IFRS 2018 - Red - Book - IFRS - 2 - Share-Based - Payment

IFRS 2
IFRS 2
Share-based Payment
In February 2004 the International Accounting Standards Board (Board) issued IFRS 2
Share-based Payment. The Board amended IFRS 2 to clarify its scope in January 2008 and to
incorporate the guidance contained in two related Interpretations (IFRIC 8 Scope of IFRS 2
and IFRIC 11 IFRS 2—Group and Treasury Share Transactions) in June 2009.
In June 2016 the Board issued Classification and Measurement of Share-based Payment Transactions
(Amendments to IFRS 2). This amended IFRS 2 to clarify the accounting for (a) the effects of
vesting and non-vesting conditions on the measurement of cash-settled share-based
payments; (b) share-based payment transactions with a net settlement feature for
withholding tax obligations; and (c) a modification to the terms and conditions of a
share-based payment that changes the classification of the transaction from cash-settled to
equity-settled.
Other Standards have made minor consequential amendments to IFRS 2. They include
IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 11 Joint Arrangements (issued
May 2011), IFRS 13 Fair Value Measurement (issued May 2011), Annual Improvements to IFRSs
2010–2012 Cycle (issued December 2013) and IFRS 9 Financial Instruments (issued July 2014).
姝 IFRS Foundation A97

IFRS 2
CONTENTS
from paragraph
INTERNATIONAL FINANCIAL REPORTING STANDARD 2
SHARE-BASED PAYMENT
OBJECTIVE 1
SCOPE 2
RECOGNITION 7
EQUITY-SETTLED SHARE-BASED PAYMENT TRANSACTIONS 10
Overview 10
Transactions in which services are received 14
Transactions measured by reference to the fair value of the equity
instruments granted 16
Modifications to the terms and conditions on which equity instruments were
granted, including cancellations and settlements 26
CASH-SETTLED SHARE-BASED PAYMENT TRANSACTIONS 30
Treatment of vesting and non-vesting conditions 33A
SHARE-BASED PAYMENT TRANSACTIONS WITH A NET SETTLEMENT
FEATURE FOR WITHHOLDING TAX OBLIGATIONS 33E
SHARE-BASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVES 34
Share-based payment transactions in which the terms of the arrangement
provide the counterparty with a choice of settlement 35
Share-based payment transactions in which the terms of the arrangement
provide the entity with a choice of settlement 41
SHARE-BASED PAYMENT TRANSACTIONS AMONG GROUP ENTITIES (2009
AMENDMENTS) 43A
DISCLOSURES 44
TRANSITIONAL PROVISIONS 53
EFFECTIVE DATE 60
WITHDRAWAL OF INTERPRETATIONS 64
APPENDICES
A Defined terms
B Application guidance
C Amendments to other IFRSs
APPROVAL BY THE BOARD OF IFRS 2 ISSUED IN FEBRUARY 2004
APPROVAL BY THE BOARD OF AMENDMENTS TO IFRS 2:
Vesting Conditions and Cancellations issued in January 2008
Group Cash-settled Share-based Payment Transactions issued in June 2009
Classification and Measurement of Share-based Payment Transactions
(Amendments to IFRS 2) issued in June 2016
A98 姝 IFRS Foundation

IFRS 2
FOR THE ACCOMPANYING GUIDANCE LISTED BELOW, SEE PART B OF THIS EDITION
IMPLEMENTATION GUIDANCE
TABLE OF CONCORDANCE
FOR THE BASIS FOR CONCLUSIONS, SEE PART C OF THIS EDITION
BASIS FOR CONCLUSIONS

IFRS 2
International Financial Reporting Standard 2 Share-based Payment (IFRS 2) is set out in

paragraphs 1–64 and Appendices A–C. All the paragraphs have equal authority.
Paragraphs in bold type state the main principles. Terms defined in Appendix A are in
italics the first time they appear in the Standard. Definitions of other terms are given in
the Glossary for International Financial Reporting Standards. IFRS 2 should be read in
the context of its objective and the Basis for Conclusions, the Preface to International
Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting
and applying accounting policies in the absence of explicit guidance. [Refer: IAS 8
paragraphs 10–12]

IFRS 2
International Financial Reporting Standard 2

Share-based Payment
Objective
1 The objective of this IFRS is to specify the financial reporting by an entity when
it undertakes a share-based payment transaction. In particular, it requires an entity
to reflect in its profit or loss and financial position [Refer: Conceptual Framework
paragraphs 4.4–4.7] the effects of share-based payment transactions, including
expenses associated with transactions in which share options are granted to
employees.
Scope
[Refer: Basis for Conclusions paragraphs BC29–BC60]
2 An entity shall apply this IFRS in accounting for all share-based payment
transactions, whether or not the entity can identify specifically some or all of
the goods or services received, including:
(a) equity-settled share-based payment transactions,

(b) cash-settled share-based payment transactions, and
(c) transactions in which the entity receives or acquires goods or services
and the terms of the arrangement provide either [Refer: paragraphs 41–43]
the entity or the supplier of those goods or services [Refer: paragraphs
35–40] with a choice of whether the entity settles the transaction in cash
(or other assets) or by issuing equity instruments,E1
[Refer: paragraphs 34–43]
except as noted in paragraphs 3A–6. In the absence of specifically identifiable

goods or services, other circumstances may indicate that goods or services have
been (or will be) received, in which case this IFRS applies. [Refer: Basis for
Conclusions paragraphs BC18A–BC18D]
[Refer also: Basis for Conclusions paragraphs BC8–BC18 for information on broad-based
employee share plans]
E1 [IFRIC Update—May 2006: Scope of IFRS 2: Share plans with cash alternatives at the discretion of the entity
The IFRIC considered whether an employee share plan in which the employer had the choice of settlement
in cash or in shares, and the amount of the settlement did not vary with changes in the share price of the
entity should be treated as a share-based payment transaction within the scope of IFRS 2. The IFRIC noted
that IFRS 2 defines a share-based payment transaction as a transaction in which the entity receives goods
or services as consideration for equity instruments of the entity or amounts that are based on the price of
equity instruments of the entity. The IFRIC further noted that the definition of a share-based payment
transaction does not require the exposure of the entity to be linked to movements in the share price of the
entity. Moreover, it is clear that IFRS 2 contemplates share-based payment transactions in which the terms
of the arrangement provide the entity with a choice of settlement, since they are specifically addressed in
paragraphs 41–43 of IFRS 2. The IFRIC therefore believed that, although the amount of the settlement did
not vary with changes in the share price of the entity, such share plans are share-based payment
transactions in accordance with IFRS 2 since the consideration may be equity instruments of the entity. The
IFRIC also believed that, even in the extreme circumstances in which the entity was given a choice of
settlement and the value of the shares that would be delivered was a fixed monetary amount, those share
plans were still within the scope of IFRS 2. The IFRIC believed that, since the requirements of IFRS 2 were
clear, the issue was not expected to create significant divergence in practice. The IFRIC therefore decided
not to add the issue to the agenda.]

IFRS 2
3 [Deleted]
3A A share-based payment transaction may be settled by another group entity (or a

shareholder of any group entity) on behalf of the entity receiving or acquiring
the goods or services. Paragraph 2 also applies to an entity that
(a) receives goods or services when another entity in the same group (or a
shareholder of any group entity) has the obligation to settle the
share-based payment transaction, or
(b) has an obligation to settle a share-based payment transaction when
another entity in the same group receives the goods or services
unless the transaction is clearly for a purpose other than payment for goods or
services supplied to the entity receiving them.
[Refer:
paragraphs 43A–43D, 63, 64 and B45–B61
Basis for Conclusions paragraphs BC19–BC22G and BC268A–BC268S]
4 For the purposes of this IFRS, a transaction with an employee (or other party) in
his/her capacity as a holder of equity instruments of the entity is not a
share-based payment transaction. For example, if an entity grants all holders of
a particular class of its equity instruments the right to acquire additional equity
instruments of the entity at a price that is less than the fair value of those equity
instruments, and an employee receives such a right because he/she is a holder of
equity instruments of that particular class, the granting or exercise of that right
is not subject to the requirements of this IFRS.
5 As noted in paragraph 2, this IFRS applies to share-based payment transactions

in which an entity acquires or receives goods or services. Goods includes
inventories, consumables, property, plant and equipment, intangible assets and
other non-financial assets. [Refer: Basis for Conclusions paragraphs BC18A–BC18D]
However, an entity shall not apply this IFRS to transactions in which the entity
acquires goods as part of the net assets acquired in a business combination as
defined by IFRS 3 Business Combinations (as revised in 2008),E2 in a combination of
entities or businesses under common control as described in paragraphs B1–B4
of IFRS 3, or the contribution of a business on the formation of a joint venture as
defined by IFRS 11 Joint Arrangements [Refer: Basis for Conclusions paragraphs
BC24A–BC24D]. Hence, equity instruments issued in a business combination in
exchange for control of the acquiree are not within the scope of this IFRS.
However, equity instruments granted to employees of the acquiree in their
capacity as employees (eg in return for continued service) are within the scope of
this IFRS. Similarly, the cancellation, replacement or other modification [Refer:
paragraphs 26–29] of share-based payment arrangements because of a business
combination or other equity restructuring shall be accounted for in accordance
with this IFRS. IFRS 3 provides guidance on determining whether equity
instruments issued in a business combination are part of the consideration
transferred in exchange for control of the acquiree (and therefore within the
scope of IFRS 3) or are in return for continued service to be recognised in the
post-combination period (and therefore within the scope of this IFRS). [Refer:
IFRS 3 paragraphs 51–53 and B50–B62]
[Refer: Basis for Conclusions paragraphs BC23–BC24D]

IFRS 2
E2 [IFRIC Update—March 2013: IFRS 3 Business Combinations and IFRS 2 Share-based Payment—Accounting
for reverse acquisitions that do not constitute a business The Interpretations Committee received requests
for guidance on how to account for transactions in which the former shareholders of a non-listed operating
entity become the majority shareholders of the combined entity by exchanging their shares for new shares
of a listed non-operating entity. However, the transaction is structured such that the listed non-operating
entity acquires the entire share capital of the non-listed operating entity. In the absence of a Standard that
specifically applies to this transaction the Interpretations Committee observed that the analysed
transaction has some features of a reverse acquisition under IFRS 3 because the former shareholders of the
legal subsidiary obtain control of the legal parent. Consequently, it is appropriate to apply by analogy, in
accordance with paragraphs 10–12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors, the guidance in paragraphs B19–B27 of IFRS 3 for reverse acquisitions. Application of the reverse
acquisitions guidance by analogy results in the non-listed operating entity being identified as the
accounting acquirer, and the listed non-operating entity being identified as the accounting acquiree. The
Interpretations Committee noted that in applying the reverse acquisition guidance in paragraph B20 of
IFRS 3 by analogy, the accounting acquirer is deemed to have issued shares to obtain control of the
acquiree. If the listed non-operating entity qualifies as a business on the basis of the guidance in
paragraph B7 of IFRS 3, IFRS 3 would be applicable to the transaction. However, if the listed non-operating
entity is not a business, the transaction is not a business combination and is therefore not within the scope
of IFRS 3. Because the analysed transaction is not within the scope of IFRS 3, the Interpretations
Committee noted that it is therefore a share-based payment transaction which should be accounted for in
accordance with IFRS 2. The Interpretations Committee observed that on the basis of the guidance in
paragraph 13A of IFRS 2, any difference in the fair value of the shares deemed to have been issued by the
accounting acquirer and the fair value of the accounting acquiree’s identifiable net assets represents a
service received by the accounting acquirer. The Interpretations Committee concluded that, regardless of
the level of monetary or non-monetary assets owned by the non-listed operating entity, the entire difference
should be considered to be payment for a service of a stock exchange listing for its shares, and that no
amount should be considered a cost of raising capital. The Interpretations Committee observed that the
service received in the form of a stock exchange listing does not meet the definition of an intangible asset
because it is not “identifiable” in accordance with paragraph 12 of IAS 38 Intangible Assets (ie it is not
separable). The service received also does not meet the definition of an asset that should be recognised in
accordance with other Standards and the Conceptual Framework. The Interpretations Committee also
observed that on the basis of the guidance in paragraph 8 of IFRS 2 which states that “when the goods or
services received or acquired in a share-based payment transaction do not qualify for recognition as
assets, they shall be recognised as expenses”, the cost of the service received is recognised as an expense.
On the basis of the analysis above, the Interpretations Committee determined that, in the light of the
existing IFRS requirements, neither an interpretation nor an amendment to Standards was necessary and
consequently decided not to add this issue to its agenda.]
6 This IFRS does not apply to share-based payment transactions in which the entity
receives or acquires goods or services under a contract within the scope of
paragraphs 8–10 of IAS 32 Financial Instruments: Presentation (as revised in 2003)1 or
paragraphs 2.4–2.7 of IFRS 9 Financial Instruments.
6A This IFRS uses the term ‘fair value’ in a way that differs in some respects from
the definition of fair value in IFRS 13 Fair Value Measurement. Therefore, when
applying IFRS 2 an entity measures fair value in accordance with this IFRS, not
IFRS 13.
[Refer: IFRS 13 paragraph 6(a)]
1 The title of IAS 32 was amended in 2005.

IFRS 2
RecognitionE3
[Refer: Basis for Conclusions paragraphs BC29–BC60, BC243–BC245, BC258, BC265 and
BC287–BC310]
E3 [IFRIC Update—November 2006: Employee benefit trusts in the separate financial statements of the sponsor
The IFRIC discussed the application to separate financial statements of an issue that had been submitted in
connection with the amendment of SIC-12 Consolidation—Special Purpose Entities to include within its
scope special purpose entities established in connection with equity compensation plans. The issue related
to an employee benefit trust (or similar entity) that has been set up by a sponsoring entity specifically to
facilitate the transfer of its equity instruments to its employees under a share-based payment arrangement.
The trust holds shares of the sponsoring entity that are acquired by the trust from the sponsoring entity or
from the market. Acquisition of those shares is funded either by the sponsoring entity or by a bank loan,
usually guaranteed by the sponsoring entity. In most circumstances, the sponsoring entity controls the
employee benefit trust. In some circumstances, the sponsoring entity may also have a direct control of the
shares held by the trust. The issue is whether guidance should be developed on the accounting treatment
for the sponsor’s equity instruments held by the employee benefit trust in the sponsor’s separate financial
statements. The IFRIC discussed whether the employee benefit trust should be treated as an extension of
the sponsoring entity, such as a branch, or as a separate entity. The IFRIC noted that the notion of ‘entity’ is
defined neither in the Framework nor in IAS 27 Consolidated and Separate Financial Statements. The IFRIC
then discussed whether the sponsoring entity should, in its separate financial statements, account for the
net investment according to IAS 27 or rather for the rights and obligations arising from the assets and
liabilities of the trust. The IFRIC noted that, in some circumstances, the sponsoring entity may have direct
control of the shares held by the trust. The IFRIC also noted that the guidance included in the Framework
and IAS 27 does not address the accounting for the shares held by the trust in the sponsor’s separate
financial statements. The IFRIC concluded that it could not reach a consensus on this matter on a timely
basis, given the different types of trusts and trust arrangements that exist. The IFRIC noted that this issue
related to two active projects of the IASB: the Conceptual Framework and the revision of IAS 27 in the
course of the Consolidation project. For these reasons, the IFRIC decided not to add the issue to its agenda.
(Since this agenda decision, IAS 27 has been amended and SIC-12 was incorporated into IFRS 10.)]
7 An entity shall recognise the goods or services received or acquired in a

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

transaction do not qualify for recognition as assets, they shall be
recognised as expenses.
9 Typically, an expense arises from the consumption of goods or services. For

example, services are typically consumed immediately, in which case an expense
is recognised as the counterparty renders service. Goods might be consumed
over a period of time or, in the case of inventories, sold at a later date, in which
case an expense is recognised when the goods are consumed or sold. However,
sometimes it is necessary to recognise an expense before the goods or services
are consumed or sold, because they do not qualify for recognition as assets. For
example, an entity might acquire goods as part of the research phase [Refer:
IAS 38 paragraphs 54–56] 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.

IFRS 2
Equity-settled share-based payment transactions
Overview
10 For equity-settled share-based payment transactions, the entity shall
measure the goods or services received, and the corresponding increase in
equity, directly, at the fair value [Refer: paragraphs B1–B41] of the goods or
services received, unless that fair value cannot be estimated reliably. If
the entity cannot estimate reliably the fair value of the goods or services
received, the entity shall measure their value, and the corresponding
increase in equity, indirectly, by reference to2 the fair value of the equity
instruments granted.
11 To apply the requirements of paragraph 10 to transactions with employees and

others providing similar services,3 the entity shall measure the fair value [Refer:
Appendix B and Basis for Conclusions paragraphs BC85–BC87] of the services received
by reference to the fair value of the equity instruments granted, because
typically it is not possible to estimate reliably the fair value of the services
received, as explained in paragraph 12. The fair value of those equity
instruments shall be measured at grant date.
[Refer:
Basis for Conclusions paragraphs BC88–BC105
Implementation Guidance paragraphs IG1–IG4]
12 Typically, shares, share options or other equity instruments are granted to

employees as part of their remuneration package, in addition to a cash salary
and other employment benefits. Usually, it is not possible to measure directly
the services received for particular components of the employee’s remuneration
package. It might also not be possible to measure the fair value of the total
remuneration package independently, without measuring directly the fair value
of the equity instruments granted. Furthermore, shares or share options are
sometimes granted as part of a bonus arrangement, rather than as a part of basic
remuneration, eg as an incentive to the employees to remain in the entity’s
employ or to reward them for their efforts in improving the entity’s
performance. By granting shares or share options, in addition to other
remuneration, the entity is paying additional remuneration to obtain additional
benefits. Estimating the fair value of those additional benefits is likely to be
difficult. Because of the difficulty of measuring directly the fair value of the
services received, the entity shall measure the fair value of the employee services
received by reference to the fair value of the equity instruments granted.
13 To apply the requirements of paragraph 10 to transactions with parties other

than employees, 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 entity obtains the goods or the counterparty renders
2 This IFRS uses the phrase ‘by reference to’ rather than ‘at’, because the transaction is ultimately
measured by multiplying the fair value of the equity instruments granted, measured at the date
specified in paragraph 11 or 13 (whichever is applicable), by the number of equity instruments that
vest, as explained in paragraph 19.
3 In the remainder of this IFRS, all references to employees also include others providing similar
services.

IFRS 2
service [Refer: Basis for Conclusions paragraphs BC88–BC105 and Implementation

Guidance paragraphs IG5–IG7]. In rare cases, if the entity rebuts this presumption
because it cannot estimate reliably the fair value of the goods or services
received, the entity shall measure the goods or services received, and the
corresponding increase in equity, indirectly, by reference to the fair value of the
equity instruments [Refer: paragraph 13A and Basis for Conclusions paragraphs
BC128D–BC128F] granted, measured at the date the entity obtains the goods or
the counterparty renders service [Refer: paragraphs 24 and 25].
13A In particular, if the identifiable consideration received (if any) by the entity
appears to be less than the fair value of the equity instruments granted or
liability incurred, typically this situation indicates that other consideration
(ie unidentifiable goods or services) has been (or will be) received by the entityE4.
The entity shall measure the identifiable goods or services received in
accordance with this IFRS. The entity shall measure the unidentifiable goods or
services received (or to be received) as the difference between the fair value of the
share-based payment and the fair value of any identifiable goods or services
received (or to be received). The entity shall measure the unidentifiable goods or
services received at the grant date. However, for cash-settled transactions, the
liability shall be remeasured at the end of each reporting period until it is
settled in accordance with paragraphs 30–33.
[Refer:
Basis for Conclusions paragraphs BC128A–BC128H
Implementation Guidance paragraphs IG5A–IG5D (including IG example 1)]
E4 [IFRIC Update—July 2014: IFRS 2 Share-based Payment—price difference between the institutional offer
price and the retail offer price for shares in an initial public offering The Interpretations Committee received
a request to clarify how an entity should account for a price difference between the institutional offer price
and the retail offer price for shares issued in an initial public offering (IPO). The submitter refers to the fact
that the final retail price could be different from the institutional price because of: (a) an unintentional
difference arising from the book-building process; or (b) an intentional difference arising from a discount
given to retail investors by the issuer of the equity instruments as indicated in the prospectus. The
submitter described a situation in which the issuer needs to fulfil a minimum number of shareholders to
qualify for a listing under the stock exchange’s regulations in its jurisdiction. In achieving this minimum
number the issuer may offer shares to retail investors at a discount from the price at which shares are sold
to institutional investors. The submitter asked the Interpretations Committee to clarify whether the
transaction should be analysed within the scope of IFRS 2. The Interpretations Committee considered
whether the transaction analysed involves the receipt of identifiable or unidentifiable goods or services
from the retail shareholder group and, therefore, whether it is a share-based payment transaction within the
scope of IFRS 2. Paragraph 13A of IFRS 2 requires that if consideration received by the entity appears to be
less than the fair value of the equity instruments granted or liability incurred, then this situation typically
indicates that other consideration (ie unidentified goods or services) has been (or will be) received by the
entity. The Interpretations Committee noted that applying this guidance requires judgement and
consideration of the specific facts and circumstances of each transaction. In the circumstances underlying
the submission, the Interpretations Committee observed that the entity issues shares at different prices to
two different groups of investors (retail and institutional) for the purpose of raising funds, and that the
difference, if any, between the retail price and the institutional price of the shares in the fact pattern
appears to relate to the existence of different markets (one that is accessible to retail investors only and
another one accessible to institutional investors only) instead of the receipt of additional goods or services,
because the only relationship between the entity and the parties to whom the shares are issued is that of
investee-investors. Consequently, the Interpretations Committee observed that the guidance in IFRS 2 is not
applicable because there is no share-based payment transaction. The Interpretations Committee also noted
that the situation considered is different to the issue on which it had issued an agenda decision in March
2013 (‘Accounting for reverse acquisitions that do not constitute a business’). In that fact pattern the
Interpretations Committee observed that the accounting acquirer received a stock exchange listing from the
listed non-operating entity, which the listed non-operating entity had previously possessed and was able to
transfer to the accounting acquirer. In that agenda decision the Interpretations Committee concluded that
continued...

IFRS 2
...continued
any difference in the fair value of the shares deemed to have been issued by the accounting acquirer and
the fair value of the accounting acquiree’s identifiable net assets represents a service received by the
accounting acquirer. The Interpretations Committee observed that in the fact pattern considered in this
submission the listing is not received from the institutional or retail shareholders. It further observed that
the fair value of the shares issued to retail investors is different from the fair value of the shares issued to
institutional investors. The fact that a regulatory requirement is met by virtue of issuing the retail shares
does not indicate that unidentifiable goods or services were received from the purchasers. On the basis of
this analysis, the Interpretations Committee determined that, in the light of the existing IFRS requirements,
sufficient guidance exists and that neither an Interpretation nor an amendment to a Standard was
necessary. Consequently, the Interpretations Committee decided not to add this issue to its agenda.]
Transactions in which services are received
14 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. In the absence of evidence
to the contrary, the entity shall presume that services rendered by the
counterparty as consideration for the equity instruments have been received.
[Refer: Basis for Conclusions paragraphs BC200–BC202] In this case, on grant date the
entity shall recognise the services received in full, with a corresponding increase
in equity.
15 If the equity instruments granted do not vest until the counterparty completes a
specified period of service, the entity shall presume that the services to be
rendered by the counterparty as consideration for those equity instruments will
be received in the future, during the vesting period. [Refer: Basis for Conclusions
paragraphs BC200–BC202] The entity shall account for those services as they are
rendered by the counterparty during the vesting period, with a corresponding
increase in equity. For example:
(a) if an employee is granted share options conditional upon completing
three years’ service, then the entity shall presume that the services to be
rendered by the employee as consideration for the share options will be
received in the future, over that three-year vesting period. [Refer:
IG example 1A]
(b) if an employee is granted share options conditional upon the

achievement of a performance condition and remaining in the entity’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 entity shall presume that the services to be
rendered by the employee as consideration for the share options will be
received in the future, over the expected vesting period. The entity shall
estimate the length of the expected vesting period at grant date, based
on the most likely outcome of the performance condition. [Refer:
IG examples 2 and 6] 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. [Refer: IG example 6] If the
performance condition is not a market condition, the entity shall revise
its estimate of the length of the vesting period, if necessary, if

IFRS 2
subsequent information indicates that the length of the vesting period

differs from previous estimates. [Refer: Basis for Conclusions
paragraph BC184 and IG example 2]
Transactions measured by reference to the fair value of

the equity instruments granted
Determining the fair value of equity instruments granted

[Refer: paragraphs B1–B41]
16 For transactions measured by reference to the fair value of the equity

instruments granted, an entity shall measure the fair value of equity
instruments granted at the measurement date, [Refer: Basis for Conclusions
paragraphs BC88–BC128] based on market prices if available, taking into account
the terms and conditions upon which those equity instruments were granted
(subject to the requirements of paragraphs 19–22).
17 If market prices are not available, the entity shall estimate the fair value of the
equity instruments granted using a valuation technique to estimate what the
price of those equity instruments would have been on the measurement date in
an arm’s length 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 (subject to the requirements of paragraphs 19–22).
18 Appendix B [Refer: paragraphs B2–B41] contains further guidance on the

measurement of the fair value of shares and share options, focusing on the
specific terms and conditions that are common features of a grant of shares or
share options to employees.E5
E5 [IFRIC Update—November 2006: Fair value measurement of post-vesting transfer restrictions The IFRIC was
asked whether the estimated value of shares issued only to employees and subject to post-vesting
restrictions could be based on an approach that would look solely or primarily to an actual or synthetic
market that consisted only of transactions between an entity and its employees and in which prices, for
example, reflected an employee’s personal borrowing rate. The IFRIC was asked whether this approach
was consistent with the requirements under IFRS 2. The IFRIC noted the requirements in paragraph B3 of
Appendix B to IFRS 2, which states that ‘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.’
Paragraph BC168 of the Basis for Conclusions on IFRS 2 notes that ‘the objective is to estimate the fair value
of the share option, not the value from the employee’s perspective.’ Furthermore, paragraph B10 of
Appendix B to IFRS 2 states that ‘factors that affect the value of the option from the individual employee’s
perspective only are not relevant to estimating the price that would be set by a knowledgeable, willing
market participant.’ The IFRIC noted that these paragraphs require consideration of actual or hypothetical
transactions, not only with employees, but rather with all actual or potential market participants willing to
invest in restricted shares that had been or might be offered to them. The IFRIC believed that the issue was
not expected to create significant divergence in practice and that the requirements of IFRS 2 were clear.
The IFRIC therefore decided not to add the issue to the agenda.]

IFRS 2
Treatment of vesting conditions

[Refer:
Implementation Guidance paragraphs IG9–IG11]
19 A grant of equity instruments might be conditional upon satisfying specified

vesting conditions. For example, a grant of shares or share options to an
employee is typically conditional on the employee remaining in the entity’s
employ for a specified period of time. There might be performance conditions
that must be satisfied, such as the entity achieving a specified growth in profit
or a specified increase in the entity’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, other than market conditions, shall be 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 shall be
based on the number of equity instruments that eventually vest. Hence, on a
cumulative basis, no amount is recognised for goods or services received if the
equity instruments granted do not vest because of failure to satisfy a vesting
condition, other than a market condition, for example, the counterparty fails to
complete a specified service period, or a performance condition is not satisfied,
subject to the requirements of paragraph 21. [Refer: IG examples 1A–3]
20 To apply the requirements of paragraph 19, the entity 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 [Refer: IG
example 1A scenario 1] and shall revise that estimate, if necessary, if subsequent
information indicates that the number of equity instruments expected to vest
differs from previous estimates. [Refer: IG example 1A scenario 2 and example 3] On
vesting date, the entity shall revise the estimate to equal the number of equity
instruments that ultimately vested, subject to the requirements of paragraph 21.
21 Market conditions, such as a target share price upon which vesting

(or exercisability) is conditioned, shall be taken into account when estimating
the fair value of the equity instruments granted. Therefore, for grants of equity
instruments with market conditions, the entity shall recognise the goods or
services received from a counterparty who satisfies all other vesting conditions
(eg services received from an employee who remains in service for the specified
period of service), irrespective of whether that market condition is satisfied.
[Refer: IG example 5]
Treatment of non-vesting conditions

21A Similarly, an entity shall take into account all non-vesting conditions when
estimating the fair value of the equity instruments granted. Therefore, for
grants of equity instruments with non-vesting conditions, the entity shall
recognise the goods or services received from a counterparty that satisfies all
vesting conditions that are not market conditions (eg services received from an
employee who remains in service for the specified period of service), irrespective
of whether those non-vesting conditions are satisfied.

IFRS 2
Treatment of a reload feature

22 For options with a reload feature, the reload feature 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

23 Having recognised the goods or services received in accordance with

paragraphs 10–22, and a corresponding increase in equity, the entity shall make
no subsequent adjustment to total equity after vesting date. For example, the
entity shall not subsequently reverse the amount recognised for services
received from an employee 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 entity from recognising a transfer within
equity, ie a transfer from one component of equity to another.
If the fair value of the equity instruments cannot be estimated

reliably
[Refer:
paragraph 13
Implementation Guidance paragraph IG16 and IG example 10]
24 The requirements in paragraphs 16–23 apply when the entity is required to

measure a share-based payment transaction by reference to the fair value of the
equity instruments granted. In rare cases, the entity may be unable to estimate
reliably the fair value of the equity instruments granted at the measurement
date, in accordance with the requirements in paragraphs 16–22. In these rare
cases only, the entity shall instead:
(a) measure the equity instruments at their intrinsic value, initially at the
date the entity obtains the goods or the counterparty renders service and
subsequently at the end of each reporting period and at the date of final
settlement, with any change in intrinsic value recognised in profit or
loss. For a grant of share options, the share-based payment arrangement
is finally settled when the options are exercised, are forfeited (eg upon
cessation of employment) or lapse (eg at the end of the option’s life).
(b) recognise the goods or services received based on the number of equity
instruments that ultimately vest or (where applicable) are ultimately
exercised. To apply this requirement to share options, for example, the
entity shall recognise the goods or services received during the vesting
period, if any, in accordance with paragraphs 14 and 15, except that the
requirements in paragraph 15(b) concerning a market condition do not
apply. 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 entity shall revise that estimate, if necessary, if subsequent
information indicates that the number of share options expected to vest
differs from previous estimates. On vesting date, the entity shall revise
the estimate to equal the number of equity instruments that ultimately

IFRS 2
vested. After vesting date, the entity 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. [Refer: Basis for Conclusions
paragraph BC144]
25 If an entity applies paragraph 24, it is not necessary to apply paragraphs 26–29,

because any modifications to the terms and conditions on which the equity
instruments were granted will be taken into account when applying the
intrinsic value method set out in paragraph 24. However, if an entity settles a
grant of equity instruments to which paragraph 24 has been applied:
(a) if the settlement occurs during the vesting period, the entity shall
account for the settlement as an acceleration of vesting, and shall
therefore recognise immediately the amount that would otherwise have
been recognised for services received over the remainder of the vesting
period.
(b) any payment made on settlement shall be accounted for as the

repurchase of equity instruments, ie 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 to the terms and conditions on which

equity instruments were granted, including cancellations
and settlements
[Refer: Basis for Conclusions paragraphs BC222–BC237B]
26 An entity 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 employees (ie reprice the options), which increases the fair
value of those options. [Refer: Implementation Guidance paragraph IG15 and IG
example 7] The requirements in paragraphs 27–29 to account for the effects of
modifications are expressed in the context of share-based payment transactions
with employees. However, the requirements shall also be applied to share-based
payment transactions with parties other than employees that are measured by
reference to the fair value of the equity instruments granted. In the latter case,
any references in paragraphs 27–29 to grant date shall instead refer to the date
the entity obtains the goods or the counterparty renders service.
27 The entity 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. [Refer: IG example 8] In addition, the entity shall recognise
the effects of modifications that increase the total fair value of the share-based
payment arrangement or are otherwise beneficial to the employee. Guidance on
applying this requirement is given in Appendix B.

