An entity measures the goods or services received in connection with a share-based payment and the corresponding increase in equity or liability at fair value.

Fair value is defined in IFRS 2 as “the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length transaction”. The measurement of share-based payment transactions is outside the scope of IFRS 13.

Measurement of equity-settled share-based payment transactions

The fair value of goods or services received by an entity should be measurable directly. If the fair value cannot be measured reliably, the entity measures the value of the goods and services by reference to the fair value of the equity instruments granted as consideration. This is referred to as the ‘indirect method’.

Measurement of fair value when goods or services are received: direct method

Entity A is a small start-up entity. To assist it in developing its business, it receives consultancy services from entity B. Entity A has scarce cash resources; so, the entities have agreed that the consideration for the consultancy services will be in the form of entity A’s ordinary shares.

The agreed rate is one share for each hour of consultancy services. Entity B has a publicized schedule of scale rates, and the amount charged for a project of this nature is normally C100 per hour. For the purpose of this example, it is assumed that there are no unidentified goods or services exchanged in this transaction (that is, at the grant date the fair value of one share is C100), but consideration should be given to this in each situation.

An expense and an increase in equity of C100 should be recognised by entity A for each hour of consultancy services received. If the scale rate changes over the life of the contract, this would be reflected in the amounts recognised as an expense and in equity. Changes to the share price over the life of the contract will not affect the amounts recognised.

Note that the counterparty is an entity (rather than an individual) that is providing services, and so it does not fall within the category of employees or others providing similar services.

Measurement of fair value when goods or services are received: indirect method

The facts are similar, except that further share are issued to entity B for assisting entity A in respect of a particular project, with 100 shares being awarded if the project is successful. In this case, it might not be possible to measure reliably the fair value of the consultancy services themselves.

The value of the transaction and shares received might have little to do with the value derived from the time spent by the consultants. Instead, the fair value should be measured as the services are rendered, by reference to the fair value of the shares offered as consideration at that time. Assuming that the services are provided evenly over a period of time, the expense would be based on the average share price over that period.

The use of the ‘indirect method’ is best illustrated in the context of employee services. Shares and share options are often granted to employees as part of their remuneration package, in addition to a cash salary and other employment benefits. Options or shares are often granted as part of a bonus arrangement, rather than as an element of basic remuneration. Estimating the fair value of different elements of the employee services and attributing those to each component of the remuneration package, is generally impractical.

The entity is required to measure the fair value of the employee services received by reference to the fair value of the equity instruments granted.

Employees, for IFRS 2 purposes, are individuals who:

• Render personal services to the entity and are regarded as employees for legal or tax purposes.
• Work for the entity under its direction in the same way as individuals considered employees for legal or tax purposes.
• Render services that are similar to those rendered by employees.

Who are employees?

An oil business hires an external consultant to assess its oil reserves. The service is provided over a five-month period; it will be settled by the entity issuing 100 shares to the consultant, valued at C40,000 when the contract was awarded. The entity estimates the cash fair value of the service to be C36,000, based on bids from other consultants. The consultant is considered an employee for tax purposes. The consultant is considered an employee for the purpose of IFRS 2. So, management should recognise the service at the fair value of the equity instruments granted (that is, C40,000).

It is presumed that the fair value of goods or services can be measured reliably in the case of transactions with parties other than employees. If this presumption is rebutted, the fair value is measured indirectly by reference to the fair value of the equity instruments granted as consideration.

The measurement of goods or services that are valued directly is as of the date on which the goods are received, or the services are rendered. Goods or services that are valued indirectly, because the reliable measurement presumption has been rebutted, are also measured when goods are received, or services are rendered.

Measurement where the presumption that the fair value of goods can be reliably measured is rebutted

An entity grants 10% of its shares to the local government for nil consideration in exchange for an indefinite-lived licence to operate in that country.

The fair value of the licence cannot be determined. The entity expects to receive a benefit from the licence, so the transaction would fall within IFRS 2’s scope. Because the licence is an identifiable good, the share-based payment should be recognised at the date when the licence is received. The fair value of the licence received cannot be estimated reliably; so, the entity should instead measure the licence received by reference to the fair value of the equity instruments granted. If the fair value of the licence could be determined and was less than the fair value of the shares, there could be unidentifiable goods or services to be accounted for (as discussed above).

The unidentifiable goods or services could be a premium paid by the entity, and would therefore make up part of the licence’s cost. In this case, the entity would need to consider if the carrying amount of the licence is impaired; and it might be able to support the carrying amount through a value-in-use model.

Employee services or unidentifiable goods or services are measured indirectly at the date on which the equity instruments are granted. The fair value is not subsequently re-measured after the grant date.

Measurement where unidentifiable goods or services are received

An entity grants shares, with a total fair value of C100,000, to parties other than employees who are from a particular section of the community (historically disadvantaged individuals) as a means of enhancing its image as a good corporate citizen. The economic benefits derived from enhancing its corporate image could take a variety of forms, such as increasing its customer base, attracting or retaining employees (who might prefer to work for an entity that supports such ‘good causes’), and improving or maintaining its ability to tender successfully for business contracts. The entity cannot identify the specific consideration received.

For example, no cash was received and no service conditions were imposed. So, the identifiable consideration (nil) is less than the fair value of the equity instruments granted (C100,000). The circumstances indicate that unidentifiable goods or services have been (or will be) received, and so IFRS 2 applies. The rebuttable presumption in IFRS 2, that the fair value of the goods or services received can be estimated reliably, does not apply here. The entity should instead measure the goods or services received by reference to the fair value of the equity instruments granted.