What is a share-based payment?

Share-based payment arrangements are arrangements where entities receive or acquire goods or services in exchange for equity instruments or cash amounts based on equity instrument prices.

Equity instruments include shares or share options of the entity or another group entity. Amounts paid that are paid in cash or other assets of the entity, based on the price (or value) of equity instruments, are also share-based payment arrangements.

IFRS 2 prescribes how to:

• recognize the goods or services received or acquired in a share-based payment transaction; and
• measure the different types of share-based payment transactions.
• IFRS 2 Share-based Payment requires an entity to recognize share-based payment transactions (such as granted shares, share options or share appreciation rights) in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity. Specific requirements are included for equity-settled and cash-settled share-based payment transactions, as well as those for which the entity or the supplier has a choice of settlement by cash or equity instruments.
• It is important to appreciate that IFRS 2 may be applicable even when the counterparty receives cash from the entity. This is because the scope of the Standard includes cash-settled share-based payment transactions

Scope

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, provided the specified vesting conditions, if any, are met.”

IFRS 2 applies to any transaction in which an entity receives goods or services as part of a share-based payment arrangement. A transfer that is clearly for a purpose other than payment for goods or services, such as a rights issue, would be outside the scope of IFRS 2.

• IFRS 2 does not include a formal definition of either goods or services, although IFRS 2 specifies that goods would include inventories, consumables, property, plant and equipment, intangible assets, and other non-financial assets and that equity instruments granted to employees are within the scope of the Standard. It confirms that goods or services do not have to be identifiable to be within the scope of IFRS 2.
• IFRS 2 does not apply to transactions in which an entity acquires goods as part of the net assets acquired in a business combination as defined in IFRS 3 or to the contribution of a business on the formation of a joint venture as defined in IFRS 11.

IFRS 2 will apply where goods or services are obtained by an entity in exchange for equity instruments of its parent or another member of the group.

Definition of goods or services

Entity B is developing a new product, and it purchases a patent from Entity C. The parties agree on a purchase price of 1,000 of Entity B’s shares. These will be issued to Entity C within 60 days of finalizing the legal documentation that transfers the patent from Entity C to Entity B. This is an equity-settled share-based payment. IFRS 2 applies to a share-based payment for a patent. The goods to which IFRS 2 applies include inventories, consumables, property, plant and equipment, intangible assets, and other non-financial assets.

The expense recognized under IFRS 2 is unaffected by whether the award is satisfied by an issue of new shares or by shares being purchased in the market. When shares are purchased in the market, an employee share trust may be involved.

The standard applies to all share-based payment transactions (whether or not the entity can identify some or all of the goods or services received), including:

• equity-settled share-based payment transactions;
• cash-settled share-based payment transactions; and
• transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash (or other assets) or by issuing equity instruments.

Purchase of non-financial items expected to be used by the entity

Entity A enters into a contract to purchase silver for use in its jewelry manufacturing business; under the contract, it will pay the supplier a cash amount equal to the value of 1,000 shares of Entity A on the date when the silver is delivered. This meets the definition of a cash-settled share-based payment transaction (that is, entity A has acquired goods in exchange for payment of an amount based on the value of its shares).

IFRS 9 applies to contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments as if the contracts were financial instruments; but the standard does not apply to contracts that were entered into and continue to be held for the receipt or delivery of the non-financial item by the entity’s expected purchase, sale or usage requirements.

Entity A’s contract does not fall within the scope of IFRS 9, whether or not it can be settled net because it was entered into to take delivery of the silver for use in entity A’s business, and entity A has a history of doing this. So, it is within the scope of IFRS 2 as a cash-settled share-based payment transaction.

Financial instruments

IFRS 2 does not apply to share-based payment transactions in which the entity receives or acquires goods or services under a contract within the scope of IFRS 9.

IAS 32 and IFRS 9 both state that they should be applied to contracts to buy or sell a non-financial item that can be settled net in cash or by another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments (apart from contracts entered into and continuing to be held for the receipt or delivery of a non-financial item by the entity’s expected purchase, sale or usage requirements (the ‘own-use’ exemption).

Interaction with IAS 32 and IFRS 9 – example

Company C enters a forward contract to buy 1,000 units of a commodity for consideration of 2,000 of Company C’s ordinary shares. Company C can settle the contract net in cash or another financial instrument but does not intend to do so because the commodity is being purchased for receipt by Company C’s expected usage requirements; Company C does not have a past practice of settling similar contracts net in cash. Accordingly, the transaction is within the scope of IFRS 2 because it involves the issue of shares in exchange for goods.

