IFRS for SMEs® Standard (2015) + Q&As

IFRS® Foundation—Supporting Material for the IFRS for SMEs Standard

Module 26—Share-based Payment

 IFRS® Foundation
Supporting Material
for the IFRS for SMEs® Standard
including the full text of
Section 26 Share-based Payment
of the IFRS for SMEs Standard
issued by the International Accounting Standards Board in October 2015

with extensive explanations, self-assessment questions and case studies

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This module has been prepared by IFRS Foundation (Foundation) education staff. It has not been approved by the International Accounting
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Contents

INTRODUCTION __________________________________________________________ 1
Which version of the IFRS for SMEs Standard? __________________________________ 1
This module ______________________________________________________________ 1
IFRS for SMEs Standard ____________________________________________________ 2
Introduction to the requirements_______________________________________________ 3
What has changed since the 2009 IFRS for SMEs Standard ________________________ 4

REQUIREMENTS AND EXAMPLES ___________________________________________ 5

Scope of this section _______________________________________________________ 5
Recognition ______________________________________________________________ 9
Recognition when there are vesting conditions __________________________________ 10
Measurement of equity-settled share-based payment transaction____________________ 12
Cash-settled share-based payment transaction __________________________________ 39
Share-based payment transactions with cash alternatives _________________________ 42
Group plans _____________________________________________________________ 44
Unidentifiable goods or services _____________________________________________ 46
Disclosures ______________________________________________________________ 47

SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS _________________________ 50

COMPARISON WITH FULL IFRS STANDARDS ________________________________ 52
TEST YOUR KNOWLEDGE ________________________________________________ 55
APPLY YOUR KNOWLEDGE _______________________________________________ 60
Case study 1 ____________________________________________________________ 60
Answer to Case study 1 ____________________________________________________ 61
Case study 2 ____________________________________________________________ 62
Answer to Case study 2 ____________________________________________________ 63
Case study 3 ____________________________________________________________ 64
Answer to Case study 3 ____________________________________________________ 65

IFRS Foundation: Supporting Material for the IFRS for SMEs®` Standard (version 2019-07)
Module 26—Share-based Payment

The accounting requirements applicable to small and medium-sized entities (SMEs)

discussed in this module are set out in the IFRS for SMEs Standard, issued by the
International Accounting Standards Board (Board) in October 2015.
This module has been prepared by IFRS Foundation education staff.
The contents of Section 26 Share-based Payment of the IFRS for SMEs Standard are set
out in this module and shaded grey. The Glossary of terms of the IFRS for SMEs
Standard (Glossary) is also part of the requirements. Terms defined in the Glossary are
reproduced in bold type the first time they appear in the text of Section 26. The notes and
examples inserted by the education staff are not shaded. These notes and examples do
not form part of the IFRS for SMEs Standard and have not been approved by the Board.

INTRODUCTION

Which version of the IFRS for SMEs® Standard?

When the IFRS for SMEs Standard was first issued in July 2009, the Board said it would
undertake an initial comprehensive review of the Standard to assess entities’ experience of the
first two years of its application and to consider the need for any amendments. To this end, in
June 2012, the Board issued a Request for Information: Comprehensive Review of the IFRS for SMEs.
An Exposure Draft proposing amendments to the IFRS for SMEs Standard was subsequently
published in 2013, and in May 2015 the Board issued 2015 Amendments to the IFRS for SMEs
Standard.
The document published in May 2015 only included amended text, but in October 2015, the
Board issued a fully revised edition of the Standard, which incorporated additional minor
editorial amendments as well as the substantive May 2015 revisions. This module is based on
that version.
The IFRS for SMEs Standard issued in October 2015 is effective for annual periods beginning on
or after 1 January 2017. Earlier application was permitted, but an entity that did so was
required to disclose the fact.
Any reference in this module to the IFRS for SMEs Standard refers to the version issued in
October 2015.

This module

This module focuses on the general requirements for presenting share-based payment
transactions applying Section 26 Share-based Payment of the IFRS for SMEs Standard. It introduces
the subject and reproduces the official text along with explanatory notes and examples
designed to enhance understanding of the requirements. The module identifies the
significant judgements required in presenting share-based payment transactions. In addition,
the module includes questions designed to test your understanding of the requirements and
case studies that provides a practical opportunity to apply the requirements to share-based
payment transactions applying the IFRS for SMEs Standard.

IFRS Foundation: Supporting Material for the IFRS for SMEs®` Standard (version 2019-07) 1
Module 26—Share-based Payment

Upon successful completion of this module, you should, within the context of the IFRS for SMEs
Standard, be able to:
 identify share-based payment transactions;
 apply the recognition requirements for share-based payment transactions, including the
requirements when there are vesting conditions;
 account for equity-settled share-based payment transactions, including shares and share
options;
 account for modifications, cancellations and settlements of equity-settled share-based
payment transactions;
 account for cash-settled share-based payment transactions, including share-based payment
transactions with cash-settled alternatives;
 demonstrate how to account for share-based payment transactions in which the
identifiable consideration appears to be less than the fair value of the equity instruments
granted or the liability incurred;
 disclose share-based payment arrangements in financial statements; and
 demonstrate an understanding of the significant judgements required in accounting for
share-based payment transactions.

IFRS for SMEs Standard

The IFRS for SMEs Standard is intended to apply to the general purpose financial statements of
entities that do not have public accountability (see Section 1 Small and Medium-sized Entities).
The IFRS for SMEs Standard is comprised of mandatory requirements and other non-mandatory
material.
The non-mandatory material includes:
 a preface, which provides a general introduction to the IFRS for SMEs Standard and explains
its purpose, structure and authority;
 implementation guidance, which includes illustrative financial statements and a table of
presentation and disclosure requirements;
 the Basis for Conclusions, which summarises the Board’s main considerations in reaching
its conclusions in the IFRS for SMEs Standard issued in 2009 and, separately, in the 2015
Amendments; and
 the dissenting opinion of a Board member who did not agree with the issue of the
IFRS for SMEs Standard in 2009 and the dissenting opinion of a Board member who did not
agree with the 2015 Amendments.
In the IFRS for SMEs Standard, there are appendices to Section 21 Provisions and Contingencies,
Section 22 Liabilities and Equity and Section 23 Revenue. These appendices provide
non-mandatory guidance.
The IFRS for SMEs Standard has been issued in two parts: Part A contains the preface, all the
mandatory material and the appendices to Section 21, Section 22 and Section 23; and Part B
contains the remainder of the material mentioned above.

Further, the SME Implementation Group (SMEIG), which assists the Board with supporting
implementation of the IFRS for SMEs Standard, publishes implementation guidance as
‘questions and answers’ (Q&As). These Q&As provide non-mandatory, timely guidance on
specific accounting questions raised with the SMEIG by entities implementing the IFRS for SMEs
Standard and other interested parties. At the time of issue of this module (November 2018) the
SMEIG has not issued any Q&As relevant to this module
IFRS Foundation: Supporting Material for the IFRS for SMEs®` Standard (version 2019-07) 2
Module 26—Share-based Payment

Introduction to the requirements

The objective of general purpose financial statements of a small or medium-sized entity is to

provide information about the entity’s financial position, performance and cash flows that is
useful for economic decision-making by a broad range of users who are not in a position to
demand reports tailored to meet their particular information needs. Such users include, for
example, owners who are not involved in managing the business, existing and potential
creditors and credit rating agencies.
The objective of Section 26 is to prescribe general requirements for presenting share-based
payment transactions.
A share-based payment transaction is one in which an entity receives goods or services as
consideration for its equity instruments, or by incurring a liability based on the price or value
of its shares or other equity instruments. Section 26 specifies the accounting for all
share-based payment transactions including those that are equity-settled, cash-settled and
those in which the terms of the arrangement provide a choice of whether the entity settles
cash (or other assets) or by issuing equity instrument.
In summary, Section 26 sets out the following requirements.
 the fair value of the goods or services received in an equity-settled share-based payment
transaction is recognised in the financial statements either as an asset or, if the asset
recognition criteria are not met, as an expense. There is a corresponding increase in
equity.(1)
 if the fair value of the goods or services cannot be estimated reliably, as for employee
services, the goods and services are measured by reference to the fair value of the equity
instruments granted. (Specific guidance is included, on how to account for vesting
conditions, modifications, cancellations and settlements.)
 goods or services received in a cash-settled share-based payment transaction are measured
at the fair value of the liability incurred. At each reporting date the fair value of the
liability is remeasured through profit or loss until it is settled.
 share-based payment transactions that provide a choice of settlement in cash or equity are
generally accounted for as cash-settled share-based payment transactions. However, if an
entity has a past practice of settling the transactions by issuing equity instruments, or the
choice of settlement has no commercial substance, the entity is required to account for the
transaction as an equity-settled share-based payment transaction.
Section 26 provides relief for group entities by permitting a share-based payment expense to
be measured on the basis of a reasonable allocation of the expense for the group.

(1)
The IFRS for SMEs Standard and this module refers to an ‘increase’ in equity when referring to the credit entry for share-
based payment transactions. However, if an entity has negative equity, for example if the entity’s accumulated trading
losses exceed other forms of equity, then the credit to equity would result in a decrease in the amount of negative equity.
IFRS Foundation: Supporting Material for the IFRS for SMEs®` Standard (version 2019-07) 3
Module 26—Share-based Payment

What has changed since the 2009 IFRS for SMEs Standard?

The following are the changes made to Section 26 by the 2015 Amendments:
 alignment of the scope and definitions with IFRS 2 Share-based Payment to clarify that share-
based payment transactions involving equity instruments of other group entities are in the
scope of Section 26 (see paragraphs 26.1–26.1A and related definitions in the glossary of
the IFRS for SMEs Standard);
 clarification that Section 26 applies to all share-based payment transactions even if the
identifiable consideration appears to be less than the fair value of the equity instruments
granted or the liability incurred (see paragraphs 26.1B and 26.17);
 clarification of the accounting treatment for vesting conditions and modifications to
grants of equity instruments (see paragraphs 26.9, 26.12 and three new definitions in the
glossary of the IFRS for SMEs Standard); and
clarification that the simplification provided for group plans relates only to the measurement
of a share-based payment expense; relief is not provided from its recognition (see paragraphs
26.16 and 26.22).

In addition this module reproduces other editorial changes.

IFRS Foundation: Supporting Material for the IFRS for SMEs®` Standard (version 2019-07) 4
Module 26—Share-based Payment

REQUIREMENTS AND EXAMPLES

Scope of this section

26.1 This section specifies the accounting for all share-based payment transactions
including those that are equity- or cash-settled or those in which the terms of the
arrangement provide a choice of whether the entity settles the transaction in cash (or
other assets) or by issuing equity instruments.

26.1A A share-based payment transaction may be settled by another group entity (or a
shareholder of any group entity) on behalf of the entity receiving the goods or services.
This section also applies to an entity that:
(a) receives goods or services when another entity in the same group (or a
shareholder of any group entity) has the obligation to settle the share-based
payment transaction; or
(b) has an obligation to settle a share-based payment transaction when another
entity in the same group receives the goods or services
unless the transaction is clearly for a purpose other than the payment for goods or
services supplied to the entity receiving them.

26.1B In the absence of specifically identifiable goods or services, other circumstances may
indicate that goods or services have been (or will be) received, in which case this section
applies (see paragraph 26.17).

26.2 Cash-settled share-based payment transactions include share appreciation rights.

For example, an entity might grant share appreciation rights to employees as part of their
remuneration package, whereby the employees will become entitled to a future cash
payment (instead of an equity instrument), based on the increase in the entity’s share
price from a specified level over a specified period of time. Or an entity might grant to its
employees a right to receive a future cash payment by granting to them a right to shares
(including shares to be issued upon the exercise of share options) that are redeemable,
either mandatorily (for example, upon cessation of employment) or at the employee’s
option.

Notes
The IFRS for SMEs Standard defines a share-based payment transaction (see the Glossary)
as follows:
A transaction in which the entity:
(a) receives goods or services from the supplier of those goods or services
(including an employee) in a share-based payment arrangement; or
(b) incurs an obligation to settle the transaction with the supplier in a share-based
payment arrangement when another group entity receives those goods or
services.
Goods include inventories, consumables, property, plant and equipment, intangible
assets and other non-financial assets. An issue of shares for cash or other financial
assets is not a share-based payment transaction if it does not involve the delivery of
goods or services. Such transactions are covered by other sections of the IFRS for SMEs

IFRS Foundation: Supporting Material for the IFRS for SMEs®` Standard (version 2019-07) 5
Module 26—Share-based Payment

Standard, for example Section 22 Liabilities and Equity. Furthermore, equity instruments
issued by an acquirer in a business combination in exchange for control of the
acquiree are specifically addressed in Section 19 Business Combinations and Goodwill.
Consequently, Section 26 does not apply to transactions in which the entity acquires
goods as part of the net assets acquired in a business combination.
Nevertheless, there may be circumstances in which goods and services are received but
they cannot be specifically identified and the exercise of judgement may be required.
An apparent discount might be an indicator that additional consideration has been or
will be received; see paragraph 26.17.

The definition of a share-based payment transaction above refers to a share-based

payment arrangement. The IFRS for SMEs Standard defines a share-based payment
arrangement (see the Glossary) as follows:
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:
(a) 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
(b) equity instruments (including shares or share options) of the entity or another
group entity
provided the specified vesting conditions, if any, are met.
Entities sometimes use their shares, or options over their shares, as a form of currency.
For example, an early-stage entity, sometimes called a start-up entity, with limited cash
might issue its shares in exchange for goods or services from a strategic partner. While
this practice may help the start-up entity to manage its cash flow, the payment in
shares may also be attractive as an investment to a vendor or service provider who
thinks that the value of the shares may increase.
Another common scenario is the use of share-based compensation to remunerate
employees. Share-based compensation plans can motivate employees to higher levels
of performance and build a sense of shared ownership in the entity. They might be
provided as a way of retaining key members of staff and as part of succession planning.
Generally, share-based payment schemes provide employees with the right to receive
equity in the entity or a cash payment based on the entity’s share price if the
performance of the entity exceeds predetermined levels. Typical performance
measures include increases in earnings per share, revenue targets and market share.
By definition, SMEs are entities whose equity instruments are not traded in a public
market. Consequently, employees of SMEs have no public market for selling their
shares. An SME that is part of a group might grant its employees shares or share
options in a listed company in the group. Alternatively, an SME might issue share
appreciation rights that give employees the right to receive compensation equal to the
share price’s appreciation (ie the excess of the estimated value of the share at the date
of exercise over a pre-established amount). Entities may pay the share appreciation in
cash, in shares, or in a combination of both.

IFRS Foundation: Supporting Material for the IFRS for SMEs®` Standard (version 2019-07) 6
Module 26—Share-based Payment

Section 26 applies to the accounting for all share-based payment transactions

including:

 equity-settled share-based payment transactions,

 cash-settled share-based payment transactions, and
 share-based payment transactions in which the terms of the arrangement provide a
choice of whether the entity settles the transaction in cash (or other assets) or by
issuing equity instruments.

The IFRS for SMEs Standard defines an equity-settled share-based payment transaction
(see the Glossary) as follows:
A share-based payment transaction in which the entity:
(a) receives goods or services as consideration for its own equity instruments
(including shares or share options); or
(b) receives goods or services but has no obligation to settle the transaction with
the supplier.
The IFRS for SMEs Standard defines a cash-settled share-based payment transaction (see
the Glossary) as follows:
A share-based payment transaction in which the entity acquires goods or services
by incurring a liability to transfer cash or other assets to the supplier of those
goods or services 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.

Examples—share-based payment transactions within the scope of

Section 26

Ex 1 As part of its ordinary activities, Entity A contracted a consultant to advise on

business development and strategy. The consultant agreed to accept ordinary
shares of Entity A as payment for his services.

Entity A is paying for services in its own shares rather than in cash. It accounts for this
equity-settled share-based payment transaction in accordance with Section 26.

Ex 2 Entity A establishes an equity compensation plan and grants options to its

employees. The options entitle the holder to purchase one ordinary share of
Entity A, at a fixed price, during a five-year period.

Entity A is using the share options as a form of employee remuneration. It accounts

for this equity-settled share-based payment transaction in accordance with Section 26.

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Module 26—Share-based Payment

Ex 3 To address concerns about the loss of experienced staff to a competitor and the
cost of training new staff, Entity A introduces a new bonus scheme as part of its
employee remuneration package. On 1 May 20X0 it grants share appreciation
rights (SARs) to its employees. On 30 April 20X3 Entity A will pay to each
employee an amount, in cash, equal to the increase in the value of one of its
shares over the three-year period from 1 May 20X0 for every SAR the employee
holds, provided the employee is still employed by Entity A on 30 April 20X3.

