business combination (see 11 below).
The revision of the Conceptual Framework in 2018 led to a minor consequential
amendment to IFRS 2 as part of the Amendments to References to the Conceptual
Framework in IFRS Standards.4 The revision amended the footnote to the definition of
an equity instrument in Appendix A (see 1.4.1 below). Entities are required to apply the
amendment on a retrospective basis for accounting periods beginning on or after
1 January 2020, although earlier application is permitted if all other amendments made
by the revised Conceptual Framework are applied (see 16.3 below for more detail on
the transitional provisions).
IFRS 2 is supplemented by implementation guidance. However, as noted above the first
paragraph of the implementation guidance, this ‘accompanies, but is not part of, IFRS 2’
1.2.1
IFRS 2 research project
In May 2015, the IASB announced a research project into certain aspects of IFRS 2.5
The objectives of the project were:
• to identify whether it is IFRS 2 that is causing perceived complexity in accounting
for share-based payment arrangements and, if it is, to identify the most common
areas of complexity; and
• to analyse why IFRS 2 has attracted so many interpretation requests.
In November 2015 the IASB considered a staff report which included an analysis of
application issues and their causes, an analysis of the two measurement models in
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IFRS 2 (equity-settled and cash-settled) and various approaches for moving the project
forward.6 The staff report observed that, on the basis of research and outreach
performed, the complexity of applying IFRS 2 in practice has two main causes: the
complexity of share-based payment arrangements themselves and use of the grant date
fair value measurement model.7
Following an update on feedback received by its staff since November 2015, the IASB
decided in May 2016:
• not to perform any further research on this topic;
• that there is no need to seek feedback on that decision or on the staff’s findings;
and
• that there is no need to publish a formal research paper or discussion paper
summarising the research performed as part of this project but the staff will
consider how best to make the work performed visible and retrievable.8
As at the time of writing, the IASB plans to publish a summary of the research findings
in the third quarter of 2018.9
1.3
Scope of the chapter and referencing convention
This chapter generally discusses the requirements of IFRS 2 for accounting periods
beginning on or after 1 January 2019 and reflects those amendments to the original
version of IFRS 2, referred to at 1.2 above, that are effective (without early adoption) as
at that date. This amended version of IFRS 2 is referred to as ‘IFRS 2’ throughout the
chapter. A detailed discussion of the application of earlier versions of the standard can
be found in International GAAP 2018 and earlier editions.
1.4
Overall approach of IFRS 2
IFRS 2 is a complex standard, in part because its overall accounting approach is
something of a hybrid. Essentially the total cost (i.e. measurement) of an award is
calculated by determining whether the award is a liability or an equity instrument, using
criteria somewhat different from those in IAS 32 – Financial Instruments: Presentation
(see 1.4.1 below), but then applying the measurement principles generally applicable to
liabilities or equity instruments under IAS 32 and IFRS 9 – Financial Instruments.
However the periodic allocation (i.e. recognition) of the cost10 is determined using
something closer to a straight-line accruals methodology, which would not generally be
used for financial instruments.
This inevitably has the result that, depending on its legal form, a transaction of equal
value to the recipient can result in several different potential charges in profit or loss for
the entity, causing some to call into question the comparability of the information
provided. Moreover, IFRS 2 is in many respects a rules-based ‘anti-avoidance’ standard,
which often requires an expense to be recorded for transactions that either have no
ultimate value to the counterparty or to which, in some cases, the counterparty actually
has no entitlement at all.
IFRS 2 has an unusually long Basis for Conclusions – longer in fact than the standard
and implementation guidance combined, highlighting some of the controversy in the
development of the standard.
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1.4.1
Classification differences between IFRS 2 and IAS 32/IFRS 9
As noted above, not only are there differences between the accounting treatment of
liabilities or equity under IFRS 2 as compared with that under IAS 32 and IFRS 9, but
the classification of a transaction as a liability or equity transaction under IFRS 2 may
differ from that under IAS 32.
One of the most important differences between IAS 32 and IFRS 2 is that a transaction
involving the delivery of equity instruments within the scope of IFRS 2 is always
accounted for as an equity transaction, whereas a similar transaction within the scope of
IAS 32 might well be classified as a liability if the number of shares to be delivered varies.