However, if Company C had a practice of settling these contracts net, or Company C did not intend to take physical delivery of the commodity, the forward contract would be within the scope of IAS 32 and IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39) and, therefore, IFRS 2 would not apply.

Business combination and continued employee service

Entity D acquires 90% of Entity E’s share capital. As part of the acquisition, entity D grants share options to Entity E’s employees that vest after two years if the employees remain in service. The equity instruments are granted to employees of the acquiree in exchange for future services, and so they fall within IFRS 2’s scope. [IFRS 2 para 5].

Award of parent entity shares by a shareholder

An individual with a 40% shareholding in Entity F awards 2% of his shareholding in Entity F to a director of Entity F’s subsidiary, entity G, in exchange for employee services. The award is within IFRS 2’s scope. A shareholder of entity F has transferred equity instruments of entity F (entity G’s parent) to a party in exchange for services to the entity. [IFRS 2 para 3A].

The award will be reflected in entity G’s financial statements and entity F’s consolidated financial statements.

Services paid for by issuing warrants

During the year, entity K’s bank provided services to Entity K; Entity K agreed to issue warrants to the bank as consideration for these services. The warrants have a fixed subscription price, and entity K will settle the warrants in equity – in other words, if the bank chooses to exercise the warrants, it will receive one share in entity K for each warrant held, in return for paying the fixed subscription price. Entity K has received services as consideration for issuing equity instruments of entity K.

This is an equity-settled share-based payment that should be accounted for under IFRS 2.

Formation of a joint venture

Entities X and Y have formed an incorporated joint venture, entity Z. On formation, entity X contributed property, plant, and equipment, and Entity Y contributed intangible assets that do not constitute a business, in exchange for their equity interests in Entity Z. The asset contributions by Entities X and Y on Entity Z’s formation are equity-settled share-based payment transactions from entity Z’s perspective, and they fall within IFRS 2’s scope.

The scope exclusion in paragraph 5 of IFRS 2 does not apply, because the formation of a joint venture does not meet the definition of a business combination; also, entities X and Y contributed assets and not businesses.

Bonus where the amount is fixed in cash terms but can be settled in shares to the same value

An entity agrees to pay a bonus of C10,000 to its employees. It has a choice of settling in cash or issuing shares with a value equivalent to the cash payment. The entity has a past practice of settling in cash, and it is considering whether the transaction is within the scope of IFRS 2. Under the principles of IAS 32, a variable number of shares issued for a fixed amount would be accounted for as a liability; so, from the perspective of IAS 32, it could be argued that this type of award should be within the scope of IAS 19 and not IFRS 2.

But, because the entity has a choice that allows it to settle the award using equity instruments or cash, the transaction is a share-based payment with a settlement choice.

If the award was always settled using shares, it would be classified as equity-settled, even though it is shared to a fixed value.

Variable number of shares for goods

Entity A signs a contract with a construction entity to acquire a new building for C1 million; ownership of the building transfers to Entity A when the construction work is complete. The purchase price will be settled by entity A issuing a variable number of its shares with a total market value of C1 million.

The transaction is within IFRS 2’s scope, and excluded from the scope of IAS 32, because the building is being acquired for use by entity A and the purchase price is being settled in shares.

Non-recourse loan enabling counterparty to purchase shares

An entity lends C100 to an employee to purchase the entity’s shares from the market. The loan is interest-free and only has recourse to the shares. Dividends paid on the shares should be used to reduce the loan. The employee should pay back the balance of the loan (or return the shares) at the earliest of three years or resignation. The IFRS IC has confirmed that this transaction would fall within the scope of IFRS 2.

The loan is considered to be part of a share-based payment transaction; in substance, this is an option with at most a three-year life, where the exercise price is reduced by any dividends. The employee is not exposed to any downside risk in the movement of the share price over the three years, because he or she can repay the loan or surrender the shares. So, the ‘loan’ is recognized as a debit in equity, for the purchase of treasury shares, and not as a receivable.

The option would be exercised on the date when the loan is repaid. In this example, the option would vest immediately, because the employee could leave on day 1, repay the loan, and be fully entitled to the shares.

