This Project is funded by EU

for Accounting Professionals

IFRS 2: SHARE - BASED PAYMENT

www.accountingreform.r
u
 The copyright of the material contained in each workbook belongs to the European
PREFACE Union and, according to its policy, may be used free of charge for any non-
commercial purpose.
This series of workbooks has been updated by the project team of the European Union
project Implementation of the Accounting Reform in the Russian Federation. The project team would like to express thanks to those who have contributed their
time and thoughts to the content of the workbooks.
The workbooks cover the concepts of International Financial Reporting Standards
(‘IFRS’). They are intended to be practical self-instruction aids Contact:
that practicing accountants can use to upgrade their knowledge, understanding and skills.
e-mail Web
Each workbook is designed for a maximum of three hours of study. Victoria.stepanova@ru.pwc.com www.accountingreform.ru
Tel. + 7 495- 967-6046 Fax. + 7 495- 967-6001
Each workbook is a combination of:
Moscow, Russia, April 2007 (updated)
 Information with examples
 Self Test Questions – Multiple choice and Exercises
 Answers to Self Test Questions

The members of the project team were contributed by PricewaterhouseCoopers,

ACCA, FBK and Agriconsulting.

The Workbook Series consists of a range of titles listed on our website.

CONTENTS
Background..................................................................................................................................................................................................................................................3
Objective of IFRS 2......................................................................................................................................................................................................................................4
Definitions....................................................................................................................................................................................................................................................4
Overview of IFRS 2.....................................................................................................................................................................................................................................7
Measurement mechanisms...........................................................................................................................................................................................................................7
Scope ...........................................................................................................................................................................................................................................................8
Recognition .................................................................................................................................................................................................................................................9
Equity-settled share-based payment transactions - Overview ...................................................................................................................................................................10
Modifications.............................................................................................................................................................................................................................................13
Cash-settled share-based payment transactions ........................................................................................................................................................................................15
Disclosures ................................................................................................................................................................................................................................................18
Multiple choice questions ..........................................................................................................................................................................................................................20
Answers to multiple choice questions........................................................................................................................................................................................................23
Appendix 1 – aids to calculations..............................................................................................................................................................................................................24
Appendix 2 – Valuation considerations.....................................................................................................................................................................................................28
Appendix 3 - Tax effects of share-based payment transactions ................................................................................................................................................................30
www. accountingreform.ru 2
Appendix 4 - Applying IFRS 2 in practice - Wayne Holdings .................................................................................................................................................................32
Note:
Material from the following PricewaterhouseCoopers publications has been used in
this workbook:
Share-based Payment
BACKGROUND
Undertakings often grant shares or share options to staff or other parties. Share plans
and share option plans are a common feature of member of staff remuneration, for
directors, senior executives and many other staff. Some undertakings issue shares or
share options to pay suppliers, such as suppliers of professional services.
The reasons for granting shares are primarily for the undertaking to save cash, if the
recipient can sell the shares in the market and the undertaking does not have to buy
back the shares.
Share options also save cash, and are normally exercised only after a period of at
least one year.
IFRS 2 captures the purchase of all goods or services settled in an undertaking’s own
equity instruments or in cash, if the amount payable depends on the price of the
undertaking’s shares (or other equity instruments, such as options).
Estimates are now required of the number of options or other instruments expected to
be exercised. Such estimates are complex to calculate where performance criteria,
such as earnings targets, are involved. Specialist valuation skills are likely to be
required in order to determine the amounts to be reported in the financial statements.
Companies using IFRS for the first time will now need to assess the impact of IFRS 2
and agree a strategy of how to convey this to stakeholders. Management should
particularly consider the potential effect in the income statement from cash-settled
schemes, and information about existing or planned share-based payment schemes.
IFRS 2 applies to all types of share-based payment transactions. These include:
1.Equity-settled An undertaking issues or transfers its own
equity instruments, or those of another
member of the same group,
as consideration for goods or services.
2. Cash-settled An undertaking, or another member of the
same group, pays cash calculated by
reference to the price of its own equity
instruments as consideration for goods or
services.

The share option fixes a price (grant price) for the shares at the start, and the
recipient hopes that the market price will be higher than the grant price when the 3. Choice of equity-settled or An undertaking or the supplier may choose
shares can be bought (when the option can be exercised). whether
cash-settled the undertaking settles in cash or by issuing
If the market price is lower, the option is worthless, as it is cheaper to buy shares in or transferring equity instruments.
the market. Share options are given to staff to motivate them to improve the
performance of the undertaking to lift the market price of its shares.
Goods acquired in share-based payment transactions include inventories,
Granting shares and options gives a part of the undertaking to the beneficiaries of the consumables, property, plant and equipment, and intangible and other non-financial
shares and options. Existing shareholders that sacrifice part of the undertaking hope assets.
that they will benefit from the cash saving and/or better performance of the company
in the future. Examples of arrangements that come under IFRS 2 are:
• Call options that give staff the right to purchase an undertaking’s shares in
It has been disputed whether there is a cost to the undertaking of these transactions. exchange for their services;
IFRS 2 says there is a cost to the undertaking and specifies its treatment.

www. accountingreform.ru 3
• Share appreciation rights that entitle staff to payments calculated by reference to
the market price of an undertaking’s shares or the shares of another undertaking
in the same group;
• In-kind capital contributions of property, plant or equipment in exchange for shares
or other
equity instruments;
• Share ownership schemes under which staff are entitled to receive an undertaking’s
shares in exchange for their services; and
• Payments for services made to external consultants that are calculated by
reference to the undertaking’s share price.
Until IFRS 2 was issued, there was no IFRS covering the recognition and
measurement of these transactions. Concerns were raised about this gap in IFRSs,
given the increasing prevalence of share-based payment transactions in many
countries.
OBJECTIVE OF IFRS 2
The objective of IFRS 2 is to specify the financial reporting of a share-based payment
transaction. It requires an undertaking to reflect in its income statement and financial
position the effects of share-based payment transactions, including expenses
associated with transactions in which share options are granted to staff.
DEFINITIONS
Binomial model
The Binomial model is an extension of the Black-Scholes model, allowing for the
facility to exercise options within a time window. It is a numerical technique that will
exactly reproduce the results of the Black-Scholes formula for an option that can only
be exercised at the end of its term. The Binomial model has a number of limitations in
relation to executive options:
• It is difficult to allow for performance conditions, turnover or exercise patterns in a
Binomial model; and
• The Binomial model is not valid for executive options because in most cases the
www. accountingreform.ru
model assumes that the option will be sold rather than exercised. Early exercise is
deemed to occur only in a few scenarios. An executive option cannot be sold in this
way, so the Binomial model is not an appropriate way for dealing with early
exerciseability of executive options.
Black-Scholes model
The Black-Scholes valuation model is a mathematical formula used to calculate the
value of a European call option based on the underlying share price, exercise price,
expiration date, risk-free rate of return, and the standard deviation (volatility) of the
share price returns.
A European call option can only be exercised at the end of its life, unlike an
American call option, which can be exercised at any time during its life. The model is
also referred to as the Black-Scholes-Merton formula for pricing an option.
The Black-Scholes model has limitations. These are that performance conditions are
not allowed for; and the option is assumed to be exercised at the end of a fixed term.
cash-settled share-based payment transaction
A share-based payment transaction in which the undertaking acquires goods or
services by incurring a liability to transfer cash (or other assets) to a supplier for
amounts that are based on the price (or value) of the undertaking’s shares or other
equity instruments of the undertaking.
equity instrument
A contract that evidences a residual interest in the assets of an undertaking after
deducting all of its liabilities.
equity instrument granted
The right (conditional or unconditional) to an equity instrument of the undertaking
conferred by the undertaking on another party, under a share-based payment
arrangement.
equity-settled share-based payment transaction
A share-based payment transaction in which the undertaking receives goods or
services as consideration for equity instruments of the undertaking (including shares
or share options).
fair value
4
The amount for which an asset could be exchanged, a liability settled, or an equity
instrument granted could be exchanged, between independent, knowledgeable,
willing parties.
grant date
The date at which the undertaking and another party (including a member of staff)
agree to a share-based payment arrangement, being when the undertaking and the
counterparty have agreed the terms and conditions of the arrangement.
At grant date, the undertaking confers on the counterparty the right to cash, other
assets, or equity instruments of the undertaking, provided the specified vesting
conditions, if any, are met.
If that agreement is subject to an approval process (for example, by shareholders),
grant date is the date when that approval is obtained.
EXAMPLE – grant date
In February 2XX5, the company offered options to new staff, subject to shareholder
approval. The awards were approved by the shareholders in June 2XX5. The grant
date is June 2XX5, when the approval was obtained.
intrinsic value
The difference between the fair value of the shares to which the counterparty has the
(conditional or unconditional) right to subscribe or which it has the right to receive,
and the price (if any) the counterparty is required to pay for those shares.
For example, a share option with an exercise price of $50, on a share with a fair value
of $70, has an intrinsic value of $20.
market condition
A condition upon which the exercise price, vesting or exercisability of an equity
instrument depends that is related to the market price of the undertaking’s equity
instruments, such as attaining:
- a specified share price, or
- a specified amount of intrinsic value of a share option, or
www. accountingreform.ru
- achieving a specified target that is based on the market price of the undertaking’s
equity instruments relative to an index of market prices of equity instruments of other
undertakings.
measurement date
The date at which the fair value of the equity instruments granted is measured for the
purposes of IFRS 2. For transactions with staff and others providing similar services,
the measurement date is grant date. For transactions with parties other than staff
(and those providing similar services), the measurement date is the date the
undertaking obtains the goods or the counterparty renders service.
EXAMPLE – Measurement date for transactions with parties other than staff
If the goods or services are received on more than one date, the undertaking should
measure the fair value of the equity instruments granted on each date when goods or
services are received. The undertaking should apply that fair value when measuring
the goods or services received on that date.
However, an approximation could be used in some cases. For example, if an
undertaking received services continuously during a three-month period, and its share
price did not change significantly during that period, the undertaking could use the
average share price during the three-month period when estimating the fair value of
the equity instruments granted.
Monte-Carlo model
The Monte-Carlo valuation model works by undertaking several thousand simulations
of future outcomes for share price and other variables, calculating the option pay-out
under each scenario, taking the average pay-out and discounting to the present day to
give an option value.
Monte-Carlo models can incorporate even very complex performance conditions,
turnover and exercise patterns that are a function of gain or time since grant. These
models are generally the best type of model for valuing executive options.
The main disadvantages of Monte-Carlo models are the complexity and the
computing power required.
reload feature
5
A feature that provides for an automatic grant of additional share options whenever
the option holder exercises previously-granted options using the undertaking’s
shares, rather than cash, to satisfy the exercise price.
reload option
A new share option granted when a share is used to satisfy the exercise price of a
previous share option.
share-based payment arrangement
An agreement between the undertaking and another party (including a member of
staff) to enter into a share-based payment transaction, which thereby entitles the
other party:
to receive cash or other assets of the undertaking for amounts that are based on the
price of the undertaking’s shares or other equity instruments of the undertaking, or
to receive equity instruments of the undertaking, provided the specified vesting
conditions, if any, are met.
share-based payment transaction
A transaction in which the undertaking:
- receives goods or services as consideration for equity instruments of the
undertaking (including shares or share options), or
- acquires goods or services by incurring liabilities to the supplier of those
goods or services for amounts that are based on the price of the
undertaking’s shares or other equity instruments of the undertaking.
share option
A contract that gives the holder the right, but not the obligation, to subscribe to the
undertaking’s shares at a fixed or determinable price for a specified period of time.
staff and others providing similar services
Individuals who render personal services to the undertaking and either:
(1) the individuals are regarded as staff for legal or tax purposes,
www. accountingreform.ru
(2) the individuals work for the undertaking under its direction in the same way as
individuals who are regarded as staff for legal or tax purposes, or
(3) the services rendered are similar to those rendered by staff.
For example, the term encompasses all management personnel, having authority and
responsibility for planning, directing and controlling the activities of the undertaking,
including non-executive directors.
vest
To become an entitlement. Under a share-based payment arrangement, a
counterparty’s right to receive cash, other assets, or equity instruments of the
undertaking vests upon satisfaction of any specified vesting conditions.
vesting conditions
The conditions that must be satisfied for the counterparty to become entitled to
receive cash, other assets or equity instruments of the undertaking, under a share-
based payment arrangement.
Vesting conditions include service conditions, which require the other party to
complete a specified period of service, and performance conditions, which require
specified performance targets to be met (such as a specified increase in the
undertaking’s profit over a specified period of time).
vesting period
The period during which all the specified vesting conditions of a share-based payment
arrangement are to be satisfied.
EXAMPLE – Vesting period
A company grants share options to its staff. Certain performance conditions need
to be satisfied over the next three years for the options to be exercisable. The
employee has to remain working for the company during this period to become
entitled to the award.
The staff provide their services over the three-year vesting period in exchange for the
granted options. The expense should therefore be recognised over this period.
volatility
6
A statistical measure of the fluctuation in the investment return on a share.
OVERVIEW OF IFRS 2
IFRS 2 requires an undertaking to recognise share-based payment transactions in its
financial statements, including transactions with staff or other parties to be settled in
cash, other assets, or equity instruments of the undertaking.
There are no exceptions to IFRS 2, other than for transactions to which other
Standards apply.
IFRS 2 sets out measurement principles and specific requirements for three types of
share-based payment transactions:
1. equity-settled share-based payment transactions, in which the undertaking receives
goods or services as consideration for equity instruments of the undertaking
(including shares or share options);
2. cash-settled share-based payment transactions, in which the undertaking acquires
goods or services by incurring liabilities to the supplier of those goods or services for
amounts that are based on the price of the undertaking’s shares or other equity
instruments of the undertaking; and
3. transactions in which the undertaking receives or acquires goods or services and
either the undertaking or the supplier of those goods or services has a choice of
whether the undertaking settles the transaction in cash or by issuing equity
instruments.
For equity-settled share-based payment transactions, an undertaking must measure
the goods or services received, and the corresponding increase in equity, directly, at
fair value, unless that fair value cannot be estimated reliably.
If the undertaking cannot estimate reliably the fair value of the goods or services
received, the undertaking is required to measure their value, and the corresponding
increase in equity, indirectly, by reference to the fair value of the equity instruments
granted.
MEASUREMENT MECHANISMS
www. accountingreform.ru
1. for transactions with staff and others providing similar services, the undertaking
must measure the fair value of the equity instruments granted, as it is usually not
possible to estimate reliably the fair value of member of staff services received.
The fair value of the equity instruments granted is measured at grant date.
2. for transactions with parties other than staff (and those providing similar services),
there is a rebuttable presumption that the fair value of the goods or services received
can be estimated reliably.
That fair value is measured at the date the undertaking obtains the goods or services.
If the presumption is rebutted, the transaction is measured by reference to the fair
value of the equity instruments granted, measured at the date the undertaking obtains
the goods or the counterparty renders service.
3. for goods or services measured by reference to the fair value of the equity
instruments granted, IFRS 2 specifies that vesting conditions, other than market
conditions, are not taken into account when estimating the fair value of the shares or
options at the relevant measurement date (as specified above).
Example – Market vesting conditions
EXAMPLE – Market vesting conditions vesting conditions
A company granted share options that become exercisable when the market price
increases by at least 10% in each year over the next three years. At the end of year
three, this target has not been met.
The company should not revise the grant date fair value and should not reverse the
staff benefits expense already recognised, because the increase in share price is a
market-based criterion. It was included in determining the fair value of the options at
the grant date.
7
x For cash-settled share-based payment transactions, IFRS 2 requires an undertaking
Instead, vesting conditions are taken into account by adjusting the number of equity
instruments included in the measurement of the transaction amount so that,
ultimately, the amount recognised for goods or services received as consideration for
the equity instruments granted is based on the number of equity instruments that
eventually vest.
to measure the goods or services acquired and the liability incurred at the fair value of
the liability. Until the liability is settled, the undertaking is required to remeasure the
fair value of the liability at each reporting date and at the date of settlement, with any
changes in value recognised in the income statement for the period.
For share-based payment transactions in which either party has a choice of whether
the undertaking settles the transaction in cash or by issuing equity instruments, the
undertaking is required to account for that transaction as a cash-settled share-based
payment transaction if the undertaking has incurred a liability to settle in cash (or
other assets), or as an equity-settled share-based payment transaction if no such
liability has been incurred.