Although the payment is in cash, the amount is based on the price of Entity A’s shares;
the amount paid for each SAR equals the increase in the value of one of Entity A’s
shares over a specified three-year period. Entity A accounts for this cash-settled
share-based payment transaction in accordance with Section 26.

Ex 4 The management of Entity B, like Entity A in Example 3 above, has been

concerned about the loss of experienced staff to a competitor and the cost of
training new staff. Consequently, on 1 May 20X0 it introduces a new bonus
scheme as part of its employee remuneration package. On 30 April 20X3 Entity B
will give to each employee shares in Entity B whose fair value on 1 May 20X0
equals 5% of his or her annual salary on 1 May 20X0, provided the employee is
still employed by Entity B on 30 April 20X3.

Entity B is using the shares as a form of employee remuneration. It accounts for this
equity-settled share-based payment transaction in accordance with Section 26.

Ex 5 A strategic consultant provides professional services to Entity B, which is a

subsidiary of Entity A. The consultant agrees to accept ordinary shares of Entity A
as payment for its services to Entity B.

Entity A, Entity B’s parent, pays the third party by issuing its ordinary shares as full
payment on behalf of Entity B. Entity A accounts for this transaction as an equity-
settled share-based payment transaction in accordance with Section 26. In Entity A’s
separate financial statements it may recognise the debit as an increase to its
“Investment in Entity B” asset. This acknowledges that the share-based payment
increases the value of the parent’s investment in the subsidiary. In Entity B’s
individual financial statements, Entity B accounts for a share-based payment
transaction based on a reasonable allocation of the expense in Entity A’s consolidated
financial statements.

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Module 26—Share-based Payment

Examples—transactions outside the scope of Section 26

Ex 6 Management of Entity C, like Entity A and Entity B in Examples 3 and 4 above, has
been concerned about the loss of experienced staff to a competitor and the cost of
training new staff. Consequently, on 1 May 20X0 it introduces a new bonus
scheme as part of its employee remuneration package. On 30 April 20X3 Entity C
will pay to each employee an amount, in cash, equal to 5% of his or her annual
salary on 1 May 20X0, provided the employee is still employed by Entity C on
30 April 20X3.

Although the payment is a cash incentive aimed at retaining staff, as in Example 3, the
amount is not based on the price of Entity C’s shares as it was in that example.
Furthermore, although the bonus is a percentage of salary, as in Example 4, the
payment here is in cash rather than in the form of shares as it was in that example.

The bonus payment is not in Entity C’s shares and is not based on the price of
Entity C’s shares. It is therefore not a share-based payment and it is outside the scope
of Section 26.

Ex 7 SME A issues 10,000 new shares in exchange for receiving 80% of the ordinary
shares of SME B.

An issue of shares for cash or other financial assets is not a share-based payment
transaction if it does not involve the delivery of goods or services. Such transactions
are covered by other sections of the IFRS for SMEs Standard. This transaction is a
business combination that is effected by the transfer of SME A’s equity instruments to
the previous owners of the shares in SME B. Equity instruments issued by an acquirer
(Entity A) in a business combination in exchange for control of the acquiree (Entity B)
are specifically addressed in Section 19 Business Combinations and Goodwill.

Recognition

26.3 An entity shall recognise the goods or services received or acquired in a share-based
payment transaction when it obtains the goods or as the services are received.
The entity shall recognise a corresponding increase in equity if the goods or services
were received in an equity-settled share-based payment transaction or a liability if
the goods or services were acquired in a cash-settled share-based payment transaction.

Example—recognition: goods received in exchange for equity

Ex 8 Entity A purchased 100 computers for its call centre in exchange for issuing
20,000 of its ordinary shares.
Entity A recognises the computers when it acquires them and accounts for them in
accordance with Section 17 Property, Plant and Equipment. It recognises an increase
in assets (the computers) and a corresponding increase in equity for the shares issued
in exchange for the computers.

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 Module 26—Share-based Payment

26.4 When the goods or services received or acquired in a share-based payment transaction
do not qualify for recognition as assets, the entity shall recognise them as expenses.

Notes
Typically, an expense arises from the consumption of goods or services. For example,
services are typically consumed immediately, in which case an expense is recognised
as the counterparty renders service. Goods might be consumed over a period of time
(for example, an item of equipment used over its useful life) or sold at a later date (for
example, inventories), in which case an expense is recognised when the goods are
consumed or sold (for example depreciation of equipment or the cost of goods sold for
inventory). However, sometimes it is necessary to recognise an expense before the
goods or services are consumed or sold, because they do not qualify for recognition as
assets.

Example—service received that does not qualify for recognition as an asset

Ex 9 As part of its ordinary activities, Entity A contracted a consultant to advise on a
new marketing campaign. The consultant agreed to accept ordinary shares of
Entity A as payment for his services.
Paragraphs 18.14 and 18.15 require expenditure on advertising and promotional
activities to be recognised as an expense. Entity A recognises a marketing expense, in
the same way as it would have done had it paid in cash. Entity A also recognises a
corresponding increase in equity.

Recognition when there are vesting conditions

26.5 If the share-based payments granted to employees vest immediately, the employee is not
required to complete a specified period of service before becoming unconditionally
entitled to those share-based payments. In the absence of evidence to the contrary, the
entity shall presume that services rendered by the employee as consideration for the
share-based payments have been received. In this case, on the grant date the entity
shall recognise the services received in full, with a corresponding increase in equity or
liabilities.

26.6 If the share-based payments do not vest until the employee completes a specified period
of service, the entity shall presume that the services to be rendered by the counterparty
as consideration for those share-based payments will be received in the future, during the
vesting period. The entity shall account for those services as they are rendered by the
employee during the vesting period, with a corresponding increase in equity or liabilities.

Notes
The IFRS for SMEs Standard defines vest (see the Glossary) as follows:
Become an entitlement. Under a share-based payment arrangement, a
counterparty’s right to receive cash, other assets or equity instruments of the
entity vests when the counterparty’s entitlement is no longer conditional on the
satisfaction of any vesting conditions.
Vesting conditions are conditions that need to be met in order for the employee or
supplier to become entitled to the share based payment. For example, employees may

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be awarded shares in an entity, but subject to the condition that they will receive
those shares only if the entity’s profit before tax in a particular period exceeds a
certain amount and if they remain employed with the entity throughout that period.
(See the notes below paragraph 26.9 for a fuller discussion about vesting conditions.)
The IFRS for SMEs Standard defines the vesting period (see the Glossary) as follows:
The period during which all the specified vesting conditions of a share-based
payment arrangement are to be satisfied.
Vesting conditions are common in employee share option plans and employee long-
term incentive plans.

Examples—recognition when there are no vesting conditions

Ex 10 On 31 December 20X1 Entity A grants each employee 10 ordinary shares. There
are no vesting conditions.
Because there are no vesting conditions there are no further conditions to be met for
employees to be entitled to the shares. Consequently, on 31 December 20X1 (the grant
date) employees of Entity A are unconditionally entitled to the shares and Entity A
recognises the staff cost in respect of the services received and a corresponding
increase in equity.

Ex 11 On 31 December 20X1 Entity A grants 10 share options to each of its employees to

reward them for their past performance. There are no vesting conditions and the
options can be exercised at any time after 31 December 20X2.
At 31 December 20X1 there are no further conditions to be met for employees to be
entitled to the share options. The share options can be exercised after 31 December
20X2. If an employee were to leave employment at Entity A before 31 December 20X2,
he or she would still keep his or her share options and be entitled to exercise those
options after 31 December 20X2.
Because there are no vesting conditions, on 31 December 20X1 (the grant date)
employees of Entity A are unconditionally entitled to the share options. Consequently,
on 31 December 20X1 Entity A recognises the staff cost in respect of the services
received and a corresponding increase in equity.

Example—recognition when there are vesting conditions

Ex 12 The facts are the same as in Example 11. However, in this example, exercise of
the share options is conditional upon an employee working for the entity
throughout 20X2.
The exercise of the share options is conditional upon the employees working
throughout 20X2. This vesting condition is a service condition (discussed below). The
services to be rendered by the employees as consideration for the share options will be
received in 20X2 (the vesting period). Consequently, Entity A recognises the staff cost
and a corresponding increase in equity in 20X2.
Note: even if it is also a condition that an employee must still be employed by Entity A
at the date of the exercise of the share option, the vesting period remains as the year to
31 December 20X2. Even if the option is actually exercised after 31 December 20X2,
the vesting period does not extend to that later date because after 31 December 20X2
all the specified vesting conditions would already have been satisfied. Consequently, it
is only if the employee leaves before 31 December 20X2 that he or she would forfeit his
or her share options.

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Module 26—Share-based Payment

Measurement of equity-settled share-based payment transactions

Measurement principle
26.7 For equity-settled share-based payment transactions, an entity shall measure the goods
or services received, and the corresponding increase in equity, at the fair value of the
goods or services received, unless that fair value cannot be estimated reliably. If the
entity cannot estimate reliably the fair value of the goods or services received, the entity
shall measure their value, and the corresponding increase in equity, by reference to the
fair value of the equity instruments granted. To apply this requirement to transactions
with employees and others providing similar services, the entity shall measure the fair
value of the services received by reference to the fair value of the equity instruments
granted, because typically it is not possible to estimate reliably the fair value of the
services received.

26.8 For transactions with employees (including others providing similar services), the fair
value of the equity instruments shall be measured at the grant date. For transactions with
parties other than employees, the measurement date is the date when the entity obtains
the goods or the counterparty renders service.

Notes

The requirements in paragraph 26.7 are summarised in the following decision tree.

Is the equity-settled share-based payment transaction

for employee services or for similar services from
others?

No Yes

Can the fair value of the

goods or services be
estimated reliably?

Yes No

Measure the transaction at Measure the transaction at Measure the transaction at

the fair value of the goods the fair value (subject to the the fair value (subject to the
or services received requirements in Section 26) requirements in Section 26)
determined at the date the of the equity instruments of the equity instruments
goods or services are granted determined at the granted determined at the
received. date the goods or services date the goods or services
are received. are received.

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Module 26—Share-based Payment

Fair value measurement of equity-settled share-based payment transactions under Section 26 of the
IFRS for SMEs Standard

Fair value is defined 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 (see the Glossary).
When the fair value of the goods or services received can be estimated reliably, the
entity measures the goods or services received, and the corresponding increase in
equity, at the fair value of the goods or services received. That fair value is measured
applying the definition of fair value in the paragraph above and the fair value
measurement requirements set out in paragraphs 11.27–11.32.
However, when the transaction is measured at the fair value of the equity instruments
granted because it is a transaction for services from employees or others providing
similar services, or because the fair value of other goods or services also cannot be
estimated reliably, Section 26 contains special requirements (see paragraph 26.9). As a
result of these special requirements, the measurement of the fair value of the equity
instruments might not be consistent with other fair value requirements in the
IFRS for SMEs Standard.
An equity-settled share-based payment transaction with employees, or others
providing similar services, is measured by reference to the fair value of the equity
instruments granted; and the date at which that fair value is measured is the date of
grant of the equity instruments. When the transaction is for other goods or services,
the date at which fair value is measured is the date at which the goods or services are
received, even when the fair value of the goods or services received is measured by
reference to the fair value of the equity instruments granted.
Section 26 contains a hierarchy for determining the fair value of shares (see paragraph
26.10) and of share options and equity-settled share appreciation rights (see paragraph
26.11).
The measurement principles in Section 26 for equity-settled share-based payment
transactions do not differentiate depending on how an entity will source the shares,
for example, whether new shares are issued or whether treasury shares are used.
Furthermore, Section 26 does not distinguish where in equity the entry should be
made. The exact journal entries made when shares are transferred to the other party—
for example, which component of equity should be credited—will depend on the legal
requirements of the jurisdiction in which the entity is based; and, in some
jurisdictions, how the shares are sourced.
Note: For the purposes of illustrating the requirements in Section 26, the examples
below recognise the credit to equity as ordinary share capital (for the par value of the
shares) and in a share premium account (for the fair value in excess of the par value of
the share).

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Module 26—Share-based Payment

Examples—measurement, transactions for goods or non-employee

services, no vesting conditions

Ex 13 Entity A purchased 100 computers for its call centre in exchange for issuing
20,000 of its ordinary shares. The cash selling price for each computer is CU500 (2)
and the shares have a par value of CU1.
The entity determines that the selling price, which is from an independent vendor in
an arm’s length transaction, is the best measure of the fair value of the computers.
Consequently, Entity A accounts for the transaction as follows:

Dr Asset: Property, plant and equipment—computers CU50,000

Cr Equity—ordinary share capital CU20,000
Cr Equity—share premium account CU30,000
To recognise the receipt of equipment in exchange for the issue of 20,000 Entity A ordinary shares.

Note: in accordance with Section 17, Entity A will depreciate the computers over their
estimated useful lives to their residual values using a depreciation method that
reflects the consumption of the service potential of the computers.

Ex 14 As part of its ordinary activities, Entity A contracted a consultant to advise on a

new marketing campaign. The consultant agreed to accept ordinary shares of
Entity A as payment for his services. The consultant advice had an invoice price
of CU3,000 and Entity A issued 100 ordinary shares with a par value of CU10 each.
The entity determines that the invoice value of the consultant fees is the best estimate
of the fair value of the marketing advice. Consequently, Entity A accounts for the
transaction as follows:

Dr Profit or loss—marketing expense CU3,000

Cr Equity—ordinary share capital CU1,000
Cr Equity—share premium account CU2,000
To recognise the receipt of marketing advice in exchange for the issue of 100 Entity A ordinary shares.

Ex 15 Entity A contracts an IT consultancy company to setup and install its IT systems.

The company provides 20 hours of consultancy services to Entity A. The usual
hourly billing rate of the consultant providing the services was CU10 at the start
of the contract, but was increased to CU12 on the consultant’s promotion part
way through the contract. The consultant did five hours’ work for Entity A after
his promotion and 15 hours before his promotion. The IT company agreed to
accept 30 ordinary shares, with a par value of CU1 each, in Entity A as
compensation for its services. Entity A issued new shares to the IT consultancy
company.
The value of the IT consultancy services received by Entity A is CU210 ((15 × CU10) +
(5 × CU12)); the measurement date is when the counterparty renders the service and so
the change in billing rate is reflected in the pricing of the transaction.

(2) In this example, and in all other examples in this module, monetary amounts are denominated in ‘currency units’ (CU).

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The entries shown below, which Entity A will make to record the transaction, reflect an
assumption that the IT services are eligible for capitalisation as part of the cost of
Entity A’s IT equipment:
Dr Asset: Property, plant and equipment—IT equipment CU210
Cr Equity—ordinary share capital CU30
Cr Equity—share premium account CU180
To recognise the capitalisation of IT consultancy services received in exchange for the issue of 30 Entity A
ordinary shares.

Example—measurement, transaction with employees, no vesting condition

Ex 16 On 31 December 20X1 Entity A grants each of its 100 employees 10 ordinary
shares with a par value of CU1. There are no vesting conditions. The fair value on
31 December 20X1, the grant date, of the 1,000 shares granted is CU5,000.
The fair value of the employees’ services must be measured by reference to the fair
value of the shares awarded, rather than the fair value of the employee services.
Because there are no vesting conditions the services in exchange for the shares have
already been provided by employees, therefore the measurement date is the grant date
of the shares. At grant date Entity A will make the following entry to record the equity
compensation:
Dr Profit or loss—staff expense* CU5,000
Cr Equity—ordinary share capital CU1,000
Cr Equity—share premium account CU4,000
To recognise the receipt of employee services in exchange for issuing 1,000 Entity A ordinary shares

* The expense reflects an assumption that, in this example, the employee compensation does not qualify
for recognition as an asset, ie ‘capitalisation’, for example, as part of the cost of inventory.

26.9 A grant of equity instruments might be conditional on employees satisfying specified

vesting conditions related to service or performance. An example of a vesting condition
relating to service is when a grant of shares or share options to an employee is
conditional on the employee remaining in the entity’s employ for a specified period of
time. Examples of vesting conditions relating to performance are when a grant of shares
or share options is conditional on a specified period of service and on the entity achieving
a specified growth in profit (a non-market vesting condition) or a specified increase in the
entity’s share price (a market vesting condition). Vesting conditions are accounted for
as follows:
(a) all vesting conditions related to employee service or to a non-market performance
condition shall be taken into account when estimating the number of equity
instruments expected to vest. Subsequently, the entity shall revise that estimate if
new information indicates that the number of equity instruments expected to vest
differs from previous estimates. On the vesting date, the entity shall revise the
estimate to equal the number of equity instruments that ultimately vested. Vesting
conditions related to employee service or to a non-market performance condition
shall not be taken into account when estimating the fair value of the shares, share
options or other equity instruments at the measurement date.
(b) all market vesting conditions and non-vesting conditions shall be taken into account
when estimating the fair value of the shares, share options or other equity
instruments at the measurement date, with no subsequent adjustment to the
estimated fair value, irrespective of the outcome of the market or non-vesting
condition, provided that all other vesting conditions are satisfied.

