DipIFR Syllabus B. Elements of financial statements - Share Based Payments - Introduction - Notes ^{1 / 7}

Well first of all it needs to be for receiving good or services and in return the company gives:

1. Its own shares

2. Cash based upon the price of its own shares

Contracts to buy or sell non-financial items that may be settled net in shares or rights to shares are outside the scope of IFRS 2 and are addressed by IAS 32

These are..

1. Equity-settled share-based payment

   This is where the company pays shares in return for goods and/or services received.

   • Dr Expense
     Cr Equity

2. Cash-settled share-based payment

   This is where cash is paid in return for goods and services received, HOWEVER..the actual cash amount though is based on the share price.

   These are also called SARs (Share Appreciation Rights).

   • Dr Expense
     Cr Liability

3. Transactions with a choice of settlement

   A choice of cash or shares paid in return for goods and services received.

   • depends on choice made

Vesting period
Often share based payments are not immediate but payable in say 3 years. The expense is spread over these 3 years and this is called the vesting period.

How much to recognise?

So we have decided that share based payments (either shares or cash based on share price) should go into the accounts .

(Dr expense Cr Equity or Liability) 

We now have to look at the value to put on these:

• Option 1: Direct method

  Use the FV of the goods or services received

• Option 2: Indirect method 

  Use the FV of the shares issued by the company

  Equity settled - Use FV of shares @ grant date
  Cash settled - Update FV of shares each year

  IFRS 2 suggests you choose option 1 - the FV of the goods/services. 

  However, if the FV of these cannot be reliably measured then you should go for option 2 - FV of shares issued.

  Strangely enough, option 2 is the most common. This is because share based payments are often associated with paying employees. 

  You cannot put a value on the work done by employees - except for the value of what you pay them i.e. Option 2.