IFRS 2 prescribes various disclosure requirements to enable users to understand:

EXAMPLE – Non-market vesting conditions Example – Non-market vesting condition

Management introduced a new equity-settled compensation plan with a non-market 1. the nature and extent of share-based payment arrangements that existed during
performance condition. During the following year, after a downturn in the company’s the period;
fortunes, it considers that there is no chance that it will meet the target.
2. how the fair value of the goods or services received, or the fair value of the equity
The cumulative expense at the end of the second year will be adjusted to nil, and the instruments granted, during the period was determined; and
charge is reversed in the current year.
3. the effect of share-based payment transactions on the undertaking’s profit or loss
Hence, on a cumulative basis, no amount is recognised for goods or services for the period and on its financial position.
received if the equity instruments granted do not vest because of failure to satisfy a
vesting condition (other than a market condition).
SCOPE
4. IFRS 2 requires the fair value of equity instruments granted to be based on market
prices and to take into account the terms and conditions upon which those equity
An undertaking shall apply IFRS 2 in accounting for all share-based payment
instruments were granted.
transactions including:
In the absence of market prices, fair value is estimated, using a valuation technique,
1. equity-settled share-based payment transactions, in which the undertaking receives
to estimate what the price of those equity instruments would have been on the
goods or services as consideration for equity instruments of the undertaking
measurement date in an independent transaction between knowledgeable, willing
(including shares or share options),
parties.
2. cash-settled share-based payment transactions, in which the undertaking acquires
5. IFRS 2 also sets out requirements if the terms and conditions of an option or share
goods or services by incurring liabilities to the supplier of those goods or services for
grant are modified (eg an option is repriced) or if a grant is cancelled, repurchased or
amounts that are based on the price of the undertaking’s shares or other equity
replaced with another grant of equity instruments.
instruments of the undertaking, and
For example, irrespective of any modification, cancellation or settlement of a grant of
3. transactions in which the undertaking receives or acquires goods or services and
equity instruments to staff, IFRS 2 generally requires the undertaking to record, as a
either the undertaking or the supplier of those goods or services has a choice of
minimum, the services received measured at the grant date fair value of the equity
instruments granted.
www. accountingreform.ru 8
whether the undertaking settles the transaction in cash (or other assets) or by issuing
equity instruments,
Transfers of an undertaking’s equity instruments by its shareholders to parties that
have supplied goods or services to the undertaking (including staff) are share-based
payment transactions, unless the transfer is clearly for a purpose other than payment
for goods (or services) supplied to the undertaking.
This also applies to transfers of equity instruments of the undertaking’s parent, or
equity instruments of another undertaking in the same group as the undertaking, to
parties that have supplied goods or services to the undertaking.
A transaction with a member of staff (or other party) in his/her capacity as a holder of
equity instruments of the undertaking is not a share-based payment transaction.
EXAMPLE - the member of staff has received a right in his/her capacity as a
shareholder
An undertaking might grant all holders of a particular class of its equity instruments
the right to acquire additional equity instruments of the undertaking at a price that is
less than the fair value of those equity instruments.
If a member of staff receives such a right because he/she is a holder of that particular
class of equity instruments, the granting or exercise of that right should not be subject
to the requirements of IFRS 2, as the member of staff has received that right in his/her
capacity as a shareholder, rather than as a member of staff.
This transaction is not subject to the requirements of IFRS 2.
IFRS 2 applies to share-based payment transactions in which an undertaking
acquires or receives goods or services. Goods include inventories, consumables,
property, plant and equipment, intangible assets and other non-financial assets.
However, an undertaking shall not apply IFRS 2 to transactions in which the
undertaking acquires goods as part a takeover, to which IFRS 3 Business
Combinations applies.
Equity instruments granted to staff of a purchased undertaking in their capacity as
staff (in return for continued service) are within the scope of IFRS 2. Similarly, the
cancellation, replacement or other modification of share-based payment
arrangements because of a business combination or other restructuring shall be
accounted for under IFRS 2.
www. accountingreform.ru
IFRS 2 does not apply to share-based payment transactions in which the undertaking
receives or acquires goods or services under a contract within the scope of
paragraphs 8-10 of IAS 32 Financial Instruments: Presentation or paragraphs 5-7 of
IAS 39 Financial Instruments: Recognition and Measurement.
Examples of these are contracts for the purchase of goods that are within the scope
of IAS 39, such as commodity contracts entered into for speculative purposes, that is,
other than to satisfy the reporting entity’s expected purchase or usage requirements.
RECOGNITION
An undertaking shall recognise the goods or services acquired in a share-based
payment transaction when it obtains the goods or as the services are received. The
undertaking 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.
When the goods or services acquired in a share-based payment transaction do not
qualify for recognition as assets, they shall be recorded as expenses.
Typically, an expense arises from the consumption of goods or services. For
example, services are usually consumed immediately, in which case an expense is
recorded as the counterparty renders service.
Goods might be consumed over a period of time or, in the case of inventories, sold at
a later date, in which case an expense is recorded when the goods are consumed or
sold. However, sometimes it is necessary to record an expense before the goods or
services are consumed or sold, because they do not qualify for recognition as assets.
For example, an undertaking might acquire goods as part of the research phase of a
project to develop a new product. Although those goods have not been consumed,
they might not qualify for recognition as assets under the applicable IFRS.
The debit side of the transaction – grant date
The debit side of the IFRS 2 transaction measures the fair value of the resources
received. This is consideration for the issue of equity instruments.
The goods or services received should be measured at their fair value at the date
when the undertaking obtains those goods or as the services are received.
9
However, if the fair value of the services received is not readily determinable, then a
surrogate measure must be used, such as the fair value of the share options or
shares granted. This is the case for staff services.
If the fair value of the equity instruments granted is used, the fair value of the services
received during a particular accounting period is not affected by subsequent changes
in the fair value of the equity instrument.
EXAMPLE - vesting date and exercise date measurement are inappropriate
Services are received during years 1-3 as the consideration for share options that are
exercised at the end of year 5.
For services received in year 1, subsequent changes in the value of the share option
in years 2-5 are unrelated to, and have no effect on, the fair value of those services
when received.
Service date measurement measures the fair value of the equity instrument at the
same time as the services are received. This means that changes in the fair value of
the equity instrument during the vesting period affect the amount attributed to the
services received.
IASB concluded that, at grant date, it is reasonable to presume that the fair value of
both sides of the contract are substantially the same, ie the fair value of the services
expected to be received is substantially the same as the fair value of the equity
instruments granted.
Thus, the grant date is the most appropriate measurement date for the purposes of
providing a surrogate measure of the fair value of the services received.
The credit side of the transaction – grant date
Although focusing on the debit side of the transaction is consistent with the primary
accounting objective, some approach the measurement date question from the
perspective of the credit side of the transaction: the issue of an equity instrument.
Staff must perform their side of the arrangement by providing the necessary services
and meeting any other performance criteria before the undertaking is obliged to
perform its side of the arrangement.
The provision of services is the consideration they use to 'pay' for the share option.
IASB concluded that, no matter which side of the transaction one focuses upon (ie the
receipt of resources or the issue of an equity instrument), grant date is the
appropriate measurement date, as it does not require remeasurement of equity
www. accountingreform.ru
interests and it provides a reasonable surrogate measure of the fair value of the
services received from staff.
EQUITY-SETTLED SHARE-BASED PAYMENT TRANSACTIONS -
OVERVIEW
For equity-settled share-based payment transactions, the undertaking shall measure
the goods or services received, and the corresponding increase in equity, directly, at
the fair value of the goods or services received, unless that fair value cannot be
estimated reliably.
If the undertaking cannot estimate reliably the fair value of the goods or services
received, the undertaking shall use the fair value of the equity instruments granted.
The undertaking shall measure the fair value of staff services received by reference to
the fair value of the equity instruments granted, as typically it is not possible to
estimate reliably the fair value of the services received. The fair value of those equity
instruments shall be measured at the grant date.
Typically, shares, share options or other equity instruments are granted to staff as
part of their remuneration package, in addition to a cash salary and other employment
benefits.
Shares or share options are sometimes granted as part of a bonus arrangement,
rather than as a part of basic remuneration, as an incentive to the staff to remain in
the undertaking’s employ or to reward them for their efforts in improving the
undertaking’s performance.
For transactions with parties other than staff, there shall be a rebuttable presumption
that the fair value of the goods or services received can be estimated reliably. That
fair value shall be measured at the date the undertaking obtains the goods or the
counterparty renders service.
If the undertaking rebuts this presumption, the undertaking shall measure the goods
or services received, and the corresponding increase in equity, indirectly, by
reference to the fair value of the equity instruments granted, measured at the date the
undertaking obtains the goods or the counterparty renders service.
10

Transactions in which services are received
If the equity instruments granted vest immediately, the counterparty is not required to
complete a specified period of service before becoming unconditionally entitled to
those equity instruments.
The undertaking shall presume that services rendered by the counterparty as
consideration for the equity instruments have been received. In this case, on grant
date the undertaking shall record the services received in full, with a corresponding
increase in equity.
If the equity instruments granted do not vest until the counterparty completes a
specified period of service, the undertaking shall presume that the services will be
received in the future, during the vesting period. The undertaking shall account for
those services as they are rendered by the counterparty during the vesting period,
with a corresponding increase in equity. For example:
1. if a member of staff is granted share options conditional upon completing three
years’ service, then the undertaking shall presume that the services will be received in
the future, over that three-year vesting period.
www. accountingreform.ru
2. if a member of staff is granted share options conditional upon the achievement of a
performance condition and remaining in the undertaking’s employ until that
performance condition is satisfied, and the length of the vesting period varies
depending on when that performance condition is satisfied, the undertaking shall
presume that the services will be received in the future, over the expected vesting
period.
The undertaking shall estimate the length of the expected vesting period at grant
date, based on the most likely outcome of the performance condition.
-If the performance condition is a market condition, the estimate of the length of the
expected vesting period shall be consistent with the assumptions used in estimating
the fair value of the options granted, and shall not be subsequently revised.
-If the performance condition is not a market condition, the undertaking shall revise its
estimate of the length of the vesting period, if necessary, if subsequent information
indicates that the length of the vesting period differs from previous estimates.
Transactions measured by reference to the fair value of the equity
instruments granted
Determining the fair value of equity instruments granted
For transactions measured by the fair value of the equity instruments granted, an
undertaking shall measure the fair value at the measurement date, based on market
prices if available, taking into account the terms and conditions upon which those
equity instruments were granted.
If market prices are not available, the undertaking shall estimate the fair value using a
valuation technique to estimate what the price of those equity instruments would have
been on the measurement date in an independent transaction between
knowledgeable, willing parties.
The valuation technique shall be consistent with generally accepted valuation
methodologies for pricing financial instruments, and shall incorporate all factors and
assumptions that knowledgeable, willing market participants would consider in setting
the price.
Treatment of vesting conditions
A grant of equity instruments might be conditional upon satisfying specified vesting
conditions.
11
For example, a grant of shares or share options to a member of staff is typically
conditional on the member of staff remaining in the undertaking’s employ for a
specified period of time.
There might be performance conditions that must be satisfied, such as the
undertaking achieving a specified growth in profit or a specified increase in the
undertaking’s share price.
Vesting conditions, other than market conditions, shall not be taken into account when
estimating the fair value of the shares or share options at the measurement date.
Instead, vesting conditions shall be taken into account by adjusting the number of
equity instruments included in the amount so that, ultimately, the amount recorded
shall be based on the number of equity instruments that eventually vest.
Hence, on a cumulative basis, no amount is recorded for goods or services received if
the equity instruments granted do not vest due to failure to satisfy a vesting condition,
such as the counterparty fails to complete a specified service period, or a
performance condition is not satisfied.
EXAMPLE – Changes in vesting estimates
A company granted options to its staff with a fair value of €300,000, determined using
the Black-Scholes model, and made the following estimates:
Estimate at grant date of the percentage of staff leaving the company before the
end of the three-year vesting period; 10%
Revised estimate, made in the second year, of the portion of staff leaving
the company before the end of three years; 5%
Actual percentage of leavers; 6%
The expense in the first year should be €90,000 (€300,000 x 1/3 x 90%). As a result
of a change in accounting estimate of the percentage of staff expected to leave, an
expense of €100,000 will be recognised in the second year. The cumulative expense
at the end of the second year is €190,000 (€300,000 x 2/3 x 95%).
At the end of the third year, 94% of the options vest, so the cumulative expense over
the vesting period is €282,000 (€300,000 x 3/3 x 94%), and the expense in the third
year is €92,000 (€282,000-€190,000).
www. accountingreform.ru
The undertaking shall recognise an amount for the goods or services received during
the vesting period based on the best available estimate of the number of equity
instruments expected to vest and shall revise that estimate, if necessary, if
subsequent information indicates that the number of equity instruments expected to
vest differs from previous estimates.
On vesting date, the undertaking shall revise the estimate to equal the number of
equity instruments that ultimately vested.
Market conditions, such as a target share price upon which vesting (when the option
may be exercised and the shares purchased) is conditioned, shall be taken into
account when estimating the fair value of the equity instruments granted.
Thus, for grants of equity instruments with market conditions, the undertaking shall
record the goods or services received from a counterparty who satisfies all other
vesting conditions (such as services received from a member of staff who remains in
service for the specified period of service), irrespective of whether that market
condition is satisfied.
Treatment of a reload feature
Reload features shall not be taken into account when estimating the fair value of
options granted at the measurement date. Instead, a reload option shall be accounted
for as a new option grant, if and when a reload option is subsequently granted.
After vesting date
Having recorded the goods or services received, and a corresponding increase in
equity, the undertaking shall make no subsequent adjustment to total equity
after vesting date.
For example, the undertaking shall not subsequently reverse the amount recorded for
services received from a member of staff if the vested equity instruments are later
forfeited or, in the case of share options, the options are not exercised.
However, this requirement does not preclude the undertaking from recording a
transfer within equity, such as a transfer from one component of equity to another.
If the fair value of the equity instruments cannot be estimated reliably
The undertaking may be unable to estimate reliably the fair value of the equity
instruments granted at the measurement date. In these rare cases only, the
undertaking shall instead:
12

1. measure the equity instruments at their intrinsic value, initially at the date the
undertaking obtains the goods or service and subsequently at each reporting date
and at the date of final settlement, with any change in intrinsic value recognised in the
income statement.
value of the share-based payment arrangement or is not otherwise beneficial to the
member of staff or service provider. However, reductions in the number of options
granted are treated as cancellations. The following diagram illustrates these
transactions:

For a grant of share options, the share-based payment arrangement is finally settled
when the options are exercised, are forfeited or lapse (at the end of the option’s life).