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Module 26—Share-based Payment

Notes
The IFRS for SMEs Standard defines vesting conditions (see the Glossary) as follows:
The conditions that determine whether the entity receives the services that
entitle the counterparty to receive cash, other assets or equity instruments of the
entity, under a share-based payment arrangement. Vesting conditions are either
service conditions or performance conditions. Service conditions require the
counterparty to complete a specified period of service. Performance conditions
require the counterparty to complete a specified period of service and specified
performance targets to be met (such as a specified increase in the entity’s profit
over a specified period). A performance condition might include a market
vesting condition.
In other words, the services delivered to the entity need to, at a minimum, meet the
conditions specified by the vesting conditions in order for the employee (or other
service provider) to become entitled to the share-based payment. Vesting conditions
are often specified in share-based payments with employees. They are conditions
intended to incentivise an employee or supplier to act in a way that provides a benefit
to the entity. For example an employee staying in service for three years and also
possibly meeting certain performance targets during that period.
The IFRS for SMEs Standard defines a market vesting condition (see the Glossary) as
follows:
A condition upon which the exercise price, vesting or exercisability of an equity
instrument depends that is related to the market price of the entity’s equity
instruments, such as attaining a specified share price or a specified amount of
intrinsic value of a share option, or achieving a specified target that is based on
the market price of the entity’s equity instruments relative to an index of
market prices of equity instruments of other entities.

Non-vesting conditions are conditions attached to share-based payments that do not

meet the definition of vesting conditions.

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Module 26—Share-based Payment

The following decision tree illustrates the evaluation of whether a condition is a service
or performance condition, or a non-vesting condition, and gives an example of each of
the various conditions as they might apply to a share option.

Does the condition determine whether the entity

receives the services that entitle the counterparty to
the share-based payment?

No Yes

Non-vesting Does the condition require only a specified

condition period of service to be completed?
(eg the share option
cannot be exercised
unless the silver No
Yes
commodity index
exceeds a specific
level on a set date). Performance condition

Service condition Is the condition related to the market

(eg the grant of a share option price of the entity’s equity instruments?
is conditional on the employee
remaining employed by the
Yes No
company for the following three
years).

Market condition Non-market condition

(eg the grant of a share (eg the grant of a share
option is conditional on option is conditional on
the company achieving the company achieving
both a specified share both a specified profit
price and the employee before tax and the
remaining with the employee remaining with
company over the the company over the
following three years). following three years).

Employee share-based payment transactions generally have vesting conditions. Guidance on

how to reflect these conditions in the measurement of the fair value of the equity instruments
is set out in paragraph 26.9. The conditions are taken into account as follows:
 Service conditions and non-market performance conditions—these vesting
conditions are not taken into account in determining the grant date fair value of
the equity instruments granted, ie the fair value is measured as though these
conditions did not exist. Instead, these conditions are reflected by estimating how
they will affect the number of equity instruments expected to vest. The estimate
of the number of equity instruments expected to vest as a result of these

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Module 26—Share-based Payment

conditions is revised throughout the vesting period, as subsequent information

comes to light; revisions to the estimate are reflected prospectively and previous
estimates are not restated, in accordance with paragraph 10.16. Applying this
approach, only the number of equity instruments satisfying these vesting
conditions is ultimately recognised in the financial statements, that is, the final
charge is the grant date fair value (calculated by excluding these conditions)
multiplied by the actual number of equity instruments that vest as a result of
these conditions.
 Market performance conditions (eg a condition involving a target share price, or
specified increase in share price)—these vesting conditions are taken into account
in determining the grant date fair value of the equity instruments granted.
Having allowed, in measuring the grant date fair value of the equity instruments,
for the possibility that the condition may not be satisfied, no subsequent
adjustment is then made to the measurement of the transaction amount,
including the number of equity instruments included in the calculation,
irrespective of the outcome of the market condition. Thus, even if no equity
instruments ultimately vest, because this condition is not met, there will still be a
charge in the financial statements. That charge will be equal to the grant date fair
value (which was calculated by reflecting this condition) multiplied by the number
of equity instruments granted and adjusted only for the number of instruments
not vesting, if any, as a result of service and non-market performance conditions
not being satisfied (as discussed in the previous bullet point).
 Non-vesting conditions—these conditions are taken into account in determining
the grant date fair value of the equity instruments granted. Accordingly,
no adjustment is made to the number of equity instruments included in the
calculation of the transaction amount, irrespective of the outcome of the
condition. In other words, the treatment is identical to that of market
performance conditions.
The requirements outlined above mean that the approach to valuing an equity
instrument at the grant date and subsequently measuring the transaction will be
different when considering service conditions and non-market performance
conditions, versus considering market performance conditions and non-vesting
conditions. The Board concluded that, for practicality and subjectivity reasons, the
effect of service and non-market performance conditions should not be included in the
valuation of the instruments at the grant date. However, the concerns about practical
difficulties do not apply to market vesting conditions because market vesting
conditions can be incorporated into option pricing models.(3)
Paragraph 26.10 sets out a ‘three-tier’ hierarchy for determining the fair value of
shares. Paragraph 26.11 contains a similar measurement hierarchy for share options
and equity-settled share appreciation rights. However, in applying these hierarchies,
paragraph 26.9 must also be considered in determining which vesting conditions to
include in that fair value measurement.

(3) For the Board’s more detailed reasoning, see paragraphs BC178–BC184 of IFRS 2 Share-based Payment, the full IFRS Standard
upon which Section 26 is based.

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Module 26—Share-based Payment

Examples—comparing the accounting treatment for different kinds of

vesting and non-vesting conditions

Ex 17 Entity A runs a copper-mining business. On 1 June 20X0 as part of a long-term

incentive scheme, Entity A provisionally awarded its sales employees a total, in
aggregate, of 1,000 Entity A shares receivable on 31 May 20X3 if the copper
commodity index on 31 May 20X3 is 8,000 or above, whether or not they are
employees on 31 May 20X3. Entity A has a year end of 31 May.

Dividends declared on the shares accrue to the employees during the three-year
period. In other words, if the condition is met, the employees will receive the
shares together with the dividends that have been declared on those shares
during the three years to 31 May 20X3. (4)

The entity estimates that on 1 June 20X0 its shares are valued at CU10 each.
The condition regarding the copper commodity index imposed by Entity A is a non-
vesting condition because it is a condition that does not require the employees to
complete any service or performance conditions in order for the award to vest.
Accordingly, it must be reflected in the fair value of the share award. This is the only
condition attached to the share award; the employees will receive the shares on
31 May 20X3 if the condition is met regardless of whether they are still employed by
Entity A on 31 May 20X3. Entity A estimates that a third party, in an arm’s length
transaction, would only pay CU7 to purchase the share awards, that is, the effect of the
condition is to reduce the value of the shares by CU3 each at 1 June 20X0.
The amount that Entity A recognises in respect of the equity-settled share-based
payment transaction would be CU7,000 and this would be recognised regardless of the
level of the copper commodity index on 31 May 20X3. It would thus be recognised
whether the employees receive the shares or not. Because there is no vesting period,
this amount would be recognised in full immediately.

Ex 18 The facts are as in Example 17. However, instead of a condition that the copper
commodity index on 31 May 20X3 is 8,000 or above, here the condition is that the
sales employees must remain in employment until 31 May 20X3. In other words,
remaining in employment is the only condition attached to the share award.
Entity A prepares annual financial statements for the year ended 31 May and:
 on 1 June 20X0 it estimates that 800 shares will vest;
 at the end of the first year (31 May 20X1) it has revised this estimate to 780;
 at 31 May 20X2 it has further revised this estimate to 750; and
 750 shares vest on 31 May 20X3 based on the number of employees still
employed on that date.
The requirement to remain in employment is a service condition and thus, in
accordance with Section 26, would not be reflected in the fair value of the share
awards. The grant date fair amount of each share is CU10.

(4)If dividends on the shares did not accrue to the employees during the three years, an adjustment may need to be made
to the fair value of the shares at grant date, ie CU10 less an adjustment for the lack of dividend rights.

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The grant date fair value amount would be recognised as an expense over the three-
year service period adjusted by the number of shares expected to vest. Consequently,
for each period, Entity A estimates how many eligible employees are expected to be
employed on 31 May 20X3 and this forms the basis for that adjustment. The journal
entries would be:
Year 1 (Year ended 31 May 20X1)
Dr Profit or loss—staff costs* CU2,600
Cr Equity CU2,600
To recognise the receipt of employee services in exchange for shares

Calculation: 780 shares expected to vest × CU10 grant date fair value of each share × 1/3 of vesting
period elapsed = CU2,600 recognised in Year 1.

Year 2 (Year ended 31 May 20X2)

Dr Profit or loss—staff costs* CU2,400
Cr Equity CU2,400
To recognise the receipt of employee services in exchange for shares

Calculation: (750 shares expected to vest × CU10 grant date fair value of each share × 2/3 of vesting
period elapsed) less CU2,600 recognised in Year 1 = CU2,400 recognised in Year 2.

Year 3 (Year ended 31 May 20X3)

Dr Profit or loss—staff costs* CU2,500
Cr Equity CU2,500
To recognise the receipt of employee services in exchange for shares

Calculation: (750 shares (which vest on 1 June) × CU10 grant date fair value of each share) less
CU5,000 recognised in Years 1 and 2 = CU2,500 recognised in Year 3.
* Because the sales staff costs do not qualify for recognition as an asset, the staff costs are recognised
as an expense.

Ex 19 The facts are the same as in Example 17. However, instead of a condition that the
copper commodity index on 31 May 20X3 is 8,000 or above, here the conditions
are that over the three-year period ended 31 May 20X3 both:
 the sales employees must remain in employment; and
 the company’s profit before tax (PBT) must increase by an average of 5% per
year.
The condition for the employees to remain in employment is a service condition and
the condition for the company to achieve a specified PBT is a non-market performance
condition. Consequently, neither of these vesting conditions would be reflected in the
grant date fair value of the award. Accordingly, the total expense recognised in
Entity A’s financial statements over the three years would be CU10 multiplied by the
number of shares actually given to employees on 31 May 20X3.
Like Example 18, the expense recognised in the years ended 31 May 20X1 and
31 May 20X2 would be based on the entity’s estimate of how many shares will vest on
31 May 20X3. However, in this example the estimates would be based on entity’s
expectations both as to how many employees will leave before 31 May 20X3 and
whether PBT will increase by an average of 5% per year over the three-year period
ended 31 May 20X3. The estimate would be revised each year until the final year (year
ended 31 May 20X3) when the total expense is ‘trued up’ to the actual outcome.

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Examples of scenarios:
- in a scenario where the PBT target were not met, meaning that no shares are given
to employees, the aggregate expense over the three years in Entity A’s financial
statements would be zero. However, if the PBT target were initially expected to be
met there might be a charge in the first year or first two years that would then be
reversed in subsequent years.
- In a different scenario where the PBT target were met but, because some
employees had left during the three years, only 750 shares were given to
employees, the expense would be CU7,500 (CU10 × 750) in total over the three
years.

Ex 20 The facts are the same as in Example 17. However, instead of a requirement for
the copper commodity index on 31 May 20X3 to be 8,000 or above, here the
requirement is both that:
 the sales employees must remain in employment over the three-year period
ended 31 May 20X3; and
 the company’s shares must be worth at least CU11 (ie the estimated share
price) on 31 May 20X3.
Entity A estimates that a third party, in an arm’s length transaction, would only
pay CU7.50 to purchase the share awards if they had the share price condition but
no other condition; that is, the effect of the share price condition is to reduce the
value of the shares by CU2.50 each.
The share price condition (a market condition) would be reflected in the grant date
fair value, but the service condition would not be reflected in that fair value.
The amount that Entity A would recognise in respect of the equity-settled share-based
payment transaction would be CU7.50 multiplied by the number of shares it expects to
give to employees based on the number employed by Entity A on 31 May 20X3.
Even if the target share price is not met the entity will recognise an expense for the
share awards based solely on how many shares would have vested considering only the
service condition. For example, if 750 shares would have been given to employees had
the share price been met, Entity A will recognise CU5,625 (CU7.50 × 750) in respect of
the share award scheme over the three-year period even though no shares are actually
given to employees. As explained in Examples 18 and 19 above, the amount would
initially be calculated by estimating the number of employees expected to remain
employed by the entity and each year revising that number in such a way that in the
final year it is ‘trued up’ to the actual number of employees employed on 31 May 20X3.

Examples—measurement when there are service vesting conditions

Ex 21 Entity B grants 100 share options to each of its 500 employees. Each grant is
conditional upon the employee working for the entity over the next three years
(ie the vesting condition is a service condition of three years). The entity
estimates that, on the date of grant, the fair value of each share option is CU15;
the fair value of CU15 is measured as though there is no service condition. On the
basis of a weighted-average probability, the entity estimates that 20% of
employees will leave during the three-year period and therefore forfeit their
rights to the share options.(5)

(5) This example is based on Scenario 1 of Example 1A set out in the Implementation Guidance to IFRS 2, Share-based Payment.

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If everything turns out exactly as expected, Entity B makes the following entries in the
years during the vesting period, for services received as consideration for the share
options.
Year 1
Dr Profit or loss—staff costs* CU200,000
Cr Equity CU200,000
To recognise the receipt of employee services in exchange for share options
Calculation: 50,000 options granted × 80% = 40,000 options expected to vest. 40,000 × CU15 grant
date fair value of each option × 1/3 of vesting period elapsed = CU200,000 recognised in Year 1.

Year 2
Dr Profit or loss—staff costs* CU200,000
Cr Equity CU200,000
To recognise the receipt of employee services in exchange for share options
Calculation: 50,000 options granted × 80% = 40,000 options expected to vest. 40,000 × CU15 grant
date fair value of each option × 2/3 of vesting period elapsed – CU200,000 = CU200,000 recognised in
Year 2. Cumulative expense at the end of Year 2 is CU400,000 (CU200,000 recognised in Year 1 and
CU200,000 recognised in Year 2).

Year 3
Dr Profit or loss—staff costs* CU200,000
Cr Equity CU200,000
To recognise the receipt of employee services in exchange for share options
Calculation: 40,000 options vested × CU15 grant date fair value of each option × 3/3 of vesting period
elapsed = CU600,000 recognised cumulatively to the end of Year 3. CU600,000 less CU200,000
recognised in Year 2 less CU200,000 recognised in Year 1 = CU200,000 recognised in Year 3.
* These entries assume that the staff costs do not qualify for capitalisation.
In each of the three years, an expense is recognised in arriving at profit or loss for the
year. The credit entry is to equity, for example this might be to retained earnings or a
separate share option reserve. The exact location within equity will often depend on
local legal requirements.
If the share options are subsequently exercised, the entity will give shares to the
employees in exchange for receiving cash (equal to the option exercise price). How
this transaction is accounted for will depend upon the legal requirements in the
entity’s jurisdiction and, in some jurisdictions, upon how the entity sources the shares
that it gives to the employees. For example, the entity might issue new shares or use
shares held as treasury shares.
Note: in this example, the share options granted all vest at the same time (ie at the end
of Year 3). In some situations, share options or other equity instruments might vest in
instalments over the vesting period. For example, an employee might be granted 100
share options, which vest in instalments of 25 share options at the end of each of the
next four years. There is no explicit guidance in Section 26 dealing with awards that
vest in instalments. Paragraph IG11 of the Guidance on implementing IFRS 2 Share-
based Payment(6) explains that in such a scenario, ‘the entity should treat each
instalment as a separate share option grant, because each instalment has a different
vesting period, and hence the fair value of each instalment will differ (because the
length of the vesting period affects, for example, the likely timing of cash flows arising

(6) In accordance with paragraph 10.6, an entity may, but is not required to, consider the requirements and guidance in
full IFRS Standards when the IFRS for SMEs Standard does not provide explicit guidance.