Full recourse loan enabling counterparty to purchase shares

The facts are the same as in the previous EXPERT Q&A except that the entity has recourse to the personal assets of the employee as well as the shares. This means that, if the employee fails to repay the loan, the entity can take possession of the employee’s assets (for example, their car or house). The employee is unconditionally bound to repay the loan.

The entity should record a receivable for the loan balance. The terms of the loan with the entity give a preferential interest rate to employees; so, a fair value adjustment to the loan balance should be recognized (under IFRS 9) as an employee remuneration expense over an appropriate service period under IAS 19.

This is because the fair value of the loan has been reduced through a preferential rate and a benefit has been provided to the employee. Full recourse loans with employees are rare in practice. Before an entity determines that it has granted a full recourse loan to an employee, the following factors should be considered to establish if the loan is, in substance, non-recourse:

The employer has legal recourse to the employee’s other assets, but it does not intend to seek repayment beyond the shares issued. The employer has a history of not demanding repayment of loan amounts over the fair value of the shares.

The employee does not have sufficient assets or other means (beyond the shares) to justify the recourse nature of the loan. The employer has accepted a recourse note on exercise and has subsequently converted the recourse note to a non-recourse note.

Example: Remuneration scheme based on a profit formula

Company A has a deferred bonus incentive scheme. The value of the entitlements is based on a formula derived from Company A’s net profit (adjusted for specified items) and then divided by a fixed number. This entitlement vests over three years. The payment to the employee on the vesting date, or the date that the employee chooses to receive a settlement after the entitlement has vested, is funded by the cash resources of Company A.

For example: entitlement value = (operating profit × 10) ÷ CU100 million

A participant who exercises his or her right to receive a settlement for a vested entitlement will receive the difference between the current entitlement value and the grant date entitlement value in cash.

In the example, if a participant received 100 entitlements at an entitlement value of CU250, the participant would receive CU16,000 (100 × (CU410 – CU250)) at the end of Year 3.

This remuneration scheme does not fall within the scope of IFRS 2. The entitlements issued by Company A represent a bonus scheme that does not result in the issue of equity instruments or in a liability that is linked to the price of Company A’s shares or other equity instruments of Company A; the scheme is an employee benefits scheme within the scope of IAS 19. The benefits payable under the scheme do not meet the definition of ‘short-term employee benefits’ under IAS 19 because they are not expected to be settled wholly within 12 months after the end of the annual reporting period in which the related service is rendered. Therefore, the recognition and measurement requirements of IAS 19 for other long-term employee benefits should be applied.

Employee share loan plans – Example

Company R grants loans to its employees that subsequently are to be used by the employees to buy shares in Company R. To obtain a settlement of the loans, Company R only has recourse to the shares bought by the employees.

The employee share loans should be accounted for by IFRS 2 as part of a share-based payment arrangement (with the entire arrangement treated as an option), and not as financial assets by IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39). The employee share loan plan falls within the scope– i.e. it results in “transactions in which the entity receives … services and the terms of the arrangement provide … the supplier of those … services with a choice of whether the entity settles the transaction in cash … or by issuing equity instruments”.

Because, to obtain a settlement of the loans, Company R only has recourse to the shares bought by the employees, Company R effectively issues share options to its employees who use the loans granted to pay for the shares. Exercise of the options would be on the date or dates when the loan is repaid by the employee.

Issue of shares to existing members and customers on listing of a mutual entity

Entity A is a mutual entity, and its shares are held by members. Entity A plans to de-mutualise and list on the local stock exchange; and it will convert the existing ‘member’ shares to ordinary equity capital in a listed entity. As part of the process, entity A will issue free shares to its customers (that is, those customers who are not members). The appropriate accounting for the share-based payment is determined by considering separately the shares issued to existing members and customers. Existing members

This is not a share-based payment arrangement, because it is with members in their capacity as existing equity holders. Customers (that are not members) The entity issues shares for nil consideration, and it is not possible to identify the specific goods and services received in return for the shares.

Entity A accounts for this arrangement under IFRS 2. Entity A measures (by IFRS 2) the unidentifiable goods and services that are received, by using the fair value of the equity instrument granted, and it recognizes a related expense immediately.

Reverse acquisition of a listed shell

Under IFRS 3, if the accounting acquiree is not a business, the transaction is not within the scope of IFRS 3.