2. record the goods or services received based on the number of equity instruments
that ultimately vest or are ultimately exercised. For share options, for example, the
undertaking shall record the goods or services received during the vesting period, if
any.

The amount recognised for goods or services received during the vesting period shall
be based on the number of share options expected to vest. The undertaking shall
revise that estimate, if necessary, if subsequent information indicates that the number
of share options expected to vest differs from previous estimates.

On the vesting date, the undertaking shall revise the estimate to equal the number of
equity instruments that ultimately vested. After vesting date, the undertaking shall
reverse the amount recognised for goods or services received if the share options are
later forfeited, or lapse at the end of the share option’s life.
If a modification increases the fair value of the equity instruments
1. If the settlement occurs during the vesting period, the undertaking shall account for
granted (for example, by reducing the exercise price of share options),
the settlement as an acceleration of vesting, and shall therefore record immediately
the incremental fair value should be added to the amount being
the amount that would otherwise have been recorded for services received over the
recognised for the services received.
remainder of the vesting period.

2. Any payment made on settlement shall be accounted for as the repurchase of
equity instruments, as a deduction from equity, except to the extent that the payment
exceeds the intrinsic value of the equity instruments, measured at the repurchase
date. Any such excess shall be recognised as an expense.
MODIFICATIONS
An undertaking might modify the terms and conditions on which the equity
instruments were granted. For example, it might reduce the exercise price of options
granted to staff (ie reprice the options), which increases the fair value of those
options.
Modifications should be viewed as incremental instruments in their own right. IFRS 2
requires an undertaking to ignore a modification if it does not increase the total fair
If a modification increases the number of equity instruments granted,
the fair value of these additional instruments is added to the amount
recognised. This will be in addition to any amount recognised in
respect of the original instrument, which should continue to be
recognised over the remainder of the original vesting period unless
there is a failure to satisfy the original non-market vesting conditions.
If a modification occurs during the vesting period, the incremental fair
value should be recognised over the period from the modification date
until the date on which the modified equity instruments vest. If the
modification occurs after the vesting date, the incremental fair value
should be recognised immediately, or over the revised vesting period if
the employee is required to complete an additional period of service
before becoming unconditionally entitled to the modified instruments.

www. accountingreform.ru 13
 If a modification provides some other benefit to staff, this should
be taken into account in estimating the number of equity
instruments that are expected to vest. For example, a vesting
condition might be eliminated.
EXAMPLE- Beneficial Modification
An undertaking granted 100 share options to each of its five key executives. The
share options vest only if the undertaking achieves its next year’s sales target of
€100 million. During the year the sales target was revised to €90 million.
A reduction in the sales target makes the options more likely to vest, and the
undertaking recognises an increased expense.
Cancellations
An undertaking may cancel and replace a grant of equity instruments. In this
case, the incremental fair value is the difference between the fair value of the
replacement instruments and the fair value of the original instruments. The
replacement is treated as a modification.
Early settlements
An undertaking may cancel or early settle an award without replacement. On early
settlement, the undertaking should recognise immediately the balance that would
have been charged over the remaining period.
When applied to share-based payment transactions with parties other than staff any
references in to grant date shall instead refer to the date the undertaking obtains the
goods or the counterparty renders service.
The undertaking shall recognise, as a minimum, the services received measured at
the grant date fair value of the equity instruments granted, unless those equity
instruments do not vest because of failure to satisfy a vesting condition (other than a
market condition) that was specified at grant date.
This applies irrespective of any modifications to the terms and conditions on which the
equity instruments were granted, or a cancellation or settlement of that grant of equity
instruments. In addition, the undertaking shall recognise the effects of modifications
that increase the total fair value of the share-based payment arrangement, or are
otherwise beneficial to the member of staff.
www. accountingreform.ru
If the undertaking cancels or settles a grant of equity instruments during the vesting
period (other than a grant cancelled by forfeiture when the vesting conditions are not
satisfied):
1. the undertaking shall account for the cancellation or settlement as an acceleration
of vesting, and shall therefore record immediately the amount that otherwise would
have been recorded for services received over the remainder of the vesting period.
2. any payment made to the member of staff on the cancellation or settlement of the
grant shall be accounted for as the repurchase of an equity interest, ie as a deduction
from equity, except to the extent that the payment exceeds the fair value of the equity
instruments granted, measured at the repurchase date. Any such excess shall be
recognised as an expense.
3. if new equity instruments are granted to the member of staff and, on the date when
those new equity instruments are granted, the undertaking identifies the new equity
instruments granted as replacement equity instruments for those cancelled, the
undertaking shall account for the granting of replacement equity instruments in the
same way as a modification of the original grant of equity instruments.
The incremental fair value granted is the difference between:
- the fair value of the replacement equity instruments and
- the net fair value of the cancelled equity instruments,
at the date the replacement equity instruments are granted.
The net fair value of the cancelled equity instruments is their fair value, immediately
before the cancellation, less the amount of any payment made to the member of staff
on cancellation of the equity instruments that is accounted for as a deduction from
equity.
If the undertaking does not identify new equity instruments granted as replacement
equity instruments for the cancelled equity instruments, the undertaking shall account
for those new equity instruments as a new grant of equity instruments.
If an undertaking repurchases vested equity instruments, the payment made to the
member of staff shall be 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.
14
 CASH-SETTLED SHARE-BASED PAYMENT TRANSACTIONS
For cash-settled share-based payment transactions, the undertaking shall measure
the goods or services acquired and the liability at the fair value of the liability. Until the
liability is settled, the undertaking 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 the income statement for the period.
For example, an undertaking might grant share appreciation rights to staff as part of
their remuneration package, whereby the staff will become entitled to a future cash
payment (rather than an equity instrument), based on the increase in the
undertaking’s share price from a specified level over a specified period of time.
EXAMPLE– Share appreciation rights
A company granted share appreciation rights to its 100 staff in March 2003, vesting in
March 2007. The following estimates were made by management in March 2004:
Estimate of the awards that will vest
80%
Fair value of each share appreciation right at March 2004
€5,000
The fair value of the liability to be recorded in March 2004 is €100,000
(100 x €5,000 x 80% x 1/4).
Management revised its estimates in March 2005 as follows:
Estimate of the awards that will vest
90%
Fair value of each share appreciation right at March 2005
€6,000
The accrued liability at that reporting date is €270,000 (100 x €6,000 x 90% x 2/4).
The increase in the liability of €170,000 (€270,000-€100,000) is recognised as an
expense in the income statement within ‘staff costs’.
Or an undertaking might grant to its staff a right to receive a future cash payment by
granting to them a right to shares (including in the form of share options) that are
redeemable, either mandatorily (upon cessation of employment) or at the member of
staff’s option.
The undertaking shall recognise the services received, and a liability to pay for those
services, as the members of staff render service.
www. accountingreform.ru
For example, some share appreciation rights vest immediately, and the staff are
therefore not required to complete a specified period of service to become entitled to
the cash payment.
In the absence of evidence to the contrary, the undertaking shall presume that the
services rendered by the staff in exchange for the share appreciation rights have
been received. Thus, the undertaking shall recognise immediately the services
received and a liability to pay for them.
If the share appreciation rights do not vest until the staff have completed a specified
period of service, the undertaking shall recognise the services received, and a liability
to pay for them, as the staff render service during that period.
The liability shall be measured, initially and at each reporting date until settled, at the
fair value of the share appreciation rights, by applying an option pricing model, taking
into account the terms and conditions on which the share appreciation rights were
granted, and the extent to which the staff have rendered service to date.
EXAMPLE – Remeasurement of share appreciation rights after vesting
A company granted share appreciation rights to 1,000 staff on 1 January 2005 based
on 1 million shares.
The rights vest on 31 December 2005, but payment is in January 2007.
The share price at 1 January 2005 was €8, at 31 December 2005 it was €10, and at
31 December 2006 it was €9.
A liability is recognised at 31 December 2005 of €2 million (1 million shares x (€10-
€8)).
In 2006 the company should recognise a gain of €1 million (1 million shares x (€10-
€9)), and reduce the liability to €1 million.
Cash alternatives
For share-based payment transactions where either has the choice of whether the
undertaking settles the transaction in cash or by issuing equity instruments, the
undertaking shall account for that transaction, or the components of that transaction,
as a cash-settled share-based payment transaction if the undertaking has incurred a
liability to settle in cash or other assets, or as an equity-settled share-based payment
transaction if no such liability has been incurred.
15

Counterparty has a choice of settlement
If an undertaking has granted the counterparty the right to choose whether a share-
based payment transaction is settled in cash or by issuing equity instruments, the
undertaking has granted a compound financial instrument, which includes a debt
component (the right to demand payment in cash) and an equity component (the right
to demand settlement in equity instruments rather than in cash).
equity instrument.
For transactions with parties other than staff, in which the fair value of the goods or
services received is measured directly, the undertaking shall measure the equity
component of the compound financial instrument as the difference between:
- the fair value of the goods or services received and
- the fair value of the debt component,

at the date when the goods or services are received.

1 See also diagram on the right

2 See also ‘Undertaking chooses settlement method’ on the right.
3 If the counterparty chooses settlement in cash, any equity component
previously recognised in equity will remain there, although there might be a
transfer from one component of equity to anothe r.
4 If the counterparty chooses settlement in equity instruments, the
1,2 See also diagram on the left.
balance of the liability is transfer red to equity as consideration for the
www. accountingreform.ru 16

For other transactions, including transactions with staff, the undertaking shall
measure the fair value at the measurement date, taking into account the terms and
conditions on which the rights to cash or equity instruments were granted.
The undertaking shall first measure the fair value of the debt component, and then
measure the fair value of the equity component—taking into account that the
counterparty must forfeit the right to receive cash in order to receive the equity
instrument. The fair value of the compound financial instrument is the sum of the fair
values of the two components.
However, share-based payment transactions in which the counterparty has the choice
of settlement are often structured so that the fair value of one settlement alternative is
the same as the other.
For example, the counterparty might have the choice of receiving share options or
cash-settled share appreciation rights. In such cases, the fair value of the equity
component is zero, and hence the fair value of the compound financial instrument is
the same as the fair value of the debt component.
EXAMPLE – Goods or non-staff services with settlement alternatives
An undertaking purchased 10kg of gold worth €80,000. The supplier can choose how
the purchase price is settled. It can:
1) receive 100 of the undertaking’s shares two years after delivery (the fair value of
this alternative is estimated at €87,000 at the date of purchase); or
2) obtain a payment equal to the market price of 90 shares at the end of the first year
after delivery (fair value of this alternative is estimated at €75,000 at the date of
purchase).
At the date of obtaining the 10kg of gold, the undertaking should record a liability of
€75,000 and an increase in equity of €5,000, determined as the difference between
the value of 10kg of gold of €80,000 and fair value of the liability of €75,000.
Conversely, if the fair values of the settlement alternatives differ, the fair value of the
equity component usually will be greater than zero, in which case the fair value of the
www. accountingreform.ru
compound financial instrument will be greater than the fair value of the debt
component.
The undertaking shall account separately for the goods or services received or
acquired in respect of each component of the compound financial instrument.
-For the debt component, the undertaking shall recognise the goods or services
acquired, and a liability to pay for those goods or services, as the counterparty
supplies goods or renders service, as in cash-settled share-based payment
transactions.
-For any equity component, the undertaking shall recognise the goods or services
received, and an increase in equity, as the counterparty supplies goods or renders
service, as in equity-settled share-based payment transactions.
At the date of settlement, the undertaking shall remeasure the liability to its fair value.
If the undertaking issues equity instruments on settlement rather than paying cash,
the liability shall be transferred direct to equity, as the consideration for the equity
instruments issued.
If the undertaking pays in cash on settlement rather than issuing equity instruments,
that payment shall be applied to settle the liability in full. Any equity component
previously recognised shall remain within equity.
Example – Staff services with settlement alternatives
Staff entitled to a bonus may choose between obtaining a cash payment equal to the
market price of 100 of the undertaking’s shares, or obtaining 100 shares. The quoted
market price of one share is €5.
The undertaking should record a liability of €500 for each entitled employee. The
equity component is nil, being the difference between the fair value of 100 shares
(€500) and the fair value of the alternative cash payment (€500).
By electing to receive cash on settlement, the counterparty forfeited the right to
receive equity instruments. However, this requirement does not preclude the
undertaking from recording a transfer within equity, (a transfer from one component of
equity to another).
Undertaking has a choice of settlement
For a share-based payment transaction in which the terms of the arrangement
provide an undertaking with the choice of whether to settle in cash or by issuing
17
equity instruments, the undertaking shall determine whether it has a present
obligation to settle in cash, and account for the share-based payment transaction
accordingly.
The undertaking has a present obligation to settle in cash if the choice of settlement in
equity instruments has no commercial substance (if the undertaking is legally
prohibited from issuing shares), or the undertaking has a past practice or a stated
policy of settling in cash, or usually settles in cash whenever the counterparty asks for
cash settlement.
If the undertaking has a present obligation to settle in cash, it shall account for the
transaction in accordance with the requirements applying to cash-settled share-based
payment transactions.
If no such obligation exists, the undertaking shall account for the transaction in
accordance with the requirements applying to equity-settled share-based payment
transactions. Upon settlement:
1. if the undertaking elects to settle in cash, the cash payment shall be accounted for
as the repurchase of an equity interest, ie as a deduction from equity, except as noted
in (3) below.
2. if the undertaking elects to settle by issuing equity instruments, no further
accounting is required (other than a transfer from one component of equity to another,
to debit share options and credit issued equity shares), except as noted in (3) below.
3. if the undertaking elects the settlement alternative with the higher fair value, as at
the date of settlement, the undertaking shall recognise an additional expense for the
excess value given, the difference between:
-the cash paid and
-the fair value of the equity instruments that would otherwise have been issued,
or the difference between:
- the fair value of the equity instruments issued and
- the amount of cash that would otherwise have been paid,
whichever is applicable.
www. accountingreform.ru
DISCLOSURES
An undertaking shall disclose information that enables users to understand the nature
and extent of share-based payment arrangements that existed during the period.
The undertaking shall disclose at least the following:
1. 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 (eg whether in cash or equity).
An undertaking with substantially similar types of share-based payment arrangements
may aggregate this information, if it does not mask the nature and extent of the
arrangements.
2. 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.
3. for share options exercised during the period, the weighted-average share price at
the date of exercise.
If options were exercised on a regular basis throughout the period, the undertaking
may instead disclose the weighted-average share price during the period.
4. for share options outstanding at the end of the period, the range of exercise prices
and weighted-average remaining contractual life.
If the range of exercise prices is wide, the outstanding options shall be divided into
ranges that are meaningful for assessing the number and timing of additional shares
18
that may be issued and the cash that may be received upon exercise of those
options.
An undertaking shall disclose information that enables users to understand how the
fair value of the goods or services received, or the fair value of the equity instruments
granted, during the period was determined.
If the undertaking has measured the fair value of goods or services received for equity
instruments of the undertaking indirectly, by reference to the fair value of the equity
instruments granted, the undertaking shall disclose at least the following:
1. for share options granted during the period, the weighted-average fair value of
those options at the measurement date and information on how that fair value was
measured, including:
i. the option pricing model used and the inputs to that model, including the weighted-
average share price, exercise price, expected volatility, option life, expected
dividends, the risk-free interest rate and any other inputs to the model, including the
method used and the assumptions made to incorporate the effects of expected early
exercise;
ii. how expected volatility was determined, including an explanation of the extent to
which forecast volatility was based on historical volatility; and
iii. whether and how any other features of the option grant were incorporated into the
measurement of fair value, such as a market condition.
2. for other equity instruments granted during the period (ie other than share options),
the number and weighted-average fair value of those equity instruments at the
measurement date, and information on how that fair value was measured, including:
i. if fair value was not measured on the basis of an observable market price, how it
was determined;
ii. whether and how expected dividends were incorporated into the measurement of
fair value; and
iii. whether and how any other features of the equity instruments granted were
incorporated into the measurement of fair value.
3. for share-based payment arrangements that were modified during the period:
i. an explanation of those modifications;
www. accountingreform.ru
ii. the incremental fair value granted (as a result of those modifications); and
iii. information on how the incremental fair value granted was measured, consistently
with the requirements set out in (1) and (2) above, where applicable.
If the undertaking has measured directly the fair value of goods or services received
during the period, the undertaking shall disclose how that fair value was determined,
(whether fair value was measured at a market price for those goods or services).
If the undertaking has rebutted the presumption that the fair value of goods and
services can be reliably measured, it shall disclose that fact, and give an explanation
of why the presumption was rebutted.
An undertaking shall disclose information that enables users to understand the effect
of share-based payment transactions on the undertaking’s profit or loss for the period
and on its financial position.
The undertaking shall disclose at least the following:
1. the total expense recognised for the period arising from share-based payment
transactions in which the goods or services received did not qualify for recognition as
assets and hence were recorded immediately as an expense, including separate
disclosure of that portion of the total expense that arises from transactions accounted
for as equity-settled share-based payment transactions;
2. for liabilities arising from share-based payment transactions:
i. the total carrying amount at the end of the period; and
ii. the total intrinsic value at the end of the period of liabilities for which the
counterparty’s right to cash or other assets had vested by the end of the period (eg
vested share appreciation rights).
19
 5. i-v