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from the exercise of the options)’. The same approach could be taken by an entity
applying the IFRS for SMEs Standard.
Ex 22 The facts are the same as in Example 21. However, in this example not everything
turns out exactly as expected. In particular:
 During Year 1, 20 employees leave.
 At the end of Year 1 the entity revises its estimate of total employee
departures over the three-year period from 20% (100 employees) to 15% (75
employees).
 During Year 2, a further 22 employees leave.
 At the end of Year 2 the entity revises its estimate of total employee
departures over the three-year period from 15% to 12% (60 employees).
 During Year 3, a further 15 employees leave (ie a total of 57 employees
forfeited their rights to the share options during the three-year period, and a
total of 44,300 share options (443 employees × 100 options per employee)
vested at the end of Year 3. (7)

Entity B records the equity compensation scheme using the following entries.

Year 1
Dr Profit or loss—staff costs* CU212,500
Cr Equity CU212,500
To recognise the receipt of employee services in exchange for share options

Calculation: 50,000 options granted × 85% = 42,500 options expected to vest. 42,500 × CU15 grant
date fair value of each option × 1/3 of vesting period elapsed = CU212,500 recognised in Year 1.

Year 2
Dr Profit or loss—staff costs* CU227,500
Cr Equity CU227,500
To recognise the receipt of employee services in exchange for share options

Calculation: 50,000 options granted × 88% = 44,000 options expected to vest. 44,000 × CU15 grant
date fair value of each option × 2/3 of vesting period elapsed = CU440,000 recognised cumulatively to
the end of Year 2. CU440,000 less CU212,500 recognised in Year 1 = CU227,500 recognised in
Year 2.

Year 3
Dr Profit or loss—staff costs* CU224,500
Cr Equity CU224,500
To recognise the receipt of employee services in exchange for share options

Calculation: 44,300 options vested × CU15 grant date fair value of each option × 3/3 of vesting period
elapsed = CU664,500 recognised cumulatively to the end of Year 3. CU664,500 less CU227,500
recognised in Year 2 less CU212,500 recognised in Year 1 = CU224,500 recognised in Year 3.

* These entries assume that the staff costs do not qualify for capitalisation.

On the vesting date, the entity revises the estimate to equal the number of equity
instruments that ultimately vested, because the only vesting condition was a service
condition.

(7) This example is based on Scenario 2 of Example 1A set out in the Implementation Guidance to IFRS 2 Share-based Payment.

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Examples—measurement when there are market vesting and service

conditions

Ex 23 At the beginning of Year 1, Entity C grants to a senior executive 10,000 share

options, conditional upon: (i) the executive remaining in the entity’s employment
until the end of Year 3 (ie this vesting condition is a service condition); and (ii) the
share price being valued at CU65 or more at the end of Year 3 (ie this vesting
condition is a market condition, which is a type of performance condition). Both
the service condition and the market condition were satisfied at the end of Year 3.

Entity C uses an option pricing model to measure the fair value of the options at the
grant date to be CU24 per option. The valuation reflects the market-based
performance condition but not the service condition, as explained in the notes
following paragraph 26.9.
Entity C expects the service condition to be satisfied.
Entity C makes the following entries during the vesting period, to recognise the
services received as consideration for the share options.

Year 1
Dr Profit or loss—staff costs* CU80,000
Cr Equity—reserves CU80,000
To recognise the receipt of employee services in exchange for 10,000 share options
(10,000 options × CU24 × 1/3 of vesting period elapsed)

Year 2
Dr Profit or loss—staff costs* CU80,000
Cr Equity—reserves CU80,000
To recognise the receipt of employee services in exchange for 10,000 share options
(10,000 options × CU24 × 2/3 of vesting period elapsed) less CU80,000 recognised in Year 1

Year 3
Dr Profit or loss—staff costs* CU80,000
Cr Equity—reserves CU80,000
To recognise the receipt of employee services in exchange for 10,000 share options
(10,000 options × CU24) less CU160,000 recognised in Years 1 and 2

* These entries assume that the staff costs do not qualify for capitalisation.

Entity C recognises the services received from the executive because the service
condition is satisfied (as expected, the executive remained in service throughout the
three-year service period).

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Ex 24 The facts are the same as in Example 23. However, in this example, although
three years of service is provided by the executive, the share options do not vest
because the market condition is not satisfied; the fair value of a share in Entity C
is only estimated to be valued at CU60 at the end of the three-year period.
Entity C makes the following entries during the three years, to recognise the services
received as consideration for the share options.

Year 1
Dr Profit or loss—staff costs* CU80,000
Cr Equity—reserves CU80,000
To recognise the receipt of employee services in exchange for 10,000 share options
(10,000 options × CU24 × 1/3 of vesting period elapsed)

Year 2
Dr Profit or loss—staff costs* CU80,000
Cr Equity—reserves CU80,000
To recognise the receipt of employee services in exchange for 10,000 share options
(10,000 options × CU24 × 2/3 of vesting period elapsed) less CU80,000 recognised in Year 1

Year 3
Dr Profit or loss—staff costs* CU80,000
Cr Equity—reserves CU80,000
To recognise the receipt of employee services in exchange for 10,000 share options
(10,000 options × CU24) less CU160,000 recognised in Years 1 and 2

* These entries assume that the staff costs do not qualify for capitalisation.

Entity C recognises the services received from the executive because the service
condition is satisfied (as expected, the executive remained in service throughout the
three-year service period). Even though the market condition (share price target) is not
satisfied, the accounting is not affected because the possibility that the market
condition would not be met was taken into account when estimating the grant date
fair value of the share options at CU24. Thus the entries are identical to those in
Example 23.

Ex 25 The facts are the same as in Example 23. However, in this example, the executive
forfeited the options when he resigned from Entity C in Year 2.
Entity C expected the service condition to be satisfied. However, the executive
resigned in Year 2.
Entity C makes the following entries during the three years, to recognise the services
received as consideration for the share options.

Year 1
Dr Profit or loss—staff costs* CU80,000
Cr Equity—reserves CU80,000
To recognise the receipt of employee services in exchange for 10,000 share options

(10,000 options × CU24 × 1/3 of vesting period elapsed)

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Year 2
Dr Equity—reserves CU80,000
Cr Profit or loss—staff costs* CU80,000
To reverse the charge for the recognition of receipt of employee services in exchange for 10,000 share
options (following the resignation of the employee)

Year 3: No entries.
* These entries assume that the staff costs do not qualify for capitalisation.

Service conditions are taken into account when estimating the number of equity
instruments expected to vest. Consequently, when the executive resigned in Year 2 it
became certain that none of the options would vest because the service condition
could not be satisfied. Consequently, the amount recognised in Year 1 is reversed in
Year 2 and no further entries are made for this share-based payment.

Shares
26.10 An entity shall measure the fair value of shares (and the related goods or services
received) using the following three-tier measurement hierarchy:
(a) if an observable market price is available for the equity instruments granted, use that
price.
(b) if an observable market price is not available, measure the fair value of equity
instruments granted using entity-specific observable market data such as:
(i) a recent transaction in the entity’s shares; or
(ii) a recent independent fair valuation of the entity or its principal assets.
(c) if an observable market price is not available and obtaining a reliable measurement
of fair value under (b) is impracticable, indirectly measure the fair value of the
shares using a valuation method that uses market data to the greatest extent
practicable to estimate what the price of those equity instruments would be on the
grant date in an arm’s length transaction between knowledgeable, willing parties.
The entity’s directors should use their judgement to apply the most appropriate
valuation method to determine fair value. Any valuation method used shall be
consistent with generally accepted valuation methodologies for valuing equity
instruments.

Notes

As discussed above, Section 26 sets out some specific requirements for the
measurement of the equity instruments issued in an equity-settled share-based
payment transaction. The starting point is fair value. For equity instruments for
which there are no service conditions and no non-market performance conditions, the
measurement valuation is fair value as defined and used in other sections of the
IFRS for SMEs Standard. For equity instruments for which there are service conditions
and/or non-market performance conditions, the measurement is also fair value as
defined and used in other sections of the IFRS for SMEs Standard except that the fair
value is determined as if these conditions were not present.

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Module 26—Share-based Payment

Section 26 contains a three-tier hierarchy for measuring the fair value of shares (and
for measuring the fair value of share options and equity-settled share appreciation
rights—see below). The first tier is to use an observable market price if one is available.
However, by definition, SMEs are entities whose equity instruments are not traded in a
public market. Consequently, generally, there will not be an observable market price
available for the shares of entities using the IFRS for SMEs Standard. Consequently,
such entities are required to use Tier Two or, if that is not possible, Tier Three.
Some entities engage valuation experts to assist them in developing fair value
estimates for shares, particularly if they have significant share-based payments or lack
sufficient valuation expertise. Further guidance on approaches to valuing shares
where there is no observable market price available can be found in the educational
material ‘IFRS 13 Fair Value Measurement: Unquoted equity instruments within the scope
of IFRS 9 Financial Instruments’ (see IFRS Foundation website at https://www.ifrs.org/-
/media/feature/supporting-implementation/ifrs-13/education-ifrs-13-eng.pdf ).
Although such guidance is written in the context of the fair value measurement
requirements in full IFRS Standards and SMEs are not required to consider guidance
on full IFRS Standards, the underlying valuation approaches described in that
guidance would also be appropriate to use under the IFRS for SMEs Standard and so
SMEs might find that education material helpful.
The following table illustrates the valuation approaches and valuation techniques
presented in that educational material:

Valuation approaches Valuation techniques

Market approach  Transaction price paid for an identical or a

similar instrument in an investee
 Comparable company valuation multiples

Income approach  Discounted cash flow (or DCF) method

 Dividend discount model (DDM)
 Constant-growth DDM
 Capitalisation model

A combination of approaches  Adjusted net asset method

might be used

Ex 26 Entity T, a small private company, establishes a bonus plan in which employees

are granted ordinary shares on the basis of achieving specified, non-market,
performance targets. Upon receipt of the shares, employees have the
unconditional right to sell them. At the end of 20X5 Entity T grants to employees
the rights to 1,500 shares. The employees will receive the shares in one year’s
time if they are still employed by the company at that date, and if the specified
profit before tax target has been met. Entity T only has one class of issued shares;
all its shares have identical rights.
The only conditions to which the share award is subject is a service condition and a
non-market performance condition. They will be reflected in the staff costs expense(8)
by taking them into account, not when measuring the fair value of a share, but,

(8) The amount will be recognised as an expense unless some or all of it qualifies for capitalisation.

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Module 26—Share-based Payment

instead, when calculating the number of shares to which that fair value should be
applied. The fair value of the shares at the grant date (31 December 20X5) needs to be
measured and this will be identical to the fair value of the existing issued shares of
Entity T, with no adjustment necessary for the service and non-market performance
conditions. Once Entity T has measured the fair value of its shares, it would need to
make an adjustment to that fair value to reflect the fact that dividends will not accrue
to the employees during the vesting period (if this is the case).

Because Entity T’s shares do not trade in a public market, Entity T must first consider
Tier Two of the measurement hierarchy in paragraph 26.10 to establish whether it can
measure the fair value of the shares using ‘entity-specific observable market data’.
An example of entity-specific observable market data could include the price resulting
from a recent sale of its shares to a third party by one of the shareholders in Entity T.
If such data is available, Entity T would need to assess whether there had been any
subsequent significant internal or external changes in the environment in which it
operates that would change the price of the transaction if it were it to take place now,
ie at the measurement date, rather than when it did take place.
However, if observable market data about the entity is not available, the entity is
required to use Tier Three of the hierarchy. Tier Three requires the entity to measure
the fair value indirectly using the most appropriate ‘valuation method that uses
market data to the greatest extent practicable’. Determining the most appropriate
valuation method requires judgement; and further judgement is required about the
assumptions used in applying that chosen method. For example, when using an
income method, in which future amounts—such as free cash flows to the firm, or
income and expenses—are discounted, judgements and estimates that need to be made
include forecasting future earnings and/or cash flows, and determining an appropriate
discount rate.

The calculation below provides an example of how Entity T might measure the fair
value of its shares. Given specific circumstances, one valuation technique might be
more appropriate than another. Consequently, entities may choose to use other
valuation techniques or, when using a discounted cash flow method, as illustrated
below, entities may consider that different assumptions portray better the specific
facts and circumstances surrounding the measurement. Additional valuation
techniques are set out in the educational material ‘IFRS 13 Fair Value Measurement:
Unquoted equity instruments within the scope of IFRS 9 Financial Instruments’
mentioned in the notes above.

Approach being used

Entity T has looked at the different valuation methods available and decided that the
most appropriate method for its shares is to use a discounted cash flow method.
Entity T discounts its expected free cash flow to the firm (FCFF) to derive the fair value
of its debt and equity combined, referred to as enterprise value. From this amount
Entity T will deduct the fair value of its debt to give, as at the end of 20X5, the fair
value of its equity in total. Entity T can then derive a value per share. Because
the shares will not be received by the employees until the following year, the
employees will not receive any dividends payable during 20X6. Consequently, Entity T
will deduct the present value of the dividends it expects to pay per share in 20X6 from
the value of a share to give the value of the award to the employees as at the end of
20X5 (ignoring the service condition and non-market vesting condition).
Entity T estimates its FCFF by first estimating its earnings before interest and tax (EBIT)
and using that to derive free cash flow.

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Forecast of EBIT
Entity T has a detailed budget for 20X6 and an outline budget for 20X7.(9) The revenue
and EBIT information from those budgets is as follows:

20X6 20X7

CU CU

Revenue 400 410

EBIT 100 102.5

EBIT as a percentage of revenue 25% 25%

Entity T assesses the outlook for the industry in which it operates and the outlook for
the economy as a whole. No major changes in the foreseeable future are expected.
Consequently, Entity T concludes that it expects a 2% growth rate for each of the three
years from 20X8 to 20Y0 and thereafter a growth rate of 1%. It also concludes that it
expects to maintain an EBIT margin as a percentage of revenue of 25%.
Before scheduling these amounts, Entity T examines its performance during the last
five years to see whether past performance supports these assumptions. The figures
for the last five years are as follows:

20X1 20X2 20X3 20X4 20X5

CU CU CU CU CU

Revenue 360 367 375 384 392

EBIT 86 88 121 87 98

EBIT as a percentage of revenue 24% 24% 32% 23% 25%

Increase in revenue from previous year 1.94% 2.18% 2.4% 2.08%

Entity T’s net earnings in 20X3 included a non-recurring credit of CU25,000 and in
20X4 included a non-recurring charge of CU5,000. Making these adjustments gives the
following results:

20X1 20X2 20X3 20X4 20X5

CU’000 CU’000 CU’000 CU’000 CU’000

Revenue 360 367 375 384 392

EBIT 86 88 121 87 98

Add/(deduct) non-recurring items - - (25) 5 -

EBIT excluding non-recurring items 86 88 96 92 98

EBIT as a percentage of revenue 24% 24% 26% 24% 25%

Increase in revenue from previous year 1.94% 2.18% 2.4% 2.08%

(9) It is assumed for the purposes of this example that any assumptions in the budgets, and in other aspects of the valuation
exercise, would be the same as those that a market participant would use.

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Entity T concludes that the figures for the past five years, together with its analysis of
the outlook for the future, support its assumptions. Accordingly, its calculations will
be based on EBIT as follows:

20X6 20X7 20X8 20X9 20Y0 20Y1 20Y2 …...

CU’000 CU’000 CU’000 CU’000 CU’000 CU’000 CU’000

Basis Budget Budget 2%↑ 2%↑ 2%↑ 1%↑ 1%↑ .......

EBIT 100 102.5 104.6 106.6 108.8 109.9 111.0

Conversion from EBIT to Free Cash Flow to Firm

In order to perform the discounted cash flow calculation, Entity T needs to convert
from EBIT to free cash flow.
Free Cash Flow to Firm (FCFF) is the cash flows available to all the capital providers of
an entity, which in Entity T’s case is the debt and equity holders.(10)

Using the budgets for 20X6 and 20X7, Entity T calculates FCFF for those two years as
follows:

20X6 20X7

CU’000 CU’000

EBIT 100 102.5

Multiply by: (1.0 less unlevered effective tax rate of 30%) × 0.7 × 0.7

70 71.8

Add: annual depreciation and amortisation 26 27

Less: reinvestment requirements (26) (26)

Less: increase in net working capital (2.4) (3)

FCFF 67.6 69.8

(10) FCFF are the cash flows available to all of the investee’s capital providers (equity and debt holders) after all operating
expenses and corporate taxes (computed using market participants’ expectations of the investee’s effective unlevered
income tax rate, (t)) have been paid, and any necessary reinvestment requirements (RR), such as capital expenditures in
fixed assets, and net working capital (NWC) have been made. FCFF can be expressed as follows:
FCFF = EBIT (1 – t) + Depreciation and amortisation – RR – Net increases in NWC.

