CHAPTER TWO

ACCOUNTING FOR SHARE BASED PAYMENT (IFRS 2)

 In a share-based payment transaction, an agreement an

entity acquires goods or services from a counterparty.
 In return, the entity provides either equity instruments or
cash equivalent to the value of these equity instruments.
This value can be based on the entity’s own equity
instruments or those of another entity within the same group
(IFRS 2).
 Cash or other assets of the entity 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; or
 Equity instruments (including shares or share options, share appreciation
rights) of the entity or another group entity provided that the specified
vesting conditions are met.
Compiled by : Addisu G (Dr) 01/27/2025
 CONCEPT OF VESTING CONDITIONS
What is Vesting Condition?
2

 In order to motivate and retain employees,

companies typically require that employees fulfill
certain conditions to earn and retain stock-based
compensation awards. These are commonly
called vesting conditions.
 An award is considered vested when an
employee's right to receive or retain the award is
no longer contingent on satisfying the vesting
condition
 Schemes often contain conditions which must be met before
there is entitlement to the shares is called Vesting conditions..
 ‘Vesting conditions’ determine whether the entity receives the
Compiled by : Addisu G (Dr) 01/27/2025
 Measurement and Recognitions

 Vesting conditions are subdivided into

1. service conditions and
2. performance conditions
 If the share-based payments vest immediately,
 The employee is not required to complete a specified period of service
before becoming unconditionally entitled to those share-based payments.
 The entity shall recognize the services received in full, with a
corresponding increase in equity or liabilities.
 If the share-based payments do not vest immediately,
 The employee completes a specified period of service
 The entity shall account for those services as they are rendered by the
employee during the vesting period, with a corresponding increase in
Compiled by : Addisu G (Dr) 01/27/2025
equity or liabilities.
 Basic recognition principles
4

 Goods acquired in a share-based payment transaction are

recognized when the entity obtains control of the goods.
 Services are recognized as the services are received.
 The ‘credit side’ of the entry is recognized in equity for an
equity-settled share-based payment transaction or as a liability
for a cash-settled share-based payment transaction.
 The debit side is recognized as an expense, unless it qualifies for
recognition as an asset under other accounting standards (e.g.,
shares issued to purchase property, plant and equipment
recognized under IAS 16 Property, Plant and Equipment).

Compiled by : Addisu G (Dr) 01/27/2025

 categories of share-based payment
transactions.
5

 In its scope of IFRS 2, there are three main

categories of share-based payment transactions.
1. Equity-settled
2. Cash-settled
3. Alternatives whether the entity settles the
transaction in cash or by issuing equity
instruments
Equity-settled share-based payment transactions
 An entity must always recognize an equity-settled share-based
payment transaction in its books if it receives the goods or
services For equity-settled
Compiled transactions
by : Addisu G (Dr) 01/27/2025
6

 Employee services are recognized as expenses, unless they qualify for

recognition as assets, with a corresponding increase in equity.
 The fair value of the share-based payment, determined at the grant
date, should be expensed over the vesting period from the service
commencement date until vesting date.
 For transactions with employees (including others providing similar
services), the fair value of the equity instruments shall be measured at
the grant date
 For transactions with parties other than employees, the measurement
date is the date when the entity obtains the goods or the counterparty
renders service.
 The grant-date fair value is not adjusted for subsequent changes in the
fair value of the equityCompiled
instruments
by : Addisuand
G (Dr)differences
01/27/2025 between the
 Share based payment transaction with no vesting conditions,
Qualified an Asset
7

Example2: Entity ABC purchased 100 computers

for its call centre in exchange for issuing 20,000 of its ordinary
shares. The cash selling price for each computer is Br 500 and the
shares have a par value of birr 1. The entity determines that the
selling price, which is from an independent vendor in an arm’s length
transaction, is the best measure of the fair value of the computers.
Consequently, Entity ABC accounts for the transaction as follows:
Property, plant and equipment—computers Br 50,000
Ordinary share capital 20,000
Share premium account 30,000
To recognize the receipt of equipment in exchange
for the issue of 20,000 Entity ABC ordinary shares
Compiled by : Addisu G (Dr) 01/27/2025
 Cont…
8

 Example2. Entity ABC contracted a consultant to

advice on a new marketing campaign. The consultant agreed to accept
ordinary shares of Entity ABC as payment for his services. The consultant
advice had an invoice price of Br 3,000 and Entity ABC issued 100
ordinary shares with a par value of Br10 each. The entity determines that
the invoice value of the consultant fees is the best estimate of the fair value
of the marketing advice. Consequently, Entity ABC accounts for the
transaction as follow
Marketing expense Br 3,000
Ordinary share capital 1,000
Share premium account 2,000
To recognize the receipt of marketing advice in exchange
for the issue of 100 Entity ABC ordinary shares
Compiled by : Addisu G (Dr) 01/27/2025
 Measurement When There Are Service
Vesting Conditions
9