IFRS 2
28 If a grant of equity instruments is cancelled or settled during the vesting period

(other than a grant cancelled by forfeiture when the vesting conditions are not
satisfied):
(a) the entity shall account for the cancellation or settlement as an
acceleration of vesting, and shall therefore recognise immediately the
amount that otherwise would have been recognised for services received
over the remainder of the vesting period.
(b) any payment made to the employee 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.
However, if the share-based payment arrangement included liability
components, the entity shall remeasure the fair value of the liability at
the date of cancellation or settlement. Any payment made to settle the
liability component shall be accounted for as an extinguishment of the
liability.
(c) if new equity instruments are granted to the employee and, on the date
when those new equity instruments are granted, the entity identifies the
new equity instruments granted as replacement equity instruments for
the cancelled equity instruments, the entity shall account for the
granting of replacement equity instruments in the same way as a
modification of the original grant of equity instruments, in accordance
with paragraph 27 and the guidance in Appendix B. [Refer: paragraphs
B42–B44 and IG examples 7–9] 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 employee on
cancellation of the equity instruments that is accounted for as a
deduction from equity in accordance with (b) above. If the entity does
not identify new equity instruments granted as replacement equity
instruments for the cancelled equity instruments, the entity shall
account for those new equity instruments as a new grant of equity
instruments.
28A If an entity or counterparty can choose whether to meet a non-vesting condition,

the entity shall treat the entity’s or counterparty’s failure to meet that
non-vesting condition during the vesting period as a cancellation.
29 If an entity repurchases vested equity instruments, the payment made to the

employee 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.

IFRS 2
Cash-settled share-based payment transactions

[Refer:
Implementation Guidance paragraphs IG18 and IG19 (including IG example 12)]
30 For cash-settled share-based payment transactions, the entity shall

measure the goods or services acquired and the liability incurred at the
fair value of the liability, subject to the requirements of paragraphs
31–33D. Until the liability is settled, the entity shall remeasure the fair
value of the liability at the end of each reporting period and at the date of
settlement, with any changes in fair value recognised in profit or loss for
the period.
31 For example, an entity might grant share appreciation rights to employees as

part of their remuneration package, whereby the employees will become
entitled to a future cash payment (rather than an equity instrument), based on
the increase in the entity’s share price from a specified level over a specified
period of time. Alternatively, an entity might grant to its employees a right to
receive a future cash payment by granting to them a right to shares (including
shares to be issued upon the exercise of share options [Refer: IG example 12]) that
are redeemable, either mandatorily (for example, upon cessation of
employment) or at the employee’s option. These arrangements are examples of
cash-settled share-based payment transactions. Share appreciation rights are
used to illustrate some of the requirements in paragraphs 32–33D; however, the
requirements in those paragraphs apply to all cash-settled share-based payment
transactions.
32 The entity shall recognise the services received, and a liability to pay for those
services, as the employees render service. For example, some share appreciation
rights vest immediately, and the employees 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 entity shall presume that the
services rendered by the employees in exchange for the share appreciation rights
have been received. Thus, the entity shall recognise immediately the services
received and a liability to pay for them. If the share appreciation rights do not
vest until the employees have completed a specified period of service, the entity
shall recognise the services received, and a liability to pay for them, as the
employees render service during that period.
33 The liability shall be measured, initially and at the end of each reporting period
until settled, at the fair value of the share appreciation rights, by applying an
option pricing model, [Refer: paragraphs B11–B41] taking into account the terms
and conditions on which the share appreciation rights were granted, and the
extent to which the employees have rendered service to date—subject to the
requirements of paragraphs 33A–33D. An entity might modify the terms and
conditions on which a cash-settled share-based payment is granted. Guidance

IFRS 2
for a modification of a share-based payment transaction that changes its

classification from cash-settled to equity-settled is given in paragraphs
B44A–B44C in Appendix B.
[Refer:
Basis for Conclusions paragraphs BC237C–BC237K
Implementation Guidance paragraph IG19B and IG example 12C]
Treatment of vesting and non-vesting conditions

[Refer:
Implementation Guidance paragraph IG19 and IG example 12A]
33A A cash-settled share-based payment transaction might be conditional upon

satisfying specified vesting conditions. There might be performance conditions
that must be satisfied, such as the entity achieving a specified growth in profit
or a specified increase in the entity’s share price. Vesting conditions, other than
market conditions, shall not be taken into account when estimating the fair
value of the cash-settled share-based payment at the measurement date. Instead,
vesting conditions, other than market conditions, shall be taken into account by
adjusting the number of awards included in the measurement of the liability
arising from the transaction.
33B To apply the requirements in paragraph 33A, the entity shall recognise an
amount for the goods or services received during the vesting period. That
amount shall be based on the best available estimate of the number of awards
that are expected to vest. The entity shall revise that estimate, if necessary, if
subsequent information indicates that the number of awards that are expected
to vest differs from previous estimates. On the vesting date, the entity shall
revise the estimate to equal the number of awards that ultimately vested.
33C Market conditions, such as a target share price upon which vesting (or
exercisability) is conditioned, as well as non-vesting conditions, shall be taken
into account when estimating the fair value of the cash-settled share-based
payment granted and when remeasuring the fair value at the end of each
reporting period and at the date of settlement.
33D As a result of applying paragraphs 30–33C, the cumulative amount ultimately

recognised for goods or services received as consideration for the cash-settled
share-based payment is equal to the cash that is paid.
Share-based payment transactions with a net settlement feature

for withholding tax obligations
[Refer:
Basis for Conclusions paragraphs BC255A–BC255P
Implementation Guidance paragraph IG19A and IG example 12B]
33E Tax laws or regulations may oblige an entity to withhold an amount for an
employee’s tax obligation associated with a share-based payment and transfer
that amount, normally in cash, to the tax authority on the employee’s behalf. To
fulfil this obligation, the terms of the share-based payment arrangement may
permit or require the entity to withhold the number of equity instruments
equal to the monetary value of the employee’s tax obligation from the total

IFRS 2
number of equity instruments that otherwise would have been issued to the
employee upon exercise (or vesting) of the share-based payment (ie the
share-based payment arrangement has a ‘net settlement feature’).
33F As an exception to the requirements in paragraph 34, the transaction described

in paragraph 33E shall be classified in its entirety as an equity-settled
share-based payment transaction if it would have been so classified in the
absence of the net settlement feature.
33G The entity applies paragraph 29 of this Standard to account for the withholding
of shares to fund the payment to the tax authority in respect of the employee’s
tax obligation associated with the share-based payment. Therefore, the payment
made shall be accounted for as a deduction from equity for the shares withheld,
except to the extent that the payment exceeds the fair value at the net
settlement date of the equity instruments withheld.
33H The exception in paragraph 33F does not apply to:
(a) a share-based payment arrangement with a net settlement feature for

which there is no obligation on the entity under tax laws or regulations
to withhold an amount for an employee’s tax obligation associated with
that share-based payment; or
(b) any equity instruments that the entity withholds in excess of the
employee’s tax obligation associated with the share-based payment
(ie the entity withheld an amount of shares that exceeds the monetary
value of the employee’s tax obligation). Such excess shares withheld
shall be accounted for as a cash-settled share-based payment when this
amount is paid in cash (or other assets) to the employee.
Share-based payment transactions with cash alternativesE6
E6 [IFRIC Update—January 2010: Transactions in which the manner of settlement is contingent on future
events The IFRIC received a request to clarify the classification and measurement of share-based payment
transactions for which the manner of settlement is contingent on either: (i) a future event that is outside the
control of both the entity and the counterparty; or (ii) a future event that is within the control of the
counterparty. The IFRIC noted that paragraphs 34–43 of IFRS 2 provide guidance only on share-based
payment transactions in which the terms of the arrangement provide the counterparty or the entity with a
choice of settlement. The IFRIC noted that IFRS 2 does not provide guidance on share-based payment
transactions for which the manner of settlement is contingent on a future event that is outside the control
of both the entity and the counterparty. The IFRIC noted that many other issues have been raised
concerning the classification and measurement of share-based payments as cash-settled or equity-settled.
The IFRIC therefore noted that it would be more appropriate for these issues to be considered collectively as
part of a post-implementation review of IFRS 2. Therefore, the IFRIC decided not to add these issues to its
agenda and recommended that those issues be dealt with by the IASB in a post-implementation review of
IFRS 2.]
34 For share-based payment transactions in which the terms of the

arrangement provide either the entity or the counterparty with the
choice of whether the entity settles the transaction in cash (or other
assets) or by issuing equity instruments, the entity shall account for that
transaction, or the components of that transaction, as a cash-settled
share-based payment transaction [Refer: paragraphs 30–33] if, and to the
extent that, the entity has incurred a liability to settle in cash or other

IFRS 2
assets, or as an equity-settled share-based payment transaction [Refer:

paragraphs 10–29] if, and to the extent that, no such liability has been
incurred.
Share-based payment transactions in which the terms of

the arrangement provide the counterparty with a choice
of settlementE7
[Refer:
Implementation Guidance paragraphs IG20–IG22 (including IG example 13)]
E7 [IFRIC Update—May 2006: Share plans with cash alternatives at the discretion of employees: grant date and
vesting periods The IFRIC considered an employee share plan in which employees were given a choice of
having cash at one date or shares at a later date. At the date the transactions were entered into, the parties
involved understood the terms and conditions of the plans including the formula that would be used to
determine the amount of cash to be paid to each individual employee (or the number of shares to be
delivered to each individual employee) but the exact amount of cash or number of shares would be known
only at a future date. The IFRIC was asked to confirm the grant date and vesting period for such share
plans. The IFRIC noted that IFRS 2 defines grant date as the date when there is a shared understanding of
the terms and conditions. Moreover, IFRS 2 does not require grant date to be the date when the exact
amount of cash to be paid (or the exact number of shares to be delivered) is known to the parties involved.
The IFRIC further noted that share-based payment transactions with cash alternatives at the discretion of
the counterparty are addressed in paragraphs 34–40 of IFRS 2. Paragraph 35 of IFRS 2 states that, if an
entity has granted the counterparty the right to choose whether a share-based payment transaction is
settled in cash or by issuing equity instruments, the entity has granted a compound financial instrument,
which includes a debt component (ie the counterparty’s right to demand cash payment) and an equity
component (ie the counterparty’s right to demand settlement in equity instruments). Paragraph 38 of IFRS 2
states that the entity shall account separately for goods or services received or acquired in respect of each
component of the compound financial instrument. The IFRIC therefore believed that the vesting period of
the equity component and that of the debt component should be determined separately and the vesting
period of each component might be different. The IFRIC believed that, since ‘grant date’ is defined in IFRS 2
and the requirements set out in paragraphs 34–40 of IFRS 2 were clear, the issues were not expected to
create significant divergence in practice. The IFRIC therefore decided that the issues should not be added
to the agenda.]
35 If an entity has granted the counterparty the right to choose whether a

share-based payment transaction is settled in cash4 or by issuing equity
instruments, the entity has granted a compound financial instrument, [Refer:
IAS 32 paragraphs 28–32] which includes a debt component (ie the counterparty’s
right to demand payment in cash) and an equity component (ie the
counterparty’s right to demand settlement in equity instruments rather than in
cash). For transactions with parties other than employees, in which the fair
value of the goods or services received is measured directly, the entity 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.
36 For other transactions, including transactions with employees, the entity shall
measure the fair value of the compound financial instrument at the
measurement date, taking into account the terms and conditions on which the
rights to cash or equity instruments were granted.
37 To apply paragraph 36, the entity shall first measure the fair value of the debt
component, and then measure the fair value of the equity component—taking
4 In paragraphs 35–43, all references to cash also include other assets of the entity.

IFRS 2
into account that the counterparty must forfeit the right to receive cash in order
to receive the equity instrument. [Refer: Implementation Guidance paragraphs
IG20–IG22 and IG example 13] 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. 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 compound financial instrument will be greater
than the fair value of the debt component.
38 The entity 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 entity 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, in accordance with the requirements applying to cash-settled
share-based payment transactions (paragraphs 30–33). For the equity
component (if any), the entity shall recognise the goods or services received, and
an increase in equity, as the counterparty supplies goods or renders service, in
accordance with the requirements applying to equity-settled share-based
payment transactions (paragraphs 10–29).
39 At the date of settlement, the entity shall remeasure the liability to its fair value.
If the entity 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. [Refer: Implementation Guidance example 13 scenario 2]
40 If the entity 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. By electing to
receive cash on settlement, the counterparty forfeited the right to receive equity
instruments. However, this requirement does not preclude the entity from
recognising a transfer within equity, ie a transfer from one component of equity
to another. [Refer: Implementation Guidance example 13 scenario 1]
Share-based payment transactions in which the terms of

the arrangement provide the entity with a choice of
settlementE8
continued...

IFRS 2
...continued
41 For a share-based payment transaction in which the terms of the arrangement

provide an entity with the choice of whether to settle in cash or by issuing
equity instruments, the entity shall determine whether it has a present
obligation to settle in cash and account for the share-based payment transaction
accordingly. The entity has a present obligation to settle in cash if the choice of
settlement in equity instruments has no commercial substance (eg because the
entity is legally prohibited from issuing shares), or the entity has a past practice
or a stated policy of settling in cash, or generally settles in cash whenever the
counterparty asks for cash settlement.
42 If the entity 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, in paragraphs 30–33.
43 If no such obligation exists, the entity shall account for the transaction in
accordance with the requirements applying to equity-settled share-based
payment transactions, in paragraphs 10–29. Upon settlement:
(a) if the entity 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 (c) below.
(b) if the entity elects to settle by issuing equity instruments, no further
accounting is required (other than a transfer from one component of
equity to another, if necessary), except as noted in (c) below.
(c) if the entity elects the settlement alternative with the higher fair value,
as at the date of settlement, the entity shall recognise an additional
expense for the excess value given, ie 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.
Share-based payment transactions among group entities

(2009 amendments)
43A For share-based payment transactions among group entities, in its separate or
individual financial statements, the entity receiving the goods or services shall
measure the goods or services received as either an equity-settled or a
cash-settled share-based payment transaction by assessing:
(a) the nature of the awards granted, and

IFRS 2
(b) its own rights and obligations.

The amount recognised by the entity receiving the goods or services may differ
from the amount recognised by the consolidated group or by another group
entity settling the share-based payment transaction.
[Refer: Basis for Conclusions paragraphs BC268A–BC268L]
43B The entity receiving the goods or services shall measure the goods or services
received as an equity-settled share-based payment transaction when:
(a) the awards granted are its own equity instruments, or
[Refer: paragraphs B48, B49 and B59]
(b) the entity has no obligation to settle the share-based payment
transaction.
[Refer: paragraphs B53 and B57]
The entity shall subsequently remeasure such an equity-settled share-based
payment transaction only for changes in non-market vesting conditions in
accordance with paragraphs 19–21. [Refer: Implementation Guidance
paragraph IG22A (including IG example 14)] In all other circumstances, the entity
receiving the goods or services shall measure the goods or services received as a
cash-settled share-based payment transaction. [Refer: paragraphs B55 and B60]
[Refer: Basis for Conclusions paragraphs BC268M–BC268O]
43C The entity settling a share-based payment transaction when another entity in
the group receives the goods or services shall recognise the transaction as an
equity-settled share-based payment transaction only if it is settled in the entity’s
own equity instruments. Otherwise, the transaction shall be recognised as a
cash-settled share-based payment transaction.
[Refer:
paragraphs B50, B54 and B58
Basis for Conclusions paragraphs BC268M–BC268O]
43D Some group transactions involve repayment arrangements that require one
group entity to pay another group entity for the provision of the share-based
payments to the suppliers of goods or services. In such cases, the entity that
receives the goods or services shall account for the share-based payment
transaction in accordance with paragraph 43B regardless of intragroup
repayment arrangements.E9
E9 [IFRIC Update—May 2013: IFRS 2 Share-based Payment—Timing of the recognition of intercompany

recharges The Interpretations Committee received a request for clarification about IFRS 2 Share-based
Payment relating to intragroup recharges made in respect of share-based payments. In the submitter’s
example, the parent company of an international group grants share-based awards to the employees of its
subsidiaries. The obligation to settle these awards is the parent’s. The awards are based on the
employee’s service to the subsidiary. The subsidiary and the parent both recognise the share-based
transaction in accordance with IFRS 2—typically over the vesting period of the awards. The parent has
also entered into recharge agreements with its subsidiaries that require the subsidiaries to pay the parent
the value of the share-based awards upon settlement of the awards by the parent. The submitter asked
whether the subsidiary’s liability to its parent in respect of these charges should be recognised from the
date of grant of the award or at the date of exercise of the award. Outreach conducted suggests that there
is diversity in practice in the recognition of these liabilities. Some respondents view the recharge and the
share-based payments as linked and recognise both from the date of grant over the vesting period. Others
think that the recharge is a separate transaction recognised by analogy with liabilities, the distribution of
equity or as an executory contract. When discussing accounting for the intercompany recharge
transaction, the Interpretations Committee was concerned at the breadth of the topic. It thought that
continued...

IFRS 2
...continued
resolving this issue would require it to address the accounting for intragroup payment arrangements
generally within the context of common control and that any conclusions drawn could have unintended
consequences on the treatment of other types of intercompany transactions. In the absence of guidance
about intercompany transactions within existing Standards and the Conceptual Framework, they did not
think that they would be able to resolve this issue efficiently. For that reason, the Interpretations Committee
decided not to add this issue to its agenda.]
Disclosures
[Refer: Implementation Guidance paragraph IG23]
44 An entity shall disclose information that enables users [Refer: Conceptual

Framework paragraphs OB2–OB10 and QC32] of the financial statements to
understand the nature and extent of share-based payment arrangements
that existed during the period.
45 To give effect to the principle in paragraph 44, the entity shall disclose at least
the following:
(a) a description of each type of share-based payment arrangement that

existed at any time during the period, including the general terms and
conditions of each arrangement, such as vesting requirements, the
maximum term of options granted, and the method of settlement
(eg whether in cash or equity). An entity with substantially similar types
of share-based payment arrangements may aggregate this information,
unless separate disclosure of each arrangement is necessary to satisfy the
principle in paragraph 44.
(b) the number and weighted average exercise prices of share options for
each of the following groups of options:
(i) outstanding at the beginning of the period;
(ii) granted during the period;
(iii) forfeited during the period;
(iv) exercised during the period;

(v) expired during the period;
(vi) outstanding at the end of the period; and
(vii) exercisable at the end of the period.

(c) 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 entity may instead disclose the
weighted average share price during the period.
(d) 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 that may be issued and the cash that may be received
upon exercise of those options.

IFRS 2
46 An entity shall disclose information that enables users of the financial

statements 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.
47 If the entity has measured the fair value of goods or services received as
consideration for equity instruments of the entity indirectly, by reference to the
fair value of the equity instruments granted, to give effect to the principle in
paragraph 46, the entity shall disclose at least the following:
(a) 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 [Refer: paragraph B5] and the inputs
[Refer: paragraphs B6–B15] to that model, including the weighted
average share price, exercise price, expected volatility, [Refer:
paragraphs B22–B30] option life, expected dividends, [Refer:
paragraphs B31–B36] the risk-free interest rate [Refer: paragraph B37]
and any other inputs to the model, [Refer: paragraphs B7–B10 and
B38–B41] including the method used and the assumptions made
to incorporate the effects of expected early exercise; [Refer:
paragraphs B16–B21]
(ii) how expected volatility was determined, including an

explanation of the extent to which expected 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.
(b) 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, [Refer: paragraphs B2 and B3] 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 [Refer: paragraphs B31–B36]
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.
(c) for share-based payment arrangements that were modified during the
period: [Refer: paragraphs 26–29 and B42–B44]
(i) an explanation of those modifications;

(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 (a) and
(b) above, where applicable.

IFRS 2
48 If the entity has measured directly the fair value of goods or services received
during the period, the entity shall disclose how that fair value was determined,
eg whether fair value was measured at a market price for those goods or services.
49 If the entity has rebutted [Refer: paragraph 13A and Basis for Conclusions
paragraphs BC128D–BC128F] the presumption in paragraph 13, [Refer:
paragraphs 24 and 25] it shall disclose that fact, and give an explanation of why
the presumption was rebutted.
50 An entity shall disclose information that enables users [Refer: Conceptual

Framework paragraphs OB2–OB10 and QC32] of the financial statements to
understand the effect of share-based payment transactions on the entity’s
profit or loss for the period and on its financial position [Refer: Conceptual
Framework paragraphs 4.4–4.7].
51 To give effect to the principle in paragraph 50, the entity shall disclose at least
the following:
(a) 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 recognised 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;
(b) 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).
52 If the information required to be disclosed by this Standard does not satisfy the
principles in paragraphs 44, 46 and 50, the entity shall disclose such additional
information as is necessary to satisfy them. For example, if an entity has
classified any share-based payment transactions as equity-settled in accordance
with paragraph 33F, the entity shall disclose an estimate of the amount that it
expects to transfer to the tax authority to settle the employee’s tax obligation
when it is necessary to inform users about the future cash flow effects associated
with the share-based payment arrangement.
[Refer: Basis for Conclusions paragraph BC255M]
Transitional provisions
53 For equity-settled share-based payment transactions, the entity shall apply this
IFRS to grants of shares, share options or other equity instruments that were
granted after 7 November 2002 and had not yet vested at the effective date of
this IFRS.
54 The entity is encouraged, but not required, to apply this IFRS to other grants of
equity instruments if the entity has disclosed publicly the fair value of those
equity instruments, determined at the measurement date.
[Refer: Implementation Guidance paragraph IG8]

IFRS 2
55 For all grants of equity instruments to which this IFRS is applied, the entity shall
restate comparative information and, where applicable, adjust the opening
balance of retained earnings for the earliest period presented.
56 For all grants of equity instruments to which this IFRS has not been applied
(eg equity instruments granted on or before 7 November 2002), the entity shall
nevertheless disclose the information required by paragraphs 44 and 45.
57 If, after the IFRS becomes effective, an entity modifies the terms or conditions of
a grant of equity instruments to which this IFRS has not been applied, the entity
shall nevertheless apply paragraphs 26–29 to account for any such
modifications.
58 For liabilities arising from share-based payment transactions existing at the

effective date of this IFRS, the entity shall apply the IFRS retrospectively. [Refer:
IAS 8 paragraph 5 (definition of retrospective application)] For these liabilities, the
entity shall restate comparative information, [Refer: IAS 1 paragraphs 38–44]
including adjusting the opening balance of retained earnings in the earliest
period presented for which comparative information has been restated, except
that the entity is not required to restate comparative information to the extent
that the information relates to a period or date that is earlier than 7 November
2002.
59 The entity is encouraged, but not required, to apply retrospectively the IFRS to
other liabilities arising from share-based payment transactions, for example, to
liabilities that were settled during a period for which comparative information
[Refer: IAS 1 paragraphs 38–44] is presented.
59A An entity shall apply the amendments in paragraphs 30–31, 33–33H and
B44A–B44C as set out below. Prior periods shall not be restated.
(a) The amendments in paragraphs B44A–B44C apply only to modifications

that occur on or after the date that an entity first applies the
amendments.
(b) The amendments in paragraphs 30–31 and 33–33D apply to share-based

payment transactions that are unvested at the date that an entity first
applies the amendments and to share-based payment transactions with a
grant date on or after the date that an entity first applies the
amendments. For unvested share-based payment transactions granted
prior to the date that an entity first applies the amendments, an entity
shall remeasure the liability at that date and recognise the effect of the
remeasurement in opening retained earnings (or other component of
equity, as appropriate) of the reporting period in which the amendments
are first applied.
(c) The amendments in paragraphs 33E–33H and the amendment to

paragraph 52 apply to share-based payment transactions that are
unvested (or vested but unexercised), at the date that an entity first
applies the amendments and to share-based payment transactions with a
grant date on or after the date that an entity first applies the
amendments. For unvested (or vested but unexercised) share-based
payment transactions (or components thereof) that were previously

IFRS 2
classified as cash-settled share-based payments but now are classified as

equity-settled in accordance with the amendments, an entity shall
reclassify the carrying value of the share-based payment liability to
equity at the date that it first applies the amendments.
59B Notwithstanding the requirements in paragraph 59A, an entity may apply the
amendments in paragraph 63D retrospectively, subject to the transitional
provisions in paragraphs 53–59 of this Standard, in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors if and only if it is
possible without hindsight. [Refer: Basis for Conclusions paragraph BC237L] If an
entity elects retrospective application, it must do so for all of the amendments
made by Classification and Measurement of Share-based Payment Transactions
(Amendments to IFRS 2).
Effective date
60 An entity shall apply this IFRS for annual periods beginning on or after
1 January 2005. Earlier application is encouraged. If an entity applies the IFRS
for a period beginning before 1 January 2005, it shall disclose that fact.
61 IFRS 3 (as revised in 2008) and Improvements to IFRSs issued in April 2009 amended
paragraph 5. An entity shall apply those amendments for annual periods
beginning on or after 1 July 2009. Earlier application is permitted. If an entity
applies IFRS 3 (revised 2008) for an earlier period, the amendments shall also be
applied for that earlier period.
62 An entity shall apply the following amendments retrospectively in annual

periods beginning on or after 1 January 2009:
(a) the requirements in paragraph 21A in respect of the treatment of
non-vesting conditions;
(b) the revised definitions of ‘vest’ and ‘vesting conditions’ in Appendix A;
(c) the amendments in paragraphs 28 and 28A in respect of cancellations.

Earlier application is permitted. If an entity applies these amendments for a
period beginning before 1 January 2009, it shall disclose that fact.
63 An entity shall apply the following amendments made by Group Cash-settled

Share-based Payment Transactions issued in June 2009 retrospectively, subject to the
transitional provisions in paragraphs 53–59, in accordance with IAS 8 for annual
periods beginning on or after 1 January 2010:
(a) the amendment of paragraph 2, the deletion of paragraph 3 and the

addition of paragraphs 3A and 43A–43D and of paragraphs B45, B47,
B50, B54, B56–B58 and B60 in Appendix B in respect of the accounting
for transactions among group entities.
(b) the revised definitions in Appendix A of the following terms:
● cash-settled share-based payment transaction,

● equity-settled share-based payment transaction,
● share-based payment arrangement, and

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● share-based payment transaction.

If the information necessary for retrospective application is not available, an
entity shall reflect in its separate or individual financial statements the amounts
previously recognised in the group’s consolidated financial statements. Earlier
application is permitted. If an entity applies the amendments for a period
beginning before 1 January 2010, it shall disclose that fact.
[Refer: Basis for Conclusions paragraph BC310A]
63A IFRS 10 Consolidated Financial Statements and IFRS 11, issued in May 2011, amended
paragraph 5 and Appendix A. An entity shall apply those amendments when it
applies IFRS 10 and IFRS 11.
63B Annual Improvements to IFRSs 2010–2012 Cycle, issued in December 2013, amended
paragraphs 15 and 19. In Appendix A, the definitions of ‘vesting conditions’ and
‘market condition’ were amended and the definitions of ‘performance
condition’ and ‘service condition’ were added. An entity shall prospectively apply
that amendment to share-based payment transactions for which the grant date
is on or after 1 July 2014. [Refer: Basis for Conclusions paragraph BC370] Earlier
application is permitted. If an entity applies that amendment for an earlier
period it shall disclose that fact.
63C IFRS 9, as issued in July 2014, amended paragraph 6. An entity shall apply that
amendment when it applies IFRS 9.
63D Classification and Measurement of Share-based Payment Transactions (Amendments to

IFRS 2), issued in June 2016, amended paragraphs 19, 30–31, 33, 52 and 63 and
added paragraphs 33A–33H, 59A–59B, 63D and B44A–B44C and their related
headings. An entity shall apply those amendments for annual periods
beginning on or after 1 January 2018. Earlier application is permitted. If an
entity applies the amendments for an earlier period, it shall disclose that fact.
Withdrawal of Interpretations
64 Group Cash-settled Share-based Payment Transactions issued in June 2009 supersedes

IFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2—Group and Treasury Share Transactions.
The amendments made by that document incorporated the previous
requirements set out in IFRIC 8 and IFRIC 11 as follows:
(a) amended paragraph 2 and added paragraph 13A in respect of the
accounting for transactions in which the entity cannot identify
specifically some or all of the goods or services received. Those
requirements were effective for annual periods beginning on or after
1 May 2006.
(b) added paragraphs B46, B48, B49, B51–B53, B55, B59 and B61 in
Appendix B in respect of the accounting for transactions among group
entities. Those requirements were effective for annual periods beginning
on or after 1 March 2007.
Those requirements were applied retrospectively in accordance with the
requirements of IAS 8, subject to the transitional provisions of IFRS 2.

IFRS 2
Appendix A
Defined terms
This appendix is an integral part of the IFRS.
cash-settled A share-based payment transaction in which the entity
share-based payment acquires goods or services by incurring a liability to transfer cash
transaction or other assets to the supplier of those goods or services for
amounts that are based on the price (or value) of equity
instruments (including shares or share options) of the entity or
another group entity.
[Refer: paragraphs 30–33D]
employees and others Individuals who render personal services to the entity and either
providing similar (a) the individuals are regarded as employees for legal or tax
services purposes, (b) the individuals work for the entity under its
direction in the same way as individuals who are regarded as
employees for legal or tax purposes, or (c) the services rendered
are similar to those rendered by employees. For example, the
term encompasses all management personnel, ie those persons
having authority and responsibility for planning, directing and
controlling the activities of the entity, including non-executive
directors.
equity instrument A contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities.5
equity instrument The right (conditional or unconditional) to an equity
granted instrument of the entity conferred by the entity on another
party, under a share-based payment arrangement.
equity-settled A share-based payment transaction in which the entity
share-based payment
(a) receives goods or services as consideration for its own
transaction
equity instruments (including shares or share
options), or
(b) receives goods or services but has no obligation to settle

the transaction with the supplier.
fair value The amount for which an asset could be exchanged, a liability
settled, or an equity instrument granted could be exchanged,
between knowledgeable, willing parties in an arm’s length
transaction.
5 The Conceptual Framework for Financial Reporting defines a liability as a present obligation of the entity
arising from past events, the settlement of which is expected to result in an outflow from the entity
of resources embodying economic benefits (ie an outflow of cash or other assets of the entity).

IFRS 2
grant date The date at which the entity and another party (including an
employee) agree to a share-based payment arrangement,
being when the entity and the counterparty have a shared
understanding of the terms and conditions of the arrangement.
At grant date the entity confers on the counterparty the right to
cash, other assets, or equity instruments of the entity, 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.
[Refer: Implementation Guidance paragraphs IG1–IG4]
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 (or will be) required to pay for those
shares. For example, a share option with an exercise price of
CU15,6 on a share with a fair value of CU20, has an intrinsic value
of CU5.
market condition A performance condition [Refer: Basis for Conclusions
paragraph BC361] upon which the exercise price, vesting or
exercisability of an equity instrument depends that is related to
the market price (or value) of the entity’s equity instruments (or
the equity instruments of another entity in the same group), such
as:
(a) attaining a specified share price or a specified amount of

intrinsic value of a share option; or
(b) achieving a specified target that is based on the market

price (or value) of the entity’s equity instruments (or the
equity instruments of another entity in the same group)
relative to an index of market prices of equity
instruments of other entities.
[Refer: Basis for Conclusions paragraph BC361]
[Link to Basis for Conclusions paragraph BC357 for the reasons why a
share market index is a non-vesting condition]
A market condition requires the counterparty to complete a

specified period of service (ie a service condition); the service
requirement can be explicit or implicit.
[Refer:
Basis for Conclusions paragraph BC346
IG example 5]
6 In this appendix, monetary amounts are denominated in ‘currency units (CU)’.