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Entity T deduces FCFF from EBIT using the same growth-rate expectations as it used to
extrapolate EBIT, as follows:

20X6 20X7 20X8 20X9 20Y0 20Y1 20Y2 ……..

CU’000 CU’000 CU’000 CU’000 CU’000 CU’000 CU’000

EBIT 100 102.5 104.6 106.6 108.8 109.9 111.0

Adj* (32.4) (32.7) (33.4) (34.0) (34.7) (35.0) (35.3)

FCFF 67.6 69.8 71.2 72.6 74.1 74.9 75.7 ………

* The adjustments are annual depreciation and amortisation less reinvestment requirements less
the increase (or plus the decrease) in net working capital less unlevered tax.

Calculation of discount rate: weighted average cost of capital

FCFF stands for the entity’s cash flows available to all of its capital providers (ie debt
holders and equity holders). Accordingly, the appropriate discount rate should reflect
the cost of raising both debt and equity financing in proportion to their use (ie the
weighted average cost of capital (WACC)).
WACC uses, as inputs, the cost of debt and the cost of equity. Guidance on how to
estimate these, and the calculation of WACC, is provided in the educational material
‘IFRS 13 Fair Value Measurement: Unquoted equity instruments within the scope of
IFRS 9 Financial Instruments’ (mentioned in the notes above).
Entity T estimates its cost of equity using the capital asset pricing model and estimates
its cost of debt by reference to long-term bonds raised in the market by companies
with similar creditworthiness. As a result it estimates its WACC to be 11.5%.

Calculation of the enterprise value

Using FCFF and WACC, Entity T can calculate the enterprise value. FCFF are cash flows
from assets, before any debt payments but after making reinvestments needed for
future growth. Thus, the resulting enterprise value is the fair value of the business to
the debt and equity providers combined. Entity T calculates enterprise value as
follows:

Enterprise Value = Σ PV* of FCFF for 20X6–20Y0 + PV of Terminal Value for 20Y1 onwards
* PV means ‘present value’.

The present value of FCFF is calculated for each of the years in Entity T’s explicit
forecast period, that is, before Entity T assumes a constant growth rate into perpetuity.
The present value of FCFF is therefore calculated for 20X6–20Y0. The terminal value is
calculated for the period after the explicit forecast period, that is, for the years for
which it is assumed there is a constant growth rate into perpetuity. For Entity T the
terminal value is calculated at the end of 20Y0 and is the discounted amount, at that
date, of the cash flows estimated to be generated in 20Y1 and subsequent years.

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Entity T’s enterprise value is therefore calculated as follows:

Total 20X6 20X7 20X8 20X9 20Y0 End of

20Y0

FCFF (CU’000) 67.6 69.8 71.2 72.6 74.1

Terminal Value (a) 712.77143

Discount factor (b) 0.94703 0.84935 0.76175 0.68318 0.61272 0.58026

PV of FCFF for
20X6–20Y0 and
PV of terminal
value (in CU’000) 686.138 64.0191 59.2848 54.2366 49.5992 45.4027 413.5956
(a) The terminal value at the end of 20Y0 is the discounted amount, at that date, of the cash flows
estimated to be generated in 20Y1 and subsequent years. It is calculated at that date because
thereafter a constant 1% per year growth has been assumed into perpetuity. It has been calculated
by dividing (FCFF for 20Y0 × 1.01) by 0.105 (being WACC less assumed future growth, ie 11.5 less
1.0).
(b) The discount factors for the years 20X6—20Y0 inclusive assume that the cash flows are even
throughout each year and have been calculated as follows: 1/(1 + WACC) ^ (n – 0.5), where n
represents the number of years from the measurement date. The discount factor applied to the
terminal value at the end of 20Y0 assumes cash flows at the end of the year and has been
calculated as 1/(1 + WACC) ^ n.
The above calculations result in an enterprise value of CU686,138.

Calculation of the fair value of an equity share

The fair value of an equity share at 31 December 20X5 is found by deducting the fair
value of debt (less cash and cash equivalents) at that date from the enterprise value
estimated above and dividing the answer by the number of shares in issue.
Assuming 40,000 shares in issue and that the fair value of Entity T’s debt at
31 December 20X5 is CU125,000, the fair value of an equity share is:

= CU14.028
(CU686,138 less CU125,000)
40,000

Calculation of the fair value of the employee awards

As discussed above, for the purposes of valuing the employee share awards, Entity T
would need to make an adjustment to reflect the fact that dividends will not accrue to
the employees during the vesting period. If the present value of the dividend expected
to be paid during 20X6 is CU0.014, the value of the employee awards at 31 December
20X5 would be CU14.014 per share (CU14.028 less CU0.014). Note that no adjustment
is made for the service conditions and non-market vesting conditions.

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Assuming the performance target is met and that none of the employees leave,
Entity T will make the following entry to record the share-based payment transaction:

Dr Profit or loss—staff costs* CU21,021

Cr Equity—reserves CU21,021
To recognise the receipt of employee services in exchange for 1,500 share awards
(1,500 shares × CU14.014)
* These entries assume that the staff costs do not qualify for capitalisation.

Share options and equity-settled share appreciation rights

26.11 An entity shall measure the fair value of share options and equity-settled share
appreciation rights (and the related goods or services received) using the following three-
tier measurement hierarchy:
(a) if an observable market price is available for the equity instruments granted, use that
price.
(b) if an observable market price is not available, measure the fair value of share options
and share appreciation rights granted using entity-specific observable market data
such as (a) for a recent transaction in the share options.
(c) if an observable market price is not available and obtaining a reliable measurement
of fair value under (b) is impracticable, indirectly measure the fair value of share
options or share appreciation rights using an option pricing model. The inputs for the
model (such as the weighted average share price, exercise price, expected volatility,
option life, expected dividends and the risk-free interest rate) shall use market data to
the greatest extent possible. Paragraph 26.10 provides guidance on determining the
fair value of the shares used in determining the weighted average share price. The
entity shall derive an estimate of expected volatility consistent with the valuation
methodology used to determine the fair value of the shares.

Notes
Shares and share options of SMEs are not traded in a public market. Consequently, it
will be rare that either market prices or entity-specific observable market data are
available for these equity instruments. SMEs will therefore need to use an option
pricing model to value their share options and equity-settled share appreciation rights
(ie Tier Three of the measurement hierarchy set out in paragraph 26.11).
All option pricing models take into account, as a minimum, the following factors or
inputs:(11)
(a) the exercise price of the option;
(b) the life of the option;
(c) the current price of the underlying shares;
(d) the expected volatility of the share price;
(e) the dividends expected on the shares (if appropriate); and
(f) the risk-free interest rate for the life of the option.

(11) based on the factors listed paragraph B6 of IFRS 2 Share-based Payment, and in paragraph 26.11(c).

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Section 26 does not contain detailed guidance on selecting and applying an

appropriate option pricing model and determining the inputs used in that model. The
only requirements specified in paragraph 26.11 (c) are that:
 market data is used to the greatest extent possible when determining the inputs;
 paragraph 26.10 is applied in determining the input used for the share price; and
 the estimate of expected volatility must be consistent with the valuation
methodology used to determine the fair value of the shares under paragraph 26.10.
Option pricing software is available to entities that need to develop fair value
estimates for options. In addition, as noted above for share valuations, some entities
engage valuation experts to assist them in this process. Nevertheless, in
understanding how to value share options and equity-settled share appreciation rights
an entity may, but is not required to, consider the Application Guidance that forms
part of IFRS 2 Share-based Payment, which includes some guidance on selecting an option
pricing model and determining the inputs into the model (see paragraphs B4-B41 of
IFRS 2). There is also significant publicly available valuation guidance in the market
on how to select and apply different option-pricing models.

Examples—fair value of share options and equity-settled share

appreciation rights

Ex 27 At the beginning of Year 1, Entity S grants senior executives 15,000 share options,
conditional upon the executives remaining in the entity’s employment until the
end of Year 3. In addition, the share options cannot be exercised unless the value
of the entity’s shares has increased from CU25 at the beginning of Year 1 to above
CU30 at the end of Year 3 (ie this vesting condition is a market condition). If the
share price is above CU30 at the end of Year 3, the share options can be exercised
at any time during the next seven years (ie by the end of Year 10). At the end of
Year 1 the entity expects that none of the senior executives will leave during the
three-year vesting period. This is revised at the end of Year 2; the entity estimated
that executives with 2,000 options would have left by the end of Year 3. At the
end of Year 3 none of the options vested because the share price condition was
not met. However, if it had been met then 13,500 options would have vested
because the service required to earn 13,500 options had been received.
Entity S uses an option pricing model to estimate the fair value of the options. As at
the grant date (beginning of Year 1) this produces a fair value estimate of CU2.50 per
option, which reflects the market vesting condition. Entity S makes the following
entries during the service period.

Year 1
Dr Profit or loss—staff costs* CU12,500
Cr Equity—reserves CU12,500
To recognise the receipt of employee services in exchange for Entity S share options
(15,000 options × CU2.50 × 1/3 of vesting period elapsed)

Year 2
Dr Profit or loss—staff costs* CU9,167
Cr Equity—reserves CU9,167
To recognise the receipt of employee services in exchange for Entity S share options
((13,000 options × CU2.50 × 2/3 of vesting period elapsed) less CU12,500)

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Year 3
Dr Profit or loss—staff costs* CU12,083
Cr Equity—reserves CU12,083
To recognise the receipt of employee services in exchange for Entity S share options
((13,500 options × CU2.50) less CU12,500 less CU9,167)
* These entries assume that the staff costs do not qualify for capitalisation.

Modifications to the terms and conditions on which equity

instruments were granted
26.12 An entity might modify the terms and conditions on which equity instruments are
granted in a manner that is beneficial to the employee, for example, by reducing the
exercise price of an option or reducing the vesting period or by modifying or
eliminating a performance condition. Alternatively an entity might modify the terms
and conditions in a manner that is not beneficial to the employee, for example, by
increasing the vesting period or adding a performance condition. The entity shall take
the modified vesting conditions into account in accounting for the share-based
payment transaction, as follows:
(a) if the modification increases the fair value of the equity instruments granted (or
increases the number of equity instruments granted) measured immediately
before and after the modification, the entity shall include the incremental fair
value granted in the measurement of the amount recognised for services received
as consideration for the equity instruments granted. The incremental fair value
granted is the difference between the fair value of the modified equity instrument
and that of the original equity instrument, both estimated as at the date of the
modification. If the modification occurs during the vesting period, the
incremental fair value granted is included in the measurement of the amount
recognised for services received over the period from the modification date until
the date when the modified equity instruments vest, in addition to the amount
based on the grant date fair value of the original equity instruments, which is
recognised over the remainder of the original vesting period.
(b) if the modification reduces the total fair value of the share-based payment
arrangement, or apparently is not otherwise beneficial to the employee, the entity
shall nevertheless continue to account for the services received as consideration
for the equity instruments granted as if that modification had not occurred.
The requirements in this paragraph are expressed in the context of share-based
payment transactions with employees. The requirements also apply to share-based
payment transactions with parties other than employees if these transactions are
measured by reference to the fair value of the equity instruments granted, but
reference to the grant date refers to the date that the entity obtains the goods or the
counterparty renders service.

Notes
When an entity modifies the vesting conditions of equity instruments granted to
employees in a share-based payment transaction, the entity continues to account for
the instruments granted based on the original terms, conditions and vesting period as
at the grant date. In addition, it assesses whether the modification increased the fair
value of the instruments by measuring the fair value immediately before the

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modification and immediately after the modification. When the modification

increased the fair value or increased the number of equity instruments granted,
the entity also accounts for the increase; the increase is recognised over the period
from the date of the modification to the date when the modified instruments vest.

Examples—modifications

Ex 28 Entity Z grants 100 share options to each of its 500 employees. Each grant is
conditional upon the employee remaining in service over the next three years.
The entity estimates that the fair value of each option at the grant date is CU15.
On the basis of a weighted-average probability, the entity estimates that 100
employees will leave during the three-year period and will therefore forfeit their
rights to the share options.(12)
Forty employees leave during Year 1. During the year, the economy of the
jurisdiction in which the entity operates unexpectedly enters recession and, along
with most companies in the jurisdiction, the entity’s business, and the fair value
of its shares, is adversely affected. At the end of Year 1, the entity reprices its
share options by lowering the exercise price. The repriced share options retain
the original vesting date; that is, they vest at the end of Year 3. The entity
estimates that a further 70 employees will leave during Years 2 and 3, and hence
the total number of employees expected to leave over the three-year vesting
period is 110. The entity estimates that, at the date of repricing, the fair value of
each of the original share options granted (ie before taking into account the
repricing) is CU5 and that the fair value of each repriced share option is CU8.

During Year 2, a further 35 employees leave, and the entity estimates that a
further 30 employees will leave during Year 3, to bring the total number of
employees expected to depart over the three-year vesting period to 105.

During Year 3, a total of 28 employees leave, and hence a total of 103 employees
ceased employment during the vesting period. For the remaining 397 employees,
the share options vested at the end of Year 3.
The condition that the employee must remain in service over the next three years is a
service condition. Entity Z makes the following entries during the vesting period, for
services received as consideration for the share options.

Year 1
Dr Profit or loss—staff costs* CU195,000
Cr Equity—reserves CU195,000
To recognise the receipt of employee services in exchange for share options
((500 employees less 110 expected to forfeit) × 100 options × CU15 × 1/3 of vesting period elapsed)

Year 2
Dr Profit or loss—staff costs* CU259,250
Cr Equity—reserves CU259,250
To recognise the receipt of employee services in exchange for share options
((500 employees less 105 expected to forfeit) × 100 options × [(CU15 × 2/3 of vesting period elapsed +
(CU3 repricing × 1/2 of period remaining after repricing elapsed)] less CU195,000 recognised in Year 1)

(12) This example is adapted from Example 7 set out in the Implementation Guidance to IFRS 2 Share-based Payment.

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Year 3
Dr Profit or loss—staff costs* CU260,350
Cr Equity—reserves CU260,350
To recognise the receipt of employee services in exchange for share options
([(500 employees less 103 forfeited) × 100 options × (CU15 + CU3)] less CU454,250)

* These entries assume that the staff costs do not qualify for capitalisation.

The modification increases the fair value of the equity instruments granted, measured
immediately before and after the modification, by CU3. (CU3 is the difference between
the fair value of the modified equity instrument and that of the original equity
instrument, both estimated as at the date of the modification—CU8 less CU5.) Because
the modification occurred during the vesting period and did not alter the vesting
period, Entity Z recognises the incremental fair value granted (CU3 per option) in the
measurement of the amount recognised for services received over the remaining
period from the modification date until the date when the modified equity
instruments vest. This recognition is in addition to the amount based on the grant
date fair value of the original equity instruments (CU15 per option), which continues
to be recognised over the original vesting period.

Ex 29 At the beginning of Year 1, Entity Y grants 1,000 share options to each member of
its sales team, conditional upon the employee remaining in the entity’s
employment for three years and on the team selling more than 50,000 units of a
particular product over the three-year period. The fair value of the share options
is CU15 per option at the grant date.

During Year 2, the entity increases the sales target to 100,000 units. By the end of
Year 3, the entity has sold 55,000 units, and the share options do not vest.
Twelve members of the sales team remained in service for the three-year period. (13)
The condition that the employee remains in service over the next three years is a
service condition and the sales target condition is a non-market performance
condition.
Because the modification to the performance condition (from 50,000 units to 100,000
units) was not beneficial to the employees (it made it less likely that the share options
will vest), the entity ignores the modified performance condition when recognising
the services received. The entity therefore recognises the services received over the
three-year period on the basis of the original grant. None of the vesting conditions are
market conditions. Accordingly, the charge is based on whether the options would
have vested on the basis of the original conditions. Because the options would have
vested based on the original sales condition, the entity ultimately recognises
cumulative remuneration expense of CU180,000 over the three-year period
(12 employees × 1,000 options × CU15 per option).

(13) This example is adapted from Example 8 set out in the Implementation Guidance to IFRS 2 Share-based Payment.

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Cancellations and settlements

26.13 An entity shall account for a cancellation or settlement of an equity-settled share-based

payment award as an acceleration of vesting, and therefore shall recognise immediately
the amount that otherwise would have been recognised for services received over the
remainder of the vesting period.