 Example1 Entity ABC grants 100 share options to each of its

500 employees. Each grant is conditional upon the employee
working for the entity over the next three years (i,e the vesting
condition is a service condition of three years). The entity
estimates that, on the date of grant, the fair value of each share
option is Br15; the fair value of Br15 is measured as though
there is no service condition. On the basis of a weighted-
average probability, the entity estimates that 20% of employees
will leave during the three-year period and therefore forfeit
their rights to the share options.
 Required: makes the necessary entries in the years during
the vesting period, for services received as consideration for
the share options Compiled by : Addisu G (Dr) 01/27/2025
 Solution
10

Year 1 Staff costs Br 200,000

Equity Br 200,000
Calculation: 50,000 options granted × 80% = 40,000 options expected to vest.
40,000 × Br15 grant date fair value of each option × 1/3 of vesting period elapsed
= Br 200,000 recognized in Year 1.

Year 2 Staff costs Br 200,000

Equity Br 200,000
Calculation: 50,000 × 80% = 40,000 options expected to vest. 40,000 × Br15 ×
2/3 -Br200, 000 = Br 200,000 recognized in Year 2.
Cumulative expense at the end of Year 2 is Br 400,000 (Br 200,000 recognized in
Year 1 and Br 200,000 recognized in Year 2).
Year Staff costs Br 200,000
Equity Br 200,000
Calculation: 40,000 × Br15 × 3/3 = Br 600,000 -200,000 recognized in
Compiled
Year 2 – Br 200,000 recognized by : Addisu
in Year 1 = BrG (Dr) 01/27/2025
200,000 recognized in Year
3
 Example 2
11

 The facts are the same as in Example above. However, in this

example not everything turns out exactly as expected. In particular:
 At the end of Year 1 the entity revises its estimate of total employee
departures over the three-year period from 20% (100 employees) to
15% (75 employees).
 At the end of Year 2 the entity revises its estimate of total employee
departures over the three-year period from 15% to 12% (60
employees).
 During Year 3, a total of 57 employees forfeited their rights to the
share options during the three-year period, and a total of 44,300
share options (443 employees × 100 options per employee) vested at
the end of Year 3.
Required: Make Compiled
a necessary
by : Addisu G (Dr) journal
01/27/2025 entries
 Solution
12 Year 1 Staff costs Br 212,500
Equity Br 212,500
Calculation: 50,000 options granted × 85% = 42,500 options expected to vest.
42,500 × Br15 grant date fair value of each option × 1/3 of vesting period elapsed
= Br 212,500 recognized in Year 1.
Year 2 Staff costs Br 227,500
Equity Br 227,500
Calculation: 50,000 options granted × 88% = 44,000 options expected to vest.
44,000 × Br15 grant date fair value of each option × 2/3 of vesting period elapsed
= Br 440,000 recognized cumulatively to the end of Year 2. Br 440,000 - 212,500
recognized in Year 1 = Br 227,500 recognized in Year 2.
Year 3 Staff costs Br 224,500
Equity Br 224,500
Calculation: 44,300 options vested × Br15 grant date fair value of each option ×
3/3 of vesting period elapsed = Br 664,500 recognized cumulatively to the end of
Year 3. Br 664,500 less Br 227,500 recognized in Year 2 less Br 212,500
recognized in Year 1 = Br 224,500 recognized in Year 3.
Compiled by : Addisu G (Dr) 01/27/2025
 Cash-Settled Share-Based Payment Transactions
13
 A cash-settled share-based payment transaction is a share-
based payment transaction 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.
 The main difference is that fair value recognized as a credit
to equity for equity-settled share-based payments is set at
grant date and not changed, whereas the cash-settled share-
based payment liability (credit entry) is continually updated
to fair value at each reporting date until the liability is
settled
Compiled by : Addisu G (Dr) 01/27/2025
 Cont…
14

 For cash-settled share-based payment transactions,

 An entity recognizes a cost and a corresponding liability.
 The liability has to be measured at each reporting date until it is settled; the
change in the fair value of the liability is recognized in profit or loss for the
period.
 The grant-date fair value of the liability is recognized over the vesting
period.
 The grant-date fair value of the liability is capitalized if the services
received qualify for asset recognition.
 Re measurements during the vesting period are recognized immediately to
the extent that they relate to past services, and recognized over the
remaining vesting period to the extent that they relate to future services.
Compiled by : Addisu G (Dr) 01/27/2025
 Re measurements of the liability are recognized in profit or loss.
 Example
15