In some circumstances, such as a reverse acquisition, it is not always clear whether a business has been acquired; so, the substance of the arrangement should be considered. Entity V, a listed entity that is not a business (for example, a listed shell company) at the time of the transaction, issues shares in exchange for shares in entity W. Although Entity V becomes Entity W’s legal parent, the transaction is not a business combination under IFRS 3; this is because Entity V is not a business, and, in substance, it has not gained control over Entity W.

This question was considered by the Interpretations Committee. Transactions in which an entity acquires goods, as part of the net assets acquired in a business combination (as defined in IFRS 3), are outside IFRS 2’s scope.

In this case, the transaction is within IFRS 2’s scope because, in substance, the shareholders of private entity W have given to the shareholders of public entity V an interest in entity W in exchange for assets within entity V and entity V’s listing status. So, entity W should fair value the consideration that Entity V’s shareholders received (that is, the shares given out by Entity W’s shareholders) and the identifiable assets of Entity V that Entity W’s shareholders acquired. Any resulting difference would be unidentifiable goods or services that should be expensed (unless it meets the definition of an asset under other standards).

Appropriate disclosure, to explain the accounting policy, is necessary.

There are certain exclusions from IFRS 2’s scope, namely: ·        Business combinations in the acquirer’s financial statements to which IFRS 3 applies, even though such a transaction might be equity-settled. Equity instruments issued to employees for services and any changes to existing share-based payment arrangements arising from the business combination are however accounted for under IFRS 2. ·        Contributions of a business on formation of a joint venture, and combinations of businesses or entities under common control. ·        Transactions with shareholders in their capacity as shareholders. ·        Contracts for the purchase of goods (such as commodities) that can be net-settled and are within the scope of IFRS 9.

Commodity contracts, net-settled contracts within the scope of IAS 32 or IFRS 9

Entity H enters into a contract to purchase 100 tonnes of cocoa beans. The purchase price will be settled in cash at an amount equal to the value of 1,000 of entity H’s shares. However, the entity can settle the contract at any time by paying an amount equal to the current market value of 1,000 of its shares, less the market value of 100 tonnes of cocoa beans.

The entity has entered into the contract as part of its hedging strategy, and it has no intention of taking physical delivery of the cocoa beans. The transaction meets the definition of a share-based payment arrangement (that is, entity H has given the counterparty a right to the payment of an amount based on the value of its shares). However, the contract can be settled net and has not been entered into to satisfy entity H’s expected purchase, sale, or usage requirements. So, entity H will not receive goods or services.

The transaction is outside IFRS 2’s scope and is instead dealt with under IAS 32 and IFRS 9.

Cash payments dependent on earnings multiple and SARs

What are shared appreciation rights

Cash-settled Share Appreciation Rights (SARs) are the most common example of an arrangement under which the entity acquires goods or services by incurring liability to transfer cash or other assets for amounts based on the price (or value) of the entity’s shares or other equity instruments; such arrangements are sometimes referred to as ‘phantom option schemes‘. Typically, these schemes put the employees in the same position as if they had been granted options, but they involve a cash payment to the employees equal to the gain that would have been made by exercising the notional options and immediately selling the shares in the market.

A non-quoted entity issued share appreciation rights (SARs) to its employees. The SARs entitle the employees to a payment equal to any increase in the entity’s share price between the grant date and the vesting date.

The arrangement’s terms and conditions define the share price used to calculate payments to employees as follows: five times EBITDA divided by the number of shares in issue. IFRS 2 is unlikely to apply to this transaction because a fixed multiple of EBITDA is not likely to reflect the fair value of the entity’s share price. If IFRS 2 does not apply, management should apply IAS 19 to this deferred compensation arrangement.

Example:

Cash payment based on earnings multiple – example

Company N, an unlisted entity, issued instruments to its employees that entitle them to a cash payment equal to the increase in Company N’s ‘share price’ (as defined) between the grant date and the vesting date. The terms and conditions of the instrument define the ‘share price’ as a specified multiple of EBITDA divided by the number of shares in issue.

Arrangements of this nature will not usually be in the scope of IFRS 2 because a specified multiple of EBITDA will not necessarily reflect the fair value of the shares; historical earnings is only one of the inputs used to determine the fair value of shares in an entity. Such arrangements will more likely fall within the scope of IAS 19.

Plan to invest in other entity shares

The entity I am implementing an unusual share option incentive plan: it will lend C1 million to an employee share trust, which will purchase shares in several publicly listed entities (but not shares in entity I or any other entities within the same group as the entity I).