Notes
The IFRS for SMEs Standard is silent on how an entity should account for any payment
in settlement or cancellation of a share-based payment award. In accordance with
Section 10, an entity would need to determine an appropriate accounting policy; it
will have to make the payment (credit cash), so the only decision is what to debit. An
entity could consider the substance of the payment; for example, if it is regarded as an
amount to purchase the equity instrument earned, it might be regarded as similar to
the repurchase of a share. This might suggest that the payment is deducted from
equity. As stated above, the IFRS for SMEs Standard requires that when there is a
modification that increases the fair value of the award, measured at the date of the
modification, the increase in fair value is accounted for as an additional charge for the
services of the employees. When a payment in settlement or cancellation is in excess
of the fair value at the date of settlement or cancellation, it would be consistent with
the treatment for modifications if the amount of the payment that exceeds the fair
value of the instruments on settlement or cancellation were charged as an additional
charge for the services of the employees. This treatment would also be consistent with
that required by paragraph 28(b) of IFRS 2 Share-based Payment.(14)
The following example assumes that the entity adopts an accounting policy that is
consistent with the suggestions in the previous paragraph.

Example—cancellations

Ex 30 Entity X grants 100 share options to each of its 300 employees. Each grant is
conditional upon the employee remaining in service over the next three years.
The entity estimates that the fair value of each option is CU10. The entity expects
all employees to complete the required service.

At the end of Year 2, all employees remain with the entity. However, the fair
value of an option has declined to CU6. Entity X decides to cancel the option
scheme and pay employees CU6.50 per option.

The entity makes the following entries.

Year 1
Dr Profit or loss—staff costs* CU100,000
Cr Equity—reserves CU100,000
To recognise the receipt of employee services in exchange for share options
(300 employees × 100 options × CU10 × 1/3 of vesting period elapsed)

(14) In accordance with paragraph 10.6, an entity may, but is not required to, consider the requirements and guidance in
full IFRS Standards when the IFRS for SMEs Standard does not provide explicit guidance.

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Year 2
Dr Profit or loss—staff costs* CU200,000
Cr Equity—reserves CU200,000
To recognise the receipt of employee services in exchange for share options
(300 employees × 100 options × CU10 × 2/2 of vesting period elapsed because of an acceleration of
vesting) less CU100,000 expensed in Year 1

Dr Equity—reserves CU180,000(a)
Dr Profit or loss—staff costs* CU15,000(b)
Cr Asset—cash CU195,000(c)
To record the cash payment in settlement of Entity X share option plan

(a) Fair value, at the date of cancellation, of the original share options = CU180,000 = (300 employees
× 100 options × CU6 fair value of option at date of cancellation).
(b) Excess of cash payment over fair value of cancelled options = CU15,000 = (300 employees × 100
options × CU0.50 payment in excess of CU6 fair value of option at date of cancellation).
(c) Cash payment to employees = CU195,000 = (300 employees × 100 options × CU6.50).
* These entries assume that the staff costs do not qualify for capitalisation.

In Year 2, Entity X records the receipt of employee services as if the share option plan
had vested immediately in Year 2. A total of CU100,000 was recognised in Year 1 so an
additional CU200,000 is recognised in Year 2. At the time of cancellation, the fair
value of the options is CU180,000. The cash payment to employees totals CU195,000,
of which CU15,000 is in excess of the fair value of the cancelled options; the CU15,000
excess is charged to profit or loss. CU180,000 is charged to equity, in effect as a
purchase of the outstanding equity instruments (the share options). The total cost
(charge to profit or loss) of the cancelled scheme is CU315,000.

Cash-settled share-based payment transactions

26.14 For cash-settled share-based payment transactions, an entity shall measure the goods or
services acquired and the liability incurred at the fair value of the liability. Until the liability
is settled, the entity shall remeasure the fair value of the liability at each reporting date
and at the date of settlement, with any changes in fair value recognised in profit or loss
for the period.

Notes
A cash-settled share-based payment transaction is a share-based payment transaction
in which the entity acquires goods or services by incurring a liability to transfer cash
or other assets to the supplier of those goods or services 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. (see the Glossary).

The payment of cash, or other assets, is ‘based on’ the price of the entity’s shares or
other equity instruments. Consequently, it may be a multiple of the entity’s share
price, for example, equal to the value of 20 shares on a specific date. Or it may be the
increase, if any, in an entity’s share price, for example, equal to the value of the
increase in 60 shares over a specified period.

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When an entity obtains the goods, or as the services are rendered, the entity recognises
the goods or services acquired, and a liability to pay for those goods or services,
measured initially at the fair value of the liability. The liability has to be remeasured
at each reporting date until it is settled; the change in the fair value of the liability is
recognised in profit or loss for the period.
In a cash-settled share-based payment transaction, the goods and services received will
always be measured at the fair value of the consideration paid for them and never at
the fair value of the goods or services received. For transactions with non-employees
this represents a difference from equity-settled share-based payment transactions.

Example—cash-settled share-based payment transaction

Ex 31 Entity X grants 100 cash share appreciation rights (SARs) to each of its 500
employees, on the condition that the employees remain in its employment for the
next three years. The SARs are exercisable up to the end of Year 5.
During Year 1, 35 employees leave. The entity estimates that a further
60 employees will leave during Years 2 and 3.
During Year 2, 40 employees leave and the entity estimates that a further 25 will
leave during Year 3. During Year 3, 22 employees leave. At the end of Year 3, all
SARs held by the remaining employees vest and 150 employees exercise their
SARs. Another 140 employees exercise their SARs at the end of Year 4 and the
remaining 113 employees exercise their SARs at the end of Year 5.
The entity estimates the fair value of the SARs at the end of each year in which a
liability exists, as shown below. The intrinsic values of the SARs at the date of
exercise (which equal the cash paid out) at the end of Years 3, 4 and 5 are also
shown below. (15)

Year Fair value Intrinsic value

1 CU14.40

2 CU15.50

3 CU18.20 CU15.00

4 CU21.40 CU20.00

5 CU25.00

In Years 3 and 4 there is a difference between the intrinsic value (the amount the
employees receive on exercise) and the fair value. This difference arises because the
fair value reflects the fact that the SARs are exercisable until the end of Year 5.
Consequently, in addition to the intrinsic value, the fair value includes the value of
the right to participate in future increases in share price, if any, that may occur
between the valuation date and the settlement date. Thus, at the end of Year 3, if an
employee exercises his or her SARs, he or she will receive CU15.00 per SAR whereas
the value of a SAR held by an employee choosing to exercise at a later date is CU18.20,
reflecting the expectation of further share price increases.

(15) This example is based on Example 12 set out in the Implementation Guidance to IFRS 2 Share-based Payment.

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Year Calculation Expense* (CU) Year-end

Liability (CU)
1 (500 - 95) employees × 100 SARs
194,400 194,400
× CU14.40 × 1/3
2 (500 - 100) employees × 100 SARs
× CU15.50 × 2/3 - CU194,400 218,933 413,333

3(a) (500 - 97 - 150) employees × 100

47,127 460,460
SARs × CU18.20 - CU413,333
+ 150 employees × 100 SARs ×
225,000
CU15.00
Total 272,127
4(b) (253 - 140) employees × 100 SARs
(218,640) 241,820
× CU21.40 - CU460,460
+ 140 employees × 100 SARs ×
280,000
CU20.00
Total 61,360
CU0 - CU241,820 (241,820) 0
5(c) + 113 employees × 100 SARs ×
282,500
CU25.00
Total 40,680

Total 787,500

* Assumes that the staff costs do not qualify for capitalisation.

(a)The calculation for Year 3 comprises three parts. The first part multiplies the fair value at the end of
Year 3 by the number of SARs that vested and that were not exercised at the end of Year 3. The
second part multiplies the intrinsic value at the end of Year 3 by the number of SARs that were exercised
at the end of Year 3, which gives the amount of cash paid out at the end of Year 3. From the sum of
these two amounts is deducted the amount provided at the end of Year 2 to give the change in liability
for the year (although for convenience it is presented above as a deduction from the first amount); this is
the third part of the calculation.
(b) The calculation for Year 4, like that for Year 3, comprises three parts. The first part multiplies the fair

value at the end of Year 4 by the number of SARs that remain unexercised at the end of Year 4. The
second part multiplies the intrinsic value at the end of Year 4 by the number of SARs that were exercised
at the end of Year 4, which gives the amount of cash paid out at the end of Year 4. From the sum of
these two amounts is deducted the amount provided at the end of Year 3 to give the change in liability
for the year (although for convenience it is presented above as a deduction from the first amount); this is
the third part of the calculation.
(c)
The calculation for Year 5 comprises two parts. The first part multiplies the intrinsic value at the end of
Year 5 by the number of SARs that were exercised at the end of Year 5, which gives the amount of cash
paid out at the end of Year 5. From this is deducted the amount provided at the end of Year 4 to give the
change in liability for the year.

Note: this example illustrates the use of share appreciation rights for employees as part
of their remuneration package. Under such as scheme, the employees will become
entitled to a future cash payment (rather than to an equity instrument), which is based
on the increase in the entity’s share price from a specified level over a specified period
of time. The liability is measured, initially, and at the end of each reporting period
until settled, at its fair value and changes in fair value are recognised in profit or loss.
Similar provisions apply to transactions with non-employees (eg an entity acquires
goods or services by incurring liabilities to the supplier of those goods or services in
amounts based on the price of the entity’s shares or other equity instruments).

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Share-based payment transactions with cash alternatives

26.15 Some share-based payment transactions give either the entity or the counterparty a
choice of settling the transaction in cash (or other assets) or by transfer of equity
instruments. In such a case, the entity shall account for the transaction as a cash-settled
share-based payment transaction unless either:
(a) the entity has a past practice of settling by issuing equity instruments; or
(b) the option has no commercial substance because the cash settlement amount bears
no relationship to, and is likely to be lower in value than, the fair value of the equity
instrument.
In circumstances (a) and (b), the entity shall account for the transaction as an equity-
settled share-based payment transaction in accordance with paragraphs 26.7–26.13.

Notes

Share-based payment transactions with cash alternatives are often structured so that
the fair value of one settlement alternative is the same as the other. For example, the
employee might have the choice of receiving share options or cash-settled share
appreciation rights with otherwise identical terms.

Examples—share-based payments with cash alternatives

Ex 32 Entity W grants to a number of employees the right to choose either 1,000

‘phantom shares’ (ie a right to a cash payment equal to the fair value of 1,000
shares) or 1,000 shares. The grant is conditional upon the completion of three
years’ service. At the end of Year 3, each employee chooses either the cash
alternative or the equity alternative. In the past, similar share-based payment
transactions have never been settled in shares by Entity W.
At the grant date, the fair value of Entity W’s shares is CU50 per share. At the end
of Years 1, 2 and 3, the fair value of Entity W’s shares is CU52, CU55 and CU60 per
share respectively. The entity does not expect to pay dividends in Years 1–3. All
employees remain in service at the end of year 3.
The fair value of the cash-settled alternative is not lower than the fair value of the
equity-settled alternative. Consequently, the cash settled alternative has not been
structured in such a way that the shares will always be chosen by the employees. In
addition, such share-based payment transactions in the past have never been settled in
shares. In accordance with paragraph 26.15, Entity W accounts for the transaction as a
cash-settled share-based payment transaction.

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On the grant date the fair value of the cash alternative is CU50,000 (1,000 phantom
shares × CU50). The entity recognises the following amounts for each employee that it
expects to remain employed by the entity at the end of Year 3:

Year Calculation Expense* Year-end

liability**
(CU) (CU)

1 1,000 phantom shares × CU52 × /3 1

17,333 17,333
1,000 phantom shares × CU55 × 2/3—
2 19,334 36,667
CU17,333
1,000 phantom shares × CU60—
3 23,333 60,000
CU36,667

Total 60,000

* Assumes that the staff costs do not qualify for capitalisation.

** The liability is equal to the cumulative expense recognised

If an employee chooses to take shares rather than cash at the end of Year 3 there would
no longer be a liability and Entity W would transfer the CU60,000 out of liabilities (Dr
Liabilities CU60,000). Entity W would be required to recognise the issue of new shares
or, alternatively, the use of treasury shares (Cr Equity CU60,000).

Ex 33 Entity W grants to a number of employees the right to choose either 1,200 shares
or a cash payment equal to the fair value of 50 shares (ie 50 ‘phantom shares’).
The grant is conditional upon the completion of three years’ service. At the end of
Year 3, each employee chooses either the cash alternative or the equity
alternative. At the grant date, the fair value of Entity W’s shares is determined to
be CU50 per share. At the end of Years 1, 2 and 3, the fair values of Entity W’s
shares are determined to be CU52, CU55 and CU60 per share respectively. The
entity does not expect to pay dividends in Years 1–3. Entity W does not expect
that any employees will leave during the 3-year service period and at the end of
year 3 all employees remain in service.

The fair value of the equity-settled alternative is significantly higher than that of the
cash-settled alternative. Consequently, the expectation is that each employee will
choose to receive shares rather than cash and the cash alternative has no commercial
substance. In accordance with paragraph 26.15, Entity W therefore accounts for the
transaction as an equity-settled share-based payment transaction.

On the grant date, the fair value of 1,200 of Entity W’s shares is CU60,000 (1,200 shares
× CU50). The entity recognises the following amounts for each employee that it expects
to remain employed by the entity at the end of Year 3:
Year 1
Dr Profit or loss—staff costs* CU20,000
Cr Equity—reserves CU20,000
To recognise the receipt of employee services in exchange for 1,200 shares

(1,200 shares × CU50 × 1/3 of vesting period elapsed)

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Year 2
Dr Profit or loss—staff costs* CU20,000
Cr Equity—reserves CU20,000
To recognise the receipt of employee services in exchange for 1,200 shares
(1,200 shares × CU50 × 2/3 of vesting period elapsed) less CU20,000 recognised in Year 1

Year 3
Dr Profit or loss—staff costs* CU20,000
Cr Equity—reserves CU20,000
To recognise the receipt of employee services in exchange for 1,200 shares
(1,200 shares × CU50) less CU40,000 recognised in Years 1 and 2

* These entries assume that the staff costs do not qualify for capitalisation.

This can be shown as:

Year Calculation Expense Equity

(CU) (CU)

1 1,200 shares × CU50 × 1/3 20,000 20,000

1,200 shares × CU50 × 2/3—

2 20,000 20,000
CU20,000
3 1,200 shares × CU50—CU40,000 20,000 20,000

Total 60,000

Group plans

26.16 If a share-based payment award is granted by an entity to the employees of one or more
group entities, and the group presents consolidated financial statements using either
the IFRS for SMEs or full IFRS, the group entities are permitted, as an alternative to the
treatment set out in paragraphs 26.3–26.15, to measure the share-based payment
expense on the basis of a reasonable allocation of the expense for the group.

Example—group plans

Ex 34 Entity A is a listed company that prepares financial statements in accordance

with full IFRS Standards. Entity A has four subsidiaries (Subsidiaries A, B, C and
D) and all of them prepare individual financial statements in accordance with the
IFRS for SMEs Standard. Entity A grants 50 share options in Entity A to each of the
sales employees at the subsidiaries, conditional upon the completion of three
years’ service with the subsidiary. The parent does not require the subsidiaries to
pay for the shares needed to settle the grant of share options.

Subsidiary A has three times as many sales employees as Subsidiaries B, C and D.

All sales employees of Subsidiaries A, B and C are expected to meet the specified
service condition. Only half of the sales employees in Subsidiary D are expected
to meet the service condition. These estimates do not change during the vesting
period.

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In its consolidated financial statements Entity A recognises an expense of

CU11,000 for the equity-settled share-based payments in each of the three years
with a corresponding increase in equity.
The IFRS for SMEs Standard does not give further guidance on how an entity determines
a reasonable allocation of the expense for the group.
The expense might be allocated between the subsidiaries for the purposes of preparing
the subsidiaries’ individual financial statements based on the number of sales
employees expected to receive the awards at the subsidiaries. Subsidiary A has three
times as many employees as Subsidiaries B, C and D. Furthermore, only half of the
employees in Subsidiary D are expected to receive the awards. Consequently, the
expense might be allocated between the subsidiaries using the following ratio: 6: 2: 2:
1 (ie subsidiary A accounts for an expense equal to 6/(6+2+2+1) = 6/11 of the expense
recognised by the parent).
An increase in equity would be recognised as a contribution from the parent in the
individual financial statements of the subsidiaries.
Subsidiaries A-D might account for the share-based payments as follows in their
individual financial statements:

Subsidiary A:

Years 1-3
Dr Profit or loss—staff costs* CU6,000
Cr Equity—capital contribution from parent CU6,000
To recognise the receipt of employee services in exchange for share options in parent entity
(CU11,000 x 6/11)

Subsidiary B and C:

Years 1-3
Dr Profit or loss—staff costs* CU2,000
Cr Equity—capital contribution from parent CU2,000
To recognise the receipt of employee services in exchange for share options in parent entity
(CU11,000 x 2/11)

Subsidiary D:

Years 1-3
Dr Profit or loss—staff costs* CU1,000
Cr Equity—capital contribution from parent CU1,000
To recognise the receipt of employee services in exchange for share options in parent entity
(CU11,000 x 1/11)

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Module 26—Share-based Payment

Unidentifiable goods or services

26.17 If the identifiable consideration received appears to be less than the fair value of the
equity instruments granted or the liability incurred, this situation typically indicates that
other consideration (ie unidentifiable goods or services) has been (or will be) received.
For example, some jurisdictions have programmes by which owners (such as
employees) are able to acquire equity without providing goods or services that can be
specifically identified (or by providing goods or services that are clearly less than the fair
value of the equity instruments granted). This indicates that other consideration has been
or will be received (such as past or future employee services). The entity shall measure
the unidentifiable goods or services received (or to be received) as the difference
between the fair value of the share-based payment and the fair value of any identifiable
goods or services received (or to be received) measured at the grant date. For cash-
settled transactions, the liability shall be remeasured at the end of each reporting period
until it is settled in accordance with paragraph 26.14.