IFRS 2
measurement date The date at which the fair value of the equity instruments
granted is measured for the purposes of this IFRS. For
transactions with employees and others providing similar
services, the measurement date is grant date. For transactions
with parties other than employees (and those providing similar
services), the measurement date is the date the entity obtains the
goods or the counterparty renders service.
[Refer: Implementation Guidance paragraphs IG5–IG7]
performance condition A vesting condition that requires:
(a) the counterparty to complete a specified period of service

(ie a service condition); the service requirement can be
explicit or implicit; [Refer: Basis for Conclusions
paragraph BC346] and
(b) specified performance target(s) to be met while the

counterparty is rendering the service required in (a).
The period of achieving the performance target(s):
(a) shall not extend beyond the end of the service period;
[Refer: Basis for Conclusions paragraph BC344] and
(b) may start before the service period on the condition that
the commencement date of the performance target is not
substantially before the commencement of the service
period. [Refer: Basis for Conclusions paragraphs BC342 and
BC343
A performance target is defined by reference to: [Refer: Basis for

Conclusions paragraph BC360]
(a) the entity’s own operations (or activities) or the

operations or activities of another entity in the same
group (ie a non-market condition); or
(b) the price (or value) of the entity’s equity instruments or

the equity instruments of another entity in the same
group (including shares and share options) (ie a market
condition). [Refer: Basis for Conclusions paragraphs BC337
and BC338]
A performance target might relate either to the performance of
the entity as a whole or to some part of the entity (or part of the
group), such as a division or an individual employee.
[Refer: Basis for Conclusions paragraphs BC351 and BC352]
reload feature A feature that provides for an automatic grant of additional
share options whenever the option holder exercises previously
granted options using the entity’s shares, rather than cash, to
satisfy the exercise price.
[Refer:
paragraph 22
Basis for Conclusions paragraphs BC188–BC192]

IFRS 2
reload option A new share option granted when a share is used to satisfy the
exercise price of a previous share option.
service condition A vesting condition that requires the counterparty to complete
a specified period of service during which services are provided to
the entity. If the counterparty, regardless of the reason, ceases to
provide service during the vesting period, it has failed to satisfy
the condition. A service condition does not require a
performance target to be met.
share-based payment An agreement between the entity (or another group7 entity or
arrangement any shareholder of any group entity) and another party
(including an employee) that entitles the other party to receive
(a) cash or other assets of the entity for amounts that are
based on the price (or value) of equity instruments
(including shares or share options) of the entity or
another group entity, or
(b) equity instruments (including shares or share options)

of the entity or another group entity,
provided the specified vesting conditions, if any, are met.

share-based payment A transaction in which the entity
transaction
(a) receives goods or services from the supplier of those
goods or services (including an employee) in a
share-based payment arrangement, or
(b) incurs an obligation to settle the transaction with the

supplier in a share-based payment arrangement when
another group entity receives those goods or services.E10
7 A ‘group’ is defined in Appendix A of IFRS 10 Consolidated Financial Statements as ‘a parent and its
subsidiaries’ from the perspective of the reporting entity’s ultimate parent. [Refer: Basis for
Conclusions paragraph BC22E]

IFRS 2
share option A contract that gives the holder the right, but not the obligation,
to subscribe to the entity’s shares at a fixed or determinable price
for a specified period of time.E11
E11 [IFRIC Update—November 2005: Employee share loan plans The IFRIC was asked to consider the
accounting treatment of employee share loan plans. Under many such plans, employee share purchases
are facilitated by means of a loan from the issuer with recourse only to the shares. The IFRIC was asked
whether the loan should be considered part of the potential share-based payment, with the entire
arrangement treated as an option, or whether the loan should be accounted for separately as a financial
asset. The IFRIC noted that the issue of shares using the proceeds of a loan made by the share issuer, when
the loan is recourse only to the shares, would be treated as an option grant in which options were exercised
on the date or dates when the loan was repaid. The IFRIC decided it would not expect diversity in practice
and would not add this item to its agenda.]
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 entity vests when the
counterparty’s entitlement is no longer conditional on the
satisfaction of any vesting conditions.
vesting condition A condition that determines whether the entity receives the
services that entitle the counterparty to receive cash, other assets
or equity instruments of the entity, under a share-based
payment arrangement. A vesting condition is either a service
condition or a performance condition.
vesting period The period during which all the specified vesting conditions of
a share-based payment arrangement are to be satisfied.

IFRS 2
Appendix B
Application guidance
This appendix is an integral part of the IFRS.
Estimating the fair value of equity instruments granted
B1 Paragraphs B2–B41 of this appendix discuss measurement of the fair value of

shares and share options granted, focusing on the specific terms and conditions
that are common features of a grant of shares or share options to employees.
Therefore, it is not exhaustive. Furthermore, because the valuation issues
discussed below focus on shares and share options granted to employees, it is
assumed that the fair value of the shares or share options is measured at grant
date. However, many of the valuation issues discussed below (eg determining
expected volatility) also apply in the context of estimating the fair value of
shares or share options granted to parties other than employees at the date the
entity obtains the goods or the counterparty renders service.
Shares
B2 For shares granted to employees, the fair value of the shares shall be measured at
the market price of the entity’s shares (or an estimated market price, if the
entity’s shares are not publicly traded), adjusted to take into account the terms
and conditions upon which the shares were granted (except for vesting
conditions that are excluded from the measurement of fair value in accordance
with paragraphs 19–21).
B3 For example, if the employee 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. [Refer:
IG example 11] 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, which are accounted for in accordance with
paragraphs 19–21.
Share options
B4 For share options granted to employees, 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.
B5 The entity shall consider factors that knowledgeable, willing market

participants would consider in selecting the option pricing model to apply. For

IFRS 2
example, many employee 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. These factors should be considered when estimating the grant
date fair value of the options. For many entities, 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 [Refer: paragraphs B11–B15] 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.
B6 All option pricing models take into account, as a minimum, the following
factors:
(a) the exercise price of the option;
(b) the life of the option;

(c) the current price of the underlying shares;
(d) the expected volatility of the share price;
(e) the dividends expected on the shares (if appropriate); and
(f) the risk-free interest rate for the life of the option.
B7 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 in
accordance with paragraphs 19–22).
B8 For example, a share option granted to an employee 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 entity 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.
B9 Similarly, another factor common to employee share options is the possibility of

early exercise of the option, for example, because the option is not freely
transferable, or because the employee must exercise all vested options upon
cessation of employment. The effects of expected early exercise shall be taken
into account, as discussed in paragraphs B16–B21.
B10 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. For example, for share options granted to employees,

IFRS 2
factors that affect the value of the option from the individual employee’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

B11 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 employee share options, the objective
is to approximate the expectations that an outside party with access to detailed
information about employees’ exercise behaviour would develop based on
information available at the grant date.
B12 Often, there is likely to be a range of reasonable expectations about future

volatility, dividends and exercise behaviour. If so, an expected value should be
calculated, by weighting each amount within the range by its associated
probability of occurrence.
B13 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 entity 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.
B14 In other circumstances, historical information may not be available. For

example, a newly listed entity will have little, if any, historical data on the
volatility of its share price. Unlisted and newly listed entities are discussed
further below.
B15 In summary, an entity 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

B16 Employees often exercise share options early, for a variety of reasons. For
example, employee share options are typically non-transferable. This often
causes employees to exercise their share options early, because that is the only
way for the employees to liquidate their position. Also, employees who cease
employment are usually required to exercise any vested options within a short
period of time, otherwise the share options are forfeited. This factor also causes
the early exercise of employee share options. Other factors causing early
exercise are risk aversion and lack of wealth diversification.
B17 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 an employee share option, is the period of time from
grant date to the date on which the option is expected to be exercised) as an

IFRS 2
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.
B18 Factors to consider in estimating early exercise include:
(a) 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. The implications of
vesting conditions are discussed in paragraphs 19–21.
(b) the average length of time similar options have remained outstanding in
the past.
(c) the price of the underlying shares. Experience may indicate that the
employees tend to exercise options when the share price reaches a
specified level above the exercise price.
(d) the employee’s level within the organisation. For example, experience
might indicate that higher-level employees tend to exercise options later
than lower-level employees (discussed further in paragraph B21).
(e) expected volatility of the underlying shares. On average, employees

might tend to exercise options on highly volatile shares earlier than on
shares with low volatility.
B19 As noted in paragraph B17, the effects of early exercise could be taken into
account by using an estimate of the option’s expected life as an input into an
option pricing model. When estimating the expected life of share options
granted to a group of employees, the entity could base that estimate on an
appropriately weighted average expected life for the entire employee group or
on appropriately weighted average lives for subgroups of employees within the
group, based on more detailed data about employees’ exercise behaviour
(discussed further below).
B20 Separating an option grant into groups for employees 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 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.
B21 Similar considerations apply when using a binomial or similar model. For
example, the experience of an entity that grants options broadly to all levels of
employees might indicate that top-level executives tend to hold their options
longer than middle-management employees hold theirs and that lower-level
employees tend to exercise their options earlier than any other group. In
addition, employees who are encouraged or required to hold a minimum
amount of their employer’s equity instruments, including options, might on

IFRS 2
average exercise options later than employees 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
B22 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.
B23 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
appreciation (or depreciation) of the share price.
B24 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 CU100 at the beginning of the
year and no dividends are paid, the year-end share price would be expected to be
between CU83.53 (CU100 × e–0.18) and CU152.20 (CU100 × e0.42) approximately
two-thirds of the time.
B25 Factors to consider in estimating expected volatility include:
(a) implied volatility from traded share options on the entity’s shares, or
other traded instruments of the entity that include option features (such
as convertible debt), if any.
(b) 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).
(c) the length of time an entity’s shares have been publicly traded. A newly
listed entity might have a high historical volatility, compared with
similar entities that have been listed longer. Further guidance for newly
listed entities is given below.
(d) 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 entity’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.

IFRS 2
(e) appropriate and regular intervals for price observations. The price
observations should be consistent from period to period. For example,
an entity might use the closing price for each week or the highest price
for the week, but it should not use the closing price for some weeks and
the highest price for other weeks. Also, the price observations should be
expressed in the same currency as the exercise price.
Newly listed entities

B26 As noted in paragraph B25, an entity should consider historical volatility of the
share price over the most recent period that is generally commensurate with the
expected option term. If a newly listed entity 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 entities following a comparable
period in their lives. For example, an entity 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 entities in the same
industry for the first six years in which the shares of those entities were publicly
traded.
Unlisted entities
B27 An unlisted entity will not have historical information to consider when
estimating expected volatility. Some factors to consider instead are set out
below.
B28 In some cases, an unlisted entity that regularly issues options or shares to
employees (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.
B29 Alternatively, the entity could consider the historical or implied volatility of
similar listed entities, for which share price or option price information is
available, to use when estimating expected volatility. This would be appropriate
if the entity has based the value of its shares on the share prices of similar listed
entities.
B30 If the entity has not based its estimate of the value of its shares on the share
prices of similar listed entities, and has instead used another valuation
methodology to value its shares, the entity could derive an estimate of expected
volatility consistent with that valuation methodology. For example, the entity
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
B31 Whether expected dividends should be taken into account when measuring the
fair value of shares or options granted depends on whether the counterparty is
entitled to dividends or dividend equivalents.

IFRS 2
B32 For example, if employees were granted options and are entitled to dividends on
the underlying shares or dividend equivalents (which might be paid in cash or
applied to reduce the exercise price) between grant date and exercise date, the
options granted should be valued as if no dividends will be paid on the
underlying shares, ie the input for expected dividends should be zero.
B33 Similarly, when the grant date fair value of shares granted to employees is
estimated, no adjustment is required for expected dividends if the employee is
entitled to receive dividends paid during the vesting period.
B34 Conversely, if the employees are not entitled to dividends or dividend

equivalents during the vesting period (or before exercise, in the case of an
option), the grant date valuation of the rights to shares or options should take
expected dividends into account. That is to say, when the fair value of an option
grant is estimated, expected dividends should be included in the application of
an option pricing model. When the fair value of a share grant is estimated, that
valuation should be reduced by the present value of dividends expected to be
paid during the vesting period.
B35 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 entity may use either its expected yield or its expected payments. If
the entity uses the latter, it should consider its historical pattern of increases in
dividends. For example, if an entity’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.
B36 Generally, the assumption about expected dividends should be based on publicly
available information. An entity that does not pay dividends and has no plans to
do so should assume an expected dividend yield of zero. However, an emerging
entity with no history of paying dividends might expect to begin paying
dividends during the expected lives of its employee share options. Those entities
could use an average of their past dividend yield (zero) and the mean dividend
yield of an appropriately comparable peer group.
Risk-free interest rate

B37 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, rather than the implied yield of zero-coupon government issues,
when estimating the fair value of an option with a life equal to the expected
term of the option being valued.

IFRS 2
Capital structure effectsE12
E12 [IFRIC Update—November 2006: Incremental fair value to employees as a result of unexpected capital
restructurings The IFRIC was asked to consider a situation in which the fair value of the equity instruments
granted to the employees of an entity increased after the sponsoring entity undertook a capital
restructuring that was not anticipated at the date of grant of the equity instruments. The original
share-based payment plan contained neither specific nor more general requirements for adjustments to the
grant in the event of a capital restructuring. As a result, the equity instruments previously granted to the
employees became more valuable as a consequence of the restructuring. The issue was whether the
incremental value should be accounted for in the same way as a modification to the terms and conditions of
the plan in accordance with IFRS 2. The IFRIC believed that the specific case presented was not a normal
commercial occurrence and was unlikely to have widespread significance. The IFRIC therefore decided not
to add the issue to its agenda.]
B38 Typically, third parties, not the entity, 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.
B39 In contrast, if share options are written by the entity, 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.
B40 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.
B41 However, the entity 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.
Modifications to equity-settled share-based payment

arrangements
B42 Paragraph 27 requires that, 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, the entity should 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. In addition, the entity should recognise the effects of
modifications that increase the total fair value of the share-based payment
arrangement or are otherwise beneficial to the employee.

IFRS 2
B43 To apply the requirements of paragraph 27:

(a) 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 entity shall include the
incremental fair value granted in the measurement of the amount
recognised for services received as consideration for the equity
instruments granted. The incremental fair value granted is the
difference between the fair value of the modified equity instrument and
that of the original equity instrument, both estimated as at the date of
the modification. If the modification occurs during the vesting period,
the incremental fair value granted is included in the measurement of the
amount recognised for services received over the period from the
modification date until the date when the modified equity instruments
vest, in addition to the amount based on the grant date fair value of the
original equity instruments, which is recognised over the remainder of
the original vesting period. If the modification occurs after vesting date,
the incremental fair value granted is recognised immediately, or over the
vesting period [Refer: IG example 7] if the employee is required to complete
an additional period of service before becoming unconditionally entitled
to those modified equity instruments.
(b) similarly, if the modification increases the number of equity instruments

granted, the entity 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 (a) 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.
(c) if the entity modifies the vesting conditions in a manner that is

beneficial to the employee, 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 entity shall take the modified vesting conditions into
account when applying the requirements of paragraphs 19–21.
B44 Furthermore, if the entity 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
employee, the entity shall nevertheless continue to account for the services
received as consideration for the equity instruments granted as if that
modification had not occurred (other than a cancellation of some or all the
equity instruments granted, which shall be accounted for in accordance with
paragraph 28). For example:

IFRS 2
(a) if the modification reduces the fair value of the equity instruments
granted, measured immediately before and after the modification, the
entity 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.
(b) if the modification reduces the number of equity instruments granted to
an employee, that reduction shall be accounted for as a cancellation of
that portion of the grant, in accordance with the requirements of
paragraph 28.
(c) if the entity modifies the vesting conditions in a manner that is not
beneficial to the employee, for example, by increasing the vesting period
[Refer: IG example 8] or by modifying or adding a performance condition
(other than a market condition, changes to which are accounted for in
accordance with (a) above), the entity shall not take the modified vesting
conditions into account when applying the requirements of paragraphs
19–21.
Accounting for a modification of a share-based payment

transaction that changes its classification from
cash-settled to equity-settled
[Refer:
Basis for Conclusions paragraphs BC237C–BC237K
Implementation Guidance paragraph IG19B and IG example 12C]
B44A If the terms and conditions of a cash-settled share-based payment transaction are
modified with the result that it becomes an equity-settled share-based payment
transaction, the transaction is accounted for as such from the date of the
modification. Specifically:
(a) The equity-settled share-based payment transaction is measured by

reference to the fair value of the equity instruments granted at the
modification date. The equity-settled share-based payment transaction is
recognised in equity on the modification date to the extent to which
goods or services have been received.
(b) The liability for the cash-settled share-based payment transaction as at
the modification date is derecognised on that date.
(c) Any difference between the carrying amount of the liability derecognised
and the amount of equity recognised on the modification date is
recognised immediately in profit or loss.
B44B If, as a result of the modification, the vesting period is extended or shortened,
the application of the requirements in paragraph B44A reflect the modified
vesting period. The requirements in paragraph B44A apply even if the
modification occurs after the vesting period.
B44C A cash-settled share-based payment transaction may be cancelled or settled

(other than a transaction cancelled by forfeiture when the vesting conditions are
not satisfied). If equity instruments are granted and, on that grant date, the

IFRS 2
entity identifies them as a replacement for the cancelled cash-settled share-based

payment, the entity shall apply paragraphs B44A and B44B.

(2009 amendments)
B45 Paragraphs 43A–43C address the accounting for share-based payment
transactions among group entities in each entity’s separate or individual
financial statements. Paragraphs B46–B61 discuss how to apply the
requirements in paragraphs 43A–43C. As noted in paragraph 43D, share-based
payment transactions among group entities may take place for a variety of
reasons depending on facts and circumstances. Therefore, this discussion is not
exhaustive and assumes that when the entity receiving the goods or services has
no obligation to settle the transaction, the transaction is a parent’s equity
contribution to the subsidiary, regardless of any intragroup repayment
arrangements.
B46 Although the discussion below focuses on transactions with employees, it also
applies to similar share-based payment transactions with suppliers of goods or
services other than employees. An arrangement between a parent and its
subsidiary may require the subsidiary to pay the parent for the provision of the
equity instruments to the employees. The discussion below does not address
how to account for such an intragroup payment arrangement.
B47 Four issues are commonly encountered in share-based payment transactions

among group entities. For convenience, the examples below discuss the issues
in terms of a parent and its subsidiary.
Share-based payment arrangements involving an entity’s own

equity instruments
B48 The first issue is whether the following transactions involving an entity’s own
equity instruments should be accounted for as equity-settled or as cash-settled in
accordance with the requirements of this IFRS:
(a) an entity grants to its employees rights to equity instruments of the

entity (eg share options), and either chooses or is required to buy equity
instruments (ie treasury shares) from another party, to satisfy its
obligations to its employees; and
(b) an entity’s employees are granted rights to equity instruments of the

entity (eg share options), either by the entity itself or by its shareholders,
and the shareholders of the entity provide the equity instruments
needed.
B49 The entity shall account for share-based payment transactions in which it
receives services as consideration for its own equity instruments as
equity-settled. This applies regardless of whether the entity chooses or is
required to buy those equity instruments from another party to satisfy its
obligations to its employees under the share-based payment arrangement. It
also applies regardless of whether:
(a) the employee’s rights to the entity’s equity instruments were granted by
the entity itself or by its shareholder(s); or

IFRS 2
(b) the share-based payment arrangement was settled by the entity itself or
by its shareholder(s).
B50 If the shareholder has an obligation to settle the transaction with its investee’s
employees, it provides equity instruments of its investee rather than its own.
Therefore, if its investee is in the same group as the shareholder, in accordance
with paragraph 43C, the shareholder shall measure its obligation in accordance
with the requirements applicable to cash-settled share-based payment
transactions in the shareholder’s separate financial statements and those
applicable to equity-settled share-based payment transactions in the
shareholder’s consolidated financial statements.
Share-based payment arrangements involving equity instruments

of the parent
B51 The second issue concerns share-based payment transactions between two or
more entities within the same group involving an equity instrument of another
group entity. For example, employees of a subsidiary are granted rights to
equity instruments of its parent as consideration for the services provided to the
subsidiary.
B52 Therefore, the second issue concerns the following share-based payment
arrangements:
(a) a parent grants rights to its equity instruments directly to the employees
of its subsidiary: the parent (not the subsidiary) has the obligation to
provide the employees of the subsidiary with the equity instruments;
and
[Refer: paragraph B53]
(b) a subsidiary grants rights to equity instruments of its parent to its

employees: the subsidiary has the obligation to provide its employees
with the equity instruments.
[Refer: paragraph B55]
A parent grants rights to its equity instruments to the employees of its

subsidiary (paragraph B52(a))
B53 The subsidiary does not have an obligation to provide its parent’s equity
instruments to the subsidiary’s employees. Therefore, in accordance with
paragraph 43B, the subsidiary shall measure the services received from its
employees in accordance with the requirements applicable to equity-settled
share-based payment transactions, and recognise a corresponding increase in
equity as a contribution from the parent.
[Refer: Implementation Guidance paragraph IG22A (including IG example 14)]
B54 The parent has an obligation to settle the transaction with the subsidiary’s
employees by providing the parent’s own equity instruments. Therefore, in
accordance with paragraph 43C, the parent shall measure its obligation in
accordance with the requirements applicable to equity-settled share-based
payment transactions.

IFRS 2
A subsidiary grants rights to equity instruments of its parent to its

employees (paragraph B52(b))
B55 Because the subsidiary does not meet either of the conditions in paragraph 43B,
it shall account for the transaction with its employees as cash-settled. This
requirement applies irrespective of how the subsidiary obtains the equity
instruments to satisfy its obligations to its employees.
Share-based payment arrangements involving cash-settled

payments to employees
B56 The third issue is how an entity that receives goods or services from its suppliers
(including employees) should account for share-based arrangements that are
cash-settled when the entity itself does not have any obligation to make the
required payments to its suppliers. For example, consider the following
arrangements in which the parent (not the entity itself) has an obligation to
make the required cash payments to the employees of the entity:
(a) the employees of the entity will receive cash payments that are linked to
the price of its equity instruments.
(b) the employees of the entity will receive cash payments that are linked to
the price of its parent’s equity instruments.
B57 The subsidiary does not have an obligation to settle the transaction with its
employees. Therefore, the subsidiary shall account for the transaction with its
employees as equity-settled, [Refer: paragraph 43B] and recognise a corresponding
increase in equity as a contribution from its parent. The subsidiary shall
remeasure the cost of the transaction subsequently for any changes resulting
from non-market vesting conditions not being met in accordance with
paragraphs 19–21. This differs from the measurement of the transaction as
cash-settled in the consolidated financial statements of the group.
B58 Because the parent has an obligation to settle the transaction with the
employees, and the consideration is cash, the parent (and the consolidated
group) shall measure its obligation in accordance with the requirements
applicable to cash-settled share-based payment transactions in paragraph 43C.
Transfer of employees between group entities

[Refer: Basis for Conclusions paragraphs BC268P–BC268S]
B59 The fourth issue relates to group share-based payment arrangements that
involve employees of more than one group entity. For example, a parent might
grant rights to its equity instruments to the employees of its subsidiaries,
conditional upon the completion of continuing service with the group for a
specified period. An employee of one subsidiary might transfer employment to
another subsidiary during the specified vesting period without the employee’s
rights to equity instruments of the parent under the original share-based
payment arrangement being affected. If the subsidiaries have no obligation to
settle the share-based payment transaction with their employees, they account
for it as an equity-settled transaction. [Refer: paragraph 43B] Each subsidiary shall
measure the services received from the employee by reference to the fair value of
the equity instruments at the date the rights to those equity instruments were

IFRS 2
originally granted by the parent as defined in Appendix A, and the proportion of

the vesting period the employee served with each subsidiary.
B60 If the subsidiary has an obligation to settle the transaction with its employees in
its parent’s equity instruments, it accounts for the transaction as cash-settled.
[Refer: paragraph 43B] Each subsidiary shall measure the services received on the
basis of grant date fair value of the equity instruments for the proportion of the
vesting period the employee served with each subsidiary. In addition, each
subsidiary shall recognise any change in the fair value of the equity instruments
during the employee’s service period with each subsidiary.
B61 Such an employee, after transferring between group entities, may fail to satisfy a
vesting condition other than a market condition as defined in Appendix A,
eg the employee leaves the group before completing the service period. In this
case, because the vesting condition is service to the group, each subsidiary shall
adjust the amount previously recognised in respect of the services received from
the employee in accordance with the principles in paragraph 19. Hence, if the
rights to the equity instruments granted by the parent do not vest because of an
employee’s failure to meet a vesting condition other than a market condition,
no amount is recognised on a cumulative basis for the services received from
that employee in the financial statements of any group entity.

IFRS 2
Appendix C
Amendments to other IFRSs
The amendments in this appendix become effective for annual financial statements covering periods
beginning on or after 1 January 2005. If an entity applies this Standard for an earlier period, these
amendments become effective for that earlier period.
*****
The amendments contained in this appendix when this Standard was issued in 2004 have been
incorporated into the relevant Standards published in this volume.

IFRS 2
Approval by the Board of IFRS 2 issued in February 2004
International Financial Reporting Standard 2 Share-based Payment was approved for issue by
the fourteen members of the International Accounting Standards Board.
Sir David Tweedie Chairman
Thomas E Jones Vice-Chairman

Mary E Barth
Hans-Georg Bruns
Anthony T Cope
Robert P Garnett
Gilbert Gélard
James J Leisenring
Warren J McGregor
Patricia L O’Malley
Harry K Schmid
John T Smith
Geoffrey Whittington
Tatsumi Yamada

IFRS 2
Approval by the Board of Vesting Conditions and

Cancellations (Amendments to IFRS 2) issued in
January 2008
Vesting Conditions and Cancellations (Amendments to IFRS 2) was approved for issue by the
thirteen members of the International Accounting Standards Board.

Mary E Barth
Stephen Cooper
Philippe Danjou
Jan Engström
Robert P Garnett
Gilbert Gélard
James J Leisenring
Warren J McGregor
John T Smith
Tatsumi Yamada
Wei-Guo Zhang

IFRS 2
Approval by the Board of Group Cash-settled Share-based

Payment Transactions (Amendments to IFRS 2) issued in
June 2009
Group Cash-settled Share-based Payment Transactions (Amendments to IFRS 2) was approved for
issue by thirteen of the fourteen members of the International Accounting Standards Board.
Mr Kalavacherla abstained in view of his recent appointment to the Board.

Mary E Barth
Stephen Cooper
Philippe Danjou
Jan Engström
Robert P Garnett
Gilbert Gélard
Prabhakar Kalavacherla
James J Leisenring
Warren J McGregor
John T Smith
Tatsumi Yamada
Wei-Guo Zhang

IFRS 2
Approval by the Board of Classification and Measurement

of Share-based Payment Transactions (Amendments to
IFRS 2) issued in June 2016
Classification and Measurement of Share-based Payment Transactions was approved for issue by the
fourteen members of the International Accounting Standards Board.
Hans Hoogervorst Chairman
Ian Mackintosh Vice-Chairman

Stephen Cooper
Philippe Danjou
Martin Edelmann
Patrick Finnegan
Amaro Gomes
Gary Kabureck
Suzanne Lloyd
Takatsugu Ochi
Darrel Scott
Chungwoo Suh
Mary Tokar
Wei-Guo Zhang

IFRS 2
IASB documents published to accompany
IFRS 2
Share-based Payment
The text of the unaccompanied standard, IFRS 2, is contained in Part A of this edition. The
text of the Basis for Conclusions on IFRS 2 is contained in Part C of this edition. Its effective
date when issued was 1 January 2005. This part presents the following documents:
IMPLEMENTATION GUIDANCE
姝 IFRS Foundation B45

IFRS 2 IG
CONTENTS
from paragraph
GUIDANCE ON IMPLEMENTING
IFRS 2 SHARE-BASED PAYMENT
DEFINITION OF GRANT DATE IG1
DEFINITION OF VESTING CONDITIONS IG4A
TRANSACTIONS WITH PARTIES OTHER THAN EMPLOYEES IG5
Transactions in which the entity cannot identify specifically some or all of
the goods or services received IG5A
Measurement date for transactions with parties other than employees IG6
TRANSITIONAL ARRANGEMENTS IG8
EQUITY-SETTLED SHARE-BASED PAYMENT TRANSACTIONS IG9
CASH-SETTLED SHARE-BASED PAYMENT TRANSACTIONS IG18
FEATURE FOR WITHHOLDING TAX OBLIGATIONS IG19A
ACCOUNTING FOR A MODIFICATION OF A SHARE-BASED PAYMENT
TRANSACTION THAT CHANGES ITS CLASSIFICATION FROM CASH-SETTLED
TO EQUITY-SETTLED IG19B
SHARE-BASED PAYMENT ARRANGEMENTS WITH CASH ALTERNATIVES IG20
SHARE-BASED PAYMENT TRANSACTIONS AMONG GROUP ENTITIES IG22A
ILLUSTRATIVE DISCLOSURES IG23
SUMMARY OF CONDITIONS FOR A COUNTERPARTY TO RECEIVE AN
EQUITY INSTRUMENT GRANTED AND OF ACCOUNTING TREATMENTS IG24
B46 姝 IFRS Foundation

IFRS 2 IG
Guidance on implementing
IFRS 2 Share-based Payment
This guidance accompanies, but is not part of, IFRS 2.
Definition of grant date
IG1 IFRS 2 defines grant date as the date at which the entity and the employee (or
other party providing similar services) agree to a share-based payment
arrangement, being when the entity and the counterparty have a shared
understanding of the terms and conditions of the arrangement. At grant date
the entity confers on the counterparty the right to cash, other assets, or equity
instruments of the entity, 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.
IG2 As noted above, grant date is when both parties agree to a share-based payment
arrangement. The word ‘agree’ is used in its usual sense, which means that
there must be both an offer and acceptance of that offer. Hence, the date at
which one party makes an offer to another party is not grant date. The date of
grant is when that other party accepts the offer. In some instances, the
counterparty explicitly agrees to the arrangement, eg by signing a contract. In
other instances, agreement might be implicit, eg for many share-based payment
arrangements with employees, the employees’ agreement is evidenced by their
commencing to render services.
IG3 Furthermore, for both parties to have agreed to the share-based payment
arrangement, both parties must have a shared understanding of the terms and
conditions of the arrangement. Therefore, if some of the terms and conditions
of the arrangement are agreed on one date, with the remainder of the terms and
conditions agreed on a later date, then grant date is on that later date, when all
of the terms and conditions have been agreed. For example, if an entity agrees
to issue share options to an employee, but the exercise price of the options will
be set by a compensation committee that meets in three months’ time, grant
date is when the exercise price is set by the compensation committee.
IG4 In some cases, grant date might occur after the employees to whom the equity
instruments were granted have begun rendering services. For example, if a
grant of equity instruments is subject to shareholder approval, grant date might
occur some months after the employees have begun rendering services in
respect of that grant. The IFRS requires the entity to recognise the services when
received. In this situation, the entity should estimate the grant date fair value of
the equity instruments (eg by estimating the fair value of the equity instruments
at the end of the reporting period), for the purposes of recognising the services
received during the period between service commencement date and grant date.
Once the date of grant has been established, the entity should revise the earlier
estimate so that the amounts recognised for services received in respect of the
grant are ultimately based on the grant date fair value of the equity instruments.

IFRS 2 IG
Definition of vesting conditions
IG4A IFRS 2 defines vesting conditions as the conditions that determine whether the
entity receives the services that entitle the counterparty to receive cash, other
assets or equity instruments of the entity under a share-based payment
arrangement. The following flowchart illustrates the evaluation of whether a
condition is a service or performance condition or a non-vesting condition.
Transactions with parties other than employees
IG5 For transactions with parties other than employees (and others providing
similar services) that are measured by reference to the fair value of the equity
instruments granted, paragraph 13 of IFRS 2 includes a rebuttable presumption
that the fair value of the goods or services received can be estimated reliably. In
these situations, paragraph 13 of IFRS 2 requires the entity to measure that fair
value at the date the entity obtains the goods or the counterparty renders
service.
Transaction in which the entity cannot identify

specifically some or all of the goods or services received
IG5A In some cases, however, it might be difficult to demonstrate that goods or
services have been (or will be) received. For example, an entity may grant shares
to a charitable organisation for nil consideration. It is usually not possible to
identify the specific goods or services received in return for such a transaction.
A similar situation might arise in transactions with other parties.
IG5B Paragraph 11 of IFRS 2 requires transactions in which share-based payments are

made to employees to be measured by reference to the fair value of the
share-based payments at grant date.1 Hence, the entity is not required to
measure directly the fair value of the employee services received.
1 In IFRS 2, all references to employees include others providing similar services.