MULTIPLE CHOICE QUESTIONS 3. In March, the undertaking offered options to new staff, subject to shareholder
approval. The awards were approved by the shareholders in August. The scheme
started in September.
1. IFRS 2 applies to all types of share-based payment transactions. These include:
The grant date is:
i. Equity-settled
1. March.
ii. Cash-settled
2. August
iii. Choice of equity-settled or cash-settled 3. September

iv. Share sales in stock markets. 4. Measurement date for transactions with parties other than staff

1. i If the goods are received on more than one date, the undertaking should measure the
2. i-ii fair value of the equity instruments granted on
3. i-iii
4. i-iv 1. the date that the first goods are received;
2. each date when goods or services are received;
3. the date that the last goods are received.
2. Examples of arrangements that come under IFRS 2 are:
i Call options that give staff the right to purchase an undertaking’s shares in
exchange for their services; 5. Vesting period

ii Share appreciation rights that entitle staff to payments calculated by reference to A undertaking grants share options to its staff. Certain performance conditions need
the market price of an undertaking’s shares or the shares of another undertaking to be satisfied over the next four years for the options to be exercisable. The
in the same group; employee has to remain working for the undertaking during this period to become
entitled to the award.
iii In-kind capital contributions of property, plant or equipment in exchange for shares
or other The expense should therefore be recognised:
equity instruments;
1. at the grant date;
iv Share ownership schemes under which staff are entitled to receive an 2. over the four-year period;
undertaking’s shares in exchange for their services; and 3. at the end of the four-year period.

v Payments for services made to external consultants that are calculated by

reference to the undertaking’s share price.

1 i
2 i-ii
3. i-iii
4. i-iv

www. accountingreform.ru 20
6. If the undertaking cannot estimate reliably the fair value of the goods or services
received, the undertaking:
1. is required to measure their value, and the corresponding increase in equity,
indirectly, by reference to the fair value of the equity instruments granted;
2. should use the par value of the shares given;
3. should use the reload option.
7. Market vesting conditions vesting conditions
A undertaking granted share options that become exercisable when the market price
increases by at least 10% in each year over the next three years. At the end of year
three, this target has not been met.
1. The undertaking should revise the grant date fair value and should reverse the staff
benefits expense already recognised.
2. The undertaking should not revise the grant date fair value and should not reverse
the staff benefits expense already recognised.
3. The undertaking should transfer the staff benefits expense to equity.
8. Non-market vesting conditions Example – Non-market vesting condition
Management introduced a new equity-settled compensation plan with a non-market
performance condition. During the following year, after a downturn in the
undertaking’s fortunes, it considers that there is no chance that it will meet the target.
1. The cumulative expense at the end of the second year will be adjusted to nil, and
the charge is reversed in the current year.
2. The undertaking should not revise the grant date fair value and should not reverse
the staff benefits expense already recognised.
3. The undertaking should transfer the staff benefits expense to equity.
9. Fair value of equity instruments
In the absence of market prices:
1. The undertaking should revise the grant date fair value and should reverse the staff
benefits expense already recognised;
www. accountingreform.ru
2. The undertaking should use the par value of the shares given;
3. The undertaking should use the reload option;
4. Fair value is estimated, using a valuation technique, to estimate what the price of
those equity instruments would have been on the measurement date in an
independent transaction between knowledgeable, willing parties.
10. For cash-settled share-based payment transactions, IFRS 2 requires an
undertaking to measure the goods or services acquired and:
1. Establish a liability which remains unchanged;
2. Establish a liability. Until the liability is settled, the undertaking is required to
remeasure the fair value of the liability at each reporting date and at the date of
settlement, with any changes in value recognised in the income statement for the
period;
3. Hold the cost in equity;
4. The undertaking should use the reload option.
11. IFRS 2 prescribes various disclosure requirements to enable users to understand:
i. the nature and extent of share-based payment arrangements that existed during the
period;
ii. how the fair value of the goods or services received, or the fair value of the equity
instruments granted, during the period was determined;
iii. the effect of share-based payment transactions on the undertaking’s profit or loss
for the period and on its financial position;
iv. the impact on clients of these transactions.
1. i
2 i-ii
3. i-iii
4. i-iv
21
12. IFRS 2 covers:
1. the undertaking shall revise its estimate of the length of the vesting period;
1. transfers of equity instruments of the undertaking’s parent to parties that have
supplied goods or services to the undertaking; 2. shall not be subsequently revised.

2. transfers of equity instruments of another undertaking in the same group as the

undertaking, to parties that have supplied goods or services to the undertaking;
16.If the performance condition is not a market condition, the estimate of the length of
3. Both 1+ 2; the expected vesting period shall be consistent with the assumptions used in
estimating the fair value of the options granted, and:
4. Neither 1 nor 2.
1. the undertaking shall revise its estimate of the length of the vesting period;

13. Business Combinations 2. shall not be subsequently revised.

IFRS 2 covers:
i Equity instruments granted to staff of a purchased undertaking in their capacity as
staff (in return for continued service);
ii The cancellation, replacement or other modification of share-based payment
arrangements because of a business combination or other restructuring;
iii Transactions in which the undertaking acquires goods as part a takeover.
17. If the vested equity instruments are later forfeited or, in the case of share options,
the options are not exercised;
1. The undertaking should use the reload option.
2. The undertaking shall subsequently reverse the amount recorded for services
received from staff.
3. The undertaking shall not subsequently reverse the amount recorded for services
received from staff.

1. i 18. Treatment of a reload feature

2 i-ii
3. i-iii Reload features shall:

14. If the fair value of the equity instruments granted is used, the fair value of the
services received during a particular accounting period:
1. is not affected by subsequent changes in the fair value of the equity instrument;
1. be taken into account when estimating the fair value of options granted at the
measurement date;
2. not be taken into account when estimating the fair value of options granted at the
measurement date.

2. is adjusted by subsequent changes in the fair value of the equity instrument.

15. If the performance condition is a market condition, the estimate of the length of
the expected vesting period shall be consistent with the assumptions used in
estimating the fair value of the options granted, and:

www. accountingreform.ru 22
19. Modifications should be viewed as: 17. 1
18. 2
1. Cancellations;
19. 3
2. Compound financial instruments. 20. 4
3. Incremental instruments.

20. Modifications. If it does not increase the total fair value of the share-based
payment arrangement or is not otherwise beneficial to the member of staff or service
provider:

1. It should be treated as a compound financial instrument;

2. It should be treated as an incremental instrument;

3. It should be treated as a reload feature;

4. It should be ignored.

ANSWERS TO MULTIPLE CHOICE QUESTIONS

Question Answer
1. 3
2. 5
3. 2
4. 2
5. 2
6. 1
7. 2
8. 1
9. 4
10. 2
11. 3
12. 3
13. 2
14. 1
15. 2
16. 1

www. accountingreform.ru 23

APPENDIX 1 – AIDS TO CALCULATIONS
Estimating the fair value of equity instruments granted
Shares
For shares granted to staff, the fair value of the shares shall be measured at the
market price of the undertaking’s shares (or an estimated market price, if the
undertaking’s shares are not publicly traded), adjusted to take into account the terms
and conditions upon which the shares were granted.
For example, if the member of staff is not entitled to receive dividends during the
vesting period, this factor shall be taken into account when estimating the fair value of
the shares granted.
Similarly, if the shares are subject to restrictions on transfer after vesting date, that
factor shall be taken into account, but only to the extent that the post-vesting
restrictions affect the price that a knowledgeable, willing market participant would pay
for that share.
For example, if the shares are actively traded in a deep and liquid market, post-
vesting transfer restrictions may have little, if any, effect on the price that a
knowledgeable, willing market participant would pay for those shares.
Restrictions on transfer or other restrictions that exist during the vesting period shall
not be taken into account when estimating the grant date fair value of the shares
granted, because those restrictions stem from the existence of vesting conditions.
Share options
For share options granted to staff, in many cases market prices are not available,
because the options granted are subject to terms and conditions that do not apply to
traded options. If traded options with similar terms and conditions do not exist, the fair
value of the options granted shall be estimated by applying an option pricing model.
The undertaking shall consider factors that knowledgeable, willing market participants
would consider in selecting the option pricing model to apply. For example, many staff
options have long lives, are usually exercisable during the period between vesting
date and the end of the options’ life, and are often exercised early.
www. accountingreform.ru
For many undertakings, this might preclude the use of the Black-Scholes-Merton
formula, which does not allow for the possibility of exercise before the end of the
option’s life and may not adequately reflect the effects of expected early exercise. It
also does not allow for the possibility that expected volatility and other model inputs
might vary over the option’s life.
However, for share options with relatively short contractual lives, or that must be
exercised within a short period of time after vesting date, the factors identified above
may not apply. In these instances, the Black-Scholes-Merton formula may produce a
value that is substantially the same as a more flexible option pricing model.
All option pricing models take into account, as a minimum, the following factors:
1. the exercise price of the option;
2. the life of the option;
3. the current price of the underlying shares;
4. the expected volatility of the share price;
5. the dividends expected on the shares (if appropriate); and
6. the risk-free interest rate for the life of the option.
Other factors that knowledgeable, willing market participants would consider in setting
the price shall also be taken into account (except for vesting conditions and reload
features that are excluded from the measurement of fair value).
For example, a share option granted to a member of staff typically cannot be
exercised during specified periods (eg during the vesting period or during periods
specified by securities regulators). This factor shall be taken into account if the option
pricing model applied would otherwise assume that the option could be exercised at
any time during its life.
However, if an undertaking uses an option pricing model that values options that can
be exercised only at the end of the options’ life, no adjustment is required for the
inability to exercise them during the vesting period (or other periods during the
options’ life), because the model assumes that the options cannot be exercised during
those periods.
Similarly, another factor common to member of staff share options is the possibility of
early exercise of the option, for example, because the option is not freely transferable,
or because the member of staff must exercise all vested options upon cessation of
employment. The effects of expected early exercise shall be taken into account.
Factors that a knowledgeable, willing market participant would not consider in setting
the price of a share option (or other equity instrument) shall not be taken into account
when estimating the fair value of share options (or other equity instruments) granted.
24