On 1 January Year 1, Company B grants one share to each of its 100 employees,
subject to a three-year service condition. If the service condition is met, then the
share will be settled in cash on 29 January Year 4. The employees will receive
the intrinsic value of the share at settlement date – i.e. any increase in the share
price between grant date and 29 January Year 4 at grant date and throughout the
vesting period, B expects all employees to remain in service with B and they
eventually do. The fair value of the shares develops as follows
. Fair Value
January Year 1 (Grant date) 9
31 December Year 1 12
31 December Year 2 13.5
31 December Year 3 (vesting date) 15
29 January Year 4 (settlement date) 14
Compiled by : Addisu G (Dr) 01/27/2025
 Required: Make necessary Journal entry

16

 Year 1
Expenses 300
Liability 300
 To recognize services received in Year 1(100 *9*1/3) recognized over the vesting period.
Expenses 100
Liability 100
 To recognize re measurement of 300 (100 x (12 - 9))*1/3
Year 2
Expenses 300
Liability 300
 To recognize services received in Year 2 (1/3 x 900
Expenses 200
Liability 200
 To recognize re measurement of 450 (100 x (13.5 - 9))*2/3 less previously recognized re measurement of 100
Compiled by : Addisu G (Dr) 01/27/2025
 Cont…
17

 Year 3
Expenses 300
Liability 300

 To recognize services received in Year 3 (1/3 x 900

Expenses 300

Liability 300
 To recognize 3/3 of re measurement of 600 (100 x 15 - 9)*3/3, less previously
recognized re measurement of 100 & 200
 Year 4
Liability 1400
Compiled by : Addisu G (Dr) 01/27/2025
Cash 1400
 Share-Based Payment Transactions with Equity/ Cash Alternatives

18

 A share-based payment transaction in which the

counterparty (e.g. an employee) has a choice of
settlement is a compound financial instrument
that includes a liability component and an equity
component.
 The entity measures the fair value of the liability
component first, which equals the fair value of
the cash alternative. The entity accounts for that
component by applying the requirements for
cash-settled share-based payments – i.e. the
liability component is re measured until
settlement date. Compiled by : Addisu G (Dr) 01/27/2025
 Cont…
19

 The value of the equity component takes into account

that the counterparty forfeits the cash alternative. The
entity accounts for the equity component, if there is
any, by applying the requirements for equity-settled
share-based payments – i.e. the equity component is not
re measured after the grant date.
 If the counterparty chooses equity settlement, then the
liability is reclassified to equity. If the counterparty
chooses cash settlement, then the equity component
remains in equity.
Compiled by : Addisu G (Dr) 01/27/2025
 Example
20

 On 1 January Year 1, Company E grants a share-based

payment to its CEO, subject to a two-year service condition.
After the service period, the CEO is entitled to either:
 1,000 shares settled in cash at their intrinsic value at

settlement date; or 1,200 share options, to be exercised at an

exercise price that equals the share price at grant date i.e. 1
 The rights can be exercised only on 29 January Year 3. The

CEO is expected to fulfill the service condition, and ultimately

does.
 The values of the individual shares and the individual share

options are always the same and develop as follows.

January Year 1 1.00 Fair value
31 December Year 1 1.30 Fair value
31 December Year 2 1.40 Fair value
Compiled by : Addisu G (Dr) 01/27/2025
29 January Year 3 1.35 Fair value
 Solution
21

 The fair value of the liability component at grant date is

1,000 (1,000 x 1). The fair value of the equity alternative
is 1,200 (1,200 x 1). Therefore, the grant-date fair value
of the equity component is 200 (1,200 -1,000).
 Required: Make Necessary Journal entry
 1st determine fair value of liability components =1,000
(1,000 x 1).
 2nd Determine fair value of the equity alternative
=1,200 (1,200 x 1).
 Then, the grant-date fair value of the equity
component = 200 (1, For equity components apply
requirements of equity settled (1,200 - 1,000).
Compiled by : Addisu G (Dr) 01/27/2025
 Cont…
22

Year 1
Expenses 100
Equity 100
To recognize expense related to equity component (200 x 1/2
Expenses 650
Liability 650
To recognize expense related to liability component (1,000 x 1.30 x 1/2).
Year 2
Expenses 100
Equity 100
To recognize expenses related to equity component 200*2/2-100 )
Expenses 750
Liability 750
To recognize expenses related to liability component (1,000 x 1.40 - 650).
Year 3
Expenses 50
Equity 50
To re measure liability component to its fair value at settlement date (1,350 - 1,400
Compiled by : Addisu G (Dr) 01/27/2025
 Cont….
Cumulative effect before settlement
23 Expenses 1,550
Equity 200
Liability 1,350
Settlement of the share-based payment is recognized
as follows under the two possible settlement scenarios
Scenario A – Employee chooses cash settlement
Liability 1350
Cash 1350
To recognize settlement of liability
Scenario B – Employee chooses equity settlement
Liability 1350
Equity 1350
To recognize reclassification of liability to equity

Compiled by : Addisu G (Dr) 01/27/2025

24

END OF CHAPTER TWO !

Compiled by : Addisu G (Dr) 01/27/2025