IFRS 2 IG
IG5C It should be noted that the phrase ‘the fair value of the share-based payment’
refers to the fair value of the particular share-based payment concerned. For
example, an entity might be required by government legislation to issue some
portion of its shares to nationals of a particular country that may be transferred
only to other nationals of that country. Such a transfer restriction may affect
the fair value of the shares concerned, and therefore those shares may have a fair
value that is less than the fair value of otherwise identical shares that do not
carry such restrictions. In this situation, the phrase ‘the fair value of the
share-based payment’ would refer to the fair value of the restricted shares, not
the fair value of other, unrestricted shares.
IG5D Paragraph 13A of IFRS 2 specifies how such transactions should be measured.
The following example illustrates how the entity should apply the requirements
of the IFRS to a transaction in which the entity cannot identify specifically some
or all of the goods or services received.
IG Example 1
Share-based payment transaction in which the entity cannot identify specifically some or
all of the goods or services received
Background
An entity granted shares with a total fair value of CU100,000(a) to parties

other than employees who are from a particular section of the community
(historically disadvantaged individuals), as a means of enhancing its image as
a good corporate citizen. The economic benefits derived from enhancing its
corporate image could take a variety of forms, such as increasing its
customer base, attracting or retaining employees, or improving or
maintaining its ability to tender successfully for business contracts.
The entity cannot identify the specific consideration received. For example,
no cash was received and no service conditions were imposed. Therefore, the
identifiable consideration (nil) is less than the fair value of the equity
instruments granted (CU100,000).
Application of requirements
Although the entity cannot identify the specific goods or services received,
the circumstances indicate that goods or services have been (or will be)
received, and therefore IFRS 2 applies.
In this situation, because the entity cannot identify the specific goods or
services received, the rebuttable presumption in paragraph 13 of IFRS 2, that
the fair value of the goods or services received can be estimated reliably, does
not apply. The entity should instead measure the goods or services received
by reference to the fair value of the equity instruments granted.
(a) In this example, and in all other examples in this guidance, monetary amounts are
denominated in ‘currency units (CU)’.
Measurement date for transactions with parties other

than employees
IG6 If the goods or services are received on more than one date, the entity should
measure the fair value of the equity instruments granted on each date when

IFRS 2 IG
goods or services are received. The entity should apply that fair value when
measuring the goods or services received on that date.
IG7 However, an approximation could be used in some cases. For example, if an

entity received services continuously during a three-month period, and its share
price did not change significantly during that period, the entity could use the
average share price during the three-month period when estimating the fair
value of the equity instruments granted.
Transitional arrangements
IG8 In paragraph 54 of IFRS 2, the entity is encouraged, but not required, to apply
the requirements of the IFRS to other grants of equity instruments (ie grants
other than those specified in paragraph 53 of the IFRS), if the entity has
disclosed publicly the fair value of those equity instruments, measured at the
measurement date. For example, such equity instruments include equity
instruments for which the entity has disclosed in the notes to its financial
statements the information required in the US by SFAS 123 Accounting for
Stock-based Compensation.
Equity-settled share-based payment transactions
IG9 For equity-settled transactions measured by reference to the fair value of the
equity instruments granted, paragraph 19 of IFRS 2 states that vesting
conditions, other than market conditions,2 are not taken into account when
estimating the fair value of the shares or share options at the measurement date
(ie grant date, for transactions with employees and others providing similar
services). 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. Hence, on a cumulative basis, no
amount is recognised for goods or services received if the equity instruments
granted do not vest because of failure to satisfy a vesting condition, eg the
counterparty fails to complete a specified service period, or a performance
condition is not satisfied. This accounting method is known as the modified
grant date method, because the number of equity instruments included in the
determination of the transaction amount is adjusted to reflect the outcome of
the vesting conditions, but no adjustment is made to the fair value of those
equity instruments. That fair value is estimated at grant date (for transactions
with employees and others providing similar services) and not subsequently
revised. Hence, neither increases nor decreases in the fair value of the equity
instruments after grant date are taken into account when determining the
transaction amount (other than in the context of measuring the incremental
fair value transferred if a grant of equity instruments is subsequently modified).
2 In the remainder of this paragraph, the discussion of vesting conditions excludes market
conditions, which are subject to the requirements of paragraph 21 of IFRS 2.

IFRS 2 IG
IG10 To apply these requirements, paragraph 20 of IFRS 2 requires the entity to

recognise 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
to 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 entity revises the estimate to equal the number of equity
instruments that ultimately vested (subject to the requirements of paragraph 21
concerning market conditions).
IG11 In the examples below, the share options granted all vest at the same time, at
the end of a specified period. In some situations, share options or other equity
instruments granted might vest in instalments over the vesting period. For
example, suppose an employee is granted 100 share options, which will vest in
instalments of 25 share options at the end of each year over the next four years.
To apply the requirements of the IFRS, the entity should treat each instalment as
a separate share option grant, because each instalment has a different vesting
period, and hence the fair value of each instalment will differ (because the
length of the vesting period affects, for example, the likely timing of cash flows
arising from the exercise of the options).
IG Example 1A
Background
An entity grants 100 share options to each of its 500 employees. Each grant
is conditional upon the employee working for the entity over the next three
years. [ie the vesting condition is a service condition of three years—service
conditions are not market conditions] The entity estimates that the fair value of
each share option is CU15. [Refer: paragraphs 11, 12 and 16–19]
On the basis of a weighted average probability, the entity estimates that

20 per cent of employees will leave during the three-year period and
therefore forfeit their rights to the share options.
Scenario 1
If everything turns out exactly as expected, the entity recognises the

following amounts during the vesting period, for services received as
consideration for the share options.
Year Calculation [Refer: paragraph 10] Remuneration Cumulative
expense for remuneration
period expense
CU CU
1 50,000 options × 80% [Refer:
paragraphs 19 and 20] × CU15 [Refer:
paragraphs 11, 12 and 16–19] ×
1
/3 years [Refer: paragraph 15(a)] 200,000 200,000
2 (50,000 options × 80% × CU15 ×
2
/3 years) – CU200,000 200,000 400,000
3 (50,000 options × 80% × CU15 ×
3
/3 years) – CU400,000 200,000 600,000
continued...

IFRS 2 IG
...continued
IG Example 1A
Scenario 2
During year 1, 20 employees leave. The entity revises its estimate of total
employee departures over the three-year period from 20 per cent
(100 employees) to 15 per cent (75 employees). During year 2, a further
22 employees leave. The entity revises its estimate of total employee
departures over the three-year period from 15 per cent to 12 per cent
(60 employees). During year 3, a further 15 employees leave. Hence, a total
of 57 employees forfeited their rights to the share options during the
three-year period, and a total of 44,300 share options (443 employees × 100
options per employee) vested at the end of year 3.
period expense
CU CU
paragraphs 19 and 20] × CU15 [Refer:
paragraphs 11, 12 and 16–19] × 1/3 years
[Refer: paragraph 15(a)] 212,500 212,500
2 (50,000 options × 88% [Refer:
paragraphs 19 and 20] × CU15 × 2/3
years) – CU212,500 227,500 440,000
3 (44,300 options [Refer: paragraphs 19
and 20] × CU15) – CU440,000 224,500 664,500
IG12 In Example 1A, the share options were granted conditionally upon the
employees’ completing a specified service period. In some cases, a share option
or share grant might also be conditional upon the achievement of a specified
performance target. Examples 2, 3 and 4 illustrate the application of the IFRS to
share option or share grants with performance conditions (other than market
conditions, which are discussed in paragraph IG13 and illustrated in Examples 5
and 6). In Example 2, the length of the vesting period varies, depending on
when the performance condition is satisfied. Paragraph 15 of the IFRS requires
the entity to estimate the length of the expected vesting period, based on the
most likely outcome of the performance condition, and to revise that estimate, if
necessary, if subsequent information indicates that the length of the vesting
period is likely to differ from previous estimates.

IFRS 2 IG
IG Example 2
Grant with a performance condition, in which the length of the vesting period varies
Background
At the beginning of year 1, the entity grants 100 shares each to

500 employees, conditional upon the employees’ remaining in the entity’s
employ during the vesting period. [ie this vesting condition is a service
condition—service conditions are not market conditions] The shares will vest at
the end of year 1 if the entity’s earnings increase by more than 18 per cent;
at the end of year 2 if the entity’s earnings increase by more than an average
of 13 per cent per year over the two-year period; and at the end of year 3 if
the entity’s earnings increase by more than an average of 10 per cent per
year over the three-year period. [ie this vesting condition is a non-market
performance condition] The shares have a fair value of CU30 per share [Refer:
paragraphs 11, 12 and 16–19] at the start of year 1, which equals the share
price at grant date. No dividends are expected to be paid over the three-year
period.
By the end of year 1, the entity’s earnings have increased by 14 per cent, and
30 employees have left. The entity expects that earnings will continue to
increase at a similar rate in year 2, and therefore expects that the shares will
vest at the end of year 2. The entity expects, on the basis of a weighted
average probability, that a further 30 employees will leave during year 2, and
therefore expects that 440 employees will vest in 100 shares each at the end
of year 2.
By the end of year 2, the entity’s earnings have increased by only 10 per cent
and therefore the shares do not vest at the end of year 2. 28 employees have
left during the year. The entity expects that a further 25 employees will
leave during year 3, and that the entity’s earnings will increase by at least
6 per cent, thereby achieving the average of 10 per cent per year.
By the end of year 3, 23 employees have left and the entity’s earnings had
increased by 8 per cent, resulting in an average increase of 10.67 per cent per
year. Therefore, 419 employees received 100 shares at the end of year 3.
continued...

IFRS 2 IG
...continued
IG Example 2
period expense
CU CU
1 440 employees [Refer: paragraphs 19
and 20] × 100 shares
× CU30 [Refer: paragraphs 11, 12
and 16–19] × 1/2 [Refer: paragraph 15(b)] 660,000 660,000
2 (417 employees [Refer: paragraphs 19
and 20] × 100 shares × CU30 × 2/3
[Refer: paragraph 15(b)]) – CU660,000 174,000 834,000
and 20] × 100 shares × CU30 × 3/3
[Refer: paragraph 15(b)]) – CU834,000 423,000 1,257,000
IG Example 3
Grant with a performance condition, in which the number of equity instruments varies
Background
At the beginning of year 1, Entity A grants share options to each of its

100 employees working in the sales department. The share options will vest
at the end of year 3, provided that the employees remain in the entity’s
employ, and provided that the volume of sales of a particular product
increases by at least an average of 5 per cent per year. If the volume of sales
of the product increases by an average of between 5 per cent and 10 per cent
per year, each employee will receive 100 share options. If the volume of sales
increases by an average of between 10 per cent and 15 per cent each year,
each employee will receive 200 share options. If the volume of sales
increases by an average of 15 per cent or more, each employee will receive
300 share options.
[This share-based payment has two vesting conditions. The first is a service condition
of three years (service conditions are not market conditions). The second is a
non-market performance condition where the number of options that vest depends on
the volume of sales of the product.]
On grant date, Entity A estimates that the share options have a fair value of
CU20 per option. [Refer: paragraphs 11, 12 and 16–19] Entity A also estimates
that the volume of sales of the product will increase by an average of
between 10 per cent and 15 per cent per year, and therefore expects that, for
each employee who remains in service until the end of year 3, 200 share
options will vest. The entity also estimates, on the basis of a weighted
average probability, that 20 per cent of employees will leave before the end
of year 3.
continued...

IFRS 2 IG
...continued
IG Example 3
By the end of year 1, seven employees have left and the entity still expects
that a total of 20 employees will leave by the end of year 3. Hence, the entity
expects that 80 employees will remain in service for the three-year period.
Product sales have increased by 12 per cent and the entity expects this rate of
increase to continue over the next 2 years.
By the end of year 2, a further five employees have left, bringing the total to
12 to date. The entity now expects only three more employees will leave
during year 3, and therefore expects a total of 15 employees will have left
during the three-year period, and hence 85 employees are expected to
remain. Product sales have increased by 18 per cent, resulting in an average
of 15 per cent over the two years to date. The entity now expects that sales
will average 15 per cent or more over the three-year period, and hence
expects each sales employee to receive 300 share options at the end of year 3.
By the end of year 3, a further two employees have left. Hence, 14 employees
have left during the three-year period, and 86 employees remain. The
entity’s sales have increased by an average of 16 per cent over the three
years. Therefore, each of the 86 employees receives 300 share options.
period expense
CU CU
1 80 employees [Refer: paragraphs 19 and
20] × 200 options [Refer: paragraphs 19
and 20] × CU20 [Refer: paragraphs 11, 12
and 16–19] × 1/3 [Refer: paragraph 15(a)] 106,667 106,667
and 20] × 300 options [Refer:
paragraphs 19 and 20] × CU20 × 2/3 ) –
CU106,667 233,333 340,000
and 20] × 300 options [Refer:
paragraphs 19 and 20] × CU20 × 3/3) –
CU340,000 176,000 516,000

IFRS 2 IG
IG Example 4
Grant with a performance condition, in which the exercise price varies

Background
At the beginning of year 1, an entity grants to a senior executive 10,000

share options, conditional upon the executive remaining in the entity’s
employ until the end of year 3. [ie this vesting condition is a service
condition—service conditions are not market conditions] The exercise price is
CU40. However, the exercise price drops to CU30 if the entity’s earnings
increase by at least an average of 10 per cent per year over the three-year
period. [ie this vesting condition is a non-market performance condition]
On grant date [Refer: paragraph 11], the entity estimates that the fair value of
the share options, with an exercise price of CU30, is CU16 per option. [Refer:
paragraphs 11, 12 and 16–19] If the exercise price is CU40, the entity estimates
that the share options have a fair value of CU12 per option. [Refer:
paragraphs 11, 12 and 16–19]
During year 1, the entity’s earnings increased by 12 per cent, and the entity
expects that earnings will continue to increase at this rate over the next two
years. The entity therefore expects that the earnings target will be achieved,
and hence the share options will have an exercise price of CU30.
During year 2, the entity’s earnings increased by 13 per cent, and the entity
continues to expect that the earnings target will be achieved.
During year 3, the entity’s earnings increased by only 3 per cent, and
therefore the earnings target was not achieved. The executive completes
three years’ service, and therefore satisfies the service condition. Because the
earnings target was not achieved, the 10,000 vested share options have an
exercise price of CU40.
Because the exercise price varies depending on the outcome of a performance

condition that is not a market condition, the effect of that performance
condition (ie the possibility that the exercise price might be CU40 and the
possibility that the exercise price might be CU30) is not taken into account
when estimating the fair value of the share options at grant date. Instead,
the entity estimates the fair value of the share options at grant date under
each scenario (ie exercise price of CU40 and exercise price of CU30) and
ultimately revises the transaction amount to reflect the outcome of that
performance condition, as illustrated below.
continued...

IFRS 2 IG
...continued
IG Example 4
period expense
CU CU
1 10,000 options [Refer: paragraphs 19
and 20] × CU16 [Refer: paragraphs 11, 12
2 (10,000 options × CU16 [Refer:
× 2/3) – CU53,333 53,334 106,667
3 (10,000 options × CU12 [Refer:
× 3/3) – CU106,667 13,333 120,000
IG13 Paragraph 21 of the IFRS requires market conditions, such as a target share price
upon which vesting (or exercisability) is conditional, to be taken into account
when estimating the fair value of the equity instruments granted. Therefore, for
grants of equity instruments with market conditions, the entity recognises the
goods or services received from a counterparty who satisfies all other vesting
conditions (eg services received from an employee who remains in service for the
specified period of service), irrespective of whether that market condition is
satisfied. Example 5 illustrates these requirements.
IG Example 5
Grant with a market condition

Background
At the beginning of year 1, an entity grants to a senior executive 10,000

share options, conditional upon the executive remaining in the entity’s
employ until the end of year 3. [ie this vesting condition is a service
condition—service conditions are not market conditions] However, the share
options cannot be exercised unless the share price has increased from CU50
at the beginning of year 1 to above CU65 at the end of year 3. [ie this vesting
condition is a market condition] If the share price is above CU65 at the end of
year 3, the share options can be exercised at any time during the next seven
years, ie by the end of year 10.
The entity applies a binomial option pricing model, which takes into account
the possibility that the share price will exceed CU65 at the end of year 3 (and
hence the share options become exercisable) and the possibility that the
share price will not exceed CU65 at the end of year 3 (and hence the options
will be forfeited). It estimates the fair value of the share options with this
market condition to be CU24 per option. [Refer: paragraphs 11, 12 and 16–21]
continued...

IFRS 2 IG
...continued
IG Example 5
Because paragraph 21 of the IFRS requires the entity to recognise the services
received from a counterparty who satisfies all other vesting conditions
(eg services received from an employee who remains in service for the
specified service period), irrespective of whether that market condition is
satisfied, it makes no difference whether the share price target is achieved.
The possibility that the share price target might not be achieved has already
been taken into account when estimating the fair value of the share options
at grant date. Therefore, if the entity expects the executive to complete the
three-year service period, and the executive does so, the entity recognises the
following amounts in years 1, 2 and 3:
period expense
CU CU
1 10,000 options [Refer: paragraphs 19–21]
× CU24 [Refer: paragraphs 11, 12
2 (10,000 options × CU24 × 2/3) –
CU80,000 80,000 160,000
3 (10,000 options × CU24) – CU160,000 80,000 240,000
As noted above, these amounts are recognised irrespective of the outcome of

the market condition. However, if the executive left during year 2 (or year 3),
the amount recognised during year 1 (and year 2) would be reversed in year 2
(or year 3). This is because the service condition, in contrast to the market
condition, was not taken into account when estimating the fair value of the
share options at grant date. Instead, the service condition is taken into
account by adjusting the transaction amount to be based on the number of
equity instruments that ultimately vest, in accordance with paragraphs 19
and 20 of the IFRS.
IG14 In Example 5, the outcome of the market condition did not change the length of
the vesting period. However, if the length of the vesting period varies depending
on when a performance condition is satisfied, paragraph 15 of the IFRS requires
the entity to presume that the services to be rendered by the employees as
consideration for the equity instruments granted will be received in the future,
over the expected vesting period. The entity is required to 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 must be consistent
with the assumptions used in estimating the fair value of the share options
granted, and is not subsequently revised. Example 6 illustrates these
requirements.

IFRS 2 IG
IG Example 6
Grant with a market condition, in which the length of the vesting period varies
Background
At the beginning of year 1, an entity grants 10,000 share options with a

ten-year life to each of ten senior executives. The share options will vest and
become exercisable immediately if and when the entity’s share price
increases from CU50 to CU70, [ie this vesting condition is a market condition in
which the length of the vesting period varies] provided that the executive remains
in service until the share price target is achieved. [ie this vesting condition is a
service condition—service conditions are not market conditions]
The entity applies a binomial option pricing model, which takes into account
the possibility that the share price target will be achieved during the ten-year
life of the options, and the possibility that the target will not be achieved.
The entity estimates that the fair value of the share options at grant date is
CU25 per option [Refer: paragraphs 11, 12 and 16–21]. From the option pricing
model, the entity determines that the mode of the distribution of possible
vesting dates is five years. In other words, of all the possible outcomes, the
most likely outcome of the market condition is that the share price target
will be achieved at the end of year 5. Therefore, the entity estimates that the
expected vesting period is five years. The entity also estimates that two
executives will have left by the end of year 5, and therefore expects that
80,000 share options (10,000 share options × 8 executives) will vest at the end
of year 5.
Throughout years 1–4, the entity continues to estimate that a total of two
executives will leave by the end of year 5. However, in total three executives
leave, one in each of years 3, 4 and 5. The share price target is achieved at
the end of year 6. Another executive leaves during year 6, before the share
price target is achieved.
continued...

IFRS 2 IG
...continued
IG Example 6
Paragraph 15 [Refer: paragraph 15(b)] of the IFRS requires the entity to

recognise the services received over the expected vesting period, as estimated
at grant date, and also requires the entity not to revise that estimate.
Therefore, the entity recognises the services received from the executives over
years 1–5. Hence, the transaction amount is ultimately based on 70,000
share options (10,000 share options × 7 executives who remain in service at
the end of year 5). [In effect the share-based payment is treated as an option with
a market condition and an expected vesting period of five years. The length of the
expected vesting period is not subsequently revised because it is a market condition
that affects its length—see paragraph 15(b)]
Although another executive left during year 6, no adjustment is made,

because the executive had already completed the expected vesting period of
five years. [Refer: paragraph 23] Therefore, the entity recognises the following
amounts in years 1–5:
period expense
CU CU
1 80,000 options [Refer: paragraphs 19–21]
× CU25 [Refer: paragraphs 11, 12 and
16–21] × 1/5 [Refer: paragraph 15(b)] 400,000 400,000
2 (80,000 options × CU25 × 2/5) –
CU400,000 400,000 800,000
3 (80,000 options × CU25 × 3/5) –
CU800,000 400,000 1,200,000
4
4 (80,000 options × CU25 × /5) –
CU1,200,000 400,000 1,600,000
5 (70,000 [Note: the reduction by 10,000
options is as a result of the service
condition not being met during the
expected vesting period—paragraph
BC180] options [Refer: paragraphs 19–20]
× CU25) – CU1,600,000 150,000 1,750,000

IFRS 2 IG
IG15 Paragraphs 26–29 and B42–B44 of the IFRS set out requirements that apply if a
share option is repriced (or the entity otherwise modifies the terms or
conditions of a share-based payment arrangement). Examples 7–9 illustrate
some of these requirements.
IG Example 7
Grant of share options that are subsequently repriced

Background
At the beginning of year 1, an entity grants 100 share options to each of its
500 employees. Each grant is conditional upon the employee remaining in
service over the next three years. [ie this vesting condition is a service
condition—service conditions are not market conditions] The entity estimates that
the fair value of each option is CU15. [Refer: paragraphs 11, 12 and 16–19] On
the basis of a weighted average probability, the entity estimates that 100
employees will leave during the three-year period and therefore forfeit their
rights to the share options.
Suppose that 40 employees leave during year 1. Also suppose that by the end
of year 1, the entity’s share price has dropped, and the entity reprices its
share options, [Refer: paragraphs 26 and 27] and that the repriced share options
vest at the end of year 3. The entity estimates that a further 70 employees
will leave during years 2 and 3, and hence the total expected employee
departures over the three-year vesting period is 110 employees. During
year 2, a further 35 employees leave, and the entity estimates that a further
30 employees will leave during year 3, to bring the total expected employee
departures over the three-year vesting period to 105 employees. During
year 3, a total of 28 employees leave, and hence a total of 103 employees
ceased employment during the vesting period. For the remaining
397 employees, the share options vested at the end of year 3.
The entity estimates that, at the date of repricing, the fair value of each of
the original share options granted (ie before taking into account the
repricing) is CU5 and that the fair value of each repriced share option is CU8.
continued...

IFRS 2 IG
...continued
IG Example 7
Paragraph 27 of the IFRS requires the entity to recognise the effects of

modifications that increase the total fair value of the share-based payment
arrangement or are otherwise beneficial to the employee. 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,
paragraph B43(a) of Appendix B requires the entity to include the
incremental fair value granted (ie 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) in the measurement of the
amount recognised for services received as consideration for the equity
instruments granted. 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.
The incremental value is CU3 per share option (CU8 – CU5). This amount is
recognised over the remaining two years of the vesting period, along with
remuneration expense based on the original option value of CU15.
The amounts recognised in years 1–3 are as follows:

period expense
CU CU
1 (500 – 110) employees [Refer:
paragraphs 19–20] × 100 options ×
CU15 [Refer: paragraphs 11, 12 and
16–19] × 1/3 [Refer: paragraph 15(a)] 195,000 195,000
paragraphs 19 and 20] × 100 options ×
(CU15 [Refer: paragraph 27] × 2/3 [Refer:
paragraph 27] + CU3 [Refer:
paragraph B43(a)] × 1/2
[Refer: paragraph B43(a)]) – CU195,000 259,250 454,250
paragraphs 19 and 20] × 100 options ×
(CU15 + CU3) – CU454,250 260,350 714,600

IFRS 2 IG
IG Example 8
Grant of share options with a vesting condition that is subsequently modified

Background
At the beginning of year 1, the entity grants 1,000 share options to each
member of its sales team, conditional upon the employee remaining in the
entity’s employ for three years, [ie this vesting condition is a service condition]
and the team selling more than 50,000 units of a particular product over the
three-year period. [ie this vesting condition is a non-market performance condition]
The fair value of the share options is CU15 per option [Refer: paragraphs 11, 12
and 16–19] at the date of grant.
During year 2, the entity increases the sales target to 100,000 units. [ie a
modification of a non-market condition—see paragraph 27] By the end of year 3,
the entity has sold 55,000 units, and the share options are forfeited. Twelve
members of the sales team have remained in service for the three-year
period.
Paragraph 20 of the IFRS requires, for a performance condition that is not a

market condition, the entity to recognise the services received during the
vesting period based on the best available estimate of the number of equity
instruments expected to vest and to 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 entity
revises the estimate to equal the number of equity instruments that
ultimately vested. However, paragraph 27 of the IFRS requires, 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, the entity to 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. Furthermore, paragraph B44(c) of Appendix B specifies that, if
the entity modifies the vesting conditions in a manner that is not beneficial
to the employee, the entity does not take the modified vesting conditions
into account when applying the requirements of paragraphs 19–21 of the
IFRS.
continued...

IFRS 2 IG
...continued
IG Example 8
Therefore, because the modification to the performance condition made it

less likely that the share options will vest, which was not beneficial to the
employee, the entity takes no account of the modified performance condition
when recognising the services received. Instead, it continues to recognise the
services received over the three-year period based on the original vesting
conditions. Hence, the entity ultimately recognises cumulative remuneration
expense of CU180,000 over the three-year period (12 employees × 1,000
options × CU15).
The same result would have occurred if, instead of modifying the
performance target, the entity had increased the number of years of service
required for the share options to vest from three years to ten years. Because
such a modification would make it less likely that the options will vest,
which would not be beneficial to the employees, the entity would take no
account of the modified service condition when recognising the services
received. Instead, it would recognise the services received from the twelve
employees who remained in service over the original three-year vesting
period.
IG Example 9
Grant of shares, with a cash alternative subsequently added

Background
At the beginning of year 1, the entity grants 10,000 shares with a fair value
of CU33 per share to a senior executive, conditional upon the completion of
three years’ service. [ie this vesting condition is a service condition—service
conditions are not market conditions] By the end of year 2, the share price has
dropped to CU25 per share. At that date, the entity adds a cash alternative
to the grant, whereby the executive can choose whether to receive 10,000
shares or cash equal to the value of 10,000 shares on vesting date. The share
price is CU22 on vesting date.
Paragraph 27 of the IFRS requires, 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, the entity to
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. Therefore, the entity
recognises the services received over the three-year period, based on the grant
date fair value of the shares.
continued...

IFRS 2 IG
...continued
IG Example 9
Furthermore, the addition of the cash alternative at the end of year 2 creates
an obligation to settle in cash. In accordance with the requirements for
cash-settled share-based payment transactions (paragraphs 30–33 of the IFRS),
the entity recognises the liability to settle in cash at the modification date,
based on the fair value of the shares at the modification date and the extent
to which the specified services have been received. Furthermore, the entity
remeasures the fair value of the liability at the end of each reporting period
and at the date of settlement, with any changes in fair value recognised in
profit or loss for the period. Therefore, the entity recognises the following
amounts:
Year Calculation [Refer: paragraphs 10 Expense Equity Liability
and 30]
CU CU CU
1 Remuneration expense for year:
10,000 shares [Refer: paragraphs
19 and 20] × CU33 [Refer:
paragraphs 11, 12 and 16–19] × 1/3
[Refer: paragraph 15(a)] 110,000 110,000
(10,000 shares × CU33 × 2/3) –
CU110,000 110,000 110,000
Reclassify equity to liabilities
[Refer: paragraph 42]: 10,000
shares × CU25 × 2/3 (166,667) 166,667
(10,000 shares × CU33 × 3/3)
[Refer: paragraph 27]
– CU220,000 110,000(a) 26,667 83,333
Adjust liability to closing fair
value: [Refer: paragraphs 30–33]
(CU166,667 + CU83,333) –
(CU22 × 10,000 shares) (30,000) (30,000)
Total 300,000 80,000 220,000
(a) Allocated between liabilities and equity, to bring in the final third of the liability
based on the fair value of the shares as at the date of the modification.

IFRS 2 IG
IG15A If a share-based payment has a non-vesting condition that the counterparty can
choose not to meet and the counterparty does not meet that non-vesting
condition during the vesting period, paragraph 28A of the IFRS requires that
event to be treated as a cancellation. Example 9A illustrates the accounting for
this type of event.
IG Example 9A
Share-based payment with vesting and non-vesting conditions when the counterparty
can choose whether the non-vesting condition is met
Background
An entity grants an employee the opportunity to participate in a plan in

which the employee obtains share options if he agrees to save 25 per cent of
his monthly salary of CU400 for a three-year period. The monthly payments
are made by deduction from the employee’s salary. The employee may use
the accumulated savings to exercise his options at the end of three years, or
take a refund of his contributions at any point during the three-year period.
The estimated annual expense for the share-based payment arrangement is
CU120.
After 18 months, the employee stops paying contributions to the plan and
takes a refund of contributions paid to date of CU1,800.
There are three components to this plan: paid salary, salary deduction paid
to the savings plan and share-based payment. The entity recognises an
expense in respect of each component and a corresponding increase in
liability or equity as appropriate. The requirement to pay contributions to
the plan is a non-vesting condition, which the employee chooses not to meet
in the second year. Therefore, in accordance with paragraphs 28(b) and 28A
of the IFRS, the repayment of contributions is treated as an extinguishment
of the liability and the cessation of contributions in year 2 is treated as a
cancellation.
continued...

IFRS 2 IG
...continued
IG Example 9A
YEAR 1 Expense Cash Liability Equity
CU CU CU CU
Paid salary 3,600
(75% × 400 × 12) (3,600)
Salary deduction paid to the 1,200

savings plan (25% × 400 × 12) (1,200)
Share-based payment 120 (120)
Total 4,920 (3,600) (1,200) (120)
YEAR 2
Paid salary 4,200
(75% × 400 × 6
+ 100% × 400 × 6) (4,200)
Salary deduction paid to the 600

savings plan (25% × 400 × 6) (600)
Refund of contributions to the

employee (1,800) 1,800
Share-based payment
(acceleration of remaining 240
expense) (120 × 3 – 120) (240)
Total 5,040 (6,000) 1,200 (240)

IFRS 2 IG
IG16 Paragraph 24 of the IFRS requires that, in rare cases only, in which the IFRS
requires the entity to measure an equity-settled share-based payment transaction
by reference to the fair value of the equity instruments granted, but the entity is
unable to estimate reliably that fair value at the specified measurement date
(eg grant date, for transactions with employees), the entity shall instead measure
the transaction using an intrinsic value measurement method. Paragraph 24
also contains requirements on how to apply this method. The following
example illustrates these requirements.
IG Example 10
Grant of share options that is accounted for by applying the intrinsic value method
Background
At the beginning of year 1, an entity grants 1,000 share options to

50 employees. The share options will vest at the end of year 3, provided the
employees remain in service until then. [ie this vesting condition is a
non-market performance condition] The share options have a life of 10 years.
The exercise price is CU60 and the entity’s share price is also CU60 at the
date of grant.
At the date of grant, the entity concludes that it cannot estimate reliably the
fair value of the share options granted. [Refer: paragraph 24]
At the end of year 1, three employees have ceased employment and the entity
estimates that a further seven employees will leave during years 2 and 3.
Hence, the entity estimates that 80 per cent of the share options will vest.
Two employees leave during year 2, and the entity revises its estimate of the
number of share options that it expects will vest to 86 per cent.
Two employees leave during year 3. Hence, 43,000 share options vested at
the end of year 3.
The entity’s share price during years 1–10, and the number of share options
exercised during years 4–10, are set out below. Share options that were
exercised during a particular year were all exercised at the end of that year.
Year Share price Number of
at year-end share options
exercised at
year-end
1 63 0
2 65 0
3 75 0
4 88 6,000
5 100 8,000
6 90 5,000
7 96 9,000
8 105 8,000
9 108 5,000
10 115 2,000
continued...

IFRS 2 IG
...continued
IG Example 10
In accordance with paragraph 24 of the IFRS, the entity recognises the

following amounts in years 1–10.
Year Calculation [Refer: paragraph 24] Expense for Cumulative
period expense
CU CU
paragraph 24(b)] × (CU63 – CU60) [Refer:
paragraph 24(a)] × 1/3 years [Refer:
paragraph 24(b)] 40,000 40,000
paragraph 24(b)] × (CU65 – CU60) [Refer:
paragraph 24(a)] × 2/3 years – CU40,000 103,333 143,333
3 43,000 options × (CU75 – CU60) –
CU143,333 501,667 645,000
4 37,000 outstanding options × (CU88 –
CU75) [Refer: paragraph 24(a)] + 6,000
exercised options × (CU88 – CU75) [Refer:
paragraph 24(a)] 559,000 1,204,000
5 29,000 outstanding options × (CU100
– CU88) + 8,000 exercised options ×
(CU100 – CU88) 444,000 1,648,000
(CU90 – CU100) (290,000) 1,358,000
(CU96 – CU90) 144,000 1,502,000
8 7,000 outstanding options × (CU105 –
CU96) + 8,000 exercised options ×
(CU105 – CU96) 135,000 1,637,000
(CU108 – CU105) 21,000 1,658,000
10 2,000 exercised options × (CU115
– CU108) 14,000 1,672,000
IG17 There are many different types of employee share and share option plans.
The following example illustrates the application of IFRS 2 to one particular type
of plan—an employee share purchase plan. Typically, an employee share
purchase plan provides employees with the opportunity to purchase the entity’s
shares at a discounted price. The terms and conditions under which employee
share purchase plans operate differ from country to country. That is to say, not
only are there many different types of employee share and share options plans,
there are also many different types of employee share purchase plans.

