IFRS 2 establishes international standards for accounting for share-based payments. Applications pertain to transactions in which an entity acquires goods or services from issuing shares or share options, including equity-settled and cash-settled share-based payments, for fair recognition and measurement. IFRS 2 improves the disclosure requirement, improving the transparency while the amendments to IFRS 2 simplify some of its inconsistent applications.
IFRS 2 Share-Based Payment
IFRS 2 shares-based payment is recognized when a business receives services or goods in lieu of shares or share options. Therefore, it allows for the proper recognition and measurement of the fair value of such transactions. Accounting standards IFRS 2 Recognition and IFRS 2 Measurement are the key factors necessary for a true and fair financial report.
IFRS 2 Recognition
IFRS 2 Recognition deals with when and how to recognize share-based payments in financial statements. The entity should recognize an expense in applying for forg share-based payments when it receives goods and services. Such fees will be added to the value of an asset if they are made to obtain assets.
Entity recognizes equity-settled transaction costs when the services are provided and even if payment will be made later. Liabilities, but for cash-settled transactions, are recognized as shares and re-measured into fair value changes until the settlement date.
IFRS 2 Measurement
They are referenced to IFRS 2 Measurement, which also provides the methodology to be applied in measuring share-based paymentsThe fair value of equity-settled payments is fixed at the grant date. If it is not directly observable, the fair value will be determined with the help of options pricing models, such as the Black-Scholes option pricing model. For cash-settled payments, fair value is determined at the date of reporting.
The measurement approach is summarised in the table below:
| Type of Share-Based Payment | Measurement Basis |
| Equity-Settled | Fair value at the grant date |
| Cash-Settled | Fair value at each reporting date |
Measurement of share-based payments includes considering factors like market conditions, non-market performance conditions, and expected service periods. Entities must reassess cash-settled transactions at each reporting date to reflect fair value changes.
IFRS 2 Journal Entries for Share-Based Payment
Share-Based Payments (Share Options). The journal entries differ based on whether the payment is equity-settled or cash-settled.
Share-Based Payment — Equity-Settled
For IFRS 2, the company gives an option, shares in, or something similar. Fair value is calculated at the grant date and remains constant.
For example: the Employee Share Option Plan
Let’s assume a company issues share options to its employees with the fair value of a share option being ₹50 and a total of 1,000 share options, vesting over five years.
Annual Expense Entry:
Dr. Employee Expense ₹10,000
Cr. Share-Based Payment Reserve ₹10,000
(Recognition of share-based payment over five years)
When employees exercise options:
Dr Share-Based Payment Reserve ₹50,000
Cr. Share Capital ₹10,000
Cr. Share Premium ₹40,000
(Transfer to equity upon exercise)
Cash-Settled Share-Based Payment
For IFRS 2 cash-settled share-based payment, the entity incurs a liability instead of issuing shares. The liability is remeasured at fair value until settlement.
Example: Share Appreciation Rights (SARs)
If a company grants 1,000 SARs at an initial fair value of ₹50 each, increasing to ₹60 in year two, the following journal entries are made:
Year 1:
Dr. Employee Expense ₹50,000
Cr. Liability ₹50,000
(Recognition of SAR liability)
Year 2 (Fair value increase):
Dr. Employee Expense ₹10,000
Cr. Liability ₹10,000
(Adjustment for fair value increase)
Upon settlement, the liability is removed, and cash is paid.
Amendments and IFRS 2 Disclosure Requirements
Impairment of Assets Concerning 4 Claims for Assets 90% Note:90% Effect Note: The Utility was supposed to say for the Iras states, and preparing the IFRS 2 disclosure would aim to make the financial statements transparent. Companies shall openly make disclosures 24… Introductory paragraph ( Sentence 7 )– The IFRS 2 amendments are prepared to comment on the standard to fit better to new business situations and to accomplish compatibility.
Disclosure Requirements of IFRS 2
Entities are required to provide the following information:
- Nature and terms of share-based payment arrangements
- Options: Granted, exercised, forfeited and expired
One illustrative disclosure is:
10,000 share options were granted at ₹50 per option ₹60 at year-end fair value. The total expenditure accounted for was ₹500000. Better explicit disclosure helps to build investor confidence as well as compliance.