The IASB offers some (pragmatic rather than conceptual) explanation for these
differences in the Basis for Conclusions to IFRS 2. First, it is argued that to apply IAS 32
to share option plans would mean that a variable share option plan (i.e. one where the
number of shares varied according to performance) would give rise to a more volatile
(and typically greater) cost than a fixed plan (i.e. one where the number of shares to be
awarded is fixed from the start), even if the same number of shares was ultimately
delivered under each plan, which would have ‘undesirable consequences’. [IFRS 2.BC109].
Second, it is argued that this is just one of several inconsistencies between IAS 32 and
IFRS 2 to be addressed as part of the IASB’s review of the definitions of liabilities and
equity in the Conceptual Framework. [IFRS 2.BC110].
The revision of the Conceptual Framework in 2018 led to a minor consequential
amendment to the footnote to the definition of an equity instrument in Appendix A to
IFRS 2. It is the definition of a liability within the footnote that has been revised rather than
the definition of an equity instrument (see 1.2 above). In a new paragraph BC384 of the Basis
for Conclusions to IFRS 2, the Board notes that the 2018 Conceptual Framework did not
address classification of financial instruments with characteristics of both liabilities and
equity and that the consequential amendments did not amend the guidance on classification
of financial instruments in IFRS 2. Therefore it does not expect the amendment to the
footnote in IFRS 2 to have a significant effect on the application of the standard.
The boundary between liabilities and equity will be further explored by the IASB in its
research project on Financial Instruments with Characteristics of Equity.11 Until there
are any further amendments resulting from this or other projects, there will continue t
o
be differences between the accounting and classification treatment of liabilities and
equity under IFRS 2, compared with that under IAS 32 and IFRS 9.
2
THE OBJECTIVE AND SCOPE OF IFRS 2
This section sets out the objective of IFRS 2 (see 2.1 below) and then considers the
scope of the standard in the following sub-sections:
• definitions in IFRS 2 relevant to the scope of the standard (see 2.2.1 below);
• transactions and arrangements within the scope of IFRS 2 (see 2.2.2 below)
including arrangements within a group and with shareholders (see 2.2.2.A below);
• transactions outside the scope of IFRS 2 (see 2.2.3 below); and
• application of the scope requirements to a number of situations frequently
encountered in practice (see 2.2.4 below).
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Further details of the transactions and arrangements discussed are given at the start of
each sub-section.
2.1 Objective
The objective of IFRS 2 is ‘to specify the financial reporting by an entity when it
undertakes a share-based payment transaction. In particular, it requires an entity to
reflect in its profit or loss and financial position the effects of share-based payment
transactions, including expenses associated with transactions in which share options are
granted to employees’. [IFRS 2.1].
2.2 Scope
2.2.1 Definitions
The following definitions are relevant to the scope of IFRS 2. [IFRS 2 Appendix A].
A share-based payment arrangement is ‘an agreement between the entity (or another
group entity or any shareholder of any group entity) and another party (including an
employee) that entitles the other party to receive
(a) 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
(b) equity instruments (including shares or share options) of the entity or another
group entity,
provided the specified vesting conditions, if any, are met.’
A share-based payment transaction is ‘a transaction in which the entity
(a) receives goods or services from the supplier of those goods or services (including
an employee) in a share-based payment arrangement, or
(b) incurs an obligation to settle the transaction with the supplier in a share-based
payment arrangement when another group entity receives those goods or services.’
An equity-settled share-based payment transaction is ‘a share-based payment
transaction 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.’
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 or
another group entity’.
A group entity in the four definitions above means any parent, subsidiary, or subsidiary
of any parent, of the entity and is based on the definition of ‘group’ in Appendix A to
IFRS 10 – Consolidated Financial Statements – as ‘a parent and its subsidiaries’.
[IFRS 2.63A, BC22E].
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An equity instrument is ‘a contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities’.
An equity instrument granted is ‘the right (conditional or unconditional) to an equity
instrument of the entity conferred by the entity on another party, under a share-based
payment arrangement’.
A share option is ‘a contract that gives the holder the right, but not the obligation, to subscribe
to the entity’s shares at a fixed or determinable price for a specified period of time’.