IFRS 2 IG
Therefore, the following example illustrates the application of IFRS 2 to one

specific employee share purchase plan.
IG Example 11
Employee share purchase plan

Background
An entity offers all its 1,000 employees the opportunity to participate in an

employee share purchase plan. The employees have two weeks to decide
whether to accept the offer. Under the terms of the plan, the employees are
entitled to purchase a maximum of 100 shares each. The purchase price will
be 20 per cent less than the market price of the entity’s shares at the date
the offer is accepted, and the purchase price must be paid immediately upon
acceptance of the offer. All shares purchased must be held in trust for the
employees, and cannot be sold for five years. The employee is not permitted
to withdraw from the plan during that period. For example, if the employee
ceases employment during the five-year period, the shares must nevertheless
remain in the plan until the end of the five-year period. Any dividends paid
during the five-year period will be held in trust for the employees until the
end of the five-year period.
In total, 800 employees accept the offer and each employee purchases, on
average, 80 shares, ie the employees purchase a total of 64,000 shares.
The weighted-average market price of the shares at the purchase date is
CU30 per share, and the weighted-average purchase price is CU24 per share.
For transactions with employees, IFRS 2 requires the transaction amount to

be measured by reference to the fair value of the equity instruments granted
(IFRS 2, paragraph 11). To apply this requirement, it is necessary first to
determine the type of equity instrument granted to the employees. Although
the plan is described as an employee share purchase plan (ESPP), some ESPPs
include option features and are therefore, in effect, share option plans. For
example, an ESPP might include a ‘look-back feature’, whereby the employee
is able to purchase shares at a discount, and choose whether the discount is
applied to the entity’s share price at the date of grant or its share price at the
date of purchase. Or an ESPP might specify the purchase price, and then
allow the employees a significant period of time to decide whether to
participate in the plan. Another example of an option feature is an ESPP
that permits the participating employees to cancel their participation before
or at the end of a specified period and obtain a refund of amounts previously
paid into the plan.
continued...

IFRS 2 IG
...continued
IG Example 11
However, in this example, the plan includes no option features. The

discount is applied to the share price at the purchase date, and the
employees are not permitted to withdraw from the plan.
Another factor to consider is the effect of post-vesting transfer restrictions,

if any. Paragraph B3 of IFRS 2 states that, if shares are subject to restrictions
on transfer after vesting date, that factor should be taken into account when
estimating the fair value of those shares, 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.
In this example, the shares are vested when purchased, but cannot be sold
for five years after the date of purchase. Therefore, the entity should
consider the valuation effect of the five-year post-vesting transfer restriction.
This entails using a valuation technique to estimate what the price of the
restricted share would have been on the purchase date in an arm’s length
transaction between knowledgeable, willing parties. Suppose that, in this
example, the entity estimates that the fair value of each restricted share is
CU28. In this case, the fair value of the equity instruments granted is CU4
per share (being the fair value of the restricted share of CU28 less the
purchase price of CU24). Because 64,000 shares were purchased, the total
fair value of the equity instruments granted is CU256,000.
In this example, there is no vesting period. Therefore, in accordance with

paragraph 14 of IFRS 2, the entity should recognise an expense of CU256,000
immediately.
However, in some cases, the expense relating to an ESPP might not be

material. IAS 8 Accounting Policies, Changes in Accounting Policies and Errors states
that the accounting policies in IFRSs need not be applied when the effect of
applying them is immaterial (IAS 8, paragraph 8). IAS 8 also states that an
omission or misstatement of an item is material if it could, individually or
collectively, influence the economic decisions that users make on the basis of
the financial statements. Materiality depends on the size and nature of the
omission or misstatement judged in the surrounding circumstances. The
size or nature of the item, or a combination of both, could be the
determining factor (IAS 8, paragraph 5). Therefore, in this example, the
entity should consider whether the expense of CU256,000 is material.
Cash-settled share-based payment transactions
IG18 Paragraphs 30–33 of the IFRS set out requirements for transactions in which an
entity acquires goods or services by incurring liabilities to the supplier of those
goods or services in amounts based on the price of the entity’s shares or other

IFRS 2 IG
equity instruments. The entity is required to recognise initially the goods or

services acquired, and a liability to pay for those goods or services, when the
entity obtains the goods or as the services are rendered, measured at the fair
value of the liability. Thereafter, until the liability is settled, the entity is
required to recognise changes in the fair value of the liability.
IG19 For example, an entity might grant share appreciation rights to employees as
part of their remuneration package, whereby the employees will become
entitled to a future cash payment (rather than an equity instrument), based on
the increase in the entity’s share price from a specified level over a specified
period of time. If the share appreciation rights do not vest until the employees
have completed a specified period of service, the entity recognises the services
received, and a liability to pay for them, as the employees render service during
that period. The liability is measured, initially and at the end of each reporting
period until settled, at the fair value of the share appreciation rights in
accordance with paragraphs 30–33D of IFRS 2. Changes in fair value are
recognised in profit or loss. Therefore, if the amount recognised for the services
received was included in the carrying amount of an asset recognised in the
entity’s statement of financial position (for example, inventory), the carrying
amount of that asset is not adjusted for the effects of the liability
remeasurement. Example 12 illustrates these requirements for a cash-settled
share-based payment transaction that is subject to a service condition. Example
12A illustrates these requirements for a cash-settled share-based payment
transaction that is subject to a performance condition.
IG Example 12
Background
An entity grants 100 cash share appreciation rights (SARs) to each of its
500 employees, on condition that the employees remain in its employ for the
next three years. [ie a cash-settled share-based payment]
During year 1, 35 employees leave. The entity estimates that a further 60

will leave during years 2 and 3. During year 2, 40 employees leave and the
entity estimates that a further 25 will leave during year 3. During year 3,
22 employees leave. At the end of year 3, 150 employees exercise their SARs,
another 140 employees exercise their SARs at the end of year 4 and the
remaining 113 employees exercise their SARs at the end of year 5.
The entity estimates the fair value of the SARs at the end of each year in
which a liability exists as shown below. At the end of year 3, all SARs held by
the remaining employees vest. The intrinsic values of the SARs at the date of
exercise (which equal the cash paid out) at the end of years 3, 4 and 5 are
also shown below.
continued...

IFRS 2 IG
...continued
IG Example 12
Year Fair value Intrinsic
value
1 CU14.40
2 CU15.50
3 CU18.20 CU15.00
4 CU21.40 CU20.00
5 CU25.00
Year Calculation [Refer: paragraphs 30–33] Expense Liability
CU CU
1 (500 – 95) employees × 100 SARs
× CU14.40 [Refer: paragraph 33] × 1/3 194,400 194,400
2 (500 – 100) employees × 100
SARs × CU15.50
[Refer: paragraph 33] × 2/3
– CU194,400 218,933 413,333
3 (500 – 97 – 150) employees × 100
SARs × CU18.20 – CU413,333 47,127 460,460
+ 150 employees × 100 SARs ×
CU15.00 225,000
Total 272,127
4 (253 – 140) employees × 100
SARs × CU21.40 – CU460,460 (218,640) 241,820
CU20.00 280,000
Total 61,360
5 CU0 – CU241,820 (241,820) 0
CU25.00 282,500
Total 40,680
Total 787,500

IFRS 2 IG
IG Example 12A
Background
An entity grants 100 cash-settled share appreciation rights (SARs) to each of its
500 employees on the condition that the employees remain in its employ for the next
three years [ie a cash-settled share-based payment] and the entity reaches a revenue target
(CU1 billion in sales) by the end of Year 3. The entity expects all employees to remain in
its employ.
For simplicity, this example assumes that none of the employees’ compensation
qualifies for capitalisation as part of the cost of an asset.
At the end of Year 1, the entity expects that the revenue target will not be achieved by
the end of Year 3. During Year 2, the entity’s revenue increased significantly and it
expects that it will continue to grow. Consequently, at the end of Year 2, the entity
expects that the revenue target will be achieved by the end of Year 3.
At the end of Year 3, the revenue target is achieved and 150 employees exercise their
SARs. Another 150 employees exercise their SARs at the end of Year 4 and the
remaining 200 employees exercise their SARs at the end of Year 5.
Using an option pricing model, the entity estimates the fair value of the SARs, ignoring
the revenue target performance condition and the employment-service condition, at the
end of each year until all of the cash-settled share-based payments are settled. At the
end of Year 3, all of the SARs vest. The following table shows the estimated fair value of
the SARs at the end of each year and the intrinsic values of the SARs at the date of
exercise (which equals the cash paid out).
Intrinsic
Fair value value of
Year of one SAR one SAR
1 CU14.40 –
2 CU15.50 –
3 CU18.20 CU15.00
4 CU21.40 CU20.00
5 CU25.00 CU25.00
Number of Best
employees estimate of
expected to whether the
satisfy the revenue
service target will
condition be met
Year 1 500 No
Year 2 500 Yes
Year 3 500 Yes
continued...

IFRS 2 IG
...continued
IG Example 12A
Year Calculation Expense Liability
CU CU
1 SARs are not expected to vest:
no expense is recognised – –
2 SARs are expected to vest: 500
employees × 100 SARs × CU15.50
× 2/3 516,667 516,667
3 (500 – 150) employees × 100 SARs ×
CU18.20 x 3/3 – CU516,667 120,333 637,000
CU15.00 225,000
Total 345,333
4 (350 – 150) employees × 100 SARs ×
CU21.40 – CU637,000 (209,000) 428,000
CU20.00 300,000
Total 91,000
5 (200 – 200) employees × 100 SARs ×
CU25.00 – CU428,000 (428,000) –
CU25.00 500,000
Total 72,000
Total 1,025,000

for withholding tax obligations
IG19A Paragraphs 33E and 33F require an entity to classify an arrangement in its
entirety as an equity-settled share-based payment transaction if it would have
been so classified in the absence of a net settlement feature that obliges the
entity to withhold an amount for an employee’s tax obligation associated with a
share-based payment. The entity transfers that amount, normally in cash, to the
tax authority on the employee’s behalf. Example 12B illustrates these
requirements.

IFRS 2 IG
IG Example 12B
Background
The tax law in jurisdiction X requires entities to withhold an amount for an employee’s
tax obligation associated with a share-based payment and transfer that amount in cash
to the tax authority on the employee’s behalf. [Refer: paragraphs 33E–33G]
On 1 January 20X1 an entity in jurisdiction X grants an award of 100 shares to an

employee; that award is conditional upon the completion of four years’ service. The
entity expects that the employee will complete the service period. For simplicity, this
example assumes that none of the employee’s compensation qualifies for capitalisation
as part of the cost of an asset.
The terms and conditions of the share-based payment arrangement require the entity to
withhold shares from the settlement of the award to its employee in order to settle the
employee’s tax obligation (that is, the share-based payment arrangement has a ‘net
settlement feature’). Accordingly, the entity settles the transaction on a net basis by
withholding the number of shares with a fair value equal to the monetary value of the
employee’s tax obligation and issuing the remaining shares to the employee on
completion of the vesting period.
The employee’s tax obligation associated with the award is calculated based on the fair
value of the shares on the vesting date. The employee’s applicable tax rate is 40 per
cent.
At grant date, the fair value of each share is CU2. The fair value of each share at
31 December 20X4 is CU10.
The fair value of the shares on the vesting date is CU1,000 (100 shares × CU10 per share)
and therefore the employee’s tax obligation is CU400 (100 shares × CU10 × 40%).
Accordingly, on the vesting date, the entity issues 60 shares to the employee and
withholds 40 shares (CU400 = 40 shares × CU10 per share). The entity pays the fair value
of the withheld shares in cash to the tax authority on the employee’s behalf. In other
words, it is as if the entity had issued all 100 vested shares to the employee, and at the
same time, repurchased 40 shares at their fair value.
Dr. Cr. Cr.
Expense Equity Liability
Year Calculation CU CU CU
1 100 shares × CU2 × 1/4 50 (50) –
2 100 shares × CU2 × 2/4 – CU50 50 (50) –
3 100 shares × CU2 × 3/4 – (CU50 + CU50) 50 (50) –
100 shares × CU2 × 4/4 – (CU50 + CU50
4 + CU50) 50 (50) –
Total 200 (200) –
continued...

IFRS 2 IG
...continued
IG Example 12B
The journal entries recorded by the entity are as follows:
During the vesting period
Accumulated compensation expense recognised over the vesting period

Dr Expense 200
Cr Equity 200
Recognition of the tax liability(a)
Dr Equity 400
Cr Liability 400
Settlement of tax obligation
Cash paid to the tax authority on the employee’s behalf at the date of settlement
Dr Liability 400
Cr Cash 400
(a) The entity considers disclosing an estimate of the amount that it expects to transfer to the tax
authority at the end of each reporting period. The entity makes such disclosure when it
determines that this information is necessary to inform users about the future cash flow effects
associated with the share-based payment. [Refer: paragraph 52]

transaction that changes its classification from cash-settled to
equity-settled
IG19B The following example illustrates the application of the requirements in

paragraphs B44A of IFRS 2 to a modification of the terms and conditions of a
cash-settled share-based payment transaction that becomes an equity-settled
share-based payment transaction.
IG Example 12C
Background
On 1 January 20X1 an entity grants 100 share appreciation rights (SARs) that will be
settled in cash to each of 100 employees on the condition that employees will remain
employed for the next four years. [ie a cash-settled share-based payment]
On 31 December 20X1 the entity estimates that the fair value of each SAR is CU10 and
consequently, the total fair value of the cash-settled award is CU100,000. On
31 December 20X2 the estimated fair value of each SAR is CU12 and consequently, the
total fair value of the cash-settled award is CU120,000.
continued...

IFRS 2 IG
...continued
IG Example 12C
On 31 December 20X2 the entity cancels the SARs and, in their place, grants 100 share
options to each employee on the condition that each employee remains in its employ
for the next two years. Therefore the original vesting period is not changed. On this
date the fair value of each share option is CU13.20 and consequently, the total fair value
of the new grant is CU132,000. All of the employees are expected to and ultimately do
provide the required service. [Refer: paragraph B44A]
For simplicity, this example assumes that none of the employees’ compensation
qualifies for capitalisation as part of the cost of an asset.
At the modification date (31 December 20X2), the entity applies paragraph B44A.
Accordingly:
(a) from the date of the modification, the share options are measured by reference
to their modification-date fair value and, at the modification date, the share
options are recognised in equity to the extent to which the employees have
rendered services;
(b) the liability for the SARs is derecognised at the modification date; and
(c) the difference between the carrying amount of the liability derecognised and the
equity amount recognised at the modification date is recognised immediately in
profit or loss.
At the modification date (31 December 20X2), the entity compares the fair value of the
equity-settled replacement award for services provided through to the modification date
(CU132,000 × 2/4 = CU66,000) with the fair value of the cash-settled original award for
those services (CU120,000 × 2/4 = CU60,000). The difference (CU6,000) is recognised
immediately in profit or loss at the date of the modification.
The remainder of the equity-settled share-based payment (measured at its

modification-date fair value) is recognised in profit or loss over the remaining two-year
vesting period from the date of the modification.
continued...

IFRS 2 IG
...continued
IG Example 12C
Dr. Cumulative Cr. Cr.
Expense expense Equity Liability
Year Calculation CU CU CU CU
1 100 employees ×100 SARs
× CU10 × 1/4 25,000 – – 25,000
2 Remeasurement before the
modification 100 employees
× 100 SARs × CU12.00 × 2/4
– 25,000 35,000 60,000 – 35,000
Derecognition of the liability,
recognition of the
modification-date fair value
amount in equity and
recognition of the effect of
settlement for CU6,000 (100
employees x 100 share
options × CU13.20 × 2/4) –
(100 employees × 100 SARs
× CU12.00 × 2/4) 6,000 66,000 66,000 (60,000)
3 100 employees × 100 share
options × CU13.20 × 3/4 –
CU66,000 33,000 99,000 33,000 –
4 100 employees x 100 share
options × CU13.20 × 4/4 –
CU99,000 33,000 132,000 33,000 –
Total 132,000 –
Share-based payment arrangements with cash alternatives
IG20 Some employee share-based payment arrangements permit the employee to

choose whether to receive cash or equity instruments. In this situation, a
compound financial instrument has been granted, ie a financial instrument
with debt and equity components. Paragraph 37 of the IFRS requires the entity
to estimate the fair value of the compound financial instrument at grant date,
by first measuring the fair value of the debt component, and then measuring the
fair value of the equity component—taking into account that the employee must
forfeit the right to receive cash to receive the equity instrument.
IG21 Typically, share-based payment arrangements with cash alternatives are

structured so that the fair value of one settlement alternative is the same as the
other. For example, the employee might have the choice of receiving share
options or cash share appreciation rights. In such cases, the fair value of the
equity component will be zero, and hence the fair value of the compound

IFRS 2 IG
financial instrument will be the same as the fair value of the debt component.
However, if the fair values of the settlement alternatives differ, usually the fair
value of the equity component will be greater than zero, in which case the fair
value of the compound financial instrument will be greater than the fair value
of the debt component.
IG22 Paragraph 38 of the IFRS requires the entity to account separately for the
services received in respect of each component of the compound financial
instrument. For the debt component, the entity recognises the services received,
and a liability to pay for those services, as the counterparty renders service, in
accordance with the requirements applying to cash-settled share-based payment
transactions. [Refer: paragraphs 30–33] For the equity component (if any), the
entity recognises the services received, and an increase in equity, as the
counterparty renders service, in accordance with the requirements applying to
equity-settled share-based payment transactions. [Refer: paragraphs 10–29]
Example 13 illustrates these requirements.
IG Example 13
Background
An entity grants to an employee the right to choose either 1,000 phantom

shares, ie a right to a cash payment equal to the value of 1,000 shares, or
1,200 shares. [Refer: paragraphs 34–40] The grant is conditional upon the
completion of three years’ service. If the employee chooses the share
alternative, the shares must be held for three years after vesting date.
At grant date, the entity’s share price is CU50 per share. At the end of
years 1, 2 and 3, the share price is CU52, CU55 and CU60 respectively. The
entity does not expect to pay dividends in the next three years. After taking
into account the effects of the post-vesting transfer restrictions, the entity
estimates that the grant date fair value of the share alternative is CU48 per
share.
At the end of year 3, the employee chooses:

Scenario 1: The cash alternative
Scenario 2: The equity alternative
continued...

IFRS 2 IG
...continued
IG Example 13
The fair value of the equity alternative is CU57,600 (1,200 shares × CU48).
The fair value of the cash alternative is CU50,000 (1,000 phantom shares ×
CU50). Therefore, the fair value of the equity component of the compound
instrument is CU7,600 (CU57,600 – CU50,000). [Refer: paragraphs 35–37]
The entity recognises the following amounts:
Year Expense Equity Liability
CU CU CU
1 Liability component [Refer:
paragraph 38]:
(1,000 × CU52 × 1/3)
[Refer: paragraphs 30–33] 17,333 17,333
Equity component
[Refer: paragraph 38]:
(CU7,600 [Refer: paragraphs 19
and 20] × 1/3 [Refer:
paragraph 15(a)]) 2,533 2,533
2 Liability component:
(1,000 × CU55 × 2/3)
[Refer: paragraphs 30–33] –
CU17,333 19,333 19,333
Equity component:
(CU7,600 × 1/3) 2,533 2,533
3 Liability component: (1,000 ×
CU60) [Refer: paragraphs 30–33] –
CU36,666 23,334 23,334
Equity component:
(CU7,600 × 1/3) 2,534 2,534
End Scenario 1: cash of CU60,000
Year paid [Refer: paragraph 40]
3 Scenario 1 totals 67,600 7,600 0
Scenario 2: 1,200 shares issued

[Refer: paragraph 39] 60,000 (60,000)
Scenario 2 totals 67,600 67,600 0

IFRS 2 IG
IG22A Paragraphs 43A and 43B of IFRS 2 specify the accounting requirements for
share-based payment transactions among group entities in the separate or
individual financial statements of the entity receiving the goods or services.
Example 14 illustrates the journal entries in the separate or individual financial
statements for a group transaction in which a parent grants rights to its equity
instruments to the employees of its subsidiary.
IG Example 14
Share-based payment transactions in which a parent grants rights to its equity

instruments to the employees of its subsidiary
Background
A parent grants 200 share options to each of 100 employees of its subsidiary,
conditional upon the completion of two years’ service with the subsidiary.
The fair value of the share options on grant date is CU30 each. At grant date,
the subsidiary estimates that 80 per cent of the employees will complete the
two-year service period. This estimate does not change during the vesting
period. At the end of the vesting period, 81 employees complete the required
two years of service. The parent does not require the subsidiary to pay for
the shares needed to settle the grant of share options.
As required by paragraph B53 of the IFRS, over the two-year vesting period,
the subsidiary measures the services received from the employees in
accordance with the requirements applicable to equity-settled share-based
payment transactions. [Refer: paragraph 43B] Thus, the subsidiary measures
the services received from the employees on the basis of the fair value of the
share options at grant date. An increase in equity is recognised as a
contribution from the parent in the separate or individual financial
statements of the subsidiary.
The journal entries recorded by the subsidiary for each of the two years are
as follows:
Year 1
Dr Remuneration expense (200 × 100
× CU30 [Refer: paragraphs 11, 12 and 16–19] ×
0.8/2 [Refer: paragraphs 19 and 20 and
paragraph 15(a)]) CU240,000
Cr Equity (Contribution from the parent) CU240,000
Year 2
Dr Remuneration expense (200 × 100
× CU30 × 0.81 [Refer: paragraphs 19 and 20] –
240,000) CU246,000
Cr Equity (Contribution from the parent) CU246,000

IFRS 2 IG
Illustrative disclosures
IG23 The following example illustrates the disclosure requirements in

paragraphs 44–52 of the IFRS.3
Extract from the Notes to the Financial Statements of Company Z for the year
ended 31 December 20X5.
Share-based Payment
During the period ended 31 December 20X5, the Company had four share-based
payment arrangements, which are described below.
Type of Senior General Executive share Senior

arrangement management employee share plan management
share option option plan share
plan appreciation
cash plan
Date of grant 1 January 20X4 1 January 20X5 1 January 20X5 1 July 20X5
Number granted 50,000 75,000 50,000 25,000
Contractual life 10 years 10 years N/A 10 years
Vesting 1.5 years’ Three years’ Three years’ Three years’
conditions service and service. service and service and
achievement of achievement of achievement of
a share price a target growth a target
target, which in earnings per increase in
was achieved. share. market share.
The estimated fair value of each share option granted in the general employee share option
plan is CU23.60. This was calculated by applying a binomial option pricing model. The
model inputs were the share price at grant date of CU50, exercise price of CU50, expected
volatility of 30 per cent, no expected dividends, contractual life of ten years, and a risk-free
interest rate of 5 per cent. To allow for the effects of early exercise, it was assumed that the
employees would exercise the options after vesting date when the share price was twice the
exercise price. Historical volatility was 40 per cent, which includes the early years of the
Company’s life; the Company expects the volatility of its share price to reduce as it matures.
The estimated fair value of each share granted in the executive share plan is CU50.00, which
is equal to the share price at the date of grant.
Further details of the two share option plans are as follows:
3 Note that the illustrative example is not intended to be a template or model and is therefore not
exhaustive. For example, it does not illustrate the disclosure requirements in paragraphs 47(c), 48
and 49 of the IFRS.

IFRS 2 IG
20X4 20X5
Number of Weighted Number of Weighted
options average options average
exercise exercise
price price
Outstanding at start of year 0 – 45,000 CU40
Granted 50,000 CU40 75,000 CU50
Forfeited (5,000) CU40 (8,000) CU46
Exercised 0 – (4,000) CU40
Outstanding at end of year 45,000 CU40 108,000 CU46
Exercisable at end of year 0 CU40 38,000 CU40
The weighted average share price at the date of exercise for share options exercised during
the period was CU52. The options outstanding at 31 December 20X5 had an exercise price
of CU40 or CU50, and a weighted average remaining contractual life of 8.64 years.
20X4 20X5
CU CU
Expense arising from share-based payment
transactions 495,000 1,105,867
Expense arising from share and share option plans 495,000 1,007,000
Closing balance of liability for cash share
appreciation plan – 98,867
Expense arising from increase in fair value of liability
for cash share appreciation plan – 9,200
Summary of conditions for a counterparty to receive an equity

instrument granted and of accounting treatments
IG24 The table below categorises, with examples, the various conditions that
determine whether a counterparty receives an equity instrument granted and
the accounting treatment of share-based payments with those conditions.

IFRS 2 IG
Summary of conditions that determine whether a counterparty receives an equity instrument granted
VESTING CONDITIONS NON-VESTING CONDITIONS
Service Performance conditions

conditions
Performance Other Neither the Counterparty Entity can
conditions that performance entity nor the can choose choose
are market conditions counterparty whether to whether to
conditions can choose meet the meet the
whether the condition condition
condition is
met
Example Requirement to Target based on Target based on Target based on Paying Continuation of
conditions remain in service the market price a successful a commodity contributions the plan by the
for three years of the entity’s initial public index towards the entity
equity offering with a exercise price
instruments specified service of a
requirement share-based
payment
Include in No Yes No Yes Yes Yes(a)

grant-date fair
value?
Accounting Forfeiture. The No change to Forfeiture. The No change to Cancellation. Cancellation.

treatment if entity revises the accounting. The entity revises the accounting. The entity The entity
the condition expense to entity continues expense to The entity recognises recognises
is not met reflect the best to recognise the reflect the best continues to immediately the immediately the
after the grant available expense over the available recognise the amount of the amount of the
date and estimate of the remainder of the estimate of the expense over expense that expense that
during the number of equity vesting period. number of equity the remainder would would
vesting period instruments instruments of the vesting otherwise have otherwise have
expected to vest. expected to vest. period. been been
recognised over recognised over
the remainder the remainder
of the vesting of the vesting
period. period.
(paragraph 19) (paragraph 21) (paragraph 19) (paragraph 21A) (paragraph 28A) (paragraph
28A)
(a) In the calculation of the fair value of the share-based payment, the probability of continuation
of the plan by the entity is assumed to be 100 per cent.

IFRS 2 IG
Table of Concordance
This table shows how the contents of IFRIC 8 and IFRIC 11 correspond with IFRS 2 (as
amended in 2009).
IFRIC 8 paragraph IFRS 2 (amended) IFRIC 11 paragraph IFRS 2 (amended)

paragraph paragraph
1 2 1 B48
2, 3 IG5A, IG5B 2, 3 B51, B52
4 None 4–6 B46
5 IG5C 7 B49
6 2 8 B53
7, 8 2 9 B59
9 2 10 B61
9–12 13A 11 B55
13, 14 64 12, 13 64
IE1–IE4 IG Example 1 IE1–IE4 IG Example 14
BC1–BC5 BC18A–BC18D BC1, BC2 None
BC6–BC12 BC128B–BC128H BC3–BC18 None
BC13 None BC19 BC268P
BC20 None
BC21, BC22 BC268Q, BC268R

IFRS 2
IASB documents published to accompany
IFRS 2
Share-based Payment
The text of the unaccompanied standard, IFRS 2, is contained in Part A of this edition. Its
effective date when issued was 1 January 2005. The text of the Accompanying Guidance on
IFRS 2 is contained in Part B of this edition. This part presents the following document:
BASIS FOR CONCLUSIONS
姝 IFRS Foundation C67

IFRS 2 BC
CONTENTS
from paragraph
BASIS FOR CONCLUSIONS ON
IFRS 2 SHARE-BASED PAYMENT
INTRODUCTION BC1
SCOPE BC7
Broad-based employee share plans, including employee share purchase
plans BC8
Transactions in which an entity cannot identify some or all of the goods or
services received (paragraph 2) BC18A
Transfers of equity instruments to employees (paragraphs 3 and 3A) BC19
Transactions within the scope of IFRS 3 Business Combinations BC23
Transactions within the scope of IAS 32 Financial Instruments: Presentation
and IAS 39 Financial Instruments: Recognition and Measurement BC25
RECOGNITION OF EQUITY-SETTLED SHARE-BASED PAYMENT
TRANSACTIONS BC29
‘The entity is not a party to the transaction’ BC34
‘The employees do not provide services’ BC36
‘There is no cost to the entity, therefore there is no expense’ BC40
‘Expense recognition is inconsistent with the definition of an expense’ BC45
‘Earnings per share is “hit twice”’ BC54
‘Adverse economic consequences’ BC58
MEASUREMENT OF EQUITY-SETTLED SHARE-BASED PAYMENT
TRANSACTIONS BC61
Measurement basis BC69
Measurement date BC88
FAIR VALUE OF EMPLOYEE SHARE OPTIONS BC129
Application of option pricing models to unlisted and newly listed entities BC137
Application of option pricing models to employee share options BC145
RECOGNITION AND MEASUREMENT OF SERVICES RECEIVED IN AN
EQUITY-SETTLED SHARE-BASED PAYMENT TRANSACTION BC200
During the vesting period BC200
Share options that are forfeited or lapse after the end of the vesting period BC218
MODIFICATIONS TO THE TERMS AND CONDITIONS OF SHARE-BASED
PAYMENT ARRANGEMENTS BC222
ACCOUNTING FOR A MODIFICATION OF A SHARE-BASED PAYMENT
TRANSACTION THAT CHANGES ITS CLASSIFICATION FROM CASH-SETTLED
TO EQUITY–SETTLED (2016 AMENDMENTS) BC237C
EFFECTIVE DATE AND TRANSITION (2016 AMENDMENTS) BC237L
SHARE APPRECIATION RIGHTS SETTLED IN CASH BC238
Is there a liability before vesting date? BC243
How should the liability be measured? BC246
C68 姝 IFRS Foundation

IFRS 2 BC
How should the associated expense be presented in the income statement? BC252
FEATURE FOR WITHHOLDING TAX OBLIGATIONS (2016 AMENDMENTS) BC255A
SHARE-BASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVES BC256
The terms of the arrangement provide the employee with a choice of
settlement BC258
The terms of the arrangement provide the entity with a choice of settlement BC265
SHARE-BASED PAYMENT TRANSACTIONS AMONG GROUP ENTITIES
(2009 AMENDMENTS) BC268A
Transfers of employees between group entities (paragraphs B59–B61) BC268P
OVERALL CONCLUSIONS ON ACCOUNTING FOR EMPLOYEE SHARE
OPTIONS BC269
Convergence with US GAAP BC270
Recognition versus disclosure BC287
Reliability of measurement BC294
TRANSITIONAL PROVISIONS BC310A
Share-based payment transactions among group entities BC310A
CONSEQUENTIAL AMENDMENTS TO OTHER STANDARDS BC311
Tax effects of share-based payment transactions BC311
Accounting for own shares held BC330
DEFINITION OF VESTING CONDITION (2013 AMENDMENTS) BC334
Whether a performance target can be set by reference to the price (or value)
of another entity (or entities) that is (are) within the group BC337
Whether a performance target that refers to a longer period than the required
service period may constitute a performance condition BC339
Whether the specified period of service that the counterparty is required to
complete can be either implicit or explicit BC346
Whether a performance target needs to be influenced by an employee BC347
Whether a share market index target may constitute a performance condition
or a non-vesting condition BC353
Whether the definition of performance condition should indicate that it
includes a market condition BC359
Whether a definition of ‘non-vesting condition’ is needed BC362
Whether the employee’s failure to complete a required service period due to
termination of employment is considered to be a failure to satisfy a service
condition BC365
Transition provisions BC370
EFFECTS OF VESTING CONDTIONS ON THE MEASUREMENT OF A
CASH-SETTLED SHARE-BASED PAYMENT (2016 AMENDMENTS) BC371

IFRS 2 BC
Basis for Conclusions on

IFRS 2 Share-based Payment
This Basis for Conclusions accompanies, but is not part of, IFRS 2.
Introduction
BC1 This Basis for Conclusions summarises the International Accounting Standards
Board’s considerations in reaching the conclusions in IFRS 2 Share-based Payment.
Individual Board members gave greater weight to some factors than to others.
BC2 Entities often issue1 shares or share options to pay employees or other parties.
Share plans and share option plans are a common feature of employee
remuneration, not only for directors and senior executives, but also for many
other employees. Some entities issue shares or share options to pay suppliers,
such as suppliers of professional services.
BC3 Until the issue of IFRS 2, there has been no International Financial Reporting
Standard (IFRS) covering the recognition and measurement of these
transactions. Concerns have been raised about this gap in international
standards. For example, the International Organization of Securities
Commissions (IOSCO), in its 2000 report on international standards, stated that
IASC (the IASB’s predecessor body) should consider the accounting treatment of
share-based payment.
BC4 Few countries have standards on the topic. This is a concern in many countries,
because the use of share-based payment has increased in recent years and
continues to spread. Various standard-setting bodies have been working on this
issue. At the time the IASB added a project on share-based payment to its agenda
in July 2001, some standard-setters had recently published proposals. For
example, the German Accounting Standards Committee published a draft
accounting standard Accounting for Share Option Plans and Similar Compensation
Arrangements in June 2001. The UK Accounting Standards Board led the
development of the Discussion Paper Accounting for Share-based Payment, published
in July 2000 by IASC, the ASB and other bodies represented in the G4+1.2
The Danish Institute of State Authorised Public Accountants issued a Discussion
Paper The Accounting Treatment of Share-based Payment in April 2000. More recently,
in December 2002, the Accounting Standards Board of Japan published a
Summary Issues Paper on share-based payment. In March 2003, the US Financial
Accounting Standards Board (FASB) added to its agenda a project to review
US accounting requirements on share-based payment. Also, the Canadian
Accounting Standards Board (AcSB) recently completed its project on share-based
payment. The AcSB standard requires recognition of all share-based payment
1 The word ‘issue’ is used in a broad sense. For example, a transfer of shares held in treasury (own
shares held) to another party is regarded as an ‘issue’ of equity instruments. Some argue that if
options or shares are granted with vesting conditions, they are not ‘issued’ until those vesting
conditions have been satisfied. However, even if this argument is accepted, it does not change the
Board’s conclusions on the requirements of the IFRS, and therefore the word ‘issue’ is used broadly,
to include situations in which equity instruments are conditionally transferred to the counterparty,
subject to the satisfaction of specified vesting conditions.
2 The G4+1 comprised members of the national accounting standard-setting bodies of Australia,
Canada, New Zealand, the UK and the US, and IASC.