These entities might be suppliers, customers, or competitors. Entity I’s employees are granted options over ‘units’ held by the employee share trust, which are shares in listed entities. The units are an amalgam of the shares held by the trust. The units do not entitle the employees to any equity interest in the trust itself and they are not based on the value of the trust.

The options are granted at market value at the date of the grant and held for three years. When employees exercise their option over the units, they are paid the difference in cash between the market price of the units at the date of the grant (the exercise price) and the market value at the date of exercise.

To fund the cash payment, the trust sells the shares relating to the exercised units. It then repays the relevant portion of the loan from entity I, and it pays the gain to employees (this assumes that the price of the underlying investments has increased in value following the grant). This transaction is outside IFRS 2’s scope because the rights are over shares that are not in Entity I or in another entity within the same group as Entity I. Accounting for the changes in the value of the assets in the trust will depend on how the assets are classified. If the assets fall into the definition of a plan asset under paragraph 7 of IAS 19, they should be accounted for in line with IAS 19. Otherwise, they will be included in the consolidated accounts and should be treated as financial assets in line with IFRS 9. The related liability will be within IAS 19’s scope.

Common control transactions

A business combination occurs between two entities under common control. The transaction is outside IFRS 3’s scope.

Where shares are issued in such a common control transaction, the primary purpose is likely to be to reorganize the legal or managerial structure of a business or to transfer a business, rather than to acquire goods or services. The shares are issued in exchange for a business (that is, an integrated set of activities and assets) that can be managed to provide a return to investors, or lower costs or other economic benefits directly to investors or other owners, members, or participants. [IFRS 3 App A].

As such, the transaction is outside IFRS 2’s scope.

Formation of a joint venture

Entities A and B are brought together to form a joint venture. The formation of a joint venture is outside the scope of IFRS 3. This transaction does not meet the definition of a business combination, because two separate entities are being brought together into one reporting entity without either entity gaining control; so, the scope exclusion in paragraph 5 of IFRS 2 would apply.

Where separate businesses are combined to form a joint venture, shares are issued to form the joint venture and not the acquisition of goods or services. The transaction is outside IFRS 2’s scope because the broader definition of business combination is used in the scope exclusion.

Measurement of unidentifiable goods and services

The entity measures any identifiable goods and services by IFRS 2. Any unidentifiable goods or services received are then measured as the difference between the fair value of the share-based payment and the fair value of any identifiable goods or services received.

The unidentifiable goods or services are measured at the grant date although, for cash-settled arrangements, the liability is remeasured at the end of each reporting period until it is settled.

Associates and joint ventures

Arrangements involving associates and joint ventures can be complicated. For example, where employees of a joint venture are granted rights over equity instruments of one or both joint venturers, such a transaction in the joint venture would be outside IFRS 2’s scope.

This is because the joint venture is not part of the same group as the joint venturers, as defined by IFRS 10. Although the shareholders of the joint venture are transferring equity instruments to employees of the joint venture in exchange for employee services to the joint venture, the awards are not in the scope of IFRS 2 in the financial statements of the joint venture; the reason for this is that the equity instruments are not those of the joint venture or another entity in the same group as the joint venture. [IFRS 2 para 3A].

The position for associates is the same. Note that investors would account for such transactions in their financial statements under IFRS 2 because they are issuing rights to their equity instruments in return for indirect benefits resulting from services provided to the joint venture. In the situation described above, the associate or joint venture entity would need to apply the hierarchy in IAS 8, specifically paragraphs 10 and 11, to determine the appropriate accounting treatment. The entity is likely to determine that either IFRS 2 or IAS 19 is the most appropriate standard.

This is a policy choice that the entity would make under IAS 8, and it would have to apply such a policy consistently. It is our view that the most appropriate treatment is to apply the principles of IFRS 2 to employee benefits that are settled in equity.

The scope of IFRS 2 includes share-based payment transactions where it is difficult to identify that goods or services have been or will be received. An entity might grant shares to a charitable organisation for nil consideration; or the fair value of goods or services received (if any) appears to be less than the fair value of the equity instruments granted, or liability incurred. The identifiable goods or services received are measured at fair value; and the unidentifiable goods or services received will be measured as the difference between the fair value of the share-based payment and the fair value of any identifiable goods or services received.