It will be seen from these definitions that IFRS 2 applies not only to awards of shares
and share options but also to awards of cash (or other assets) of a value equivalent to
the value, or a movement in the value, of a particular number of shares. Such cash
awards may arise in a number of situations. For example:
• an entity may wish to extend its share scheme to the employees of overseas
subsidiaries in jurisdictions where it may be difficult, or even illegal, to trade in the
entity’s shares, or where delivering shares would not give the same tax benefits to
employees as would apply in the parent’s own jurisdiction; or
• the entity may not wish to dilute existing shareholdings by significant share awards
to employees.
In such cases, the employees may instead be offered cash equivalent to the value of the
shares that they would otherwise have obtained.
2.2.2
Transactions within the scope of IFRS 2
Subject to the exceptions noted at 2.2.3 below, IFRS 2 must be applied to all share-
based payment transactions, including:
(a) equity-settled share-based payment transactions (discussed at 4 to 8 below);
(b) cash-settled share-based payment transactions (discussed at 9 below); and
(c) transactions where either the entity or the supplier of goods or services can choose
whether the transaction is to be equity-settled or cash-settled (discussed at 10
below). [IFRS 2.2].
Whilst the boundaries between these types of transaction are reasonably self-
explanatory, there may be transactions – as discussed in more detail at 9 and 10 below
– that an entity may intuitively regard as equity-settled which are in fact required to be
treated as cash-settled under IFRS 2.
Although IFRS 2 was primarily a response to concerns over share-based remuneration, its
scope is not restricted to transactions with employees. For example, if an external supplier
of goods or services, including another group entity, is paid in shares or share options, or
cash (or other assets) of equivalent value, IFRS 2 must be applied. Goods include:
• inventories;
• consumables;
• property, plant and equipment;
• intangibles; and
• other non-financial assets. [IFRS 2.5].
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It will be seen that ‘goods’ do not include financial assets, which raises some further
issues (see 2.2.3.F below).
The scope of IFRS 2 extends to:
• group share schemes and certain transactions with shareholders (see 2.2.2.A below);
• transactions with employee benefit trusts and similar vehicles (see 2.2.2.B below);
• transactions where the identifiable consideration received appears to be less than
the consideration given (see 2.2.2.C below);
• ‘all employee’ share plans (see 2.2.2.D below); and
• vested transactions (see 2.2.2.E below).
2.2.2.A
Group schemes and transactions with group shareholders: scope issues
The definitions of ‘share-based payment arrangement’ and ‘share-based payment
transaction’ at 2.2.1 above have the effect
that the scope of IFRS 2 is not restricted to
transactions where the reporting entity acquires goods or services in exchange for its
own equity instruments (or cash or other assets based on the cost or value of those
equity instruments). Within a group of companies it is common for one member of the
group (typically the parent) to have the obligation to settle a share-based payment
transaction in which services are provided to another member of the group (typically a
subsidiary). This transaction is within the scope of IFRS 2 for the entity receiving the
services (even though it is not a direct party to the arrangement between its parent and
its employee), the entity settling the transaction and the group as a whole.
Accordingly, IFRS 2 requires an entity to account for a transaction in which it either:
• receives goods or services when another entity in the same group (or a shareholder of
any group entity) has the obligation to settle the share-based payment transaction, or
• has an obligation to settle a share-based payment transaction when another entity
in the same group receives the goods or services
unless the transaction is clearly for a purpose other than payment for goods or services
supplied to the entity receiving them. [IFRS 2.3A].
Moreover, the definitions of ‘equity-settled share-based payment transaction’ and
‘cash-settled share-based payment transaction’ have the effect that the analysis of the
transaction as equity-settled or cash-settled (and its accounting treatment) may differ
when viewed from the perspective of the entity receiving the goods or services, the
entity settling the transaction and the group as a whole. [IFRS 2.43A].
We consider below seven scenarios, based on the simple structure in Figure 30.1 below.
These scenarios are by no means exhaustive, but cover the situations most commonly
seen in practice.
The scenarios considered in this section do not consider recharge arrangements
between group entities. The accounting treatment of group share schemes, including
those with recharge arrangements, is discussed in more detail at 12 below.
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payment
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Figure 30.1:
Scope of IFRS 2
Shareholder
Parent
Subsidiary
The scenarios assume that:
• the shareholder is not a group entity; and
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 502