IFRS 2 BC
transactions, including transactions in which share options are granted to

employees (discussed further in paragraphs BC281 and BC282).
BC5 Users of financial statements and other commentators are calling for
improvements in the accounting treatment of share-based payment. For
example, the proposal in the IASC/G4+1 Discussion Paper and ED 2 Share-based
Payment, that share-based payment transactions should be recognised in the
financial statements, resulting in an expense when the goods or services are
consumed, received strong support from investors and other users of financial
statements. Recent economic events have emphasised the importance of high
quality financial statements that provide neutral, transparent and comparable
information to help users make economic decisions. In particular, the omission
of expenses arising from share-based payment transactions with employees has
been highlighted by investors, other users of financial statements and other
commentators as causing economic distortions and corporate governance
concerns.
BC6 As noted above, the Board began a project to develop an IFRS on share-based
payment in July 2001. In September 2001, the Board invited additional
comment on the IASC/G4+1 Discussion Paper, with a comment deadline of
15 December 2001. The Board received over 270 letters. During the
development of ED 2, the Board was also assisted by an Advisory Group,
consisting of individuals from various countries and with a range of
backgrounds, including persons from the investment, corporate, audit,
academic, compensation consultancy, valuation and regulatory communities.
The Board received further assistance from other experts at a panel discussion
held in New York in July 2002. In November 2002, the Board published an
Exposure Draft, ED 2 Share-based Payment, with a comment deadline of 7 March
2003. The Board received over 240 letters. The Board also worked with the FASB
after that body added to its agenda a project to review US accounting
requirements on share-based payment. This included participating in meetings
of the FASB’s Option Valuation Group and meeting the FASB to discuss
convergence issues.
BC6A In 2007 the Board added to its agenda a project to clarify the scope and
accounting for group cash-settled share-based payment transactions in the
separate or individual financial statements of the entity receiving the goods or
services when that entity has no obligation to settle the share-based payment. In
December 2007 the Board published Group Cash-settled Share-based Payment
Transactions (proposed amendments to IFRS 2). The resulting amendments issued
in June 2009 also incorporate the requirements of two Interpretations—IFRIC 8
Scope of IFRS 2 and IFRIC 11 IFRS 2—Group and Treasury Share Transactions. As a
consequence, the Board withdrew both Interpretations.
Scope
BC7 Much of the controversy and complexity surrounding the accounting for
share-based payment relates to employee share options. However, the scope of
IFRS 2 is broader than that. It applies to transactions in which shares or other
equity instruments are granted to employees. It also applies to transactions
with parties other than employees, in which goods or services are received as

IFRS 2 BC
consideration for the issue of shares, share options or other equity instruments.
The term ‘goods’ includes inventories, consumables, property, plant and
equipment, intangible assets and other non-financial assets. Lastly, the IFRS
applies to payments in cash (or other assets) that are ‘share-based’ because the
amount of the payment is based on the price of the entity’s shares or other
equity instruments, eg cash share appreciation rights.
Broad-based employee share plans, including

employee share purchase plans
BC8 Some employee share plans are described as ‘broad-based’ or ‘all-employee’
plans, in which all (or virtually all) employees have the opportunity to
participate, whereas other plans are more selective, covering individual or
specific groups of employees (eg senior executives). Employee share purchase
plans are often broad-based plans. Typically, employee share purchase plans
provide employees with an opportunity to buy a specific number of shares at a
discounted price, ie at an amount that is less than the fair value of the shares.
The employee’s entitlement to discounted shares is usually conditional upon
specific conditions being satisfied, such as remaining in the service of the entity
for a specified period.
BC9 The issues that arise with respect to employee share purchase plans are:
(a) are these plans somehow so different from other employee share plans
that a different accounting treatment is appropriate?
(b) even if the answer to the above question is ‘no’, are there circumstances,
such as when the discount is very small, when it is appropriate to
exempt employee share purchase plans from an accounting standard on
share-based payment?
BC10 Some respondents to ED 2 argued that broad-based employee share plans should
be exempt from an accounting standard on share-based payment. The reason
usually given was that these plans are different from other types of employee
share plans and, in particular, are not a part of remuneration for employee
services. Some argued that requiring the recognition of an expense in respect of
these types of plans was perceived to be contrary to government policy to
encourage employee share ownership. In contrast, other respondents saw no
difference between employee share purchase plans and other employee share
plans, and argued that the same accounting requirements should therefore
apply. However, some suggested that there should be an exemption if the
discount is small.
BC11 The Board concluded that, in principle, there is no reason to treat broad-based
employee share plans, including broad-based employee share purchase plans,
differently from other employee share plans (the issue of ‘small’ discounts is
considered later). The Board noted that the fact that these schemes are available
only to employees is in itself sufficient to conclude that the benefits provided
represent employee remuneration. Moreover, the term ‘remuneration’ is not
limited to remuneration provided as part of an individual employee’s contract:
it encompasses all benefits provided to employees. Similarly, the term services
encompasses all benefits provided by the employees in return, including

IFRS 2 BC
increased productivity, commitment or other enhancements in employee work

performance as a result of the incentives provided by the share plan.
BC12 Moreover, distinguishing regular employee services from the additional benefits
received from broad-based employee share plans would not change the
conclusion that it is necessary to account for such plans. No matter what label is
placed on the benefits provided by employees—or the benefits provided by the
entity—the transaction should be recognised in the financial statements.
BC13 Furthermore, that governments in some countries have a policy of encouraging

employee share ownership is not a valid reason for according these types of
plans a different accounting treatment, because it is not the role of financial
reporting to give favourable accounting treatment to particular transactions to
encourage entities to enter into them. For example, governments might wish to
encourage entities to provide pensions to their employees, to lessen the future
burden on the state, but that does not mean that pension costs should be
excluded from the financial statements. To do so would impair the quality of
financial reporting. The purpose of financial reporting is to provide information
to users of financial statements, to assist them in making economic decisions.
The omission of expenses from the financial statements does not change the fact
that those expenses have been incurred. The omission of expenses causes
reported profits to be overstated and hence the financial statements are not
neutral, are less transparent and comparable, and are potentially misleading to
users.
BC14 There remains the question whether there should be an exemption for some
plans, when the discount is small. For example, FASB Statement of Financial
Accounting Standards No. 123 Accounting for Stock-Based Compensation contains an
exemption for employee share purchase plans that meet specified criteria, of
which one is that the discount is small.
BC15 On the one hand, it seems reasonable to exempt an employee share purchase
plan if it has substantially no option features and the discount is small. In such
situations, the rights given to the employees under the plan probably do not
have a significant value, from the entity’s perspective.
BC16 On the other hand, even if one accepts that an exemption is appropriate,
specifying its scope is problematic, eg deciding what constitutes a small
discount. Some argue that a 5 per cent discount from the market price (as
specified in SFAS 123) is too high, noting that a block of shares can be sold on
the market at a price close to the current share price. Furthermore, it could be
argued that it is unnecessary to exempt these plans from the standard. If the
rights given to the employees do not have a significant value, this suggests that
the amounts involved are immaterial. Because it is not necessary to include
immaterial information in the financial statements, there is no need for a
specific exclusion in an accounting standard.
BC17 For the reasons given in the preceding paragraph, the Board concluded that
broad-based employee share plans, including broad-based employee share
purchase plans, should not be exempted from the IFRS.
BC18 However, the Board noted that there might be instances when an entity engages
in a transaction with an employee in his/her capacity as a holder of equity

IFRS 2 BC
instruments, rather than in his/her capacity as an employee. For example, an

entity might grant all holders of a particular class of its equity instruments the
right to acquire additional equity instruments of the entity at a price that is less
than the fair value of those equity instruments. If an employee receives such a
right because he/she is a holder of that particular class of equity instruments,
the Board concluded that the granting or exercise of that right should not be
subject to the requirements of the IFRS, because the employee has received that
right in his/her capacity as a shareholder, rather than as an employee.
Transactions in which an entity cannot identify some or

all of the goods or services received (paragraph 2)3
BC18A The Board incorporated into IFRS 2 the consensus of IFRIC 8 in Group Cash-settled
Share-based Payment Transactions issued in June 2009. This section summarises the
IFRIC’s considerations in reaching that consensus, as approved by the Board.
BC18B IFRS 2 applies to share-based payment transactions in which the entity receives
or acquires goods or services. However, in some situations it might be difficult
to demonstrate that the entity has received goods or services. This raises the
question of whether IFRS 2 applies to such transactions. In addition, if the entity
has made a share-based payment and the identifiable consideration received
(if any) appears to be less than the fair value of the share-based payment, does
this situation indicate that goods or services have been received, even though
those goods or services are not specifically identified, and therefore that IFRS 2
applies?
BC18C When the Board developed IFRS 2, it concluded that the directors of an entity
would expect to receive some goods or services in return for equity instruments
issued (paragraph BC37). This implies that it is not necessary to identify the
specific goods or services received in return for the equity instruments granted
to conclude that goods or services have been (or will be) received. Furthermore,
paragraph 8 of the IFRS establishes that it is not necessary for the goods or
services received to qualify for recognition as an asset in order for the
share-based payment to be within the scope of IFRS 2. In this case, the IFRS
requires the cost of the goods or services received or receivable to be recognised
as expenses.
BC18D Accordingly, the Board concluded that the scope of IFRS 2 includes transactions
in which the entity cannot identify some or all of the specific goods or services
received. If the value of the identifiable consideration received appears to be less
than the fair value of the equity instruments granted or liability incurred,
typically,4 this circumstance indicates that other consideration
(ie unidentifiable goods or services) has been (or will be) received.
3 Paragraphs BC18A–BC18D are added as a consequence of Group Cash-settled Share-based Payment

Transactions (Amendments to IFRS 2) issued in June 2009.
4 In some cases, the reason for the transfer would explain why no goods or services have been or will
be received. For example, a principal shareholder, as part of estate planning, transfers some of his
shares to a family member. In the absence of factors that indicate that the family member has
provided, or is expected to provide, any goods or services to the entity in return for the shares, such
a transaction would be outside the scope of IFRS 2.

IFRS 2 BC
Transfers of equity instruments to employees

(paragraphs 3 and 3A)5
BC19 In some situations, an entity might not issue shares or share options to
employees (or other parties) direct. Instead, a shareholder (or shareholders)
might transfer equity instruments to the employees (or other parties).
BC20 Under this arrangement, the entity has received services (or goods) that were
paid for by its shareholders. The arrangement could be viewed as being, in
substance, two transactions—one transaction in which the entity has reacquired
equity instruments for nil consideration, and a second transaction in which the
entity has received services (or goods) as consideration for equity instruments
issued to the employees (or other parties).
BC21 The second transaction is a share-based payment transaction. Therefore, the

Board concluded that the entity should account for transfers of equity
instruments by shareholders to employees or other parties in the same way as
other share-based payment transactions. The Board reached the same
conclusion with respect to transfers of equity instruments of the entity’s parent,
or of another entity within the same group as the entity, to the entity’s
employees or other suppliers.
BC22 However, such a transfer is not a share-based payment transaction if the transfer
of equity instruments to an employee or other party is clearly for a purpose
other than payment for goods or services supplied to the entity. This would be
the case, for example, if the transfer is to settle a shareholder’s personal
obligation to an employee that is unrelated to employment by the entity, or if
the shareholder and employee are related and the transfer is a personal gift
because of that relationship.
BC22A In December 2007 the Board published an exposure draft Group Cash-settled
Share-based Payment Transactions proposing amendments to IFRS 2 and IFRIC 11 to
clarify the accounting for such transactions in the separate or individual
financial statements of the entity receiving goods or services. The Board
proposed to include specified types of such transactions within the scope of
IFRS 2 (not IAS 19 Employee Benefits), regardless of whether the group share-based
payment transaction is cash-settled or equity-settled.
BC22B Nearly all of the respondents to the exposure draft agreed that the group
cash-settled transactions between a parent and a subsidiary described in the
exposure draft should be within the scope of IFRS 2. Respondents generally
believed that including these transactions is consistent with IFRS 2’s main
principle that the entity should recognise the goods or services that it receives in
a share-based transaction. However, respondents also expressed concerns that
the proposed scope:
(a) adopted a case-by-case approach and was inconsistent with the
definitions of share-based payment transactions in IFRS 2.
(b) was unclear and increased the inconsistency in the scope requirements
among the applicable IFRSs, including IFRIC 11.
5 Paragraphs BC22A—BC22G are added as a consequence of Group Cash-settled Share-based Payment

Transactions (Amendments to IFRS 2) issued in June 2009.

IFRS 2 BC
BC22C Many respondents expressed concerns that similar transactions would continue
to be treated differently. Because no amendments to the definitions of
share-based payment transactions were proposed, some transactions might not
be included within the scope of IFRS 2 because they did not meet those
definitions. The Board agreed with respondents that the proposals did not
achieve the objective of including all share-based payment transactions within
the scope of IFRS 2 as intended.
BC22D When finalising the amendments issued in June 2009, the Board reaffirmed the
view it had intended to convey in the proposed amendments, namely that the
entity receiving the goods or services should account for group share-based
payment transactions in accordance with IFRS 2. Consequently, IFRS 2 applies
even when the entity receiving the goods or services has no obligation to settle
the transaction and regardless of whether the payments to the suppliers are
equity-settled or cash-settled. To avoid the need for further guidance on the
scope of IFRS 2 for group transactions, the Board decided to amend some of the
defined terms and to supersede paragraph 3 by a new paragraph 3A to state
clearly the principles applicable to those transactions.
BC22E During its redeliberations of the proposed amendments, the Board agreed with
respondents’ comments that, as proposed, the scope of IFRS 2 remained unclear
and inconsistent between the standard and related Interpretations. For
example, the terms ‘shareholder’ and ‘parent’ have different meanings: a
shareholder is not necessarily a parent, and a parent does not have to be a
shareholder. The Board noted that share-based payment transactions among
group entities are often directed by the parent, indicating a level of control.
Therefore, the Board clarified the boundaries of a ‘group’ by adopting the same
definition as in paragraph 4 of IAS 27 Consolidated and Separate Financial Statements,
which includes only a parent and its subsidiaries.6
BC22F Some respondents to the exposure draft questioned whether the proposals
should apply to joint ventures. Before the Board’s amendments, the guidance in
paragraph 3 (now superseded by paragraph 3A) stated that when a shareholder
transferred equity instruments of the entity (or another group entity), the
transaction would be within the scope of IFRS 2 for the entity receiving the
goods or services. However, that guidance did not specify the accounting by a
shareholder transferor. The Board noted that the defined terms in Appendix A,
as amended, would clearly state that any entity (including a joint venture) that
receives goods or services in a share-based payment transaction should account
for the transaction in accordance with the IFRS, regardless of whether that
entity also settles the transaction.
BC22G Furthermore, the Board noted that the exposure draft and related discussions
focused on clarifying guidance for transactions involving group entities in the
separate or individual financial statements of the entity receiving the goods or
services. Addressing transactions involving related parties outside a group
structure in their separate or individual financial statements would significantly
expand the scope of the project and change the scope of IFRS 2. Therefore, the
6 The consolidation requirements in IAS 27 were superseded by IFRS 10 Consolidated Financial Statements
issued in May 2011. The definition of control changed but the definition of a group was not
substantially changed.

IFRS 2 BC
Board decided not to address transactions between entities not in the same
group that are similar to share-based payment transactions but outside the
definitions as amended. This carries forward the existing guidance of IFRS 2 for
entities not in the same group and the Board does not intend to change that
guidance.
Transactions within the scope of IFRS 3 Business

Combinations
BC23 An entity might acquire goods (or other non-financial assets) as part of the net
assets acquired in a business combination for which the consideration paid
included shares or other equity instruments issued by the entity. Because IFRS 3
applies to the acquisition of assets and issue of shares in connection with a
business combination, that is the more specific standard that should be applied
to that transaction.
BC24 Therefore, equity instruments issued in a business combination in exchange for

control of the acquiree are not within the scope of IFRS 2. However, equity
instruments granted to employees of the acquiree in their capacity as
employees, eg in return for continued service, are within the scope of IFRS 2.
Also, the cancellation, replacement, or other modifications to share-based
payment arrangements because of a business combination or other equity
restructuring should be accounted for in accordance with IFRS 2.
BC24A IFRS 3 (as revised in 2008) changed the definition of a business combination. The
previous definition of a business combination was ‘the bringing together of
separate entities or businesses into one reporting entity’. The revised definition
of a business combination is ‘a transaction or other event in which an acquirer
obtains control of one or more businesses’.
BC24B The Board was advised that the changes to that definition caused the accounting
for the contribution of a business in exchange for shares issued on formation of
a joint venture by the venturers to be within the scope of IFRS 2. The Board
noted that common control transactions may also be within the scope of IFRS 2
depending on which level of the group reporting entity is assessing the
combination.
BC24C The Board noted that during the development of revised IFRS 3 it did not discuss
whether it intended IFRS 2 to apply to these types of transactions. The Board
also noted that the reason for excluding common control transactions and the
accounting by a joint venture upon its formation from the scope of revised
IFRS 3 was to give the Board more time to consider the relevant accounting
issues. When the Board revised IFRS 3, it did not intend to change existing
practice by bringing such transactions within the scope of IFRS 2, which does
not specifically address them.
BC24D Accordingly, in Improvements to IFRSs issued in April 2009, the Board amended
paragraph 5 of IFRS 2 to confirm that the contribution of a business on the
formation of a joint venture and common control transactions are not within
the scope of IFRS 2.

IFRS 2 BC
Transactions within the scope of IAS 32 Financial

Instruments: Presentation and IAS 39 Financial
Instruments: Recognition and Measurement7
BC25 The IFRS includes consequential amendments to IAS 32 and IAS 39 (both as
revised in 2003)8 to exclude from their scope transactions within the scope of
IFRS 2.
BC26 For example, suppose the entity enters into a contract to purchase cloth for use
in its clothing manufacturing business, whereby it is required to pay cash to the
counterparty in an amount equal to the value of 1,000 of the entity’s shares at
the date of delivery of the cloth. The entity will acquire goods and pay cash at an
amount based on its share price. This meets the definition of a share-based
payment transaction. Moreover, because the contract is to purchase cloth,
which is a non-financial item, and the contract was entered into for the purpose
of taking delivery of the cloth for use in the entity’s manufacturing business, the
contract is not within the scope of IAS 32 and IAS 39.
BC27 The scope of IAS 32 and IAS 39 includes contracts to buy non-financial items that
can be settled net in cash or another financial instrument, or by exchanging
financial instruments, with the exception of contracts that were entered into
and continue to be held for the purpose of the receipt or delivery of a
non-financial item in accordance with the entity’s expected purchase, sale or
usage requirements. A contract that can be settled net in cash or another
financial instrument or by exchanging financial instruments includes (a) when
the terms of the contract permit either party to settle it net in cash or another
financial instrument or by exchanging financial instruments; (b) when the
ability to settle net in cash or another financial instrument, or by exchanging
financial instruments, is not explicit in the terms of the contract, but the entity
has a practice of settling similar contracts net in cash or another financial
instrument, or by exchanging financial instruments (whether with the
counterparty, by entering into offsetting contracts, or by selling the contract
before its exercise or lapse); (c) when, for similar contracts, the entity has a
practice of taking delivery of the underlying and selling it within a short period
after delivery for the purpose of generating a profit from short-term fluctuations
in price or dealer’s margin; and (d) when the non-financial item that is the
subject of the contract is readily convertible to cash (IAS 32, paragraphs 8–10
and IAS 39, paragraphs 5–7).
BC28 The Board concluded that the contracts discussed in paragraph BC27 should
remain within the scope of IAS 32 and IAS 39 and they are therefore excluded
from the scope of IFRS 2.
Recognition of equity-settled share-based payment transactions
BC29 When it developed ED 2, the Board first considered conceptual arguments

relating to the recognition of an expense arising from equity-settled share-based
payment transactions, including arguments advanced by respondents to the
7 IFRS 9 Financial Instruments replaced IAS 39. IFRS 9 applies to all items that were previously within
the scope of IAS 39. Paragraphs BC25–BC28 refer to matters relevant when IFRS 2 was issued.
8 The title of IAS 32 was amended in 2005.

IFRS 2 BC
Discussion Paper and other commentators. Some respondents who disagreed

with the recognition of an expense arising from particular share-based payment
transactions (ie those involving employee share options) did so for practical,
rather than conceptual, reasons. The Board considered those practical issues
later (see paragraphs BC294–BC310).
BC30 The Board focused its discussions on employee share options, because that is
where most of the complexity and controversy lies, but the question of whether
expense recognition is appropriate is broader than that—it covers all
transactions involving the issue of shares, share options or other equity
instruments to employees or suppliers of goods and services. For example, the
Board noted that arguments made by respondents and other commentators
against expense recognition are directed solely at employee share options.
However, if conceptual arguments made against recognition of an expense in
relation to employee share options are valid (eg that there is no cost to the
entity), those arguments ought to apply equally to transactions involving other
equity instruments (eg shares) and to equity instruments issued to other parties
(eg suppliers of professional services).
BC31 The rationale for recognising all types of share-based payment

transactions—irrespective of whether the equity instrument is a share or a share
option, and irrespective of whether the equity instrument is granted to an
employee or to some other party—is that the entity has engaged in a transaction
that is in essence the same as any other issue of equity instruments. In other
words, the entity has received resources (goods or services) as consideration for
the issue of shares, share options or other equity instruments. It should
therefore account for the inflow of resources (goods or services) and the increase
in equity. Subsequently, either at the time of receipt of the goods or services or
at some later date, the entity should also account for the expense arising from
the consumption of those resources.
BC32 Many respondents to ED 2 agreed with this conclusion. Of those who disagreed,
some disagreed in principle, some disagreed for practical reasons, and some
disagreed for both reasons. The arguments against expense recognition in
principle were considered by the Board when it developed ED 2, as were the
arguments against expense recognition for practical reasons, as explained below
and in paragraphs BC294–BC310.
BC33 Arguments commonly made against expense recognition include:

(a) the transaction is between the shareholders and the employees, not the
entity and the employees.
(b) the employees do not provide services for the options.
(c) there is no cost to the entity, because no cash or other assets are given
up; the shareholders bear the cost, in the form of dilution of their
ownership interests, not the entity.

IFRS 2 BC
(d) the recognition of an expense is inconsistent with the definition of an

expense in the conceptual frameworks used by accounting
standard-setters, including the IASB’s Framework for the Preparation and
Presentation of Financial Statements.9
(e) the cost borne by the shareholders is recognised in the dilution of
earnings per share (EPS); if the transaction is recognised in the entity’s
accounts, the resulting charge to the income statement would mean that
EPS is ‘hit twice’.
(f) requiring the recognition of a charge would have adverse economic
consequences, because it would discourage entities from introducing or
continuing employee share plans.
‘The entity is not a party to the transaction’

BC34 Some argue that the effect of employee share plans is that the existing
shareholders transfer some of their ownership interests to the employees and
that the entity is not a party to this transaction.
BC35 The Board did not accept this argument. Entities, not shareholders, set up
employee share plans and entities, not shareholders, issue share options to their
employees. Even if that were not the case, eg if shareholders transferred shares
or share options direct to the employees, this would not mean that the entity is
not a party to the transaction. The equity instruments are issued in return for
services rendered by the employees and the entity, not the shareholders, receives
those services. Therefore, the Board concluded that the entity should account
for the services received in return for the equity instruments issued. The Board
noted that this is no different from other situations in which equity instruments
are issued. For example, if an entity issues warrants for cash, the entity
recognises the cash received in return for the warrants issued. Although the
effect of an issue, and subsequent exercise, of warrants might be described as a
transfer of ownership interests from the existing shareholders to the warrant
holders, the entity nevertheless is a party to the transaction because it receives
resources (cash) for the issue of warrants and further resources (cash) for the
issue of shares upon exercise of the warrants. Similarly, with employee share
options, the entity receives resources (employee services) for the issue of the
options and further resources (cash) for the issue of shares on the exercise of
options.
‘The employees do not provide services’

BC36 Some who argue that the entity is not a party to the transaction counter the
points made above with the argument that employees do not provide services for
the options, because the employees are paid in cash (or other assets) for their
services.
BC37 Again, the Board was not convinced by this argument. If it were true that
employees do not provide services for their share options, this would mean that
entities are issuing valuable share options and getting nothing in return.
9 References to the Framework are to IASC’s Framework for the Preparation and Presentation of Financial
Statements, adopted by the IASB in 2001. In September 2010 the IASB replaced the Framework with
the Conceptual Framework for Financial Reporting.

IFRS 2 BC
Employees do not pay cash for the share options they receive. Hence, if they do
not provide services for the options, the employees are providing nothing in
return. If this were true, by issuing such options the entity’s directors would be
in breach of their fiduciary duties to their shareholders.
BC38 Typically, shares or share options granted to employees form one part of their
remuneration package. For example, an employee might have a remuneration
package consisting of a basic cash salary, company car, pension, healthcare
benefits, and other benefits including shares and share options. It is usually not
possible to identify the services received in respect of individual components of
that remuneration package, eg the services received in respect of healthcare
benefits. But that does not mean that the employee does not provide services for
those healthcare benefits. Rather, the employee provides services for the entire
remuneration package.
BC39 In summary, shares, share options or other equity instruments are granted to
employees because they are employees. The equity instruments granted form a
part of their total remuneration package, regardless of whether that represents a
large part or a small part.
‘There is no cost to the entity, therefore there is no

expense’
BC40 Some argue that because share-based payments do not require the entity to
sacrifice any cash or other assets, there is no cost to the entity, and therefore no
expense should be recognised.
BC41 The Board regards this argument as unsound, because it overlooks that:
(a) every time an entity receives resources as consideration for the issue of
equity instruments, there is no outflow of cash or other assets, and on
every other occasion the resources received as consideration for the issue
of equity instruments are recognised in the financial statements; and
(b) the expense arises from the consumption of those resources, not from an
outflow of assets.
BC42 In other words, irrespective of whether one accepts that there is a cost to the
entity, an accounting entry is required to recognise the resources received as
consideration for the issue of equity instruments, just as it is on other occasions
when equity instruments are issued. For example, when shares are issued for
cash, an entry is required to recognise the cash received. If a non-monetary
asset, such as plant and machinery, is received for those shares instead of cash,
an entry is required to recognise the asset received. If the entity acquires
another business or entity by issuing shares in a business combination, the
entity recognises the net assets acquired.
BC43 The recognition of an expense arising out of such a transaction represents the
consumption of resources received, ie the ‘using up’ of the resources received for
the shares or share options. In the case of the plant and machinery mentioned
above, the asset would be depreciated over its expected life, resulting in the
recognition of an expense each year. Eventually, the entire amount recognised
for the resources received when the shares were issued would be recognised as
an expense (including any residual value, which would form part of the

IFRS 2 BC
measurement of the gain or loss on disposal of the asset). Similarly, if another

business or entity is acquired by an issue of shares, an expense is recognised
when the assets acquired are consumed. For example, inventories acquired will
be recognised as an expense when sold, even though no cash or other assets were
disbursed to acquire those inventories.
BC44 The only difference in the case of employee services (or other services) received
as consideration for the issue of shares or share options is that usually the
resources received are consumed immediately upon receipt. This means that an
expense for the consumption of resources is recognised immediately, rather
than over a period of time. The Board concluded that the timing of
consumption does not change the principle; the financial statements should
recognise the receipt and consumption of resources, even when consumption
occurs at the same time as, or soon after, receipt. This point is discussed further
in paragraphs BC45–BC53.
‘Expense recognition is inconsistent with the definition

of an expense’
BC45 Some have questioned whether recognition of an expense arising from
particular share-based payment transactions is consistent with accounting
standard-setters’ conceptual frameworks, in particular, the Framework, which
states:
Expenses are decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrences of liabilities that result in
decreases in equity, other than those relating to distributions to equity
participants. (paragraph 70,10 emphasis added)
BC46 Some argue that if services are received in a share-based payment transaction,
there is no transaction or event that meets the definition of an expense. They
contend that there is no outflow of assets and that no liability is incurred.
Furthermore, because services usually do not meet the criteria for recognition as
an asset, it is argued that the consumption of those services does not represent a
depletion of assets.
BC47 The Framework defines an asset and explains that the term ‘asset’ is not limited to
resources that can be recognised as assets in the balance sheet (Framework,
paragraphs 49 and 50).11 Although services to be received in the future might
not meet the definition of an asset,12 services are assets when received. These
assets are usually consumed immediately. This is explained in FASB Statement
of Financial Accounting Concepts No. 6 Elements of Financial Statements:
Services provided by other entities, including personal services, cannot be stored

and are received and used simultaneously. They can be assets of an entity only
momentarily—as the entity receives and uses them—although their use may create
or add value to other assets of the entity … (paragraph 31)
10 now paragraph 4.25 of the Conceptual Framework

11 now paragraphs 4.4 and 4.5 of the Conceptual Framework
12 For example, the entity might not have control over future services.