Example—cannot identify the specific goods or services received

Ex 35 Following the introduction of new legislation, an entity gives 100 shares to each
of ten employees who meet certain criteria. Dividends declared on the shares are
paid to the employees when they are paid by the entity. The employees are free to
sell the shares whenever they wish but, under conditions imposed by the entity, if
they sell them within the first five years, they must be sold to another person
meeting the same criteria as themselves. The entity estimates that the fair value
of a share, taking account of the restrictions in respect of its future sale, is CU6.

The entity determines that it cannot identify any specific goods or services relating to
the awards. However, this would still be considered to be an equity-settled share-based
payment transaction under paragraph 26.17. There is no asset identified as part of the
transaction and so the total charge of CU6,000 (100 shares × 10 employees × CU6) is
recognised as an expense when the shares are granted.

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Module 26—Share-based Payment

Disclosures

26.18 An entity shall disclose the following information about the nature and extent of
share-based payment arrangements that existed during the period:
(a) a description of each type of share-based payment arrangement that existed at any
time during the period, including the general terms and conditions of each
arrangement, such as vesting requirements, the maximum term of options granted,
and the method of settlement (for example, whether in cash or equity). An entity with
substantially similar types of share-based payment arrangements may aggregate this
information.
(b) the number and weighted average exercise prices of share options for each of the
following groups of options:
(i) outstanding at the beginning of the period;
(ii) granted during the period;
(iii) forfeited during the period;
(iv) exercised during the period;
(v) expired during the period;
(vi) outstanding at the end of the period; and
(vii) exercisable at the end of the period.

26.19 For equity-settled share-based payment arrangements, an entity shall disclose

information about how it measured the fair value of goods or services received or the
value of the equity instruments granted. If a valuation methodology was used, the entity
shall disclose the method and its reason for choosing it.

26.20 For cash-settled share-based payment arrangements, an entity shall disclose information
about how the liability was measured.

26.21 For share-based payment arrangements that were modified during the period, an entity
shall disclose an explanation of those modifications.

26.22 If the entity is part of a group share-based payment plan, and it measures its share-based
payment expense on the basis of a reasonable allocation of the expense recognised for
the group, it shall disclose that fact and the basis for the allocation (see paragraph 26.16).

26.23 An entity shall disclose the following information about the effect of share-based payment
transactions on the entity’s profit or loss for the period and on its financial position:
(a) the total expense recognised in profit or loss for the period; and
(b) the total carrying amount at the end of the period for liabilities arising from
share-based payment transactions.

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Module 26—Share-based Payment

Ex 36 The following example illustrates the disclosure requirements for share-based

payments.(16)
Extract from the Notes to the Financial Statements of Company Z, which owns and operates a
number of hotels, for the year ended 31 December 20X5.
Share-based payment
During the period ended 31 December 20X5 the company had four share-based
payment arrangements, which are described below.

Type of Senior General Executive share Senior management

arrangement management employee plan share appreciation
share option plan share option rights
plan

Date of grant 1 January 20X4 1 January 20X5 1 January 20X5 1 July 20X5

Number granted 50,000 75,000 50,000 25,000

Contractual life 10 years 10 years 4 years 3 years

Settlement type Equity Equity Equity Cash

Vesting One and a half Three years’ Four years’ Three years’ service
conditions years’ service service. service and and achievement of a
and achievement achievement of target increase in
of a room a target growth revenue per available
occupancy target, in profit before room.
which was tax.
achieved.

The estimated fair value of each share option granted in the general employee share
option plan is CU23.60. The fair value of each share option granted was estimated by
applying an option pricing model; a binomial option pricing model was used. The
model inputs were the estimated fair value of each share at grant date of CU50.00,
exercise price of CU50.00, expected volatility of 30 per cent, no expected dividends,
contractual life of ten years, and a risk-free interest rate of 5 per cent. To allow for the
effects of early exercise, it was assumed that the employees would exercise the options
after vesting date when the estimated fair value of each share was twice the exercise
price. The binomial option pricing model was chosen by the directors because it
allows for the early exercise of options but is also suitable for options with long lives.
The estimated fair value of each share granted in the executive share plan is CU50.00,
which is equal to the estimated share price at the date of grant.
The estimated fair value of each share to use as the share price, for the executive share
plan, share appreciation rights and as an input to the binomial option pricing model,
was estimated using a price/book valuation multiple. The directors chose this method
because it is regarded as appropriate for capital-intensive industries. Furthermore,
when a minority stake in one of the company’s competitors was sold at the start of the
year, the transaction price was established using a price/book valuation multiple.

(16) The illustrative example is not intended to be a template or model and is therefore not exhaustive. It does not, for
instance, illustrate the disclosure requirements in paragraph 26.21 because there were no modifications during the period.

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Further details of the two share option plans are as follows:

20X4 20X5

Number of Weighted Number of Weighted

options average options average
exercise price exercise price

Outstanding at start of year 0 – 45,000 CU40

Granted 50,000 CU40 75,000 CU50

Forfeited (5,000) CU40 (8,000) CU46

Exercised 0 – (4,000) CU40

Outstanding at end of year 45,000 CU40 108,000 CU46

Exercisable at end of year 0 CU40 38,000 CU40

20X4 20X5

CU CU

Expense arising from share-based payment transactions 495,000 1,105,867

Closing balance of liability for share appreciation rights – 98,867

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Module 26—Share-based Payment

SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS

Applying the requirements of the IFRS for SMEs Standard to transactions and events often
requires the exercise of judgement, including making estimates. Information about
significant judgements made by an entity’s management and key sources of estimation
uncertainty are useful when assessing an entity’s financial position, performance and cash
flows. Consequently, in accordance with paragraph 8.6, an entity must disclose the
judgements—apart from those involving estimates—that its management has made when
applying the entity’s accounting policies and that have the most significant effect on the
amounts recognised in the financial statements.

Furthermore, applying paragraph 8.7, an entity must disclose information about the key
assumptions concerning the future, and other key sources of estimation uncertainty at the
reporting date, that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year.
Other sections of the IFRS for SMEs Standard require disclosure of information about particular
judgements and estimation uncertainties.

When accounting for share-based payments, there are two principal situations where
significant estimates and other judgements are required to be made: determining the fair
value of equity not traded in an active market; and assessing the impact of vesting conditions.

Fair value estimates

For equity-settled share-based payment transactions, an entity measures the goods or services
received, and the corresponding increase in equity, at the fair value of the goods or services
received. However, if the entity cannot estimate reliably the fair value of the goods or services
received, it measures their fair value by reference to the fair value of the equity instruments
granted. To apply this requirement to transactions with employees and others providing
similar services, an entity must measure the fair value of the services received by reference to
the fair value of the equity instruments granted, because it is typically not possible to reliably
estimate the fair value of the services received.

Because shares in an SME are not traded in an active market, directors of SMEs must use their
judgement to ensure they adopt the most appropriate valuation method to determine the fair
value of the shares. Furthermore they must make significant estimates and other judgements
when applying the chosen valuation method. For example, when using an income-based
approach to determine the value of an entity (and its shares), several estimates and
judgements must be made. They include estimates of future cash flows and their uncertainty
(ie their amount, variation and timing) and the time value of money (an appropriate discount
rate must be selected).

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To estimate the fair value of share option and equity-settled share appreciation rights, an
option pricing model will generally be used. All option pricing models take into account, as a
minimum, the following factors and these inputs require management to make judgements
and estimates:
(a) weighted-average share price;
(b) exercise price;
(c) expected volatility;
(d) option life;
(e) expected dividends; and
(f) risk-free interest rate.

When there is no listed share price, making judgements and estimates can be difficult; for
example, trying to estimate expected volatility when there is no record of historical volatility.

When the share-based payment transaction is cash-settled, it is still necessary to estimate the
fair value of the liability and it has to be estimated at each year-end until settlement.

Impact of vesting and non-vesting conditions

Management is required to make a number of estimates when accounting for vesting and
non-vesting conditions when measuring equity-settled share based payments. A grant of
equity instruments might be conditional upon employees satisfying specified vesting
conditions related to service or performance. All vesting conditions related to employee
service or to a non-market performance condition are taken into account when estimating the
number of equity instruments expected to vest. Subsequently, an entity is required to revise
that estimate if new information indicates that the number of equity instruments expected to
vest differs from previous estimates. Similarly, on the vesting date, an entity is required to
revise the estimate to equal the number of equity instruments that ultimately vested, or
would have vested, as a result of the service and non-market performance conditions.
All market vesting and non-vesting conditions are taken into account when estimating the
fair value of the shares or share options at the measurement date, with no subsequent
adjustment, irrespective of the outcome.

Other judgements

In addition to the two main areas of judgement described above, a further source of
uncertainty might concern deciding who are ‘employees and others providing similar
services’. Equity-settled share-based payment transactions with employees and others
providing similar services are measured by valuing the equity instruments granted, whereas
all other equity-settled share-based payment transactions are measured by valuing the goods
or services received, and it is only if the value of the goods or services received cannot be
estimated reliably that they are measured by reference to the instruments issued.

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COMPARISON WITH FULL IFRS STANDARDS

When accounting for and reporting share-based payment transactions for periods beginning
on 1 January 2017, the main differences between the requirements of full IFRS Standards (see
IFRS 2 Share-based Payment) and the IFRS for SMEs Standard (see Section 26 Share-based Payment)
are:
 the IFRS for SMEs Standard is drafted in simpler language than that used in full
IFRS Standards;
 there is less guidance on how to account for cancellations and settlements in
Section 26 of the IFRS for SMEs Standard than there is in IFRS 2.
 The IFRS for SMEs Standard also contains fewer disclosure requirements than are in
IFRS 2. However, while the IFRS for SMEs Standard removes some of those
requirements, it does introduce three disclosures not in IFRS 2.

The main other differences between Section 26 and IFRS 2 are set out below.

 IFRS 2 requires that in the rare cases that the fair value of equity instruments granted
cannot be estimated reliably, an entity measures the instruments at their intrinsic
value; the intrinsic value is determined initially and then revised at the end of each
reporting period and on final settlement (paragraph 24 of IFRS 2). Section 26 of the
IFRS for SMEs Standard does not have a similar requirement and so entities are required
to use a valuation method to determine the fair value of the equity instruments.
Section 26 emphasises that when choosing a valuation technique for the fair value of
shares the entity’s directors should use their judgement. The IFRS 2 requirement to
use intrinsic value in rare cases was not included in Section 26 because the Board
observed that it would not provide much of a simplification for SMEs. This is because
intrinsic value requires determining the fair value of the underlying shares at each
reporting date until settlement (and SMEs, by definition, do not have an active
market/quoted price for their shares).

 the IFRS for SMEs Standard contains a simplification from IFRS 2 with regards to share-
based payment transactions with cash alternatives. Paragraph 26.15 specifies that
when a share-based payment transaction gives either the entity or the holder a choice
of settlement in cash or equity instruments, the entity must account for the
transaction as a cash-settled share-based payment transaction unless either the entity
has a past practice of settling by issuing equity instruments; or the option to settle in
cash has no commercial substance. In either of these circumstances, the IFRS for SMEs
Standard requires that the transaction is accounted for as being equity-settled. IFRS 2,
on the other hand, requires:

(a) if the counterparty has the choice of how the transaction is settled, the entity
recognises a compound financial instrument and the debt and equity components
are accounted for separately as share-based payment transactions under IFRS 2;
and
(b) if the entity has the choice of how the transaction is settled, the entity accounts for
the transaction as a cash-settled share-based payment transaction to the extent it
has incurred a liability to settle in cash or other assets and an equity-settled share-
based payment transaction to the extent that no such liability has been incurred.

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Module 26—Share-based Payment

 the IFRS for SMEs Standard provides a simplification for group entities: when a parent
grants an award to employees of its subsidiary and the parent presents consolidated
financial statements using either the IFRS for SMEs Standard or full IFRS Standards, the
subsidiary is permitted to measure the expense and related capital contribution on a
reasonable allocation of the group expense. IFRS 2 does not include a similar
simplification and instead provides detailed requirements for accounting for share-
based payments among group entities.

IFRS 2 includes specific requirements in the following areas that are not covered in the
IFRS for SMEs Standard (note, these requirements would not necessarily lead to differences in
accounting, for example if the SME considered the IFRS 2 requirements in the absence of
requirements in the IFRS for SMEs Standard):

 IFRS 2 specifies some additional requirements for measuring the fair value of equity
instruments, including:
o the effects of expected early exercise are taken into account when measuring the
fair value; and
o a reload feature is not permitted to be reflected in the fair value of the options
granted at measurement date but instead is accounted for as a new option if and
when granted.

 IFRS 2 specifies some additional requirements for cancellations and settlements,

including:
o when new equity instruments are granted as a replacement for cancelled
instruments, IFRS 2 contains explicit guidance requiring the entity to account for
the new grant as though it were a modification of the original instruments.
o any payments made to an employee on the cancellation or settlement of a grant of
equity instruments are accounted for as the repurchase of an equity interest except
in the following cases:
- the payment exceeds the fair value of the equity instruments granted,
measured at the repurchase date. Any such excess is recognised as an expense.
- if the arrangement included liability components, the entity shall remeasure
the fair value of the liability at the date of cancellation or settlement. Any
payment made to settle the liability component shall be accounted for as an
extinguishment of the liability
o similarly, if an entity repurchases vested equity instruments, the payment made to
the employee is accounted for as a deduction from equity, except to the extent that
the payment exceeds the fair value of the equity instruments repurchased,
measured at the repurchase date. Any such excess shall be recognised as an
expense.
In June 2016 the Board issued Classification and Measurement of Share-based Payment Transactions
(Amendments to IFRS 2). These amendments added guidance to clarify the accounting for
 the effects of vesting and non-vesting conditions on the measurement of cash-settled
share-based payments (namely, that entities should follow the same approach as for
equity-settled share-based payments);
 the accounting for share-based payment transactions with a net settlement feature for
withholding tax obligations (namely that the arrangement should be classified as
equity-settled in its entirety, provided it would have been classified as equity-settled
had it not included that feature); and

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 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 (namely that the
original liability is derecognised and an equity settled share-based payment is
recognised at the modification date fair value to the extent that services have been
rendered up to that date).

The IFRS for SMEs Standard does not have requirements in these three areas, but could
consider this guidance applying paragraphs 10.4-10.6 of the IFRS for SMEs Standard.

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Module 26—Share-based Payment

TEST YOUR KNOWLEDGE

Test your knowledge of the requirements for share-based payment transactions applying the
IFRS for SMEs Standard by answering the questions provided.
You should assume that all amounts mentioned are material.
Once you have completed the test, check your answers against those set out beneath it.

Mark the box next to the most correct statement.

Question 1

An entity recognises the goods or services received or acquired in a share-based payment

transaction:
(a) only when the share-based payment is cash-settled.
(b) when it receives the goods or services.
(c) only when the vesting period ends.
(d) only on the date that the equity instruments are granted.

Question 2

If share options granted to employees under a share-based payment transaction vest

immediately:
(a) the entity defers recognition of the services rendered by the employees.
(b) the entity records a liability because the employees are owed something.
(c) the services are recognised immediately because it is presumed the employees have
already provided the related services.
(d) the entity accounts for those services as they are rendered by the employee during the
vesting period.