For example, for share options granted to staff, factors that affect the value of the
option from the individual member of staff’s perspective only are not relevant to
estimating the price that would be set by a knowledgeable, willing market participant.
Inputs to option pricing models
In estimating the expected volatility of and dividends on the underlying shares, the
objective is to approximate the expectations that would be reflected in a current
market or negotiated exchange price for the option. Similarly, when estimating the
effects of early exercise of member of staff share options, the objective is to
approximate the expectations that an outside party with access to detailed information
about staff exercise behaviour would develop based on information available at the
grant date.
When there is likely to be a range of reasonable expectations about future volatility,
dividends and exercise behaviour, an expected value should be calculated, by
weighting each amount within the range by its associated probability of occurrence.
Expectations about the future are generally based on experience, modified if the
future is reasonably expected to differ from the past. In some circumstances,
identifiable factors may indicate that unadjusted historical experience is a relatively
poor predictor of future experience.
For example, if an undertaking with two distinctly different lines of business disposes
of the one that was significantly less risky than the other, historical volatility may not
be the best information on which to base reasonable expectations for the future.
In other circumstances, historical information may not be available. For example, a
newly-listed undertaking will have little, if any, historical data on the volatility of its
share price.
In summary, an undertaking should not simply base estimates of volatility, exercise
behaviour and dividends on historical information without considering the extent to
which the past experience is expected to be reasonably predictive of future
experience.
Expected early exercise
Staff often exercise share options early, for a variety of reasons. For example,
member of staff share options are typically non-transferable. This often causes staff to
exercise their share options early, because that is the only way for the staff to
liquidate their position. Also, staff who cease employment are usually required to
exercise any vested options within a short period of time, otherwise the share options
www. accountingreform.ru
are forfeited. Other factors causing early exercise are risk aversion and lack of wealth
diversification.
The means by which the effects of expected early exercise are taken into account
depends upon the type of option pricing model applied. For example, expected early
exercise could be taken into account by using an estimate of the option’s expected life
(which, for a member of staff share option, is the period of time from grant date to the
date on which the option is expected to be exercised) as an input into an option
pricing model (eg the Black-Scholes-Merton formula). Alternatively, expected early
exercise could be modelled in a binomial or similar option pricing model that uses
contractual life as an input.
Factors to consider in estimating early exercise include:
1. the length of the vesting period, because the share option typically cannot be
exercised until the end of the vesting period. Hence, determining the valuation
implications of expected early exercise is based on the assumption that the options
will vest.
2. the average length of time similar options have remained outstanding in the past.
3. the price of the underlying shares. Experience may indicate that the staff tend to
exercise options when the share price reaches a specified level above the exercise
price.
4. the member of staff’s level within the organisation. For example, experience might
indicate that higher-level staff tend to exercise options later than lower-level staff.
5. expected volatility of the underlying shares. On average, staff might tend to
exercise options on highly volatile shares earlier than on shares with low volatility.
When estimating the expected life of share options granted to a group of staff, the
undertaking could base that estimate on an appropriately weighted-average expected
life for the entire member of staff group or on appropriately weighted-average lives for
subgroups of staff within the group, based on more detailed data about staff exercise
behaviour.
Separating an option grant into groups for staff with relatively homogeneous exercise
behaviour is likely to be important. Option value is not a linear function of option term;
value increases at a decreasing rate as the term lengthens.
For example, if all other assumptions are equal, although a two-year option is worth
more than a one-year option, it is not worth twice as much. That means that
calculating estimated option value on the basis of a single weighted-average life that
25
includes widely differing individual lives would overstate the total fair value of the
share options granted. Separating options granted into several groups, each of which
has a relatively narrow range of lives included in its weighted-average life, reduces
that overstatement.
Similar considerations apply when using a binomial or similar model. For example, the
experience of an undertaking that grants options broadly to all levels of staff might
indicate that top-level executives tend to hold their options longer than middle-
management staff hold theirs and that lower-level staff tend to exercise their options
earlier than any other group.
In addition, staff who are encouraged or required to hold a minimum amount of their
employer’s equity instruments, including options, might generally exercise options
later than staff not subject to that provision. In those situations, separating options by
groups of recipients with relatively homogeneous exercise behaviour will result in a
more accurate estimate of the total fair value of the share options granted.
Expected volatility
Expected volatility is a measure of the amount by which a price is expected to
fluctuate during a period. The measure of volatility used in option pricing models is the
annualised standard deviation of the continuously compounded rates of return on the
share over a period of time. Volatility is typically expressed in annualised terms that
are comparable, regardless of the time period used in the calculation, for example,
daily, weekly or monthly price observations.
The rate of return (which may be positive or negative) on a share for a period
measures how much a shareholder has benefited from dividends and increase (or
reduction) of the share price.
The expected annualised volatility of a share is the range within which the
continuously compounded annual rate of return is expected to fall approximately two-
thirds of the time.
For example, to say that a share with an expected continuously compounded rate of
return of 12 per cent has a volatility of 30 per cent means that the probability that the
rate of return on the share for one year will be between -18 per cent (12% - 30%) and
42 per cent (12% + 30%) is approximately two-thirds. If the share price is $100 at the
beginning of the year and no dividends are paid, the year-end share price would be
expected to be between $83.53 ($100 × e -0.18) and $152.20 ($100 × e 0.42)
approximately two-thirds of the time.
Factors to consider in estimating expected volatility include:
www. accountingreform.ru
1. implied volatility from traded share options on the undertaking’s shares, or other
traded instruments of the undertaking that include option features (such as convertible
debt), if any.
2. the historical volatility of the share price over the most recent period that is
generally commensurate with the expected term of the option (taking into account the
remaining contractual life of the option and the effects of expected early exercise).
3. the length of time an undertaking’s shares have been publicly traded. A newly-
listed undertaking might have a high historical volatility, compared with similar
undertakings that have been listed longer.
4. the tendency of volatility to revert to its mean, ie its long-term average level, and
other factors indicating that expected future volatility might differ from past volatility.
For example, if an undertaking’s share price was extraordinarily volatile for some
identifiable period of time because of a failed takeover bid or a major restructuring,
that period could be disregarded in computing historical average annual volatility.
5. appropriate and regular intervals for price observations. The price observations
should be consistent from period to period.
For example, an undertaking might use the closing price for each week or the highest
price for the week, but should be consistent. Also, the price observations should be
expressed in the same currency as the exercise price.
Newly-listed undertakings
If a newly-listed undertaking does not have sufficient information on historical
volatility, it should nevertheless compute historical volatility for the longest period for
which trading activity is available. It could also consider the historical volatility of
similar undertakings following a comparable period in their lives.
For example, an undertaking that has been listed for only one year and grants options
with an average expected life of five years might consider the pattern and level of
historical volatility of undertakings in the same industry for the first six years in which
the shares of those undertakings were publicly traded.
Unlisted undertakings
An unlisted undertaking will not have historical information to consider when
estimating expected volatility. Some factors to consider instead are set out below.
26
In some cases, an unlisted undertaking that regularly issues options or shares to staff
(or other parties) might have set up an internal market for its shares. The volatility of
those share prices could be considered when estimating expected volatility.
Alternatively, the undertaking could consider the historical or implied volatility of
similar listed undertakings, for which share price or option price information is
available, to use when estimating expected volatility. This would be appropriate if the
undertaking has based the value of its shares on the share prices of similar listed
undertakings.
If the undertaking has used another valuation methodology to value its shares, the
undertaking could derive an estimate of expected volatility consistent with that
valuation methodology.
For example, the undertaking might value its shares on a net asset or earnings basis.
It could consider the expected volatility of those net asset values or earnings.
Expected dividends
Whether expected dividends should be taken into account when measuring the fair
value of shares or options depends on whether the counterparty is entitled to
dividends.
Option pricing models generally call for expected dividend yield. However, the models
may be modified to use an expected dividend amount rather than a yield. An
undertaking may use either its expected yield or its expected payments. If the
undertaking uses the latter, it should consider its historical pattern of increases in
dividends.
For example, if an undertaking’s policy has generally been to increase dividends by
approximately 3 per cent per year, its estimated option value should not assume a
fixed dividend amount throughout the option’s life unless there is evidence that
supports that assumption.
Generally, the assumption about expected dividends should be based on publicly-
available information. An undertaking that does not pay dividends and has no plans to
do so should assume an expected dividend yield of zero.
However, an emerging undertaking with no history of paying dividends might expect
to begin paying dividends during the expected lives of its member of staff share
options. Those undertakings could use an average of their past dividend yield (zero)
and the mean dividend yield of an appropriately comparable peer group.
www. accountingreform.ru
Risk-free interest rate
Typically, the risk-free interest rate is the implied yield currently available on zero-
coupon government issues of the country in whose currency the exercise price is
expressed, with a remaining term equal to the expected term of the option being
valued (based on the option’s remaining contractual life and taking into account the
effects of expected early exercise).
It may be necessary to use an appropriate substitute, if no such government issues
exist or circumstances indicate that the implied yield on zero-coupon government
issues is not representative of the risk-free interest rate (for example, in high inflation
economies).
Also, an appropriate substitute should be used if market participants would typically
determine the risk-free interest rate by using that substitute when estimating the fair
value of an option with a life equal to the expected term of the option being valued.
Capital structure effects
Typically, third parties, not the undertaking, write traded share options. When these
share options are exercised, the writer delivers shares to the option holder. Those
shares are acquired from existing shareholders. Hence the exercise of traded share
options has no dilutive effect.
In contrast, if share options are written by the undertaking, new shares are issued
when those share options are exercised (either actually issued or issued in
substance, if shares previously repurchased and held in treasury are used).
Given that the shares will be issued at the exercise price rather than the current
market price at the date of exercise, this actual or potential dilution might reduce the
share price, so that the option holder does not make as large a gain on exercise as on
exercising an otherwise similar traded option that does not dilute the share price.
Whether this has a significant effect on the value of the share options granted
depends on various factors, such as the number of new shares that will be issued on
exercise of the options compared with the number of shares already issued. Also, if
the market already expects that the option grant will take place, the market may have
already factored the potential dilution into the share price at the date of grant.
However, the undertaking should consider whether the possible dilutive effect of the
future exercise of the share options granted might have an impact on their estimated
fair value at grant date. Option pricing models can be adapted to take into account
this potential dilutive effect.
27
Modifications to equity-settled share-based payment arrangements
The undertaking should recognise the effects of modifications that increase the total
fair value of the share-based payment arrangement, or are otherwise beneficial to the
member of staff.
1. if the modification increases the fair value of the equity instruments granted (eg by
reducing the exercise price), measured immediately before and after the modification,
the undertaking 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.
If the modification occurs after vesting date, the incremental fair value granted is
recognised immediately, or over the vesting period if the member of staff is required
to complete an additional period of service before becoming unconditionally entitled to
those modified equity instruments.
2. similarly, if the modification increases the number of equity instruments granted,
the undertaking shall include the fair value of the additional equity instruments
granted, measured at the date of the modification, in the measurement of the amount
recognised for services received as consideration for the equity instruments granted,
consistently with the requirements in (1) above.
For example, if the modification occurs during the vesting period, the fair value of the
additional equity instruments 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 additional equity instruments vest, in addition to the amount based on
the grant date fair value of the equity instruments originally granted, which is
recognised over the remainder of the original vesting period.
3. if the undertaking modifies the vesting conditions in a manner that is beneficial to
the member of staff, for example, by reducing the vesting period or by modifying or
eliminating a performance condition (other than a market condition, changes to which
are accounted for in accordance with (a) above), the undertaking shall take the
modified vesting conditions into account.
www. accountingreform.ru
Furthermore, if the undertaking modifies the terms or conditions of the equity
instruments granted in a manner that reduces the total fair value of the share-based
payment arrangement, or is not otherwise beneficial to the member of staff, the
undertaking shall nevertheless continue to account for the services received as
consideration for the equity instruments granted as if that modification had not
occurred (other than a cancellation of some or all the equity instruments granted). For
example:
1. if the modification reduces the fair value of the equity instruments granted,
measured immediately before and after the modification, the undertaking shall not
take into account that decrease in fair value and shall continue to measure the
amount recognised for services received as consideration for the equity instruments
based on the grant date fair value of the equity instruments granted.
2. if the modification reduces the number of equity instruments granted to a member
of staff, that reduction shall be accounted for as a cancellation of that portion of the
grant.
3. if the undertaking modifies the vesting conditions in a manner that is not beneficial
to the member of staff, for example, by increasing the vesting period or by modifying
or adding a performance condition (other than a market condition, changes to which
are accounted for in accordance with (1) above), the undertaking shall not take the
modified vesting conditions into account.
APPENDIX 2 – VALUATION CONSIDERATIONS
Gathering the required information
The fair value of a share option is determined using valuation models when market
prices are not available. The commonly used models are the Black-Scholes model,
the Binomial model and the Monte-Carlo model. All these models are derived from
the same underlying theories. However, they vary in the extent to which it is possible
to reflect the specific terms of a particular award or variations in the assumptions.
The choice of modelling approach will be influenced by the details of the award. The
Black-Scholes model will generally be appropriate for a simple option that has a
three-year service vesting period and a six-month exercise period. The Binomial
model is an extension of the Black-Scholes model and allows for an extended
exercise window. The Monte-Carlo model may be the only way to value a complex
option with, for example, a 10-year contractual term and market conditions for a
newly listed company that expects share price volatility to be high following the IPO
and then to reduce.
28
 The majority of staff options cannot be traded, so staff only has the choice of either
keeping or exercising the option. Exercising is the only way in which value can be
Most modelling approaches will need consideration of at least the following
realised. This means that most staff share options are exercised much earlier than
parameters:
their contractual term. As the value of an option is related to its duration,
management needs to estimate how long that will be. This will be straightforward for
• Share price at grant date: the market value of shares should be easy to ascertain if
some types of arrangement, as they have a limited exercise window. But this will be
the share is traded. However, this may require some effort for unlisted entities. A
complex for many other types of arrangement, as staff may be able to exercise at any
value will be needed for tax purposes in most jurisdictions but that may not always be
time between, for example, the third and 10th anniversary of the grant.
fair value.
Factors to consider include: what has past experience been? Have staff exercised as
• Exercise price: this should be clearly identifiable from the terms of the award. If it is
soon as possible or held on to their options for as long as possible? What factors
not, it is unlikely that the parties to the award can be considered to have a ‘shared
might influence the staff’ choices? Some examples of factors that may influence staff
understanding of the terms’. This would mean the grant date has not yet been
behaviour are:
established.
• The intrinsic value of the option: staff might exercise their options once a certain
• Share price volatility: a history of market prices will provide evidence of historical
level of gain has been reached, either in absolute or percentage terms.
volatility for actively traded shares, but does that provide a reasonable guide to the
future? What special events may have distorted that history? For other shares without
• General state of the equity market: if markets are generally climbing, staff might be
a trading record, a comparator group or
more inclined to hold on to their options as long as possible. If markets are
a sector-specific index may provide an indication. How you choose a comparator or
performing poorly, staff might decide to exercise as soon as they see a gain.
index will be a matter of judgement, but market data should be taken into account
wherever possible.
• The dividend yield on the share: when the share does not pay a dividend, the
option holder does not lose anything by not exercising the option. For a dividend-
• The risk-free rate of return: this should be based on zero-coupon government-bond
paying share, the option holder is forgoing the dividends that exceed the risk-free rate
yields of appropriate duration, which should be available from market indicators.
of return on the cash that would be used to fund the exercise price of the options.
• The expected dividends: these can influence the value of awards, depending on
• Tax treatment of the benefits: this can vary significantly between territories. If a tax
how they will be treated. For example, for an option, dividends are effectively ‘lost’
charge crystallises on vesting, staff may have to exercise to meet their tax liability.
until exercise; for
some forms of share awards, they are reinvested. Is the assumption consistent with
Entities may find gathering the required information and tracking the awarded
any policy or forecasts given to markets? Could the assumption that is subject to
instruments a challenge, as there may have been less need for the information in the
stock-exchange regulations be considered a forecast by markets?
past and data may not have been kept in a form that permits the necessary detail to
be extracted. The complexity of data gathering depends on the extent and complexity
• Performance conditions: what are the possible outcomes? How can the likelihood
of awards and the availability of records that track the awarded instruments in the
of these possible outcomes be evaluated? What data are the performance conditions
required form.
measured on?