IFRS 2 BC
BC48 This applies to all types of services, eg employee services, legal services and
telephone services. It also applies irrespective of the form of payment.
For example, if an entity purchases services for cash, the accounting entry is:
Dr Services received
Cr Cash paid
BC49 Sometimes, those services are consumed in the creation of a recognisable asset,
such as inventories, in which case the debit for services received is capitalised as
part of a recognised asset. But often the services do not create or form part of a
recognisable asset, in which case the debit for services received is charged
immediately to the income statement as an expense. The debit entry above (and
the resulting expense) does not represent the cash outflow—that is what the
credit entry was for. Nor does it represent some sort of balancing item, to make
the accounts balance. The debit entry above represents the resources received,
and the resulting expense represents the consumption of those resources.
BC50 The same analysis applies if the services are acquired with payment made in
shares or share options. The resulting expense represents the consumption of
services, ie a depletion of assets.
BC51 To illustrate this point, suppose that an entity has two buildings, both with gas
heating, and the entity issues shares to the gas supplier instead of paying cash.
Suppose that, for one building, the gas is supplied through a pipeline, and so is
consumed immediately upon receipt. Suppose that, for the other building, the
gas is supplied in bottles, and is consumed over a period of time. In both cases,
the entity has received assets as consideration for the issue of equity
instruments, and should therefore recognise the assets received, and a
corresponding contribution to equity. If the assets are consumed immediately
(the gas received through the pipeline), an expense is recognised immediately; if
the assets are consumed later (the gas received in bottles), an expense is
recognised later when the assets are consumed.
BC52 Therefore, the Board concluded that the recognition of an expense arising from
share-based payment transactions is consistent with the definition of an expense
in the Framework.
BC53 The FASB considered the same issue and reached the same conclusion in
SFAS 123:
Some respondents pointed out that the definition of expenses in FASB Concepts
Statement No. 6, Elements of Financial Statements, says that expenses result from
outflows or using up of assets or incurring of liabilities (or both). They asserted
that because the issuance of stock options does not result in the incurrence of a
liability, no expense should be recognised. The Board agrees that employee stock
options are not a liability—like stock purchase warrants, employee stock options
are equity instruments of the issuer. However, equity instruments, including
employee stock options, are valuable financial instruments and thus are issued for
valuable consideration, which…for employee stock options is employee services.
Using in the entity’s operations the benefits embodied in the asset received results
in an expense … (Concepts Statement 6, paragraph 81, footnote 43, notes that, in

IFRS 2 BC
concept most expenses decrease assets. However, if receipt of an asset, such as

services, and its use occur virtually simultaneously, the asset often is not recorded.)
[paragraph 88]
‘Earnings per share is “hit twice”’

BC54 Some argue that any cost arising from share-based payment transactions is
already recognised in the dilution of earnings per share (EPS). If an expense
were recognised in the income statement, EPS would be ‘hit twice’.
BC55 However, the Board noted that this result is appropriate. For example, if the
entity paid the employees in cash for their services and the cash was then
returned to the entity, as consideration for the issue of share options, the effect
on EPS would be the same as issuing those options direct to the employees.
BC56 The dual effect on EPS simply reflects the two economic events that have
occurred: the entity has issued shares or share options, thereby increasing the
number of shares included in the EPS calculation—although, in the case of
options, only to the extent that the options are regarded as dilutive—and it has
also consumed the resources it received for those options, thereby decreasing
earnings. This is illustrated by the plant and machinery example mentioned in
paragraphs BC42 and BC43. Issuing shares affects the number of shares in the
EPS calculation, and the consumption (depreciation) of the asset affects
earnings.
BC57 In summary, the Board concluded that the dual effect on diluted EPS is not
double-counting the effects of a share or share option grant—the same effect is
not counted twice. Rather, two different effects are each counted once.
‘Adverse economic consequences’

BC58 Some argue that to require recognition (or greater recognition) of employee
share-based payment would have adverse economic consequences, in that it
might discourage entities from introducing or continuing employee share plans.
BC59 Others argue that if the introduction of accounting changes did lead to a
reduction in the use of employee share plans, it might be because the
requirement for entities to account properly for employee share plans had
revealed the economic consequences of such plans. They argue that this would
correct the present economic distortion, whereby entities obtain and consume
resources by issuing valuable shares or share options without accounting for
those transactions.
BC60 In any event, the Board noted that the role of accounting is to report
transactions and events in a neutral manner, not to give ‘favourable’ treatment
to particular transactions to encourage entities to engage in those transactions.
To do so would impair the quality of financial reporting. The omission of
expenses from the financial statements does not change the fact that those
expenses have been incurred. Hence, if expenses are omitted from the income
statement, reported profits are overstated. The financial statements are not
neutral, are less transparent and are potentially misleading to users.
Comparability is impaired, given that expenses arising from employee
share-based payment transactions vary from entity to entity, from sector to
sector, and from year to year. More fundamentally, accountability is impaired,

IFRS 2 BC
because the entities are not accounting for transactions they have entered into
and the consequences of those transactions.
Measurement of equity-settled share-based payment transactions
BC61 To recognise equity-settled share-based payment transactions, it is necessary to

decide how the transactions should be measured. The Board began by
considering how to measure share-based payment transactions in principle.
Later, it considered practical issues arising from the application of its preferred
measurement approach. In terms of accounting principles, there are two basic
questions:
(a) which measurement basis should be applied?
(b) when should that measurement basis be applied?
BC62 To answer these questions, the Board considered the accounting principles
applying to equity transactions. The Framework states:
Equity is the residual interest in the assets of the enterprise after deducting all of
its liabilities … The amount at which equity is shown in the balance sheet is
dependent upon the measurement of assets and liabilities. Normally, the
aggregate amount of equity only by coincidence corresponds with the aggregate
market value of the shares of the enterprise … (paragraphs 49 and 67)13
BC63 The accounting equation that corresponds to this definition of equity is:
assets minus liabilities equals equity
BC64 Equity is a residual interest, dependent on the measurement of assets and

liabilities. Therefore, accounting focuses on recording changes in the left side of
the equation (assets minus liabilities, or net assets), rather than the right side.
Changes in equity arise from changes in net assets. For example, if an entity
issues shares for cash, it recognises the cash received and a corresponding
increase in equity. Subsequent changes in the market price of the shares do not
affect the entity’s net assets and therefore those changes in value are not
recognised.
BC65 Hence, the Board concluded that, when accounting for an equity-settled
share-based payment transaction, the primary accounting objective is to account
for the goods or services received as consideration for the issue of equity
instruments. Therefore, equity-settled share-based payment transactions should
be accounted for in the same way as other issues of equity instruments, by
recognising the consideration received (the change in net assets), and a
corresponding increase in equity.
BC66 Given this objective, the Board concluded that, in principle, the goods or services
received should be measured at their fair value at the date when the entity
obtains those goods or as the services are received. In other words, because a
change in net assets occurs when the entity obtains the goods or as the services
are received, the fair value of those goods or services at that date provides an
appropriate measure of the change in net assets.
13 now paragraphs 4.4 and 4.22 of the Conceptual Framework

IFRS 2 BC
BC67 However, for share-based payment transactions with employees, it is usually

difficult to measure directly the fair value of the services received. As noted
earlier, typically shares or share options are granted to employees as one
component of their remuneration package. It is usually not possible to identify
the services rendered in respect of individual components of that package.
It might also not be possible to measure independently the fair value of the total
package, without measuring directly the fair value of the equity instruments
granted. Furthermore, options or shares are sometimes granted as part of a
bonus arrangement, rather than as a part of basic remuneration, eg as an
incentive to the employees to remain in the entity’s employ, or to reward them
for their efforts in improving the entity’s performance. By granting share
options, in addition to other remuneration, the entity is paying additional
remuneration to obtain additional benefits. Estimating the fair value of those
additional benefits is likely to be difficult.
BC68 Given these practical difficulties in measuring directly the fair value of the
employee services received, the Board concluded that it is necessary to measure
the other side of the transaction, ie the fair value of the equity instruments
granted, as a surrogate measure of the fair value of the services received. In this
context, the Board considered the same basic questions, as mentioned above:
(a) which measurement basis should be applied?

(b) when should that measurement basis be applied?
Measurement basis
BC69 The Board discussed the following measurement bases, to decide which should
be applied in principle:
(a) historical cost

(b) intrinsic value
(c) minimum value
(d) fair value.
Historical cost
BC70 In jurisdictions where legislation permits, entities commonly repurchase their
own shares, either directly or through a vehicle such as a trust, which are used
to fulfil promised grants of shares to employees or the exercise of employee
share options. A possible basis for measuring a grant of options or shares would
be the historical cost (purchase price) of its own shares that an entity holds (own
shares held), even if they were acquired before the award was made.
BC71 For share options, this would entail comparing the historical cost of own shares
held with the exercise price of options granted to employees. Any shortfall
would be recognised as an expense. Also, presumably, if the exercise price
exceeded the historical cost of own shares held, the excess would be recognised
as a gain.
BC72 At first sight, if one simply focuses on the cash flows involved, the historical cost
basis appears reasonable: there is a cash outflow to acquire the shares, followed
by a cash inflow when those shares are transferred to the employees (the

IFRS 2 BC
exercise price), with any shortfall representing a cost to the entity. If the cash
flows related to anything other than the entity’s own shares, this approach
would be appropriate. For example, suppose ABC Ltd bought shares in another
entity, XYZ Ltd, for a total cost of CU500,000,14 and later sold the shares to
employees for a total of CU400,000. The entity would recognise an expense for
the CU100,000 shortfall.
BC73 But when this analysis is applied to the entity’s own shares, the logic breaks
down. The entity’s own shares are not an asset of the entity.15 Rather, the shares
are an interest in the entity’s assets. Hence, the distribution of cash to buy back
shares is a return of capital to shareholders, and should therefore be recognised
as a decrease in equity. Similarly, when the shares are subsequently reissued or
transferred, the inflow of cash is an increase in shareholders’ capital, and should
therefore be recognised as an increase in equity. It follows that no revenue or
expense should be recognised. Just as the issue of shares does not represent
revenue to the entity, the repurchase of those shares does not represent an
expense.
BC74 Therefore, the Board concluded that historical cost is not an appropriate basis
upon which to measure equity-settled share-based payment transactions.
Intrinsic value
BC75 An equity instrument could be measured at its intrinsic value. The intrinsic
value of a share option at any point in time is the difference between the market
price of the underlying shares and the exercise price of the option.
BC76 Often, employee share options have zero intrinsic value at the date of
grant—commonly the exercise price is at the market value of the shares at grant
date. Therefore, in many cases, valuing share options at their intrinsic value at
grant date is equivalent to attributing no value to the options.
BC77 However, the intrinsic value of an option does not fully reflect its value. Options
sell in the market for more than their intrinsic value. This is because the holder
of an option need not exercise it immediately and benefits from any increase in
the value of the underlying shares. In other words, although the ultimate
benefit realised by the option holder is the option’s intrinsic value at the date of
exercise, the option holder is able to realise that future intrinsic value because of
having held the option. Thus, the option holder benefits from the right to
participate in future gains from increases in the share price. In addition, the
14 All monetary amounts in this Basis for Conclusions are denominated in ‘currency units (CU)’.
15 The Discussion Paper discusses this point: Accounting practice in some jurisdictions may present
own shares acquired as an asset, but they lack the essential feature of an asset—the ability to provide
future economic benefits. The future economic benefits usually provided by an interest in shares
are the right to receive dividends and the right to gain from an increase in value of the shares.
When a company has an interest in its own shares, it will receive dividends on those shares only if
it elects to pay them, and such dividends do not represent a gain to the company, as there is no
change in net assets: the flow of funds is simply circular. Whilst it is true that a company that holds
its own shares in treasury may sell them and receive a higher amount if their value has increased, a
company is generally able to issue shares to third parties at (or near) the current market price.
Although there may be legal, regulatory or administrative reasons why it is easier to sell shares that
are held as treasury shares than it would be to issue new shares, such considerations do not seem to
amount to a fundamental contrast between the two cases. (Footnote to paragraph 4.7)

IFRS 2 BC
option holder benefits from the right to defer payment of the exercise price
until the end of the option term. These benefits are commonly referred to as the
option’s ‘time value’.
BC78 For many options, time value represents a substantial part of their value. As
noted earlier, many employee share options have zero intrinsic value at grant
date, and hence the option’s value consists entirely of time value. In such cases,
ignoring time value by applying the intrinsic value method at grant date
understates the value of the option by 100 per cent.
BC79 The Board concluded that, in general, the intrinsic value measurement basis is
not appropriate for measuring share-based payment transactions, because
omitting the option’s time value ignores a potentially substantial part of an
option’s total value. Measuring share-based payment transactions at such an
understated value would fail to represent those transactions faithfully in the
financial statements.
Minimum value
BC80 A share option could be measured at its minimum value. Minimum value is
based on the premise that someone who wants to buy a call option on a share
would be willing to pay at least (and the option writer would demand at least)
the value of the right to defer payment of the exercise price until the end of the
option’s term. Therefore, minimum value can be calculated using a present
value technique. For a dividend-paying share, the calculation is:
(a) the current price of the share, minus
(b) the present value of expected dividends on that share during the option
term (if the option holder does not receive dividends), minus
(c) the present value of the exercise price.
BC81 Minimum value can also be calculated using an option pricing model with an
expected volatility of effectively zero (not exactly zero, because some option
pricing models use volatility as a divisor, and zero cannot be a divisor).
BC82 The minimum value measurement basis captures part of the time value of
options, being the value of the right to defer payment of the exercise price until
the end of the option’s term. It does not capture the effects of volatility. Option
holders benefit from volatility because they have the right to participate in gains
from increases in the share price during the option term without having to bear
the full risk of loss from decreases in the share price. By ignoring volatility, the
minimum value method produces a value that is lower, and often much lower,
than values produced by methods designed to estimate the fair value of an
option.
BC83 The Board concluded that minimum value is not an appropriate measurement
basis, because ignoring the effects of volatility ignores a potentially large part of
an option’s value. As with intrinsic value, measuring share-based payment
transactions at the option’s minimum value would fail to represent those
transactions faithfully in the financial statements.

IFRS 2 BC
Fair value
BC84 Fair value is already used in other areas of accounting, including other
transactions in which non-cash resources are acquired through the issue of
equity instruments. For example, consideration transferred in a business
combination is measured at fair value, including the fair value of any equity
instruments issued by the entity.
BC85 Fair value, which is the amount at which an equity instrument granted could be
exchanged between knowledgeable, willing parties in an arm’s length
transaction, captures both intrinsic value and time value and therefore provides
a measure of the share option’s total value (unlike intrinsic value or minimum
value). It is the value that reflects the bargain between the entity and its
employees, whereby the entity has agreed to grant share options to employees
for their services to the entity. Hence, measuring share-based payment
transactions at fair value ensures that those transactions are represented
faithfully in the financial statements, and consistently with other transactions
in which the entity receives resources as consideration for the issue of equity
instruments.
BC86 Therefore, the Board concluded that shares, share options or other equity
instruments granted should be measured at their fair value.
BC87 Of the respondents to ED 2 who addressed this issue, many agreed with the
proposal to measure the equity instruments granted at their fair value. Some
respondents who disagreed with the proposal, or who agreed with reservations,
expressed concerns about measurement reliability, particularly in the case of
smaller or unlisted entities. The issues of measurement reliability and unlisted
entities are discussed in paragraphs BC294–BC310 and BC137–BC144,
respectively.
Measurement date
BC88 The Board first considered at which date the fair value of equity instruments
should be determined for the purpose of measuring share-based payment
transactions with employees (and others providing similar services).16 The
possible measurement dates discussed were grant date, service date, vesting date
and exercise date. Much of this discussion was in the context of share options
rather than shares or other equity instruments, because only options have an
exercise date.
16 When the Board developed the proposals in ED 2, it focused on the measurement of equity-settled
transactions with employees and with parties other than employees. ED 2 did not propose a
definition of the term ‘employees’. When the Board reconsidered the proposals in ED 2 in the light
of comments received, it discussed whether the term might be interpreted too narrowly. This could
result in a different accounting treatment of services received from individuals who are regarded as
employees (eg for legal or tax purposes) and substantially similar services received from other
individuals. The Board therefore concluded that the requirements of the IFRS for transactions with
employees should also apply to transactions with other parties providing similar services. This
includes services received from (1) individuals who work for the entity under its direction in the
same way as individuals who are regarded as employees for legal or tax purposes and (2) individuals
who are not employees but who render personal services to the entity similar to those rendered by
employees. All references to employees therefore include other parties providing similar services.

IFRS 2 BC
BC89 In the context of an employee share option, grant date is when the entity and
the employee enter into an agreement, whereby the employee is granted rights
to the share option, provided that specified conditions are met, such as the
employee’s remaining in the entity’s employ for a specified period. Service date
is the date when the employee renders the services necessary to become entitled
to the share option.17 Vesting date is the date when the employee has satisfied
all the conditions necessary to become entitled to the share option. For
example, if the employee is required to remain in the entity’s employ for three
years, vesting date is at the end of that three-year period. Exercise date is when
the share option is exercised.
BC90 To help determine the appropriate measurement date, the Board applied the
accounting concepts in the Framework to each side of the transaction.
For transactions with employees, the Board concluded that grant date is the
appropriate measurement date, as explained in paragraphs BC91–BC105.
The Board also considered some other issues, as explained in
paragraphs BC106–BC118. For transactions with parties other than employees,
the Board concluded that delivery date is the appropriate measurement date
(ie the date the goods or services are received, referred to as service date in the
context of transactions with employees), as explained in
paragraphs BC119–BC128.
The debit side of the transaction

BC91 Focusing on the debit side of the transaction means focusing on measuring the
fair value of the resources received. This measurement objective is consistent
with the primary objective of accounting for the goods or services received as
consideration for the issue of equity instruments (see paragraphs BC64–BC66).
The Board therefore concluded that, in principle, the goods or services received
should be measured at their fair value at the date when the entity obtains those
goods or as the services are received.
BC92 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 employee services.
BC93 If the fair value of the equity instruments granted is used as a surrogate measure
of the fair value of the services received, both vesting date and exercise date
measurement are inappropriate because 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. For example, suppose that 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.
BC94 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
17 Service date measurement theoretically requires the entity to measure the fair value of the share
option at each date when services are received. For pragmatic reasons, an approximation would
probably be used, such as the fair value of the share option at the end of each accounting period, or
the value of the share option measured at regular intervals during each accounting period.

IFRS 2 BC
value of the equity instrument during the vesting period affect the amount
attributed to the services received. Some argue that this is appropriate, because,
in their view, there is a correlation between changes in the fair value of the
equity instrument and the fair value of the services received. For example, they
argue that if the fair value of a share option falls, so does its incentive effects,
which causes employees to reduce the level of services provided for that option,
or demand extra remuneration. Some argue that when the fair value of a share
option falls because of a general decline in share prices, remuneration levels also
fall, and therefore service date measurement reflects this decline in
remuneration levels.
BC95 The Board concluded, however, that there is unlikely to be a high correlation
between changes in the fair value of an equity instrument and the fair value of
the services received. For example, if the fair value of a share option doubles, it
is unlikely that the employees work twice as hard, or accept a reduction in the
rest of their remuneration package. Similarly, even if a general rise in share
prices is accompanied by a rise in remuneration levels, it is unlikely that there is
a high correlation between the two. Furthermore, it is likely that any link
between share prices and remuneration levels is not universally applicable to all
industry sectors.
BC96 The Board 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. This conclusion, together with the Board’s
conclusion that there is unlikely to be a high correlation between the fair value
of the services received and the fair value of the equity instruments granted at
later measurement dates, led the Board to conclude that 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

BC97 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, ie the issue of an
equity instrument. The Board therefore considered the matter from this
perspective too.
Exercise date
BC98 Under exercise date measurement, the entity recognises the resources received
(eg employee services) for the issue of share options, and also recognises changes
in the fair value of the option until it is exercised or lapses. Thus, if the option is
exercised, the transaction amount is ultimately ‘trued up’ to equal the gain
made by the option holder on exercise of the option. However, if the option
lapses at the end of the exercise period, any amounts previously recognised are
effectively reversed, hence the transaction amount is ultimately trued up to
equal zero. The Board rejected exercise date measurement because it requires
share options to be treated as liabilities, which is inconsistent with the
definition of liabilities in the Framework. Exercise date measurement requires
share options to be treated as liabilities because it requires the remeasurement

IFRS 2 BC
of share options after initial recognition, which is inappropriate if the share

options are equity instruments. A share option does not meet the definition of a
liability, because it does not contain an obligation to transfer cash or other
assets.
Vesting date, service date and grant date

BC99 The Board noted that the IASC/G4+1 Discussion Paper supported vesting date
measurement, and rejected grant date and service date measurement, because it
concluded that the share option is not issued until vesting date. It noted that
the employees must perform their side of the arrangement by providing the
necessary services and meeting any other performance criteria before the entity
is obliged to perform its side of the arrangement. The provision of services by
the employees is not merely a condition of the arrangement, it is the
consideration they use to ‘pay’ for the share option. Therefore, the Discussion
Paper concluded, in economic terms the share option is not issued until vesting
date. Because the entity performs its side of the arrangement on vesting date,
that is the appropriate measurement date.
BC100 The Discussion Paper also proposed recognising an accrual in equity during the
vesting period to ensure that the services are recognised when they are received.
It proposed that this accrual should be revised on vesting date to equal the fair
value of the share option at that date. This means that amounts credited to
equity during the vesting period will be subsequently remeasured to reflect
changes in the value of that equity interest before vesting date. That is
inconsistent with the Framework because equity interests are not subsequently
remeasured, ie any changes in their value are not recognised. The Discussion
Paper justified this remeasurement by arguing that because the share option is
not issued until vesting date, the option is not being remeasured. The credit to
equity during the vesting period is merely an interim measure that is used to
recognise the partially completed transaction.
BC101 However, the Board noted that even if one accepts that the share option is not
issued until vesting date, this does not mean that there is no equity interest
until then. If an equity interest exists before vesting date, that interest should
not be remeasured. Moreover, the conversion of one type of equity interest into
another should not, in itself, cause a change in total equity, because no change
in net assets has occurred.
BC102 Some supporters of vesting date suggest that the accrual during the
performance period meets the definition of a liability. However, the basis for
this conclusion is unclear. The entity is not required to transfer cash or other
assets to the employees. Its only commitment is to issue equity instruments.
BC103 The Board concluded that vesting date measurement is inconsistent with the
Framework, because it requires the remeasurement of equity.
BC104 Service date measurement does not require remeasurement of equity interests
after initial recognition. However, as explained earlier, the Board concluded
that incorporating changes in the fair value of the share option into the
transaction amount is unlikely to produce an amount that fairly reflects the fair
value of the services received, which is the primary objective.

IFRS 2 BC
BC105 The Board therefore 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 under the Framework, because it
does not require remeasurement of equity interests and it provides a reasonable
surrogate measure of the fair value of the services received from employees.
Other issues
IAS 32 Financial Instruments: Disclosure and Presentation18

BC106 As discussed above, under the definitions of liabilities and equity in the
Framework, both shares and share options are equity instruments, because
neither instrument requires the entity to transfer cash or other assets. Similarly,
all contracts or arrangements that will be settled by the entity issuing shares or
share options are classified as equity. However, this differs from the distinction
between liabilities and equity applied in IAS 32. Although IAS 32 also considers,
in its debt/equity distinction, whether an instrument contains an obligation to
transfer cash or other assets, this is supplemented by a second criterion, which
considers whether the number of shares to be issued (and cash to be received) on
settlement is fixed or variable. IAS 32 classifies a contract that will or may be
settled in the entity’s own equity instruments as a liability if the contract is a
non-derivative for which the entity is or may be obliged to deliver a variable
number of the entity’s own equity instruments; or a derivative that will or may
be settled other than by the exchange of a fixed amount of cash or another
financial asset for a fixed number of the entity’s own equity instruments.
BC107 In some cases, the number of share options to which employees are entitled
varies. For example, the number of share options to which the employees will
be entitled on vesting date might vary depending on whether, and to the extent
that, a particular performance target is exceeded. Another example is share
appreciation rights settled in shares. In this situation, a variable number of
shares will be issued, equal in value to the appreciation of the entity’s share
price over a period of time.
BC108 Therefore, if the requirements of IAS 32 were applied to equity-settled

share-based payment transactions, in some situations an obligation to issue
equity instruments would be classified as a liability. In such cases, final
measurement of the transaction would be at a measurement date later than
grant date.
BC109 The Board concluded that different considerations applied in developing IFRS 2.
For example, drawing a distinction between fixed and variable option plans and
requiring a later measurement date for variable option plans has undesirable
consequences, as discussed in paragraphs BC272–BC275.
BC110 The Board concluded that the requirements in IAS 32, whereby some obligations
to issue equity instruments are classified as liabilities, should not be applied in
the IFRS on share-based payment. The Board recognises that this creates a
difference between IFRS 2 and IAS 32. Before deciding whether and how that
difference should be eliminated, the Board concluded that it is necessary to
18 In August 2005 IAS 32 was amended as IAS 32 Financial Instruments: Presentation.

IFRS 2 BC
address this issue in a broader context, as part of a fundamental review of the

definitions of liabilities and equity in the Framework, particularly because this is
not the only debt/equity classification issue that has arisen in the share-based
payment project, as explained below.
Suggestions to change the definitions of liabilities and equity

BC111 In concluding that, for transactions with employees, grant date is the
appropriate measurement date under the Framework, the Board noted that some
respondents to ED 2 and the Discussion Paper support other measurement dates
because they believe that the definitions of liabilities and equity in the
Framework should be revised.
BC112 For example, some supporters of vesting date argue that receipt of employee
services between grant date and vesting date creates an obligation for the entity
to pay for those services, and that the method of settlement should not matter.
In other words, it should not matter whether that obligation is settled in cash or
in equity instruments—both ought to be treated as liabilities. Therefore, the
definition of a liability should be modified so that all types of obligations,
however settled, are included in liabilities. But it is not clear that this approach
would necessarily result in vesting date measurement. A share option contains
an obligation to issue shares. Hence, if all types of obligations are classified as
liabilities, then a share option would be a liability, which would result in
exercise date measurement.
BC113 Some support exercise date measurement on the grounds that it produces the
same accounting result as ‘economically similar’ cash-settled share-based
payments. For example, it is argued that share appreciation rights (SARs) settled
in cash are substantially similar to SARs settled in shares, because in both cases
the employee receives consideration to the same value. Also, if the SARs are
settled in shares and the shares are immediately sold, the employee ends up in
exactly the same position as under a cash-settled SAR, ie with cash equal to the
appreciation in the entity’s share price over the specified period. Similarly,
some argue that share options and cash-settled SARs are economically similar.
This is particularly true when the employee realises the gain on the exercise of
share options by selling the shares immediately after exercise, as commonly
occurs. Either way, the employee ends up with an amount of cash that is based
on the appreciation of the share price over a period of time. If cash-settled
transactions and equity-settled transactions are economically similar, the
accounting treatment should be the same.
BC114 However, it is not clear that changing the distinction between liabilities and
equity to be consistent with exercise date measurement is the only way to
achieve the same accounting treatment. For example, the distinction could be
changed so that cash-settled employee share plans are measured at grant date,
with the subsequent cash payment debited directly to equity, as a distribution to
equity participants.
BC115 Others who support exercise date measurement do not regard share option
holders as part of the ownership group, and therefore believe that options
should not be classified as equity. Option holders, some argue, are only
potential owners of the entity. But it is not clear whether this view is held

IFRS 2 BC
generally, ie applied to all types of options. For example, some who support
exercise date measurement for employee share options do not necessarily
advocate the same approach for share options or warrants issued for cash in the
market. However, any revision to the definitions of liabilities and equity in the
Framework would affect the classification of all options and warrants issued by
the entity.
BC116 Given that there is more than one suggestion to change the definitions of
liabilities and equity, and these suggestions have not been fully explored, it is
not clear exactly what changes to the definitions are being proposed.
BC117 Moreover, the Board concluded that these suggestions should not be considered
in isolation, because changing the distinction between liabilities and equity
affects all sorts of financial interests, not just those relating to employee share
plans. All of the implications of any suggested changes should be explored in a
broader project to review the definitions of liabilities and equity in the
Framework. If such a review resulted in changes to the definitions, the Board
would then consider whether the IFRS on share-based payment should be
revised.
BC118 Therefore, after considering the issues discussed above, the Board confirmed its
conclusion that grant date is the appropriate date at which to measure the fair
value of the equity instruments granted for the purposes of providing a
surrogate measure of the fair value of services received from employees.
Share-based payment transactions with parties other than

employees
BC119 In many share-based payment transactions with parties other than employees, it
should be possible to measure reliably the fair value of the goods or services
received. The Board therefore concluded that the IFRS should require an entity
to presume that the fair value of the goods or services received can be measured
reliably.19 However, in rare cases in which the presumption is rebutted, it is
necessary to measure the transaction at the fair value of the equity instruments
granted.
BC120 Some measurement issues that arise in respect of share-based payment

transactions with employees also arise in transactions with other parties. For
example, there might be performance (ie vesting) conditions that must be met
before the other party is entitled to the shares or share options. Therefore, any
19 ED 2 proposed that equity-settled share-based payment transactions should be measured at the fair
value of the goods or services received, or by reference to the fair value of the equity instruments
granted, whichever fair value is more readily determinable. For transactions with parties other
than employees, ED 2 proposed that there should be a rebuttable presumption that the fair value of
the goods or services received is the more readily determinable fair value. The Board reconsidered
these proposed requirements when finalising the IFRS. It concluded that it would be more
consistent with the primary accounting objective (explained in paragraphs BC64–BC66) to require
equity-settled share-based payment transactions to be measured at the fair value of the goods or
services received, unless that fair value cannot be estimated reliably (eg in transactions with
employees). For transactions with parties other than employees, the Board concluded that, in many
cases, it should be possible to measure reliably the fair value of the goods or services received, as
noted above. Hence, the Board concluded that the IFRS should require an entity to presume that the
fair value of the goods or services received can be measured reliably.

IFRS 2 BC
conclusions reached on how to treat vesting conditions in the context of

share-based payment transactions with employees also apply to transactions
with other parties.
BC121 Similarly, performance by the other party might take place over a period of
time, rather than on one specific date, which again raises the question of the
appropriate measurement date.
BC122 SFAS 123 does not specify a measurement date for share-based payment
transactions with parties other than employees, on the grounds that this is
usually a minor issue in such transactions. However, the date at which to
estimate the fair value of equity instruments issued to parties other than
employees is specified in the US interpretation EITF 96-18 Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services:
[The measurement date is] the earlier of the following:
(a) The date at which a commitment for performance by the counterparty to

earn the equity instruments is reached (a “performance commitment”), or
(b) The date at which the counterparty’s performance is complete. (extract

from Issue 1, footnotes excluded)
BC123 The second of these two dates corresponds to vesting date, because vesting date
is when the other party has satisfied all the conditions necessary to become
unconditionally entitled to the share options or shares. The first of the two
dates does not necessarily correspond to grant date. For example, under an
employee share plan, the employees are (usually) not committed to providing
the necessary services, because they are usually able to leave at any time. Indeed,
EITF 96-18 makes it clear that the fact that the equity instrument will be
forfeited if the counterparty fails to perform is not sufficient evidence of a
performance commitment (Issue 1, footnote 3). Therefore, in the context of
share-based payment transactions with parties other than employees, if the
other party is not committed to perform, there would be no performance
commitment date, in which case the measurement date would be vesting date.
BC124 Accordingly, under SFAS 123 and EITF 96-18, the measurement date for
share-based payment transactions with employees is grant date, but for
transactions with other parties the measurement date could be vesting date, or
some other date between grant date and vesting date.
BC125 In developing the proposals in ED 2, the Board concluded that for transactions
with parties other than employees that are measured by reference to the fair
value of the equity instruments granted, the equity instruments should be
measured at grant date, the same as for transactions with employees.
BC126 However, the Board reconsidered this conclusion during its redeliberations of
the proposals in ED 2. The Board considered whether the delivery (service) date
fair value of the equity instruments granted provided a better surrogate measure
of the fair value of the goods or services received from parties other than
employees than the grant date fair value of those instruments. For example,
some argue that if the counterparty is not firmly committed to delivering the
goods or services, the counterparty would consider whether the fair value of the

IFRS 2 BC
equity instruments at the delivery date is sufficient payment for the goods or
services when deciding whether to deliver the goods or services. This suggests
that there is a high correlation between the fair value of the equity instruments
at the date the goods or services are received and the fair value of those goods or
services. The Board noted that it had considered and rejected a similar
argument in the context of transactions with employees (see paragraphs BC94
and BC95). However, the Board found the argument more compelling in the
case of transactions with parties other than employees, particularly for
transactions in which the counterparty delivers the goods or services on a single
date (or over a short period of time) that is substantially later than grant date,
compared with transactions with employees in which the services are received
over a continuous period that typically begins on grant date.
BC127 The Board was also concerned that permitting entities to measure transactions
with parties other than employees on the basis of the fair value of the equity
instruments at grant date would provide opportunities for entities to structure
transactions to achieve a particular accounting result, causing the carrying
amount of the goods or services received, and the resulting expense for the
consumption of those goods or services, to be understated.
BC128 The Board therefore concluded that for transactions with parties other than
employees in which the entity cannot measure reliably the fair value of the
goods or services received at the date of receipt, the fair value of those goods or
services should be measured indirectly, based on the fair value of the equity
instruments granted, measured at the date the goods or services are received.
Transactions in which the entity cannot identify specifically some

or all of the goods or services received (paragraph 13A)20
BC128A The Board incorporated into IFRS 2 the consensus of IFRIC 8 in Group Cash-settled
Share-based Payment Transactions issued in June 2009. This section summarises the
IFRIC’s considerations in reaching that consensus, as approved by the Board.
BC128B IFRS 2 presumes that the consideration received for share-based payments is
consistent with the fair value of those share-based payments. For example, if the
entity cannot estimate reliably the fair value of the goods or services received,
paragraph 10 of the IFRS requires the entity to measure the fair value of the
goods or services received by reference to the fair value of the share-based
payment made to acquire those goods or services.
BC128C The Board noted that it is neither necessary nor appropriate to measure the fair
value of goods or services as well as the fair value of the share-based payment for
every transaction in which the entity receives goods or non-employee services.
However, when the value of the identifiable consideration received appears to be
less than the fair value of the share-based payment, measurement of both the
goods or the services received and the share-based payment may be necessary in
order to measure the value of the unidentifiable goods or services received.
BC128D Paragraph 13 of the IFRS stipulates a rebuttable presumption that the value of
identifiable goods or services received can be reliably measured. The Board
20 Paragraphs BC128A–BC128H are added as a consequence of amendments to IFRS 2 Group Cash-settled

Share-based Payment Transactions issued in June 2009.