IFRS 2 Amendments
IFRS 2 amendment topics, to name a few:
- Vesting conditions by type
- Share-based payments and their tax treatment
- Change of settlement conditions
For example, the amendments clarified that performance conditions are to be considered when estimating the fair value. Share-based payment tax deductions should be made using the required IFRS. Monitoring amendments entailing IFRS 2 is necessary to ensure entities comply with any changing account standard when due.
IFRS 2 Scope
Scope of IFRS 2 includes:
- Any type of share-based payment that is settled in shares, equity or cash.
- Transactions with suppliers or with employees.
- Share-based payments with performance conditions
- The scope excludes any share-based payment transactions that are only to provide financing.
IFRS 2 Summary
In short, the IFRS 2 summary includes:
- Share-based payments are recognized when services are received.
- Measured at fair value using valuation models.
- Disclosed in transactions and their impact on the financials.
- Understanding the IFRS 2 summary and IFRS 2 scope leads to their correct implementation.
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Relevance to ACCA Syllabus
IFRS 2 Share-Based Payment is one of the essential top 10 must-have topics to write on in the ACCA syllabus part, particularly for Strategic Business Reporting(SBR) and Financial Reporting(FR) exams. As a result, students need to understand how companies account for pay in the form of shares in a company and the potential effects on both a company’s financial statements and analysis of their performance. Since share-based payments have an effect on financial reporting, corporate governance, and employee incentives, ACCA candidates need to pay particular attention to the recognition measurement, and disclosure requirements of IFRS 2 so that they will be able to prepare financial statements in line with the standards.
IFRS 2 ACCA Questions
Q1: At what point should an entity recognize share-based payments under IFRS 2?
A) When shares are granted
B) When shares are vested
C) When services are received
If the company purchases the shares for cashD)
Ans: C) when service is rendered
Q2. How Pertain to IFRS 2 for equity settled share based payments?
B) In case of fair value of goods or services received
B) Fair value of granted equity instruments
C) The book value of the stock shares issued
D) At fair value of equity instrument
Ans: B) At fair value of the equity instruments granted
Q3: If the share-based payment is cash settled what is the accounting treatment?
A) Identity as equity transaction
B) Fair value at grant date, does not remeasure
C) Somewhat of a liability and remeasured to fair value each reporting period until settled
D) Expense but not a liability
Ans: C) Liability and then remeasured at fair value until extinguished
Q4: All of the following are the key features of IFRS 2 except
A) reporting share based transaction at fair value
To account for share-based payments as expenses.
D) Not accounted for in the statements = share based payments
D) Required disclosure of share transactions and share-based transactions in the notes to financial statements
Ans: C) Not included in financial statements for share based payments
Q5: What is a share-based payment with non-market vesting conditions?
A) It is disregarded in determining the grant-date fair value
B) It adjusts the expectation of vesting shares
C) It is remeasured in every reporting period
Financial statements under a basis of the financial statements it will only be disclosed in the notes but not recognized.
Ans: B) It gives an effect on number of underlying shares on vesting
Relevance to US CMA Syllabus
Given below are some Accounting topics that are a part of the Certified Management Accountant CMA syllabus: IFRS 2 under financial reporting and performance management CMAs are working in the corporate finance domain where share-based payment be it for internal reporting, cost analysis or performance evaluation is important. This standard can help management accountants to measure the cost of employee compensation and develop incentive structures aligned with the performance of the firm, and thereby with the financial sustainability of the entity as a whole.
IFRS 2 US CMA Questions
Q1: What is the fair value of share options granted to employees and how does an entity measure it?
A) With respect to intrinsic value as of the grant date
B) At the market price on the day of exercise
C) Using an option-pricing model at grant date
D) At expense of the companys net assets
Ans: An option-pricing model at the grant date
Q2: What is the cost-incurring type for equity settled share-based payment?
A) At the time of exercise of the options by the employees
B) Profit and loss throughout the vesting period
C) The stock price exceeds the exercise price
D) At delivery date only
Ans: B) In P&L during vesting period
Q3: What qualifies as a criterion of cash-settled share-based payment?
A) Is the liability required to be remesured at each reporting date?