• Expected life: the factors relevant to determining the expected life of an option are
the contractual term, the possibility of an early exercise, and whether the option can
be traded.

www. accountingreform.ru 29
 APPENDIX 3 - TAX EFFECTS OF SHARE-BASED PAYMENT
TRANSACTIONS
Whether expenses arising from share-based payment transactions are deductible,
and if so, whether the amount of the tax deduction is the same as the reported
expense and whether the tax deduction arises in the same accounting period, varies
from country to country.
If the amount of the tax deduction is the same as the reported expense, but the tax
deduction arises in a later accounting period, this will result in a deductible temporary
difference under IAS 12 Income Taxes. Temporary differences usually arise from
differences between the carrying amount of assets and liabilities and the amount
attributed to those assets and liabilities for tax purposes.
www. accountingreform.ru
However, IAS 12 also deals with items that have a tax base but are not recognised as
assets and liabilities in the balance sheet. It gives an example of research costs that
are recognised as an expense in the financial statements in the period in which the
costs are incurred, but are deductible for tax purposes in a later accounting period.
IAS 12 states that the difference between the tax base of the research costs, being
the amount that will be deductible in a future accounting period, and the carrying
amount of nil is a deductible temporary difference that results in a deferred tax asset.
Applying this guidance indicates that if an expense arising from a share-based
payment transaction is recognised in the financial statements in one accounting
period and is tax-deductible in a later accounting period, this should be accounted for
as a deductible temporary difference.
A deferred tax asset is recognised for all deductible temporary differences to the
extent that it is probable that taxable profit will be available against which the
deductible temporary difference can be used.
If the undertaking is able to claim a tax deduction for the total transaction amount at
the date of grant but the undertaking records an expense arising from that transaction
30
over the vesting period should be accounted for as a taxable temporary difference,
and a deferred tax liability should be recognised.
However, the amount of the tax deduction might differ from the amount of the
expense recognised in the financial statements. For example, the measurement basis
applied for accounting purposes might not be the same as that used for tax purposes,
for example intrinsic value might be used for tax purposes and fair value for
accounting purposes.
Similarly, the measurement date might differ. For example, US undertakings receive a
tax deduction based on intrinsic value at the date of exercise in respect of some share
options, whereas for accounting purposes an undertaking applying SFAS 123 would
recognise an expense based on the option's fair value, measured at the date of grant.
There could also be other differences in the measurement method applied for
accounting and tax purposes, for example differences in the treatment of forfeitures or
different valuation methodologies applied.
If grant date measurement is used for accounting purposes and exercise date
measurement is used for tax purposes. Under grant date measurement, any changes
in the value of the equity instrument after grant date accrue to the members of staff
(or other party) in their capacity as equity participants. Therefore, some argue that
any tax effects arising from those valuation changes should be credited to equity (or
debited to equity, if the value of the equity instrument declines).
Similarly, some argue that the tax deduction arises from an equity transaction (the
exercise of options), and hence the tax effects should be reported in equity. It can
also be argued that this treatment is consistent with the requirement to account for the
tax effects of transactions or events in the same way as the undertaking accounts for
those transactions or events themselves.
If the tax deduction relates to both an income statement item and an equity item, the
associated tax effects should be allocated between the income statement and equity.
Others disagree, arguing that the tax deduction relates to staff remuneration expense,
that is an income statement item only, and therefore all of the tax effects of the
deduction should be recognised in the income statement. The fact that the taxing
authority applies a different method in measuring the amount of the tax deduction
does not change this conclusion.
The IASB noted that, if one accepts that it might be appropriate to debit/credit to
equity the tax effect of the difference between the amount of the tax deduction and
the total recognised expense where that difference relates to changes in the value of
www. accountingreform.ru
equity interests, there could be other reasons why the amount of the tax deduction
differs from the total recognised expense.
For example, grant date measurement may be used for both tax and accounting
purposes, but the valuation methodology used for tax purposes might produce a
higher value than the methodology used for accounting purposes (the effects of early
exercise might be ignored when valuing an option for tax purposes).
Under IAS 12, the deferred tax asset for a deductible temporary difference is based
on the amount the taxation authorities will permit as a deduction in future periods.
Therefore, the measurement of the deferred tax asset should be based on an
estimate of the future tax deduction. If changes in the share price affect that future tax
deduction, the estimate of the expected future tax deduction should be based on the
current share price.
If a later measurement date is applied for tax purposes, it is very unlikely that the tax
deduction will ever equal the cumulative expense, except by coincidence.
For example, if share options are granted to staff, and the undertaking receives a tax
deduction measured as the difference between the share price and the exercise price
at the date of exercise, it is extremely unlikely that the tax deduction will ever equal
the cumulative expense.
CONCLUSIONS
1. If the tax deduction expected to be received is less than or equal to the cumulative
expense, the associated tax benefits expected to be received should be recorded as
tax income and included in the income statement for the period.
2. If the tax deduction expected to be received exceeds the cumulative expense, the
excess associated tax benefits expected to be received should be recognised directly
in equity.
31
 APPENDIX 4 - APPLYING IFRS 2 IN PRACTICE - WAYNE HOLDINGS
(FROM PRICEWATERHOUSECOOPERS PUBLICATION: SHARE-BASED PAYMENT)

This section illustrates the accounting for the various types of share-based payment transactions that were entered into by fictional multinational company Wayne Holdings, Inc.
(Wayne Holdings).
It also provides the disclosures that Wayne Holdings is required to present for these transactions.
(The numbers in this section are provided for illustrative purposes only. They do not necessarily reflect the results that actual share-based payment transactions would produce.)

Wayne Holdings is a calendar-year IFRS preparer, and the recognition, measurement and disclosures are illustrated for its 31 December 2005 year-end.

Wayne Holdings applies IFRS 2 to all shares, share options and other equity instruments that were granted after 7 November 2002 and not vested as of 1 January 2005. Wayne
Holdings also applies IFRS 2 to the modifications made after 1 January 2005 to the terms and conditions of equity instruments granted before 7 November 2002. Wayne Holdings
applies IFRS 2 retrospectively to liabilities arising from share-based payment transactions existing at 1 January 2005.

A four-step approach has been taken in the analysis of the IFRS 2 transactions:

• Step A: Obtain the key data needed to perform the calculations;

• Step B: Make an initial estimate of the total amounts to be recorded;

• Step C: Determine the expense for each year and the corresponding journal entries; and

• Step D: Determine tax adjustments.

Details of factors to be considered in valuations of share-based payment transactions are included in Appendix A – ‘Valuation considerations’.

1. Share options granted to key executives

Wayne Holdings grants 100 share options to each of its 10 key executives at 1 January 2005, with the following conditions:

(1) they must complete three years of service, and

(2) there must be an 18% increase in share price by the end of 2007.

Wayne Holdings estimates that its 10 executives will complete the three-year service period. The fa ir value of one option at grant date is €5. The market condition of an 18%
increase in the share price has been included in the fair value of €5. The exercise price of each option is €3. The options have a contractual life of 10 years, and Wayne Holdings has
estimated their value using a Monte-Carlo model.
www. accountingreform.ru 32
Step A: Obtain the key data needed to perform the calculations

Grant date 1 January 2005

Vesting date 31 December 2007

Options per key executive 100

Fair value per option at grant date €5

Number of staff entitled to options 10

Exercise price €3

Departure rate (estimated at grant date) 0%

Market-based performance condition 18% increase in share price

Step B: Make an initial estimate of the total amount to be recorded

Step Result Explanation

Totalfair valueof on e aw ard €500 100 optionsat a fair valueof €5

Total num berof aw ardsexp ectedto vest 10 10 x 100%

Total com pensation
expense €5,000 10 x 500

Step C: Determine the expense for each year and the corresponding journal entries
At grant date, Wayne Holdings expected that none of the key executives would leave the compan y during the vesting period.

No staff left Wayne Holdings during 2005, but two staff unexpectedly left the company during 2006. Wayne Holdings therefore revised its total compensation expense down to
€4,000 (8 x €500). The increase in share price exceeded the increase in the share price threshold by the end of 2007.

As a result, eight staff vested their options at the end of 2007. These options are exercised on 5 January 2008, and Wayne Holdings issues shares with a par value of €1 to its staff.

www. accountingreform.ru 33
Yearended C harge Explanation
31 Decem ber2005 €1,667 5,000x 1/3
31 Decem ber2006 €1,000 4,000x 2/3 – 1,667
The chargerecognisedin 2005for the tw o staffthat unexpectedly
left the com pany is adjustedin 2006

31 Decem ber2007 €1,333 4,000x 3/3 – 2,667

Total €4,000 8 staffx 500

The journal entries are determined as follows:

(Amounts shown in euros)
Dr Cr

1) Recognition of staff benefits expense in 2005

Dr Staff benefits expense 1,667

Cr Equity (separate component) 1,667

2) Recognition of staff benefits expense in 2006

Dr Staff benefits expense 1,000

Cr Equity (separate component) 1,000

3) Recognition of staff benefits expense in 2007

Dr Staff benefits expense 1,333

Cr Equity (separate component) 1,333

4) Recognition of shares issued on exercise

(100 shares to 8 staff at a nominal value of €1)

Dr Equity (separate component) 4,000

Cr Equity (share capital) 800
Cr Equity (share premium) 3,200

5) Receipt of the exercise price (100 shares to 8 staff at €3 per share)

Dr Cash and cash equivalents 2,400

Cr Equity (share premium) 2,400

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that the tax deduction relating to an equity-settled share-based payment transaction involving share
options is based on the difference between the share price and the exercise price of an option at exercise date, which represents the intrinsic value for tax purposes.
The following information will need to be gathered in order to determine the tax consequences of the share options.

www. accountingreform.ru 34
 1 January 2005 31 December2005 31 December2006 31 December2007 5 January 2008
(grant date) (vestingdate) (exercise date)

S hareprice €7 €9 €15 €22 €23

E xerciseprice €3 €3 €3 €3 €3

In trinsicvalue €4 €6 €12 €19 €20

N u m berof op tions 1,000 1,000 800 800 800

outstanding and expected
to vest

Tax rate 40% 40% 40% 40% 40%

C o m p enation
s – €1,667 €2,667 €4,000 €4,000
expen se(cu m uative
l )

B en efitb asedon – €2,000 €6,400 €15,200 €16,000

intrinsicvalue (6 x 1,000)x 1/3 (12 x 800)x 2/3 (19 x 800)x 3/3 (2 0 x 80 0)

D eferredtax asset – €800 €2,560 €6,080 –

(at 40% )

C urrenttax receivabe l – – – – €6,400

(16,000x 40% )

C h an gein d eferre
d – €800 €1,760 €3,520 (€6,080)
tax asset
D eferredtax:
– recordedin profit – €667 €400 €533 (€1,600)
o r lo ss (1,667x 40%) (2,667x 40% (4,000x 40% (4,000 x 40% )
-667) -667-400)
– recordedin equity – €133 €1,360 €2,987 (€4,480)
(800-667) (1,760-400) (3,520-533) (133+1,360+
2,987)

www. accountingreform.ru 35
The journal entries are determined as follows:
(Amounts shown in euros)
Dr Cr
1) Recognition of deferred tax asset at 31 December 2005
Dr Deferred tax asset 800
Cr Deferred tax income 667
Cr Equity (separate component) 133

2) Recognition of deferred tax asset at 31 December 2006

Dr Deferred tax asset 1,760
Cr Deferred tax income 400
Cr Equity (separate component) 1,360

3) Recognition of deferred tax asset at 31 December 2007

Dr Deferred tax asset 3,520
Cr Deferred tax income 533
Cr Equity (separate component) 2,987

4) Derecognition of deferred tax asset at the exercise date on 5 January 2008

Dr Deferred tax expense 1,600
Dr Equity (separate component) 4,480
Cr Deferred tax asset 6,080

5) Recognition of current income tax benefit at the exercise date on 5 January 2008
Dr Current income tax receivable 6,400
Cr Current tax income (profit or loss) 1,600
Cr Equity (share premium) 4,800

www. accountingreform.ru 36
2. Performance conditions – an increase in earnings
Wayne Holdings grants 100 shares to each of its 500 management-level staff at 1 January
2005, conditional upon the staff remaining in Wayne Holdings’ employment during the vesting period.
The shares will vest at the end of year one if:
- the company’s earnings increase by more than 10%;
- at the end of year two if the company’s earnings increase by more than 15 % over the two- year period;
and
- at the end of year three if the undertaking’s earnings increase by more than 36% over the three-year period. The fair value of one share at grant date is €7.

Wayne Holdings’s earnings have increased by 8% by the end of 2005, and 30 staff have left.
The company expects that earnings will continue to increase at a similar rate in 2006 and therefore expects that the shares will vest at the end of 2006.
Wayne Holdings also expects that an additional 30 staff will leave in 2006, and that 440 staff will receive their shares at the end 2006.

Step A: Obtain the key data needed to perform the calculations

Grant date 1 January 2005
Estimated vesting date (estimated at grant date and re-estimated each period) 31 December 2006
Shares per employee 100
Fair value per share at grant date €7
Number of staff entitled to shares 500
Estimated departures 30 per year
Exercise price €0
(A grant of shares effectively represents a grant of options with an exercise price of nil.)

Step B: Make an initial estimate of the total amount to be recorded

Step Result Explanation
Total fair value of one award €700 100 shares at a fair value of €7
Total number of awards expected to vest 440 500-2 x 30
Total compensation expense €308,000 440 x €700

Step C: Determine the expense for each year and the corresponding journal entries
By the end of 2006, Wayne Holdings’ earnings in fact increase by 12% and the shares do not therefore vest. Additionally, only 28 staff leave during 2006, rather than 30 originally
estimated by Wayne Holdings. Wayne Holdings believes that an additional 25 staff will leave in 2007
and earnings will increase so that the performance target will be achieved in 2007.
 By the end of 2007, only 23 staff have left, compared with Wayne Holdings’ original estimation of 25, and the performance target has been met. Wayne Holdings therefore revised the
total compensation expense as follows:

Year ended Charge Explanation

31 December 2005 €154,000 440 x €700 x 1/2
31 December 2006 €40,600 (417 x €700 x 2/3)-€154,000
31 December 2007 €98,700 419 x €700 x 3/3-€154,000-€40,600
Total €293,300 419 x €700

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of staff benefits expense for 2005

Dr Staff benefits expense 154,000
Cr Equity (separate component) 154,000

2) Recognition of staff benefits expense for 2006

Dr Staff benefits expense 40,600
Cr Equity (separate component) 40,600

3) Recognition of staff benefits expense for 2007

Dr Staff benefits expense 98,700
Cr Equity (separate component) 98,700

4) To record shares issued

Dr Equity (separate component) 293,300
Cr Equity (share capital at par value of €1 per share) 41,900
Cr Equity (share premium) 251,400

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that the tax deduction relating to this equity-settled share-based payment transaction is based on the share price at the
vesting date. The following information will need to be gathered in order to determine the tax consequences of the compensation expense:

31 Decem ber2005 31 Decem ber2006 31 Decem ber2007

(vestingdate)
Share price at each year end €9 €15 €22

N um ber of shares expected 440 417 419

to vest (in hundreds)

Tax rate 40% 40% 40%

C om pensation expense €154,000 €194,600 €293,300

(cum ulative)

Tax benefit based on €198,000 €417,000 €921,800

intrinsicvalue (440 x 100 x 9 x 1/2) (417 x 100 x 15 x 2/3) (419 x 100 x 22 x 3/3)

D eferred tax asset (40% ) €79,200 €166,800 –

C urrent incom e tax – – €368,720

(balance sheet) (921,800 x 40% )

C hange in deferred tax asset €79,200 €87,600 (€166,800)

D eferred tax:
– recognised in the €61,600 €16,240 (€77,840)
incom e statem ent (154,000 x 40% ) (194,600 – 154,000) x 40% (61,600+16,240)

– recognised in equity €17,600 €71,360 (€88,960)

(79,200-61,600) (87,600-16,240) (17,600+71,360)
 The journal entries are determined as follows:
(Amounts shown in euros) Dr Cr

1) Recognition of deferred tax asset at 31 December 2005

Dr Deferred tax asset 79,200

Cr Deferred tax income 61,600
Cr Equity (separate component) 17,600
2) Recognition of deferred tax asset at 31 December 2006
Dr Deferred tax asset 87,600
Cr Deferred tax income 16,240
Cr Equity (separate component) 71,360
3) Derecognition of deferred tax asset at the vesting date
Dr Equity (separate component) 88,960
Dr Deferred tax expense 77,840
Cr Deferred tax asset 166,800
4) Recognition of current income tax benefit at the vesting date
Dr Current income tax receivable 368,720
Cr Current tax income (profit or loss) (293,300 x 40%) 117,320
Cr Equity (share premium) 251,400

3. Share options – repricing

Wayne Holdings granted 100 share options to each of its 600 management-level staff at
1 January 2002, conditional upon the staff remaining employed by Wayne Holdings over a five-year period.
The share price at grant date was €20. The exercise price is €25.
Wayne Holdings decides to reprice the options at 2 January 2005, at an exercise price of €10.
At the repricing date, Wayne Holdings estimates that the fair value of the original award (before taking into account the repricing) is €1.50, and the fair value of the repriced award is €3.
The incremental value is therefore €1.50. The repriced options will vest at the end of 2006.
Wayne Holdings has 500 staff left at the date of repricing and estimates that 440 staff will receive their share options at the end 2006. It estimates that 30 staff will leave in 2005, and
that another 30 will leave in 2006.
The actual number of leavers was 30 for 2005, and 28 for 2006.

