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In June 2016 the IASB issued Amendments to IFRS 2, Classification and measurement of share-based payment transactions. The amendments bring together a collection of three amendments to IFRS 2:
- the effects of vesting conditions on the measurement of cash-settled share-based payments;
- accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled ; and
- the classification of share-based payment transactions with net settlement features for withholding taxes.
The amendments are effective for years commencing on or after 1 January 2018. The EU endorsed the amendments on 26 February 2018.
IFRS 2 applies to all share-based payment transactions in which goods or services are received as part of a share-based payment arrangement. A share-based payment arrangement is defined as:
"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:
- 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) of the entity or another group entity."
The most common application is to employee share schemes, such as share option schemes. However, entities sometimes also pay for other expenses such as professional fees and for the purchase of assets, by means of share-based payment.
The accounting treatment under IFRS 2 is based on the fair value of the instruments. Both the valuation of and the accounting for awards can be difficult, due to the complex models that need to be used to calculate the fair value of options and also due to the variety and complexity of schemes. In addition, the standard requires extensive disclosures. The result generally is to reduce reported profits, especially in entities that use share-based payment extensively as part of their remuneration strategy.
Typically, share-based payment transactions are recognised as expenses or assets over any vesting period.
Equity-settled share-based payment transactions are measured at the grant date fair value for employee services; and, for non-employee transactions, at the fair value of the goods or services received at the date on which the entity recognises the goods or services. If the fair value of the goods or services cannot be estimated reliably – such as employee services and circumstances in which the goods or services cannot be specifically identified – the entity uses the fair value of the equity instruments granted. Additionally, management needs to consider if there are any unidentifiable goods or services received or to be received by the entity, as these also have to be recognised and measured in accordance with IFRS 2.
Equity-settled share-based payment transactions are not re-measured once the grant date fair value has been determined.
The treatment is different for cash-settled share-based payment transactions: cash-settled awards are measured at the fair value (as defined in IFRS 2 and not as defined in IFRS 13) of the liability. The liability is re-measured at each balance sheet date and at the date of settlement, with changes in fair value recognised in the income statement.