Example – Share options in a joint venture

Entity J is a 50:50 joint venture between entities K and L. Entity K grants options over its shares to senior employees of Entity J, without making any charge to Entity J. Entity L does not provide any contribution to the joint venture to compensate Entity K.

Entity K applies the equity method to investments in joint ventures in its consolidated financial statements and the cost method in its separate financial statements. Entity J’s financial statements in the scope of IFRS 2 include transfers of equity instruments of an entity’s parent (or of an entity in the same group) in return for goods or services.

Entity K is a joint venture investor and is not entity J’s parent, nor is it in the same group as entity J. ‘Group’ is defined in IFRS 10 as being a parent and all its subsidiaries. So, from Entity J’s perspective, the award in Entity J of share options in Entity K is not within IFRS 2’s scope. The arrangement also falls outside IAS 19’s scope. IAS 19 applies to all employee benefits but defines those as “all forms of consideration given by an entity in exchange for service rendered by employees”.

Because no consideration is given by entity J, this arrangement does not meet the definition of an employee benefit. IAS 8 requires entities to apply a hierarchy when determining their accounting policies. Where there is no IFRS governing a transaction, IAS 8 requires management to look first at any IFRS standard or interpretation dealing with similar or related issues.

Although it is not a formal requirement, it is our view that the most appropriate treatment is for entity J to apply the principles of IFRS 2 to this equity-settled share-based payment.

This is supported by the treatment where a parent entity grants options over its shares to employees of its subsidiary. In this case, entity K does not meet the definition of a parent entity; but, in the absence of any other guidance, this is an acceptable approach. The disclosure requirements of IAS 24 should be applied by entity J (for example, if any of the employees are key management personnel).

Note that, if compensation was paid by entity J for the share-based payment, perhaps in the form of a recharge payment required by entity K, the transaction would be within IAS 19’s scope. Entity K’s financial statements Entity K has an equity-settled share-based payment arrangement, and it should measure the goods and services received under IFRS 2 as appropriate.

So, in its separate financial statements, entity K would capitalize the IFRS 2 grant date fair value into its cost of the investment in the joint venture; it would also consider whether there were any impairment indicators. Entity K should apply the principles of IAS 31 (or superseded by IAS 28 (revised)) to its consolidated financial statements.

If Entity J has accounted for the share-based payment, 50% of this amount would be recorded by Entity K when the equity method is applied. Because entity L did not provide an equivalent contribution to the joint venture, entity K would record an additional cost; this would result in 100% of the share-based payment charge being recorded in its consolidated financial statements. Entity L’s financial statements Other than the fact that Entity L will need to account for its joint venture interest in Entity J, there will be no impact on Entity L’s separate financial statements. For further guidance on accounting for joint ventures.

Transactions with shareholders or other parties, including employees in their capacity as holders of equity instruments, are outside IFRS 2’s scope.

Identification of ’employees and others providing similar services’

Further references to employees in this chapter will include others providing similar services.

The determination as to whether an individual is ‘like an employee’ is a matter requiring careful judgment.

The following factors may indicate that the counterparty in a share-based payment transaction is an employee or is providing services like an employee.

• The purchasing entity is paying for the right to use certain individuals and not the actual output from the individuals (i.e. the purchasing entity has the risk of downtime).
• The individuals are under the direct supervision of the purchasing entity.
• The contract depends on the services of a specified individual.
• The purchasing entity receives substantially all the output from the individual for a specified period.
• The individuals perform services that are similar to services currently provided by employees.

Factors to indicate that an individual is not an employee or providing services similar to an employee include the following.

• The individual performs services that cannot legally be provided by employees.
• The individual uses technology that is not legally available to the purchasing entity to perform the services.

Shares issued by joint ventures in exchange for contributions received

When joint ventures are formed, they frequently issue shares in exchange for contributions from venturers. These contributions can be received in various forms (e.g. cash, assets, or businesses).

When the contribution is in the form of cash and the shares are not issued as consideration for goods or services, the cash contribution is received from the venturers in their capacity as owners. It is, therefore, outside the scope of IFRS 2 for the joint venture and should be accounted for by IAS 32.

However, when a venturer contributes assets that do not comprise a business (e.g. property, plant and equipment, or an intangible asset) on the formation of a joint venture, these transactions are within the scope of IFRS 2 for the joint venture because the joint venture issues shares as consideration for goods. Such transactions should be accounted for as equity-settled share-based payment transactions with non-employees.