B) The expense is recorded only when actual cash is paid
C) The fair value of the equity instrument at the grant date
D) The expense is charged to retained earnings
Ans : A) Provision must be remeasured at each reporting date
Q4: What is not considered while estimating fair value of share options?
A) The price volatility characteristics of the stock
B) Dividends yield on the stock
C) Duration of the employee’s expected employment with the Company
D) The CEO’s salary
Ans: D) The CEO’s salary
Q5: What is the role of share-based payments from a managerial perspective?
A) To manipulate stock prices
Retain more profits in the company
C) To motivate employees to act in the interest of the shareholders
D) To reduce financial reporting requirements
Ans: C) Align employee incentives to those of the shareholders
Relevance to US CPA Syllabus
If you are working on US CPA, IFRS 2 is covered in the FAR (Financial Accounting and Reporting ) section of the US CPA exam (Certified Public Accountant). FIN 28 would be included in a CPA’s knowledge of how to account for share-based transactions and report on these transactions, particularly for multinational corporations and to the SEC. It should be in compliance with IGAAP (International Generally Accepted Accounting Principles) and specific employee compensation standards.
IFRS 2 US CPA Questions
Q1: How should IFRS 2 treatment be applied to share-based payments?
A) Disclosed only in a footNote
B) Acts as an expense in the financial statements
C) A financial statements and not appearing as exercised
D) Is recognized as a contingent liability
Ans: B) In financial statements, treated as an expense.
Q2: When a company pays a liability by issuing shares, how does it record the entry?
A) Recognise as equity-settled share-based payment
B) Consider it a dividend payment
C) Record as a cash-settled transaction
D) Don’t do anything about this transaction since this is non cash related
Ans : A) Equity settled share based payment
Q3: What portion of the calculation of share options is a key consideration in IFRS 2 when measuring?
A) Historical cost of shares
B) Estimated fair value at the grant date
C) Aggregate authorized capital of share
D) Company’s profit margin
Ans: B) Fair value estimated as at the grant date
Q4: What happens if a share-based payment vests when an employee leaves?
A) They still get the shares
B) The opposite of expense in any financial statements
C) The company persists on accretive expense
D) The company updates future expense recognition for forfeiture estimates
Ans: D) Forfeitures are estimated, and company recognizes expenses in subsequent periods
Q5: What is the effect of IFRS 2 on profit and loss account?
A) Pays more for share-based compensation expenses
B) cost of financing reduces revenue
C) Not determining gain or loss
D) Impacts equity, not income
Ans: A ] Share-based compensation costs also reduce expenses
Relevance to CFA Syllabus
IFRS 2: The Financial Reporting and Analysis (FRA) section of the Chartered Financial Analyst (CFA) curriculum addresses IFRS 2. CFA candidates need to understand share-based compensation in order to assess firm performance, financial ratios, and earnings quality. These factors have ramifications for profitability and clarity of financial statements so investors and analysts need to take a view on their impact on valuation.
IFRS 2 CFA Questions
Q1: What kind of effect does share-based compensation have on a company’s financial ratios?
A) Net income will increase and EPS will increase
B) Increases costs and dings earnings per share
C) Does not impact financial ratios
D) Liabilities decrease and total return on assets increases
Ans: B) Increase cost and reduces earnings ● per share
Q2: Why is there a separate chapter for share-based payments in this regard towards payments to employees?
A) To design artificial costs and reduce tax liability
B) To incentivize employees to focus on the company’s long-term performance
C) In order for you not to make cash compensation
D) So performance reviews are not necessary
Ans: B) To link employees interest with long term company performance
Q3: Determine how IFRS 2 will affect the valuation of this company
A) No effect on valuation
B) It increases reported net income
C) Reduces operating income by increasing expenses
D) Increases the book value of equity
Ans: C) Operating income gets reduced due to increase in expenses
Q4: As per IFRS 2, how are options given to employees accounted for?
A) They are seen as a liability
B) The grant date is when fair value is used for measurement
C) No aparece en estados financieros
Question 1 options: A) bills
Ans: B) They are measured at fair value at Grant date
Q5: What are the key share options valuation model?
A) Discounted cash flow model
B) Black-Scholes model
C) Price-to-earnings ratio
D) Dividend discount model
Ans: B) Black-Scholes model
