for an entitys interest in a

trust. In our view, the appropriate accounting depends on whether:

The entity has a beneficial interest in the trusts residual assets. The entity
could recognise an investment in the trust.

The employees own the beneficial interest in the residual assets. If they do,
and there is no formal loan agreement, the entity should record a debit in equity.

A formal loan arrangement exists between the entity and the trust. The funding
could be treated as a loan to the trust. Entities should be aware that this loan may
become impaired.

Insight
If the transfer of cash to the trust is treated as a loan and receivable asset under
IAS 39 (or amortised cost asset under IFRS 9), an impairment charge may often
be required because the asset is not recoverable. The expectation is that the
employees will ultimately receive the shares, at which time the trust would no
longer have any assets to justify the receivable in the sponsoring entitys accounts
and the asset would be impaired. If the transfer of cash to the trust is treated as
a capital contribution, any investment in trust balance generated would also be
subject to impairment review.

An impairment may result in a double debit because the entity recognises both
the share-based payment charge and the impairment charge.

In our view, where it is clear that the sponsor retains the majority of the risks and
rewards relating to the funding arrangement, the trust has, in substance, acted as
an agent for the sponsor. We believe it would be acceptable in this case for the
sponsor to account for the issue of the shares to the trust as the issue of treasury
shares, thus eliminating the problem of the double debit described above.
Factors that may indicate that the trust has acted merely as an agent and the
sponsor retains the risks relating to the funding include:

The entity bears the ultimate risk of a fall in the price of the shares held by
the trust;

The trust has no other unencumbered assets on which the entity could
claim should the shares be issued to employees; and

The entity has guaranteed any portion of any third-party loan the trust
has obtained.

48 | PricewaterhouseCoopers A practical guide to share-based payments

Section 8 Tax and share-based payments

The impact of share-based payments on current and deferred tax is addressed in IAS 12,
Income taxes.

8.1 Does deferred tax arise from equity-settled share-based payment

arrangements?

Yes. In some tax jurisdictions, a tax deduction is received for remuneration paid in
shares, share options or other equity instruments of the entity.

Example
An entity may be entitled to an upfront tax deduction where shares are purchased
on the market through a trust structure. As the IFRS 2 share-based payment
expense has not yet been incurred, a deferred tax liability is recognised and will
unwind over the vesting period.

The IFRS 2 expense may be charged to the income statement over the vesting period,
but the tax deduction is only available when the shares are issued to the employees on
exercise. The calculation of the deferred tax asset is complicated because the future
tax deduction may be based on the share price at the date of exercise, which cannot be
known until that date.

In this situation, the expected tax deduction is estimated on the basis of the information
that is available at the end of the period. Therefore, the measurement of the deductible
temporary difference is based on the entitys share price at the balance sheet date.

To the extent that the tax deduction is equal to, or is less than, the cumulative
remuneration expense under IFRS 2, current and deferred tax is recognised through
the income statement. However, when the tax deduction is greater than the cumulative
expense, the incremental tax deduction is recognised in equity.

8.2 Does deferred tax arise from cash-settled share-based payment

arrangements?

Typically yes, where a tax deduction is available when the payment is made.
Cash-settled share-based payments, such as share appreciation rights issued to
employees, would be treated in exactly the same way as other expenses where there
is a timing difference between the accounting recognition and any tax deduction.

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