Transactions in which a venturer contributes a business in exchange for shares in the joint venture are outside the scope of IFRS 2 and IFRS 3 for the joint venture. The selection of appropriate accounting policies for such transactions involves similar considerations to those for combinations of entities or businesses under common control which are also outside the scope of IFRS 3.

 Transactions with employees and transactions with shareholders

If an entity makes a bonus issue of shares to all of its shareholders, and these include some of the entity’s employees, this will not represent a share-based payment transaction to be dealt with under IFRS 2.

However, there could be a situation where an employee invests in an entity that is working towards a stock market listing or a trade sale. In these cases, a venture capital entity or similar investor could be involved in the transaction; so, the employee could subscribe for the shares at the same amount as the other investors.

The issue is whether the employee is acting as a shareholder or an employee. Often, the interested parties (including directors, management, and other shareholders) have acquired shares for a ‘fair; value, which might not equate to grant date fair value for IFRS 2 and would typically be tax-driven.

It is important to note that a value determined for tax purposes often reflects factors that it would not be appropriate to allow for under IFRS 2 (for example, a lack of marketability); so, it could be lower than the IFRS 2 grant date fair value. If there are no conditions or incentives attached to the acquired shares, the employee is acting purely as a shareholder. But, in the majority of situations, there are likely to be service conditions or leaver provisions; so, the arrangement would be accounted for as a share-based payment transaction under IFRS 2. The shares in question are often referred to as ‘sweet’ or ‘sweat’ equity, depending on whether they are offered at an advantageous price or in return for services rather than cash.

Employees acting in capacity as shareholders

Entity A makes a rights issue to all of its shareholders, entitling them to purchase one new share, for each five shares owned, at a price of C10. The shareholders include 20 people who are also employees. No other conditions are attached to the rights issue. Shares are being issued to employees in their capacity as shareholders, and not in exchange for their services. Also, the employees are not required to complete a period of service in exchange for the new shares. As such, the transaction is outside IFRS 2’s scope.

Capital contribution of a building in settlement of a rights issue

Entity B makes a rights issue to all shareholders. Shareholders are entitled to acquire one new share, for each share owned, at a fixed price of C4 at the date of the rights issue. Entity C owns 1 million of Entity B’s shares (that is, 10% of the share capital). Entity C subscribes to 1 million of Entity B’s new shares. Following the subscription, entity C proposes to Entity B to settle the purchase price of the new shares by transferring to Entity B an office building that it owns. Entity B agrees to accept the building as a settlement for the new shares. This transaction is a rights issue to all shareholders, so IFRS 2 does not apply.

The method of payment is irrelevant because this is a transaction with shareholders in their capacity as shareholders; therefore, the transfer of the building is outside IFRS 2’s scope. The subscription established a right to receive a fixed payment of C4 million from entity C.

The transfer of the building was agreed upon after the receivable was established and is in settlement of the C4 million receivable.

In-kind capital contribution by existing shareholder

Entity D needs a new office building and has arranged to acquire it from an existing shareholder. The purchase price will be settled by the entity issuing 1,000 new shares. For legal purposes, the transaction is considered an in-kind capital contribution of a building. The counterparty did not act in its capacity as a shareholder but as a supplier of the office building. As such, the in-kind capital contribution is within IFRS 2’s scope. This would mean that the office building is recognized at its fair value, and equity is credited by the same amount for the share issue.

Points to consider before concluding that transactions with employees are outside the scope of IFRS 2

Several points need to be considered before concluding that transactions with employees are not within IFRS 2’s scope; these include: Whether the instrument that the employees are entitled to is an equity instrument or linked to an equity instrument, as defined by the standard.

If it is, and the value to employees varies depending on the extent to which the employee provides services, the transaction would be within IFRS 2’s scope as a share-based payment. Whether the rights/interests of employee shareholders differ from those of other investor shareholders (for example, venture capitalists).

Employees might have the right to additional shares, while other investor shareholders give up their rights – a so-called ‘ratchet mechanism’. This ratchet usually depends on the business’ performance; and so, employees receive more shares if the business does well.

This would qualify as a performance condition because services from employees contribute towards the entity meeting the performance targets; the transaction is, therefore, within IFRS 2’s scope. Whether holders have different rights following an exit event. Through the articles, employees could be given different rights (in terms of cash or shares) if an investor exits through an IPO rather than a trade sale. This provides evidence of a performance condition (achieving different rights to cash or shares, depending on the exit event that occurs) that could bring the arrangement within the scope of IFRS 2.