The options are all exercised on 31 December 2007.

Step A: Obtain the key data needed to perform the calculations
Modification date 2 January 2005

Vesting date 31 December 2006

Share options per employee 100

Incremental fair value per option at the modification date €1.50

Number of staff entitled to options 500

Estimated departures over a two-year period 60

Step B: Make an initial estimate of the total amount to be recorded

Compensation expense under the old arrangement (from 2002 through 2006):
Wayne Holdings is not required to apply IFRS 2 to the original grant, as the instruments were granted prior to 7 November 2002. However, it is required to apply IFRS 2 to the
modification, as the repricing occurred after 1 January 2005.

Compensation expense for the incremental value arising from the repriced award (from 2005 through 2006):

Step R esult Explanation

To talfair valu eof eachaw ard €150 100 optionsat an increm ental
valueof €1.50

Totalnum berof aw ardsexpectedto vest 440 500-60

Total com pensation
expense €66,000 440 x €150

Step C: Determine the expense for each year and the corresponding journal entries
The compensation expense arising from the repricing, considering the revised estimates of the number of staff expected to leave, is determined as follows:

Year Charge Explanation

31 Decem ber2005 €33,000 440 staffx €150 x 1/2
31 Decem ber2006 €33,300 442 staffx €150 x 2/2 – €33,000

Total €66,300 442 staffx 150

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of staff benefits expense for 2005

Dr Staff benefits expense 33,000

Cr Equity (separate component) 33,000

2) Recognition of staff benefits expense for 2006

Dr Staff benefits expense 33,300

Cr Equity (separate component) 33,300

3) Recognition of shares issued on exercise

Dr Cash and cash equivalents 442,000

Cr Equity (share capital) (44,200 shares at par value of €1 per share) 44,200
Cr Equity (share premium) 397,800

Dr Equity (separate component) 66,300

Cr Equity (share premium) 66,300

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that the tax deduction relating to this equity-settled share-based payment transaction involving share options is based on
the difference between the share price and the exercise price of an option at exercise date, which represents the intrinsic value for tax purposes. The information that will need to
be gathered in order to determine the tax consequences of the compensation expense is overleaf.

1 December 2005 31 December 2006 31 December 2007

 (vesting date) (exercise date)

Share price at each year end €9 €15 €22

Exercise price €10 €10 €10
Intrinsic value €0 €5 €12

Number of options expected 440 442 442

to vest (in hundreds)

Tax rate 40% 40% 40%

Compensation expense €33,000 €66,300 €66,300

(cumulative)

Tax benefit based on – €221,000 €530,400

intrinsic value (442 x 100 x 5 x 2/2) (442 x 100 x 12)

Current tax receivable (40%) – – €212,160

Deferred tax asset (40%) – €88,400 –

Change in deferred tax asset – €88,400 (€88,400)

Deferred tax:
– recognised in the – €26,520 (€26,520)
income statement (66,300 x 40%)

– recognised in equity – €61,880 (€61,880)

(88,400-26,520)

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr
1) Recognition of deferred tax asset at 31 December 2005
Dr Deferred tax asset –
Cr Deferred tax income –
Cr Equity (separate component) –
2) Recognition of deferred tax asset at 31 December 2006
Dr Deferred tax asset 88,400
Cr Deferred tax income 26,520
Cr Equity (separate component) 61,880
3) Derecognition of deferred tax asset on exercise
Dr Equity (separate component) 61,880
Dr Deferred tax expense 26,520
Cr Deferred tax asset 88,400
4) Recognition of current tax receivable
Dr Current tax receivable 212,160
Cr Current tax income 26,520
Cr Equity (share premium) 185,640

4. Share appreciation rights

Wayne Holdings granted 10 share appreciation rights (SARs) to each member of a group of 40 management staff on 1 January 2004. The SARs provide the staff, at the date the rights
are exercised, the right to receive cash equal to the appreciation in the undertaking’s share price since the grant date. All of the rights vest on 31 December 2005.

They can be exercised during 2006 and 2007. The undertaking estimates that at grant date, the fair value of each SAR granted is €11, and 10% of the staff will leave evenly during the
two-year period.

The fair values and intrinsic values are shown below. In 2006, six staff exercise the SARs at 31 December 2006; the remaining 30 staff exercise the SARs in 2007.

D ate Fair value Intrinsicvalue

31 Decem ber2004 €12 €10
31 Decem ber2005 €8 €7

31 Decem ber2006 €13 €10

31 Decem ber2007 €12 €12

Intrinsic value equals fair value at the end of the life of a SAR because there is no time value.

Step A: Obtain the key data needed to perform the calculations

 Grant date 1 January 2004
Vesting date 31 December 2005
SAR per employee 10
Fair value per SAR at grant date €11
Number of staff entitled to SARs 40
Departure rate (evenly) 10%
Number of staff at 31 December 2004 38
Number of staff at 31 December 2005 36

Step B: Make initial estimate of the total amount to be recorded

This step is not applicable to cash-settled transactions.

Step C: Calculate the expense for each year and determine the corresponding journal entries

Year E xp en es Liability Explanation

31 Dec 2004 €2,160 €2,160 36 staffx 1 0 S A R sx €12 (fairvalue)x 50% (vestingperiod)

31 Dec 2005 €720 €2,880 36 staffx 10 S A R sx €8 (fairvalue)x 100%(vestingperiod)

The expensefor 2005is calculated by the differencebetw eenthe fair valueof the liabilityat 31 Decem ber2004and 31 D ecem ber2005.
31 Dec 2006 €1,620 €3,900 30 staffx 1 0 S A R sx €13 (fairvalue).
(1,020+600
)

The expensefor 2006includesthe cashpaidto the six staffthat exercisedtheir options

at 31 D ecem ber2006(6 staffx 10 S A R sx €10 ).

31 Dec 2007 (€300) – The liabilityis nil as all staffhave exercisedthe irS A R s.

T he cashpaidis €3,600(30 x 10 x 12). The incom eis the differencebetw eenthe liabilityat 31 D ecem ber2005(€3,900)
and the cashpaid(€3,600).
Total €4,200 n/a

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of staff benefits expense in 2004

Dr Staff benefits expense 2,160

Cr Liability 2,160

2) Recognition of staff benefits expense in 2005

Dr Staff benefits expense 720

Cr Liability 720

3) Recognition of staff benefits expense in 2006

Dr Staff benefits expense 1,620

Cr Liability 1,620

4) To record the cash paid to six staff who exercised their options in 2006

Dr Liability 600
Cr Cash and cash equivalents 600

5) Staff benefits expense in 2007 and exercise of the share appreciation rights by the 30 staff.

Dr Liability 3,900
Cr Staff benefits expense 300
Cr Cash and cash equivalents 3,600

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that the tax deduction relating to a cash- settled share-based payment transaction involving SARs is
based on the intrinsic value for tax purposes. The intrinsic value for tax purposes was determined as follows:

D ate Intrinsicvalue
31 Decem ber2004 €10
31 Decem ber2005 €7

31 Decem ber2006 €10

31 Decem ber2007 €12

The tax consequences of the SARs would then be determined as follows:

31 Decem ber2004 31 D ecem ber2005 31 Decem ber2006 31 Decem ber2007

Intrinsicvalue €10 €7 €10 €12

N um berof S A Rs 360 360 300 0

expectedto vestor outstandingaftervesting

Tax rate 40% 40% 40% 40%

Vesting 50% 100% 100% 100%

D eferredtax asset €720 €1,008 €1,200 –

(360 x 10 x 40%x (360 x 7 x 40% (300x 10 x 40%
50%) x 100%) x 100% )

C urrentincome – – €240 €1,440

tax receivabl
e (60 x €10 x 40%) (300x €12 x 40% )

C hanges in deferred €720 €288 €192 (€1,200)

tax asset

Tax recognisedin the €720 €288 €432 €240

incom estatem ent(currentand deferred)
The journal entries would be determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of deferred tax asset at 31 December 2004

Dr Deferred tax asset 720
Cr Deferred tax income 720
2) Recognition of deferred tax asset at 31 December 2005
Dr Deferred tax asset 288
Cr Deferred tax income 288
3) Recognition of deferred tax asset at 31 December 2006
Dr Deferred tax asset 192
Cr Deferred tax income 192
4) Recognition of current tax benefit at 31 December 2006
Dr Current tax receivable 240
Cr Current tax income (profit and loss) 240
5) Derecognition of deferred tax asset at 31 December 2007
Dr Deferred tax expense 1,200
Cr Deferred tax asset 1,200
6) Recognition of current income tax benefit at 31 December 2007
Dr Current tax receivable 1,440
Cr Current tax income (profit or loss) 1,440

5. Transactions with settlement alternatives

At 1 January 2005, Wayne Holdings grants its CEO the right to choose either 1,000 phantom shares
(ie, the right to receive a cash payment equal to the value of 1,000 shares) or 1,500 shares. The grant
is conditional upon the completion of two years of service. If the CEO chooses the share alternative, he must keep the shares for a period of five years. The share price is as follows:

D ate Fair value

1 January 2005 €7

31 Decem ber2005 €9
31 Decem ber2006 €15

31 Decem ber2007 €22

 After taking into account the effects of the post-vestin g transfer restrictions, the undertaking estimates that the grant date fair value of the share alternative is
€6.50 per share.
Step A: Obtain the key data needed to perform the calculations
Grant date 1 January 2005
Vesting date 31 December 2006
Fair value of share alternative at grant date €6.50

Step B: Make the initial estimate of the total amounts to be recorded

Calculate the fair values of the equity and debt alternatives.

Alternatives Fair value Calculation

E quityalternative €9,750 1,500x €6.50
C ashalte rnative €7,000 1,000x €7

The fair value of the equity component of the compound financial instrument is therefore €2,750.

Step C: Determine the expense for each year and the corresponding jour nal entries
The CEO exercises his cash option at the end of 2006. The equity and liability components to be recorded in 2005 and 2006 are determined as follows:

Year ended E xp enes Liability Equity Explanation

31 Decem ber2005 €4,500 €4,500 1,000x €9 x 1/2
31 Decem ber2005 €1,375 €1,375 €2,750x 1/2

31 Decem ber2006 €10,500 €10,500 (1,000x €15)-4,500

31 Decem ber2006 €1,375 €1,375 €2,750x 1/2

Total €17,750 €15,000 €2,750

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of staff benefits expense in 2005

Dr Staff benefits expense 5,875

Cr Liability 4,500
Cr Equity (separate component) 1,375

2) Recognition of staff benefits expense in 2006

Dr Staff benefits expense 11,875

Cr Liability 10,500
Cr Equity (separate component) 1,375

3) Settlement of the phantom shares

Dr Liability 15,000
Cr Cash and cash equivalents 15,000
Dr Equity (separate component) 2,750
Cr Equity (retained earnings) 2,750

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that the tax deduction relating to an arrangement with settlement alternatives is based on the share price at the date
of settlement for the phantom shares.

The tax consequences of the arrangement would be determined as follows:

Year ended 31 D ecem ber2005 31 D ecem ber2006

S hareprice €9 €15

N um berof S A R soutstanding
at eachyearend 1,000 1,000
Tax rate 40% 40%

Vesting 50% 100%

D eferredtax asset €1,800 –

(1,000x €9 x 40% )x 50%

C urrentincom etax receivabl

e – €6,000
(1,000x €15 x 40% )x 100%

Tax recognisedin the incom estatem ent(currentand deferred

) €1,800 €4,200
 The journal entries would be determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of deferred tax asset at 31 December 2005

Dr Deferred tax asset 1,800

Cr Deferred tax income 1,800

2) Derecognition of the deferred tax asset at 31 December 2006

Dr Deferred tax expense 1,800

Cr Deferred tax asset 1,800

3) Recognition of current tax benefit at 31 December 2006

Dr Current tax receivable 6,000

Cr Current tax income (profit and loss) 6,000

6. ‘Save as you earn’ schemes

500 Wayne Holdings staff participate in a share purchase plan on the following terms:

• Staff invest a fixed amount of €100 per month in a savings plan, operated by an independent investment manager, by deductions from their pay for a period of three years from 1 April 2005.

• The savings plan provides a fixed return of 10% of the final invested amount at the end of three years. This return is guaranteed by the investment manager operating the savings plan and has no
cost to the employer. Each employee will have accumulated savings of €3,960 after three years (€100 x 36 months, ie €3,600, plus 10% return = €3,960).

• In addition to the 10% return, staff will receive options with an exercise price of €6 if they remain staff. Each employee will therefore use the saved amount to acquire 660 shares (€3,960/€6 =
660 shares).

• At the end of the savings period, staff have a six-month exercise window.

Step A: Obtain the key data needed to perform the calculations

Grant date 1 April 2005

Vesting date 31 March 2008

Options per employee 660

Fair value per option at grant date €4

Number of staff entitled to options 500

Exercise price €6

Share price at grant date €8

Departures (estimated at grant date) 50

Step B: Make an initial estimate of the total amounts to be recorded

Step R esult Explanation

Totalfair valueof one award €2,640 660 optionsx €4

Total num berof aw ardsexpectedto vest 450 500-50

Total compensation
expense €1,188,000 450 x €2,640

Step C: Determine the expense for each year and the corresponding journal entries
At grant date, Wayne Holdings expected that 50 staff would leave the company during the vesting period. This estimate was not revised during the vesting period, as the number of staff leaving
during 2005, 2006 and 2007 was in line with expectations.

In 2008, more staff left the company than expected, and by 1 April 2008, 120 of the 500 staff had either left the company or stopped their saving and therefore forfeited their option rights.

As a result, 380 staff vested their options at the end of March 2008. These options are exercised on 5 April 2008, and Wayne Holdings issues shares with a par value of €1 to its staff.

