IFRS 2 Share-based payment and Deferred tax implications Plus Q&A and EXAMPLE CASES

IFRS 2 Share-based payment Pilot paper, 12/08, 12/10, 6/12, 12/13, 6/14 Share-based payment transactions should be recognised in the financial statements. You need to understand and be able to advise on: x Recognition x Measurement x Disclosure of both equity settled and cash settled transactions. 1.1 Background Transactions whereby entities purchase goods or services from other parties, such as suppliers and employees, by issuing shares or share options to those other parties are increasingly common. Share schemes are a common feature of director and executive remuneration and in some countries the authorities may offer tax incentives to encourage more companies to offer shares to employees. Companies whose shares or share options are regarded as a valuable 'currency' commonly use sharebased payment to obtain employee and professional services. The increasing use of share-based payment has raised questions about the accounting treatment of such transactions in company financial statements. Share options are often granted to employees at an exercise price that is equal to or higher than the market price of the shares at the date the option is granted. Consequently, the options have no intrinsic value and so no transaction is recorded in the financial statements. This leads to an anomaly: if a company pays its employees in cash, an expense is recognised in profit or loss, but if the payment is in share options, no expense is recognised. 1.1.1 Arguments against recognition of share-based payment in the financial statements There are a number of arguments against recognition. The IASB has considered and rejected the arguments below. FAST FORWARDPart B Accounting standards ~ 9: Share-based payment 263 (a) No cost therefore no charge There is no cost to the entity because the granting of shares or options does not require the entity to sacrifice cash or other assets. Therefore, a charge should not be recognised. This argument is unsound because it ignores the fact that a transaction has occurred. The employees have provided valuable services to the entity in return for valuable shares or options. (b) Earnings per share is hit twice It is argued that the charge to profit or loss for the employee services consumed reduces the entity's earnings, while at the same time there is an increase in the number of shares issued. However, the dual impact on earnings per share simply reflects the two economic events that have occurred. (i) The entity has issued shares or options, thus increasing the denominator of the earnings per share calculation. (ii) It has also consumed the resources it received for those shares or options, thus reducing the numerator. (c) Adverse economic consequences It could be argued that entities might be discouraged from introducing or continuing employee share plans if they were required to recognise them on the financial statements. However, if this happened, it might be because the requirement for entities to account properly for employee share plans had revealed the economic consequences of such plans. A situation where entities are able to obtain and consume resources by issuing valuable shares or options without having to account for such transactions could be perceived as a distortion. 1.2 Objective and scope IFRS 2 requires an entity to reflect the effects of share-based payment transactions in its profit or loss and financial position. IFRS 2 applies to all share-based payment transactions. There are three types: (a) Equity-settled share-based payment transactions, in which the entity receives goods or services in exchange for equity instruments of the entity (including shares or share options). (b) Cash-settled share-based payment transactions, in which the entity receives goods or services in exchange for amounts of cash that are based on the price (or value) of the entity's shares or other equity instruments of the entity. (c) Transactions in which the entity receives or acquires goods or services and either the entity or the supplier has a choice as to whether the entity settles the transaction in cash (or other assets) or by issuing equity instruments. IFRS 2 was amended in June 2009 to address situations in those parts of the world where, for public policy or other reasons, companies give their shares or rights to shares to individuals, organisations or groups that have not provided goods or services to the comp