Leaver conditions (the articles or terms and conditions might define good leavers and bad leavers). In this situation, employees could lose their rights to shares if they leave the entity, and the shares are repurchased or canceled.

So, employees might only earn their right to the shares if they stay with the entity or, for example, in the event of a trade sale or an IPO. This would also be considered a service condition; and so, the arrangement is in IFRS 2’s scope. Whether additional services are being provided. Employees will often lose their rights to shares if they leave the entity (see above).

There is often a service requirement (for example, to stay in employment for several years or until a change in control). But this will not always be the case, and some employees will have the right to share irrespective of whether they stay or leave. This does not automatically mean that the arrangement is outside IFRS 2’s scope, because the entity would still need to determine whether additional services (whether or not they are identifiable) are being provided by the shareholders in their capacity as employees, [IFRS 2 para 2].

Whether a trust is involved in the arrangement. The existence of an employee benefit trust, to buy back and warehouse shares for the benefit of other employees, could well imply that shares are being issued as an incentive; and so, the arrangement is in IFRS 2’s scope.

The above list is not exhaustive, but it highlights some of the areas that should be considered to determine if the transaction is within IFRS 2’s scope.

Example – Purchase of shares at fair value, with service condition A CEO is offered the opportunity to buy 100,000 shares in entity A at C1 each, which is the same price paid by the venture capital investor that holds 40% of entity A’s shares. If the CEO resigns within two years, he should give the shares back to the entity, in return for a payment of the lower of his subscription price and the fair value of the shares. This transaction is in IFRS 2’s scope, because the arrangement includes a service condition, and this condition should be satisfied before the CEO is fully entitled to the risks and rewards of the shares (that is, there is a vesting period of two years).

The CEO might be paying the IFRS 2 grant date fair value for the shares on the grant date (C1); if so, provided the award was equity-settled, there would be no IFRS 2 charge. But, since the arrangement is within the scope of IFRS 2, consideration should be given to disclosures prescribed in IFRS 2 and IAS 24.

The value of quoted shares is different from the IFRS 2 value attributed to goods or services

When the value of the shares is known because they are quoted in a market and this produces a materially different value from the value attributed to the services by IFRS 2, an additional expense may need to be recognized for unidentified goods and services. In such situations, all evidence needs to be considered carefully to understand the substance of the transaction and the reason for the apparent discrepancy.

This may, in some cases, indicate that additional services were received. In other cases, the services may have been difficult to value, and the conflicting evidence may prompt a reconsideration of that value. In rare cases, the arrangements may indeed relate to unidentified goods or services (e.g., because the difference represents a charitable donation).

The price difference between the institutional offer price and the retail offer price for shares in an initial public offering

Entity A issues shares in an initial public offering (IPO). To reach a wider range of investors and to meet a regulatory requirement for IPOs in its jurisdiction, Entity A splits the offering between institutional investors and retail investors (none of whom has any other connection with the entity). The shares are offered to retail investors at a discount to the price at which shares are sold to institutional investors. Accordingly, the identifiable consideration received from retail investors appears to be less than the fair value of the equity instruments issued by Entity A.

The issue of shares is entirely a financing transaction and should be accounted for as such. No goods or services have been received by Entity A and, accordingly, no share-based payment transaction has taken place.

When the identifiable consideration received by an entity in connection with an issue of shares appears to be less than the fair value of the equity instruments granted, the entity needs to consider the underlying purpose of the transaction and the specific facts and circumstances, particularly as to whether the difference implies that other consideration (i.e., unidentifiable goods or services) has been, or will be, received.

In the circumstances under consideration, the price difference between the institutional offer price and the retail offer price does not represent payment for goods or services. The purpose of the transaction is to raise funds and the difference between the subscription prices for institutional and retail investments can be attributed to the existence of different markets (one that is only accessible to retail investors and another only accessible to institutional investors).

Entity A is not acquiring or receiving any identifiable or unidentifiable goods or services from the retail investors because the only relationship between Entity A and the parties to whom the shares are issued is that of the investee/investors.

Consequently, there is no share-based payment transaction and IFRS 2 does not apply.

The fact that a regulatory requirement is met by issuing the retail shares does not indicate that unidentifiable goods or services were received from the purchasers.