The staff benefits expense is as follows:

Periodended E xp enes Explanation

31 Decem ber2005 €297,000 €2,640x 450 x 9/36

31 Decem ber2006 €396,000 €2,640x 450 x 12/36

31 Decem ber2007 €396,000 €2,640x 450 x 12/36

31 M arch2008 (€85,800) €2,640x 380 less expenserecognisedin 2005to 2007

This is the adjustm entfor actualforfeituresat end M arch2008
Total €1,003,200 380 staffx €2,640

The journal entries are as follows:

(Amounts shown in euros) Dr Cr

 1) Recognition of staff benefits expense in 2005

Dr Staff benefits expense 297,000

Cr Equity (separate component) 297,000

2) Recognition of staff benefits expense in 2006

Dr Staff benefits expense 396,000

Cr Equity (separate component) 396,000

3) Recognition of staff benefits expense in 2007

Dr Staff benefits expense 396,000

Cr Equity (separate component) 396,000

4) Staff benefits expense, including adjustment for actual forfeitures

Dr Equity (separate component) 85,800

Cr Staff benefits expense 85,800

5) Recognition of shares issued to staff at exercise price

Dr Cash and cash equivalents 1,504,800

Cr Equity (share capital) 250,800
Cr Equity (share premium) 1,254,000

Dr Equity (separate component) 1,003,200

Cr Equity (share premium) 1,003,200

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that the tax deduction relating to an equity-settled share-based payment transaction involving share options is based on the difference
between the share price and the exercise price of an option at exercise date, which represents the intrinsic value for tax purposes. In order to determine the tax consequences of accounting for the
expense, the following information will need to be gathered:

1 April 2005 31 December2005 31 December2006 31 December2007 5 April 2008

(grant date) (exercise date)
S hareprice €7 €9 €15 €22 €20
E xerciseprice €6 €6 €6 €6 €6

Intrinsicvalue €1 €3 €9 €16 €14

N um berof options 297,000 297,000 297,000 297,000 250,800

expectedto vest

Tax rate 40% 40% 40% 40% 40%

C om pens ation expense – €297,000 €693,000 €1,089,000 €1,003,200

(cum ulative)

B enefitbasedon €222,750 €1,559,250 €4,356,000 €3,511,200

intrinsicvalue (3 x 297,000x 9/36) (9 x 297,000x 21/36) (16 x 297,000 x 33/36) (250,800x 14)

D eferredtax asset – €89,100 €623,700 €1,742,400 –

(at 40% )

C urrenttax asset(40%) – – – – €1,404,480

C urrenttax:
– recognisedin profit
and loss
– recognisedin equity
– – – – €401,280
(1,003,20
0 x 40% )
– – – €1,003,200

C hangein deferred – €89,100 €534,600 €1,118,700 (€1,742,400)

tax asset

D eferredtax:
– recognisedin profit – €89,100 €188,100 €158,400 (€435,600)
and loss (693,000x 40%- (1,089,000x 40% -89,100) 89,100-188,100)

– recognisedin equity – – €346,500 €960,300 (€1,306,800)

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of deferred tax asset at 31 December 2005

Dr Deferred tax asset 89,100

Cr Deferred tax income 89,100

2) Recognition of the deferred tax asset at 31 December 2006

 Dr Deferred tax asset 534,600
Cr Deferred tax income 188,100
Cr Equity (separate component) 346,500

3) Recognition of the deferred tax asset at 31 December 2007

Dr Deferred tax asset 1,118,700

Cr Deferred tax income 158,400
Cr Equity (separate component) 960,300

4) Derecognition of the deferred tax asset at exercise date

Dr Deferred tax expense 435,600

Dr Equity (separate component) 1,306,800
Cr Deferred tax asset 1,742,400

5) Recognition of current tax benefit at exercise date

Dr Current tax receivable 1,404,480

Cr Equity (share premium) 1,003,200
Cr Current tax income (profit and loss) 401,280

7. In-kind capital contributions

Wayne Holdings issued 100,000 shares in exchange for a capital contribution of an office building. The ownership of the building was transferred to Wayne Holdings on 15 January 2005 when the
shares were issued. The fair value of the building on that date was €5,500,000.

Step A: Obtain the key data needed to perform the calculations

Date the goods or services were obtained 15 January 2005
Vesting 100%

Valuation report showing fair value of the building €5,500,000

Step B: Make an initial estimate of the total amounts to be recorded

The fair value of the building was determined to be €5,500,000 based on a report prepared by a professional valuer.

Step C: Determine the journal entries

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of Property, plant and equipment at 15 January 2005

Dr Property, plant and equipment 5,500,000
Cr Equity (share premium) 5,400,000
Cr Equity (share capital) (at par value of €1 per share) 100,000

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that the tax deduction is equal to tax consequences for 2005 and following years would be determined as follows (amounts expressed
in thousands):

31
Decem ber2005 31 Decem ber2006 Following years

C a rying valueof the building €4,950 €4,400 –

Tax baseof the building €4,950 €4,400 –

Tax rate 40% 40% 40%

Vesting 100% 100% 100%

C urrentincom etax received/receivabl

e €220 €440 €2,200
(5,500/10x 40% )x 100%
Tax recognisedin the incom estatem ent €220 €220 €1,760

The journal entries would be determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of current tax benefit at 31 December 2005

Dr Current tax receivable 220,000

Cr Current tax income (profit or loss) 220,000

2) Recognition of current tax benefit at 31 December 2006

Dr Current tax receivable 220,000

Cr Current tax income (profit or loss) 220,000

3) Recognition of current tax benefit rateably over the period of 2007 to 2014

Dr Current tax receivable 1,760,000

Cr Current tax income (profit or loss) 1,760,000

8. Shares for services

Wayne Holdings is establishing a media business and has hired a marketing agency to provide consultancy services. The services will be settled by issuing 50,000 shares.

Step A: Obtain the key data needed to perform the calculations

Period over which the service is provided 1 January to 28 February 2005
Fair value of the service €400,000

Fair value of the service was determined based on bids submitted by other marketing agencies to provide the consulting services.

Step B: Make an initial estimate of the total amount to be recorded at the grant date
The total amount to be recorded is the service’s fair value of €400,000.

Step C: Determine the expense for each period and the corresponding journal entries

Period E xpense Equity Explanation

31 January 2005 €200,000 €200,000 €400,000x 50%
28 February 2005 €200,000 €200,000 €400,000x 100%-€200,000

Total €400,000 €400,000

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of the services rendered in January 2005

Dr Operating expenses 200,000

Cr Equity (separate component) 200,000

2) Recognition of the services for February 2005

Dr Operating expenses 200,000

Cr Equity (separate component) 200,000

3) Issuance of shares
Dr Equity (separate component) 400,000
Cr Equity (share premium) 350,000
Cr Equity (share capital, at par value €1 per share) 50,000

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that there is no tax deduction for non-cash costs incurred in connection with consultancy services settled by
issuing shares. No tax effects are recognised as a result.

Illustrative disclosures
This section provides examples of the disclosures required under IFRS 2. For illustration purposes, we have included disclosures for all of the examples included in this section.

Accounting policy
Wayne Holdings regularly enters into equity-settled or cash-settled share-based payment transactions with staff and other third parties.

• Staff services settled in equity instruments

The fair value of the staff services received in exchange for the grant of options or shares is recognised as an expense. The total amount to be expensed rateably over the vesting
period is determined by reference to the fair value of the options or shares determined at the grant date, excluding the impact of any non-market vesting conditions (for example,
profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable or the number
of shares that the employee will ultimately receive. This estimate is revised at each balance sheet date and the difference is charged or credited to the income statement, with a
corresponding adjustment to equity. The proceeds received on exercise of the options net of any directly attributable transaction costs are credited to equity.

• Other goods or services settled in equity instruments

Goods or services (other than staff services) received in exchange for an equity-settled share-based payment are measured directly at their fair value and are recognised as an
expense when consumed or capitalised as assets. The proceeds received on exercise of the options, net of any directly attributable transaction costs, are credited to share capital
(nominal value) and share premium when the options are exercised.

• Goods or services settled in cash

Goods or services, including staff services received in exchange for cash-settled share- based payments, are recognised at the fair value of the liability incurred and are expensed
when consumed or capitalised as assets, which are depreciated or amortised. The liability is remeasured at each balance sheet date to its fair value, with all changes recognised
immediately in profit or loss.

Share-based payment arrangements – disclosu res in the notes

During the period ended 31 December 2005, Wayne Holdings had six share-based payment arrangements with staff and entered into two other share-based transactions. The
details of the arrangements are described on this and the following pages.

Arrangem ent 1: Share options grantedto 2: Perform ance conditions– 3: Share options– repricing
key executives increasein earnings
Nature of the arrangem ent G rantof shareoptions G rantof shareoptions G rantof shareoptions
Date of grant 1 January 2005 1 January 2005 1 January 2002
N um berof instrum ents 1,000 50,000 50,0001
granted
E xerciseprice €3 n/ a €25 (repricedat €10 at 2
January 2005)
S harepriceat the date of €7 €7 €20
grant
C ontractual
life (years) 10 10 10
Vestingcondition s Threeyearsof service and Variablevesting basedon the Five-yearservice period (tw o
18% increasein shareprice achievem ent of non-m arket- yearsrem aining
by end of 2007 based perform ance afterrepricing)
conditions
Settlem en t S ha res S h ares S ha res
E xpectedvolatility 40% n/a 40%
E xpectedoptionlife at grant 4 n/a 42
date (years)
R isk-freeinterestrate 4.8% n/a 4.8%
E xpecteddividend(dividend 0% 0% 0%
yield)
E xpecteddepartures (grant 0% 30 departures/yea
r 30 departures/ year
after
date) 2004

Expectedoutcom eof m eeting n/a (allowed for in 100%by 2006 n/a

perform ance criteria(at the determ iningfair value)
grantdate )
Fair valueper granted €5 €7 Increm entalvaluefrom
instrum ent determ inedat the repricingis €1.5
grantdate
Valuation m odel M onte-C arlo
m odel n/a Binom ialm odel
1. The undertaking originally granted 60,000 options on 1 January 2002. The options were repriced at 2 January 2005
when the number of outstanding options was 50,000.
2 The expected life of the option at grant date (1 January 2002) was seven years. At the date of modification (2
January 2005), the expected remaining life was estimated at four years.

The undertaking uses a Black-Scholes model to value options with no vesting conditions other than time less there is an extended exercise period. It uses the Monte-Carlo or
Binomial models to value options with performance conditions. The expected volatility for the share option arrangements is based on historical volatility determined by the
analysis of daily share price movements over the past three years.

Arrangem ent 4: Share appreciation rights 5: A transactionwith 6: Save as you earn schem e
settlementalternatives
Date of grant 1 January 2004 1 January 2005 1 April 2005
Num berof instrum ents 400 1,000(cash) 330,000
granted -1,500(shares)
E xerciseprice n/a n/a €6
 S harepriceat the date of €15 €7 €8
grant
C ontractual
life (years) 4 10 3.5
Vestingcondition s Two-year service period Two-year service period Three-yearserviceservice
periodand savings
requirem ent
Settlem en t C a sh C ashor shares S ha re s
E xpectedvolatility 40% 40% 40%
E xpectedoptionlife at grant 4 3 3.2
date (years)
R isk-freeinterestrate 4.8% 4.8% 4.8%
E xpecteddividend(dividend 0% 0% 0%
yield)
Expecteddepartures (grant 10% evenlyover tw o-year 0% 50 over3 years
date) period
Expectedoutcom eof m eeting n/a n/a n/a
perform ance criteria(at the
grantdate)
Fair valueper granted €11 Fair valueof share alternative €4
instrum en t determ inedat the €6.5; Fair valueof cash
grantdate alternative €7
Valuation m odel Black-Schole
s Binom ialm odel Black-Schole
s

No share options were exercised during the period. The following information applies to options outstanding at the end of each period:

31 Decem ber2005 31 Decem ber2004

R angeof Weighted Num berof Weighted-average Weighted Num ber Weightedaverage

exercise average options remaininglife -average of shares remaininglife
prices exercise (’000) Expected Contractual exercise (’000) Expected C ontractual

€15-27 €25 – – – €25 50,000 1.8 7.3

€8-15 €10 47,000 2.2 7.7 – – – –

€5-8 €6 321,420 2.45 2.75 – – – –

€0-5 €3 1,000 3.3 9.3 – – – –

A reconciliation of movements in the number of share options (Arrangement 1 – ‘Share options granted to key executives’, Arrangement 3 – ‘Share-options – repricing,’
and Arrangement 6 – ‘Save as you earn scheme’) can be summarised as follows:

2005 2004
 W eighted-
average Weighted-average
Num ber of options exercise price Num berof options exercise price
O utstanding
at startof year 50,000 €25 50,000 €25
Effectof m odifications (50,000) €25 – –
and cancellations
G ra n ted 381,0001 €6.5 – –
Forfeited (11,580) €7 – –

E xe rcise d – – – –

O utstanding
at end of year 369,420 €6.5 50,000 €25

E xercisa ble
at year-end – – – –

The amounts recognised in the financial statements (before taxes) for share-based payment transactions with staff can be summarised as follows:

Ex pens
e 2005 2004
Equity-settledarrangem ents
a) S hareoptionsgrantedto key executive
s €1,667 –

b ) Perform anceconditions– an increasein earnings €154,000 –

c) R epricedshareoptions €33,000 –

d) ‘Save as you earn’scheme €297,000 –

Sub-total €485,667 –

Cash-settledarrangem ents
e ) S h a reappreciation rights €720 €2,160

Arrangementswith settlementalternatives

f) Transactionsw ith settlem entalternatives €5,875 –

Total expense €492,262 €2,160

Liabilityfor cash-settledarrangem ent

s 31 D ecem ber2005 31 D ecem ber2004
a ) S h a reappreciation rights €2,880 €2,160 b) Transactionsw ith settlem entalternatives

€4,500 – Total liability €7,380 €2,160

1 WayneHoldings also granted the CEO a compound financial instrument, giving the CEO the right to receive 1,500 shares subject to a five-year holding restriction or a cash
payment equivalent to the value of 1,000 shares.
The fair value of the shares for the arrangements in which shares are granted was based on the quoted share price. No dividend payments were expected; consequently, the
measurement of the options’ fair value did not consider dividends.
Share options granted in 2002 were repriced at 2 January 2005 due to the decrease in share price.
The exercise price at 2 January 2005 is €10 instead of the original exercise price of €25.
The incremental value as a result of the repricing was determined to be €1.50.

All of the rights arising from Arrangement 4 – ‘Share appreciation rights’, are fully vested at
31 December 2005. The intrinsic value of these rights is €7 (for each right).

In addition to the arrangements described above, the undertaking issued 100,000 shares on 15 January
2005 in exchange for an in-kind contribution of an office building with a fair value of €5,500,000. The fair value was based on a report prepared by an independent professional valuer.
The undertaking also issued 50,000 shares in exchange for consulting services recognised as an expense and a corresponding increase in equity at a fair value of €400,000. The fair
value of the service was determined based on bids submitted by other potential suppliers.
This publication has been produced with the assistance of the European Union. The contents of this publication are the sole responsibility of ZAO “PricewaterhouseCoopers” and
ACCA, FBK and Agriconsulting and can in no way be taken to reflect the views of the European Union.