Question 3

For equity-settled share-based payment transactions, an entity measures the goods or services
received:
(a) always at the fair value of the goods and services received.
(b) always at the fair value of the equity instruments issued.
(c) at the cost of goods and services provided by employees and others providing similar
services.
(d) at the fair value of the goods or services received unless that fair value cannot be
estimated reliably.

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Question 4

For equity-settled share-based payment transactions for employee services, the fair value of the
equity instruments is measured:
(a) on the grant date.
(b) on the exercise date.
(c) at the end of the vesting period or exercise period, whichever is later.
(d) at the date when the entity knows how many instruments will vest.

Question 5

For equity-settled share-based payment transactions with parties other than employees, the
measurement date is:
(a) the grant date.
(b) the exercise date.
(c) when the entity obtains the goods or the counterparty renders service.
(d) when the warranty period for the goods or services expires.

Question 6

A grant of equity instruments might be conditional on employees satisfying specified vesting

conditions related to service or performance. On the vesting date, the entity:
(a) never revises the estimate of the number of equity instruments expected to vest for
the number of equity instruments that ultimately vest.
(b) revises the estimate of the number of equity instruments expected to vest to equal the
number of equity instruments that ultimately vest for vesting conditions related to
employee service and to a non-market performance condition.
(c) revises the estimate of the number of equity instruments expected to vest to equal the
number of equity instruments that ultimately vest for vesting conditions related to
employee service and to a market performance condition.
(d) revises the estimate of the number of equity instruments expected to vest to equal the
number of equity instruments that ultimately vest for all vesting conditions.

Question 7

When measuring the fair value of shares (and the related goods or services received) in an
equity-settled share-based payment transaction an entity:
(a) must always use observable market prices of the entity’s own shares.
(b) uses observable market prices but only for non-employee share-based transactions.
(c) uses prices established by the entity’s directors for that type of share-based
transaction.
(d) uses observable market prices, if available, and, if not available, uses other measures
according to a measurement hierarchy.

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Question 8

For modifications of vesting conditions in an equity-settled share-based payment transaction

for employee services, the entity:
(a) takes the modified vesting conditions into account by recognising the change in
fair value over the period from the date of the modification to the date that the
modified equity instruments vest.
(b) takes the modified vesting conditions into account only if it is beneficial to employees
and does so by recognising the change in fair value over the original vesting period,
using a prior period adjustment to adjust for the part of the vesting period that relates
to prior periods.
(c) takes the modified vesting conditions into account only if it is beneficial to employees
and does so by recognising the change in fair value over the period from the date of
the modification to the date that the modified equity instruments vest.
(d) makes no adjustment to amounts recognised for remuneration expenses.

Question 9

A cash-settled share-based payment transaction is a share-based payment transaction in which

the entity acquires goods or services by incurring a liability to transfer cash or other assets to
the supplier of those goods or services for amounts that are based on:
(a) the price (or value) of those goods or services.
(b) the price (or value) of equity instruments of the entity or the supplier.
(c) the price (or value) of equity instruments of the entity or another group entity.
(d) the price (or value) set out in the contractual agreement between the entity and the
supplier.

Question 10
For share-based payment transactions offering a choice of settling the transaction in cash (or
other assets) or by transfer of equity instruments the entity accounts for the transaction as a
cash-settled share-based payment unless:
(a) the entity chooses to account for the transaction as an equity-settled share-based
payment.
(b) the entity has a past practice of settling by issuing equity instruments.
(c) the option to settle in cash has no commercial substance.
(d) the entity has a past practice of settling by issuing equity instruments or the option to
settle in cash has no commercial substance.

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Question 11
Under an employee long-term incentive plan operated by Company A, 1,000 of Company A’s
shares will be given to employees in three years’ time if the following conditions are met. The
shares only vest if the value of a share has risen to CU34 at the end of the three-year period and
if the employees are still employed by Company A on the same date. On the grant date the fair
value of the company’s shares is determined to be CU30 applying Section 26. The company
plans to pay no dividends over the next three years. All eligible employees remain employed
by Company A at the end of the three-year period. Which of the following is true:
(a) if the share price on the vesting date is CU35, Company A charges, over the three years
as remuneration expense, CU35,000 (CU35 × 1,000); and
if the share price on the vesting date is CU32, Company A charges, over the three years
as remuneration expense, CU0.
(b) if the share price on the vesting date is CU35, Company A charges, over the three years
as remuneration expense, CU35,000 (CU35 × 1,000); and.
if the share price on the vesting date is CU32, Company A charges, over the three years
as remuneration expense, CU32,000 (CU32 × 1,000).
(c) if the share price on the vesting date is CU35, Company A charges, over the three years
as remuneration expense, CU30,000 (CU30 × 1,000); and.
if the share price on the vesting date is CU32, Company A charges, over the three years
as remuneration expense, CU0.
(d) regardless of the share price on the vesting date, Company A charges, over the three
years as remuneration expense, CU30,000 (CU30 × 1,000).
(e) regardless of the share price on the vesting date, Company A charges, over the three
years as remuneration expense, CU0.

Question 12
The accounting for which of the following transactions is specified in a section of the
IFRS for SMEs Standard other than Section 26:
(a) an entity issues 100 of its own ordinary shares to an independent third party in
exchange for a plot of land classified as property, plant and equipment.
(b) an entity issues 100 of its own ordinary shares to an independent third party
in exchange
for a plot of land classified as investment property.
(c) an entity issues 100 of its own ordinary shares to an independent third party in
exchange for a plot of land classified as inventory.
(d) an entity issues 100 of its own ordinary shares to an independent contractor
in exchange
for accounting services.
(e) an entity issues 100 of its own ordinary shares to an independent third party in
exchange for a business.
(f) an entity issues 100 of its own ordinary shares to its employees in exchange for
employee services.

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Answers

Q1 (b) see paragraph 26.3.

Q2 (c) see paragraph 26.5.
Q3 (d) see paragraph 26.7.
Q4 (a) see paragraph 26.8.
Q5 (c) see paragraph 26.8.
Q6 (b) see paragraph 26.9.
Q7 (d) see paragraph 26.10.
Q8 (c) see paragraph 26.12.
Q9 (c) see paragraph 26.14.
Q10 (d) see paragraph 26.15.
Q11 (d) see paragraph 26.9.
Q12 (e) see paragraphs 26.1 and 19.11.

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Module 26—Share-based Payment

APPLY YOUR KNOWLEDGE

Apply your knowledge of the requirements for presenting share-based payment transactions
applying the IFRS for SMEs Standard by completing the case studies provided.
Once you have completed the case studies, check your answers against those set out beneath
it.

Case study 1

Entity M, whose shares are not publicly traded, entered into the following share-based
payment transactions in 20X1 to 20X3:
(a) On 30 January 20X1 Entity M received marketing services in exchange for 400 of its
shares. The counterparty initially quoted a price of CU10,000 based on its normal
market rates, but agreed to accept Entity M’s shares rather than cash payment. The
fair value for Entity M’s shares on 30 January was estimated at CU26 per share.
(b) On 31 December 20X2 Entity M established a supplementary annual bonus plan for its
sales manager. The intention was to make the bonus approximately equal to 1% of the
total salary (excluding the bonus), subject to issuing whole numbers of shares. Upon
receipt of the shares, which was on 31 December, the sales manager had the
immediate and unconditional right to sell them. Entity M granted 3,000 shares under
the plan. Management estimated that the fair value of Entity M’s shares on
31 December was CU28 per share. The pre-bonus salary was CU8,401,050.
(c) On 2 October 20X3 Entity M purchased office equipment by issuing 4,000 of its
ordinary shares. The selling price for the equipment is CU110,000. Management
estimated that the fair value of Entity M’s shares on 2 October was CU29 per share.

Prepare Entity M’s journal entries for these share-based payment transactions. Ignore the
journal entries required in respect of the shares themselves. Assume that none of Entity M’s
employee compensation qualifies for capitalisation.

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Answer to Case study 1

30 January 20X1

Dr Profit or loss—marketing expense CU10,000

Cr Equity CU10,000
To recognise the receipt of marketing services in exchange for 400 Entity M shares

Note: the normal market rate of the marketing services, assuming the purchase is from an
independent vendor, is the best measurement of the fair value of the marketing services
received. Entity M would measure the fair value of the services received at the fair value of
the shares granted in exchange for the services only if the fair value of the services cannot be
determined reliably (ie 400 shares × CU26 per share = CU10,400).

31 December 20X2

Dr Profit or loss—staff bonus CU84,000

Cr Equity CU84,000
To recognise receipt of employee services in exchange for 3,000 Entity M shares

Note: because the share-based payment vests at the grant date (at 31 December 20X2), the sales
manager has an unconditional right to trade the shares. No part of the award is for future
services (ie the full amount is recognised as an expense on 31 December 20X2). The fair value
of the sale manager’s services is measured at the fair value of the shares issued in exchange
for those services, ie 3,000 shares × CU28 fair value per share (see paragraph 26.7).

2 October 20X3

Dr Asset: Property, plant and equipment—equipment CU110,000

Cr Equity CU110,000
To recognise the receipt of equipment in exchange for 4,000 Entity M shares

Note: the normal selling price, assuming the purchase is from an independent vendor, is the
best measurement of the fair value of the equipment received. Entity M could measure the
fair value of the equipment received at the fair value of the shares granted in exchange for the
equipment at CU116,000 (ie 4,000 shares × CU29 each) only if the fair value of the equipment
received cannot be estimated reliably (see paragraph 26.7).
After purchase, Entity M depreciates the equipment based on its estimated useful life and
residual value.

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Module 26—Share-based Payment

Case study 2

On 31 December 20X0 Entity N grants 10 share options to each of its 1,000 employees.
Each grant is conditional upon the employee remaining in service over the next three years.
On 31 December 20X0 management, using an appropriate option pricing model, measures
the fair value of each option at CU5. On the basis of a weighted average probability, the entity
estimates that 100 employees will leave during the three-year period and therefore forfeit
their rights to the share options.
Forty employees leave during 20X1. By 31 December 20X1 the market in which Entity N
operates has declined significantly and this has had a negative impact on the fair value of
Entity N’s business and that of its competitors; consequently Entity N reprices its share
options. The repricing of the share options increased the fair value of each share option
measured immediately before the repricing by CU2. The vesting date remains unaltered and
the repriced share options vest on 31 December 20X3. On 31 December 20X1 management
estimates that a further 70 employees will leave during 20X2 and 20X3, and hence the total
expected employee departures over the three-year vesting period is 110 employees.
During year 20X2 a further 35 employees leave, and on 31 December 20X2 management
estimates that a further 30 employees will leave during 20X3 (ie the total expected employee
departures over the three-year vesting period is estimated at 105 employees).
During 20X3 28 employees leave (ie 103 employees ceased employment during the
vesting period). For the remaining 897 employees, the share options vested on 31 December
20X3.

Required:
(a) Determine the estimated amount of total remuneration at the date of the grant, before any
repricing.
(b) Prepare the journal entries to record remuneration expense in 20X1, 20X2 and 20X3.
Assume that the employee compensation does not qualify for capitalisation.

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Module 26—Share-based Payment

Answer to Case study 2

(a) The condition that an employee remains in service over the next three years is a service
condition. The grant date estimate, before any repricing, of total remuneration over the
three years is CU45,000 [(1,000 employees less 100 expected forfeiture) × 10 options each ×
CU5 fair value per option]. If no repricing took place and, as expected, 100 employees left,
Entity N would record CU15,000 remuneration expense in each of the years 20X1,20X2
and 20X3. No expense is recognised in 20X0 because none of the services for which the
share options are granted are received in 20X0.
(b) Entity N makes the following journal entries during the vesting period, for services
received as consideration for the share options issued, taking into account the repricing
and updated information on expected vesting.
For the year ended 31 December 20X1

Dr Profit or loss—staff costs CU14,833

Cr Equity—reserves CU14,833

(1,000 employees less 110 expected forfeiture) × 10 options × CU5 × 1/3 of vesting period elapsed
To recognise the receipt of employee services in the current year in exchange for 10 Entity N share
options per employee.

For the year ended 31 December 20X2

Dr Profit or loss—staff costs CU23,950

Cr Equity—reserves CU23,950

[(1,000 employees less 105 expected forfeiture) × 10 options × ((CU5 original × 2/3 of vesting period
elapsed) + (CU2 repricing × 1/2 of period remaining after pricing elapsed))]—CU14,833
To recognise the receipt of employee services in the current year in exchange for 10 Entity N share
options per employee

For the year ended 31 December 20X3

Dr Profit or loss—staff costs CU24,007

Cr Equity—reserves CU24,007

[(1,000—103) employees × 10 options × (CU5 original + CU2 repricing)] less CU38,783 recognised in
20X1 and 20X2
To recognise the receipt of employee services in the current year in exchange for 10 Entity N share
options per employee

Note: entities are required to recognise the effects of modifications that increase the total
fair value or are otherwise beneficial to the employee, measured immediately before and
after the modification. Consequently, Entity N is required to recognise the incremental
CU2 fair value per option that results from the repricing. Because the modification occurs
during the vesting period, the incremental fair value granted, that is, CU2, is included in
the measurement of the amount recognised for services received over the period from the
modification date (31 December 20X1) until the date when the modified equity
instruments vest (31 December 20X3); that is, it is charged over the last two years of the
three-year vesting period. This expense is in addition to the amount based on the grant
date fair value of the original equity instruments, CU5, which is recognised over the
original vesting period of the three years to 31 December 20X3.

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Module 26—Share-based Payment

Case study 3

Entity P establishes a programme of share-appreciation rights (SARs) by which its executives

are entitled to receive cash equal to the growth, if any, in the fair value of the ordinary shares
over a four-year period. On 31 December 20Y0 the executives were granted 40,000 SARs
conditional upon each executive remaining in the employment (service) of Entity P for the
next four years, ie until 31 December 20Y4 (Year 4). The fair value of P’s shares on
31 December 20Y0 was CU30.
The executives will be paid the cash, equal to the increase (if any) in the fair value of the
shares over the four years to 31 December 20Y4, in February 20Y5. The fair value of the SARs is
measured at CU6 per SAR on 31 December 20Y0, CU9 on 31 December 20Y1, CU15 on
31 December 20Y2, CU8 on 31 December 20Y3 and CU12 on 31 December 20Y4. The intrinsic
value of the SARs at the date of exercise (which equals the cash paid out) was also CU12. All
executives remain employed by Entity P during the four years.

1. Prepare a four-year (20Y1–20Y4) schedule calculating the employee compensation

pertaining to the 40,000 SARs granted to the executives.
2. Prepare the journal entries for employee compensation expense in each of the four years
for the 40,000 SARs and the journal entry for the cash payment in 20Y5. Assume that the
employee compensation does not qualify for capitalisation.

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Module 26—Share-based Payment

Answer to Case study 3

(a) Employee compensation schedule for SARs

Expense/
Fair Percentage (credit) Accrued
Date value accrued for year to date Workings
CU % CU CU
31/12/Y1 9 25 90,000 90,000 (CU9 × 40,000 SARs × 1/4)

31/12/Y2 15 50 210,000 210,000 (CU15 × 40,000 SARs × 2/4) less CU90,000

300,000
31/12/Y3 8 75 (60,000) (60,000) (CU8 × 40,000 SARs × 3/4) less CU300,000
240,000
31/12/Y4 12 100 240,000 240,000 (CU12 × 40,000 SARs) less CU240,000
480,000

(b) Journal entries for employee compensation expense

For the year ended 31 December 20Y1

Dr Profit or loss—staff costs CU90,000

Cr Liability—employee share appreciation plan CU90,000

To recognise the receipt of employee services in the current year in exchange for 40,000 SARs of Entity P
over four years—first year

For the year ended 31 December 20Y2

Dr Profit or loss—staff costs CU210,000

Cr Liability—employee share appreciation plan CU210,000

To recognise the receipt of employee services in the current year in exchange for 40,000 SARs of Entity P
over four years—second year

For the year ended 31 December 20Y3

Dr Liability—employee share appreciation plan CU60,000

Cr Profit or loss—staff costs CU60,000

To recognise the receipt of employee services in the current year in exchange for 40,000 SARs of Entity P
over four years—third year—reverse part of the charge in prior years

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Module 26—Share-based Payment

For the year ended 31 December 20Y4

Dr Profit or loss—staff costs CU240,000

Cr Liability—employee share appreciation plan CU240,000

To recognise the receipt of employee services in the current year in exchange for 40,000 SARs of Entity P
over four years—final year

For the year ended 31 December 20Y5

Dr Liability—employee share appreciation plan CU480,000

Cr Asset—cash CU480,000

To recognise the payment of cash to employees under the share appreciation plan for the four years
ended 31 December 20Y4

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