IFRS 2 BC
noted that goods or services that are unidentifiable cannot be reliably measured
and that this rebuttable presumption is relevant only for identifiable goods or
services.
BC128E The Board noted that when the goods or services received are identifiable, the
measurement principles in the IFRS should be applied. When the goods or
services received are unidentifiable, the Board concluded that the grant date is
the most appropriate date for the purposes of providing a surrogate measure of
the value of the unidentifiable goods or services received (or to be received).
BC128F The Board noted that some transactions include identifiable and unidentifiable
goods or services. In this case, it would be necessary to measure at the grant date
the fair value of the unidentifiable goods or services received and to measure the
value of the identifiable goods or services in accordance with the IFRS.
BC128G For cash-settled transactions in which unidentifiable goods or services are

received, it is necessary to remeasure the liability at each subsequent reporting
date in order to be consistent with the IFRS.
BC128H The Board noted that the IFRS’s requirements in respect of the recognition of the
expense arising from share-based payments would apply to identifiable and
unidentifiable goods or services. Therefore, the Board decided not to issue
additional guidance on this point.
Fair value of employee share options
BC129 The Board spent much time discussing how to measure the fair value of
employee share options, including how to take into account common features of
employee share options, such as vesting conditions and non-transferability.
These discussions focused on measuring fair value at grant date, not only
because the Board regarded grant date as the appropriate measurement date for
transactions with employees, but also because more measurement issues arise at
grant date than at later measurement dates. In reaching its conclusions in ED 2,
the Board received assistance from the project’s Advisory Group and from a
panel of experts. During its redeliberations of the proposals in ED 2, the Board
considered comments by respondents and advice received from valuation
experts on the FASB’s Option Valuation Group.
BC130 Market prices provide the best evidence of the fair value of share options.
However, share options with terms and conditions similar to employee share
options are seldom traded in the markets. The Board therefore concluded that,
if market prices are not available, it will be necessary to apply an option pricing
model to estimate the fair value of share options.
BC131 The Board decided that it is not necessary or appropriate to prescribe the precise
formula or model to be used for option valuation. There is no particular option
pricing model that is regarded as theoretically superior to the others, and there
is the risk that any model specified might be superseded by improved
methodologies in the future. Entities should select whichever model is most
appropriate in the circumstances. For example, many employee share options
have long lives, are usually exercisable during the period between vesting date
and the end of the option’s life, and are often exercised early. These factors

IFRS 2 BC
should be considered when estimating the grant date fair value of share options.
For many entities, this might preclude the use of the Black-Scholes-Merton
formula, which does not take into account the possibility of exercise before the
end of the share option’s life and may not adequately reflect the effects of
expected early exercise. This is discussed further below (paragraphs
BC160–BC162).
BC132 All option pricing models take into account the following option features:
● the exercise price of the option

● the current market price of the share
● the expected volatility of the share price
● the dividends expected to be paid on the shares
● the rate of interest available in the market

● the term of the option.
BC133 The first two items define the intrinsic value of a share option; the remaining
four are relevant to the share option’s time value. Expected volatility, dividends
and interest rate are all based on expectations over the option term. Therefore,
the option term is an important part of calculating time value, because it affects
the other inputs.
BC134 One aspect of time value is the value of the right to participate in future gains, if
any. The valuation does not attempt to predict what the future gain will be, only
the amount that a buyer would pay at the valuation date to obtain the right to
participate in any future gains. In other words, option pricing models estimate
the value of the share option at the measurement date, not the value of the
underlying share at some future date.
BC135 The Board noted that some argue that any estimate of the fair value of a share
option is inherently uncertain, because it is not known what the ultimate
outcome will be, eg whether the share option will expire worthless or whether
the employee (or other party) will make a large gain on exercise. However, the
valuation objective is to measure the fair value of the rights granted, not to
predict the outcome of having granted those rights. Hence, irrespective of
whether the option expires worthless or the employee makes a large gain on
exercise, that outcome does not mean that the grant date estimate of the fair
value of the option was unreliable or wrong.
BC136 A similar analysis applies to the argument that share options do not have any
value until they are in the money, ie the share price is greater than the exercise
price. This argument refers to the share option’s intrinsic value only. Share
options also have a time value, which is why they are traded in the markets at
prices greater than their intrinsic value. The option holder has a valuable right
to participate in any future increases in the share price. So even share options
that are at the money have a value when granted. The subsequent outcome of
that option grant, even if it expires worthless, does not change the fact that the
share option had a value at grant date.

IFRS 2 BC
Application of option pricing models to unlisted and

newly listed entities
BC137 As explained above, two of the inputs to an option pricing model are the entity’s
share price and the expected volatility of its share price. For an unlisted entity,
there is no published share price information. The entity would therefore need
to estimate the fair value of its shares (eg based on the share price of similar
entities that are listed, or on a net assets or earnings basis). It would also need to
estimate the expected volatility of that value.
BC138 The Board considered whether unlisted entities should be permitted to use the
minimum value method instead of a fair value measurement method.
The minimum value method is explained earlier, in paragraphs BC80–BC83.
Because it excludes the effects of expected volatility, the minimum value
method produces a value that is lower, often much lower, than that produced by
methods designed to estimate the fair value of an option. Therefore, the Board
discussed how an unlisted entity could estimate expected volatility.
BC139 An unlisted entity that regularly issues share options or shares to employees (or
other parties) might have an internal market for its shares. The volatility of the
internal market share prices provides a basis for estimating expected volatility.
Alternatively, an entity could use the historical or implied volatility of similar
entities that are listed, and for which share price or option price information is
available, as the basis for an estimate of expected volatility. This would be
appropriate if the entity has estimated the value of its shares by reference to the
share prices of these similar listed entities. If the entity has instead used another
methodology to value its shares, the entity could derive an estimate of expected
volatility consistent with that methodology. For example, the entity might
value its shares on the basis of net asset values or earnings, in which case it
could use the expected volatility of those net asset values or earnings as a basis
for estimating expected share price volatility.
BC140 The Board acknowledged that these approaches for estimating the expected
volatility of an unlisted entity’s shares are somewhat subjective. However, the
Board thought it likely that, in practice, the application of these approaches
would result in underestimates of expected volatility, rather than overestimates,
because entities were likely to exercise caution in making such estimates, to
ensure that the resulting option values are not overstated. Therefore, estimating
expected volatility is likely to produce a more reliable measure of the fair value
of share options granted by unlisted entities than an alternative valuation
method, such as the minimum value method.
BC141 Newly listed entities would not need to estimate their share price. However, like
unlisted entities, newly listed entities could have difficulties in estimating
expected volatility when valuing share options, because they might not have
sufficient historical share price information upon which to base an estimate of
expected volatility.
BC142 SFAS 123 requires such entities to consider the historical volatility of similar
entities during a comparable period in their lives:

IFRS 2 BC
For example, an entity that has been publicly traded for only one year that grants
options with an average expected life of five years might consider the pattern and
level of historical volatility of more mature entities in the same industry for the
first six years the stock of those entities were publicly traded. (paragraph 285b)
BC143 The Board concluded that, in general, unlisted and newly listed entities should
not be exempt from a requirement to apply fair value measurement and that the
IFRS should include implementation guidance on estimating expected volatility
for the purposes of applying an option pricing model to share options granted
by unlisted and newly listed entities.
BC144 However, the Board acknowledged that there might be some instances in which
an entity—such as (but not limited to) an unlisted or newly listed entity—cannot
estimate reliably the grant date fair value of share options granted. In this
situation, the Board concluded that the entity should measure the share option
at its intrinsic value, initially at the date the entity obtains the goods or the
counterparty renders service and subsequently at each reporting date until the
final settlement of the share-based payment arrangement, with the effects of the
remeasurement recognised in profit or loss. For a grant of share options, the
share-based payment arrangement is finally settled when the options are
exercised, forfeited (eg upon cessation of employment) or lapse (eg at the end of
the option’s life). For a grant of shares, the share-based payment arrangement is
finally settled when the shares vest or are forfeited.
Application of option pricing models to employee share

options
BC145 Option pricing models are widely used in, and accepted by, the financial
markets. However, there are differences between employee share options and
traded share options. The Board considered the valuation implications of these
differences, with assistance from its Advisory Group and other experts,
including experts in the FASB’s Option Valuation Group, and comments made
by respondents to ED 2. Employee share options usually differ from traded
options in the following ways, which are discussed further below:
(a) there is a vesting period, during which time the share options are not
exercisable;
(b) the options are non-transferable;

(c) there are conditions attached to vesting which, if not satisfied, cause the
options to be forfeited; and
(d) the option term is significantly longer.
Inability to exercise during the vesting period

BC146 Typically, employee share options have a vesting period, during which the
options cannot be exercised. For example, a share option might be granted with
a ten-year life and a vesting period of three years, so the option is not exercisable
for the first three years and can then be exercised at any time during the
remaining seven years. Employee share options cannot be exercised during the
vesting period because the employees must first ‘pay’ for the options, by

IFRS 2 BC
providing the necessary services. Furthermore, there might be other specified

periods during which an employee share option cannot be exercised (eg during a
closed period).
BC147 In the finance literature, employee share options are sometimes called
Bermudian options, being partly European and partly American. An American
share option can be exercised at any time during the option’s life, whereas a
European share option can be exercised only at the end of the option’s life. An
American share option is more valuable than a European share option, although
the difference in value is not usually significant.
BC148 Therefore, other things being equal, an employee share option would have a
higher value than a European share option and a lower value than an American
share option, but the difference between the three values is unlikely to be
significant.
BC149 If the entity uses the Black-Scholes-Merton formula, or another option pricing
model that values European share options, there is no need to adjust the model
for the inability to exercise an option in the vesting period (or any other period),
because the model already assumes that the option cannot be exercised during
that period.
BC150 If the entity uses an option pricing model that values American share options,
such as the binomial model, the inability to exercise an option during the
vesting period can be taken into account in applying such a model.
BC151 Although the inability to exercise the share option during the vesting period
does not, in itself, have a significant effect on the value of the option, there is
still the question whether this restriction has an effect when combined with
non-transferability. This is discussed in the following section.
BC152 The Board therefore concluded that:
(a) if the entity uses an option pricing model that values European share
options, such as the Black-Scholes-Merton formula, no adjustment is
required for the inability to exercise the options during the vesting
period, because the model already assumes that they cannot be exercised
during that period.
(b) if the entity uses an option pricing model that values American share
options, such as a binomial model, the application of the model should
take account of the inability to exercise the options during the vesting
period.
Non-transferability
BC153 From the option holder’s perspective, the inability to transfer a share option
limits the opportunities available when the option has some time yet to run and
the holder wishes either to terminate the exposure to future price changes or to
liquidate the position. For example, the holder might believe that over the
remaining term of the share option the share price is more likely to decrease
than to increase. Also, employee share option plans typically require employees
to exercise vested options within a fixed period of time after the employee leaves
the entity, or to forfeit the options.

IFRS 2 BC
BC154 In the case of a conventional share option, the holder would sell the option
rather than exercise it and then sell the shares. Selling the share option enables
the holder to receive the option’s fair value, including both its intrinsic value
and remaining time value, whereas exercising the option enables the holder to
receive intrinsic value only.
BC155 However, the option holder is not able to sell a non-transferable share option.
Usually, the only possibility open to the option holder is to exercise it, which
entails forgoing the remaining time value. (This is not always true. The use of
other derivatives, in effect, to sell or gain protection from future changes in the
value of the option is discussed later.)
BC156 At first sight, the inability to transfer a share option could seem irrelevant from
the entity’s perspective, because the entity must issue shares at the exercise
price upon exercise of the option, no matter who holds it. In other words, from
the entity’s perspective, its commitments under the contract are unaffected by
whether the shares are issued to the original option holder or to someone else.
Therefore, in valuing the entity’s side of the contract, from the entity’s
perspective, non-transferability seems irrelevant.
BC157 However, the lack of transferability often results in early exercise of the share
option, because that is the only way for the employees to liquidate their
position. Therefore, by imposing the restriction on transferability, the entity has
caused the option holder to exercise the option early, thereby resulting in the
loss of time value. For example, one aspect of time value is the value of the right
to defer payment of the exercise price until the end of the option term. If the
option is exercised early because of non-transferability, the entity receives the
exercise price much earlier than it would otherwise have done.
BC158 Non-transferability is not the only reason why employees might exercise share
options early. Other reasons include risk aversion, lack of wealth diversification,
and termination of employment (typically, employees must exercise vested
options soon after termination of employment; otherwise the options are
forfeited).
BC159 Recent accounting standards and proposed standards (including ED 2) address

the issue of early exercise by requiring the expected life of a non-transferable
share option to be used in valuing it, rather than the contractual option term.
Expected life can be estimated either for the entire share option plan or for
subgroups of employees participating in the plan. The estimate takes into
account factors such as the length of the vesting period, the average length of
time similar options have remained outstanding in the past and the expected
volatility of the underlying shares.
BC160 However, comments from respondents to ED 2 and advice received from

valuation experts during the Board’s redeliberations led the Board to conclude
that using a single expected life as an input into an option pricing model (eg the
Black-Scholes-Merton formula) was not the best solution for reflecting in the
share option valuation the effects of early exercise. For example, such an
approach does not take into account the correlation between the share price and
early exercise. It would also mean that the share option valuation does not take
into account the possibility that the option might be exercised at a date that is

IFRS 2 BC
later than the end of its expected life. Therefore, in many instances, a more
flexible model, such as a binomial model, that uses the share option’s
contractual life as an input and takes into account the possibility of early
exercise on a range of different dates in the option’s life, allowing for factors
such as the correlation between the share price and early exercise and expected
employee turnover, is likely to produce a more accurate estimate of the option’s
fair value.
BC161 Binomial lattice and similar option pricing models also have the advantage of
permitting the inputs to the model to vary over the share option’s life.
For example, instead of using a single expected volatility, a binomial lattice or
similar option pricing model can allow for the possibility that volatility might
change over the share option’s life. This would be particularly appropriate when
valuing share options granted by entities experiencing higher than usual
volatility, because volatility tends to revert to its mean over time.
BC162 For these reasons, the Board considered whether it should require the use of a
more flexible model, rather than the more commonly used Black-Scholes-Merton
formula. However, the Board concluded that it was not necessary to prohibit the
use of the Black-Scholes-Merton formula, because there might be instances in
which the formula produces a sufficiently reliable estimate of the fair value of
the share options granted. For example, if the entity has not granted many
share options, the effects of applying a more flexible model might not have a
material impact on the entity’s financial statements. Also, for share options
with relatively short contractual lives, or share options that must be exercised
within a short period of time after vesting date, the issues discussed in
paragraph BC160 may not be relevant, and hence the Black-Scholes-Merton
formula may produce a value that is substantially the same as that produced by
a more flexible option pricing model. Therefore, rather than prohibit the use of
the Black-Scholes-Merton formula, the Board concluded that the IFRS should
include guidance on selecting the most appropriate model to apply. This
includes the requirement that the entity should consider factors that
knowledgeable, willing market participants would consider in selecting the
option pricing model to apply.
BC163 Although non-transferability often results in the early exercise of employee

share options, some employees can mitigate the effects of non-transferability,
because they are able, in effect, to sell the options or protect themselves from
future changes in the value of the options by selling or buying other derivatives.
For example, the employee might be able, in effect, to sell an employee share
option by entering into an arrangement with an investment bank whereby the
employee sells a similar call option to the bank, ie an option with the same
exercise price and term. A zero-cost collar is one means of obtaining protection
from changes in the value of an employee share option, by selling a call option
and buying a put option.
BC164 However, it appears that such arrangements are not always available.
For example, the amounts involved have to be sufficiently large to make it
worthwhile for the investment bank, which would probably exclude many
employees (unless a collective arrangement was made). Also, it appears that
investment banks are unlikely to enter into such an arrangement unless the

IFRS 2 BC
entity is a top listed company, with shares traded in a deep and active market, to
enable the investment bank to hedge its own position.
BC165 It would not be feasible to stipulate in an accounting standard that an

adjustment to take account of non-transferability is necessary only if the
employees cannot mitigate the effects of non-transferability through the use of
other derivatives. However, using expected life as an input into an option
pricing model, or modelling early exercise in a binomial or similar model, copes
with both situations. If employees were able to mitigate the effects of
non-transferability by using derivatives, this would often result in the employee
share options being exercised later than they would otherwise have been. By
taking this factor into account, the estimated fair value of the share option
would be higher, which makes sense, given that non-transferability is not a
constraint in this case. If the employees cannot mitigate the effects of
non-transferability through the use of derivatives, they are likely to exercise the
share options much earlier than is optimal. In this case, allowing for the effects
of early exercise would significantly reduce the estimated value of the share
option.
BC166 This still leaves the question whether there is a need for further adjustment for
the combined effect of being unable to exercise or transfer the share option
during the vesting period. In other words, the inability to exercise a share
option does not, in itself, appear to have a significant effect on its value. But if
the share option cannot be transferred and cannot be exercised, and assuming
that other derivatives are not available, the holder is unable to extract value
from the share option or protect its value during the vesting period.
BC167 However, it should be noted why these restrictions are in place: the employee
has not yet ‘paid’ for the share option by providing the required services (and
fulfilling any other performance conditions). The employee cannot exercise or
transfer a share option to which he/she is not yet entitled. The share option will
either vest or fail to vest, depending on whether the vesting conditions are
satisfied. The possibility of forfeiture resulting from failure to fulfil the vesting
conditions is taken into account through the application of the modified grant
date method (discussed in paragraphs BC170–BC184).
BC168 Moreover, for accounting purposes, the objective is to estimate the fair value of
the share option, not the value from the employee’s perspective. The fair value
of any item depends on the expected amounts, timing, and uncertainty of the
future cash flows relating to the item. The share option grant gives the
employee the right to subscribe to the entity’s shares at the exercise price,
provided that the vesting conditions are satisfied and the exercise price is paid
during the specified period. The effect of the vesting conditions is considered
below. The effect of the share option being non-exercisable during the vesting
period has already been considered above, as has the effect of
non-transferability. There does not seem to be any additional effect on the
expected amounts, timing or uncertainty of the future cash flows arising from
the combination of non-exercisability and non-transferability during the vesting
period.
BC169 After considering all of the above points, the Board concluded that the effects of
early exercise, because of non-transferability and other factors, should be taken

IFRS 2 BC
into account when estimating the fair value of the share option, either by
modelling early exercise in a binomial or similar model, or using expected life
rather than contracted life as an input into an option pricing model, such as the
Black-Scholes-Merton formula.
Vesting conditions
BC170 Employee share options usually have vesting conditions. The most common
condition is that the employee must remain in the entity’s employ for a
specified period, say three years. If the employee leaves during that period, the
options are forfeited. There might also be other performance conditions, eg that
the entity achieves a specified growth in share price or earnings.
BC171 Vesting conditions ensure that the employees provide the services required to
‘pay’ for their share options. For example, the usual reason for imposing service
conditions is to retain staff; the usual reason for imposing other performance
conditions is to provide an incentive for the employees to work towards
specified performance targets.
BC171A In 2005 the Board decided to take on a project to clarify the definition of vesting
conditions and the accounting treatment of cancellations. In particular, the
Board noted that it is important to distinguish between non-vesting conditions,
which need to be satisfied for the counterparty to become entitled to the equity
instrument, and vesting conditions such as performance conditions. In
February 2006 the Board published an exposure draft Vesting Conditions and
Cancellations, which proposed to restrict vesting conditions to service conditions
and performance conditions. Those are the only conditions that determine
whether the entity receives the services that entitle the counterparty to the
share-based payment, and therefore whether the share-based payment vests. In
particular, a share-based payment may vest even if some non-vesting conditions
have not been met. The feature that distinguishes a performance condition
from a non-vesting condition is that the former has an explicit or implicit
service requirement and the latter does not.
BC171B In general, respondents to the exposure draft agreed with the Board’s proposals
but asked for clarification of whether particular restrictive conditions, such as
‘non-compete provisions’, are vesting conditions. The Board noted that a
share-based payment vests when the counterparty’s entitlement to it is no longer
conditional on future service or performance conditions. Therefore, conditions
such as non-compete provisions and transfer restrictions, which apply after the
counterparty has become entitled to the share-based payment, are not vesting
conditions. The Board revised the definition of ‘vest’ accordingly.
BC172 Some argue that the existence of vesting conditions does not necessarily imply
that the value of employee share options is significantly less than the value of
traded share options. The employees have to satisfy the vesting conditions to
fulfil their side of the arrangement. In other words, the employees’ performance
of their side of the arrangement is what they do to pay for their share options.
Employees do not pay for the options with cash, as do the holders of traded
share options; they pay with their services. Having to pay for the share options
does not make them less valuable. On the contrary, it proves that the share
options are valuable.

IFRS 2 BC
BC173 Others argue that the possibility of forfeiture without compensation for
part-performance suggests that the share options are less valuable. The
employees might partly perform their side of the arrangement, eg by working
for part of the period, then have to leave for some reason, and forfeit the share
options without compensation for that part performance. If there are other
performance conditions, such as achieving a specified growth in the share price
or earnings, the employees might work for the entire vesting period, but fail to
meet the vesting conditions and therefore forfeit the share options.
BC174 Similarly, some argue that the entity would take into account the possibility of
forfeiture when entering into the agreement at grant date. In other words, in
deciding how many share options to grant in total, the entity would allow for
expected forfeitures. Hence, if the objective is to estimate at grant date the fair
value of the entity’s commitments under the share option agreement, that
valuation should take into account that the entity’s commitment to fulfil its side
of the option agreement is conditional upon the vesting conditions being
satisfied.
BC175 In developing the proposals in ED 2, the Board concluded that the valuation of
rights to share options or shares granted to employees (or other parties) should
take into account all types of vesting conditions, including both service
conditions and performance conditions. In other words, the grant date
valuation should be reduced to allow for the possibility of forfeiture due to
failure to satisfy the vesting conditions.
BC176 Such a reduction might be achieved by adapting an option pricing model to

incorporate vesting conditions. Alternatively, a more simplistic approach might
be applied. One such approach is to estimate the possibility of forfeiture at
grant date, and reduce the value produced by an option pricing model
accordingly. For example, if the valuation calculated using an option pricing
model was CU15, and the entity estimated that 20 per cent of the share options
would be forfeited because of failure to satisfy the vesting conditions, allowing
for the possibility of forfeiture would reduce the grant date value of each option
granted from CU15 to CU12.
BC177 The Board decided against proposing detailed guidance on how the grant date
value should be adjusted to allow for the possibility of forfeiture. This is
consistent with the Board’s objective of setting principles-based standards. The
measurement objective is to estimate fair value. That objective might not be
achieved if detailed, prescriptive rules were specified, which would probably
become outdated by future developments in valuation methodologies.
BC178 However, respondents to ED 2 raised a variety of concerns about the inclusion of

vesting conditions in the grant date valuation. Some respondents were
concerned about the practicality and subjectivity of including non-market
performance conditions in the share option valuation. Some were also
concerned about the practicality of including service conditions in the grant
date valuation, particularly in conjunction with the units of service method
proposed in ED 2 (discussed further in paragraphs BC203–BC217).
BC179 Some respondents suggested the alternative approach applied in SFAS 123,
referred to as the modified grant date method. Under this method, service

IFRS 2 BC
conditions and non-market performance conditions are excluded from the grant
date valuation (ie the possibility of forfeiture is not taken into account when
estimating the grant date fair value of the share options or other equity
instruments, thereby producing a higher grant date fair value), but are instead
taken into account by requiring the transaction amount to be based on the
number of equity instruments that eventually vest. Under this method, on a
cumulative basis, no amount is recognised for goods or services received if the
equity instruments granted do not vest because of failure to satisfy a vesting
condition (other than a market condition), eg the counterparty fails to complete
a specified service period, or a performance condition (other than a market
condition) is not satisfied.
BC180 After considering respondents’ comments and obtaining further advice from
valuation experts, the Board decided to adopt the modified grant date method
applied in SFAS 123. However, the Board decided that it should not permit the
choice available in SFAS 123 to account for the effects of expected or actual
forfeitures of share options or other equity instruments because of failure to
satisfy a service condition. For a grant of equity instruments with a service
condition, SFAS 123 permits an entity to choose at grant date to recognise the
services received based on an estimate of the number of share options or other
equity instruments expected to vest, and to revise that estimate, if necessary, if
subsequent information indicates that actual forfeitures are likely to differ from
previous estimates. Alternatively, an entity may begin recognising the services
received as if all the equity instruments granted that are subject to a service
requirement are expected to vest. The effects of forfeitures are then recognised
when those forfeitures occur, by reversing any amounts previously recognised
for services received as consideration for equity instruments that are forfeited.
BC181 The Board decided that the latter method should not be permitted. Given that
the transaction amount is ultimately based on the number of equity
instruments that vest, it is appropriate to estimate the number of expected
forfeitures when recognising the services received during the vesting period.
Furthermore, by ignoring expected forfeitures until those forfeitures occur, the
effects of reversing any amounts previously recognised might result in a
distortion of remuneration expense recognised during the vesting period. For
example, an entity that experiences a high level of forfeitures might recognise a
large amount of remuneration expense in one period, which is then reversed in
a later period.
BC182 Therefore, the Board decided that the IFRS should require an entity to estimate
the number of equity instruments expected to vest and to revise that estimate, if
necessary, if subsequent information indicates that actual forfeitures are likely
to differ from previous estimates.
BC183 Under SFAS 123, market conditions (eg a condition involving a target share
price, or specified amount of intrinsic value on which vesting or exercisability is
conditioned) are included in the grant date valuation, without subsequent
reversal. That is to say, when estimating the fair value of the equity instruments
at grant date, the entity takes into account the possibility that the market
condition may not be satisfied. Having allowed for that possibility in the grant
date valuation of the equity instruments, no adjustment is made to the number

IFRS 2 BC
of equity instruments included in the calculation of the transaction amount,

irrespective of the outcome of the market condition. In other words, the entity
recognises the goods or services received from a counterparty that satisfies all
other vesting conditions (eg services received from an employee who remains in
service for the specified service period), irrespective of whether that market
condition is satisfied. The treatment of market conditions therefore contrasts
with the treatment of other types of vesting conditions. As explained in
paragraph BC179, under the modified grant date method, vesting conditions are
not taken into account when estimating the fair value of the equity instruments
at grant date, but are instead taken into account by requiring the transaction
amount to be based on the number of equity instruments that eventually vest.
BC184 The Board considered whether it should apply the same approach to market
conditions as is applied in SFAS 123. It might be argued that it is not
appropriate to distinguish between market conditions and other types of
performance conditions, because to do so could create opportunities for
arbitrage, or cause an economic distortion by encouraging entities to favour one
type of performance condition over another. However, the Board noted that it is
not clear what the result would be. On the one hand, some entities might prefer
the ‘truing up’ aspect of the modified grant date method, because it permits a
reversal of remuneration expense if the condition is not met. On the other
hand, if the performance condition is met, and it has not been incorporated into
the grant date valuation (as is the case when the modified grant date method is
used), the expense will be higher than it would otherwise have been (ie if the
performance condition had been incorporated into the grant date valuation).
Furthermore, some entities might prefer to avoid the potential volatility caused
by the truing up mechanism. Therefore, it is not clear whether having a
different treatment for market and non-market performance conditions will
necessarily cause entities to favour market conditions over non-market
performance conditions, or vice versa. Furthermore, the practical difficulties
that led the Board to conclude that non-market performance conditions should
be dealt with via the modified grant date method rather than being included in
the grant date valuation do not apply to market conditions, because market
conditions can be incorporated into option pricing models. Moreover, it is
difficult to distinguish between market conditions, such as a target share price,
and the market condition that is inherent in the option itself, ie that the option
will be exercised only if the share price on the date of exercise exceeds the
exercise price. For these reasons, the Board concluded that the IFRS should
apply the same approach as is applied in SFAS 123.
Option term
BC185 Employee share options often have a long contractual life, eg ten years. Traded
options typically have short lives, often only a few months. Estimating the
inputs required by an option pricing model, such as expected volatility, over
long periods can be difficult, giving rise to the possibility of significant
estimation error. This is not usually a problem with traded share options, given
their much shorter lives.
BC186 However, some share options traded over the counter have long lives, such as ten
or fifteen years. Option pricing models are used to value them. Therefore,

IFRS 2 BC
contrary to the argument sometimes advanced, option pricing models can be

(and are being) applied to long-lived share options.
BC187 Moreover, the potential for estimation error is mitigated by using a binomial or
similar model that allows for changes in model inputs over the share option’s
life, such as expected volatility, and interest and dividend rates, that could occur
and the probability of those changes occurring during the term of the share
option. The potential for estimation error is further mitigated by taking into
account the possibility of early exercise, either by using expected life rather than
contracted life as an input into an option pricing model or by modelling
exercise behaviour in a binomial or similar model, because this reduces the
expected term of the share option. Because employees often exercise their share
options relatively early in the share option’s life, the expected term is usually
much shorter than contracted life.
Other features of employee share options

BC188 Whilst the features discussed above are common to most employee share
options, some might include other features. For example, some share options
have a reload feature. This entitles the employee to automatic grants of
additional share options whenever he/she exercises previously granted share
options and pays the exercise price in the entity’s shares rather than in cash.
Typically, the employee is granted a new share option, called a reload option, for
each share surrendered when exercising the previous share option. The exercise
price of the reload option is usually set at the market price of the shares on the
date the reload option is granted.
BC189 When SFAS 123 was developed, the FASB concluded that, ideally, the value of the
reload feature should be included in the valuation of the original share option at
grant date. However, at that time the FASB believed that it was not possible to
do so. Accordingly, SFAS 123 does not require the reload feature to be included
in the grant date valuation of the original share option. Instead, reload options
granted upon exercise of the original share options are accounted for as a new
share option grant.
BC190 However, recent academic research indicates that it is possible to value the
reload feature at grant date, eg Saly, Jagannathan and Huddart (1999).21
However, if significant uncertainties exist, such as the number and timing of
expected grants of reload options, it might not be practicable to include the
reload feature in the grant date valuation.
BC191 When it developed ED 2, the Board concluded that the reload feature should be
taken into account, where practicable, when measuring the fair value of the
share options granted. However, if the reload feature was not taken into
account, then when the reload option is granted, it should be accounted for as a
new share option grant.
BC192 Many respondents to ED 2 agreed with the proposals in ED 2. However, some

disagreed. For example, some disagreed with there being a choice of treatments.
Some respondents supported always treating reload options granted as new
21 P J Saly, R Jagannathan and S J Huddart. 1999. Valuing the Reload Features of Executive Stock
Options. Accounting Horizons 13 (3): 219–240.

IFRS 2 BC
grants whereas others supported always including the reload feature in the
grant date valuation. Some expressed concerns about the practicality of
including the reload feature in the grant date valuation. After reconsidering
this issue, the Board concluded that the reload feature should not be included in
the grant date valuation and therefore all reload options granted should be
accounted for as new share option grants.
BC193 There may be other features of employee (and other) share options that the
Board has not yet considered. But even if the Board were to consider every
conceivable feature of employee (and other) share options that exist at present,
new features might be developed in the future.
BC194 The Board therefore concluded that the IFRS should focus on setting out clear
principles to be applied to share-based payment transactions, and provide
guidance on the more common features of employee share options, but should
not prescribe extensive application guidance, which would be likely to become
outdated.
BC195 Nevertheless, the Board considered whether there are share options with such
unusual or complex features that it is too difficult to make a reliable estimate of
their fair value and, if so, what the accounting treatment should be.
BC196 SFAS 123 states that ‘it should be possible to reasonably estimate the fair value of
most stock options and other equity instruments at the date they are granted’
(paragraph 21). However, it states that, ‘in unusual circumstances, the terms of
the stock option or other equity instrument may make it virtually impossible to
reasonably estimate the instrument’s fair value at the date it is granted’.
The standard requires that, in such situations, measurement should be delayed
until it is possible to estimate reasonably the instrument’s fair value. It notes
that this is likely to be the date at which the number of shares to which the
employee is entitled and the exercise price are determinable. This could be
vesting date. The standard requires that estimates of compensation expense for
earlier periods (ie until it is possible to estimate fair value) should be based on
current intrinsic value.
BC197 The Board thought it unlikely that entities could not reasonably determine the
fair value of share options at grant date, particularly after excluding vesting
conditions22 and reload features from the grant date valuation. The share
options form part of the employee’s remuneration package, and it seems
reasonable to presume that an entity’s management would consider the value of
the share options to satisfy itself that the employee’s remuneration package is
fair and reasonable.
BC198 When it developed ED 2, the Board concluded that there should be no exceptions
to the requirement to apply a fair value measurement basis, and therefore it was
not necessary to include in the proposed IFRS specific accounting requirements
for share options that are difficult to value.
BC199 However, after considering respondents’ comments, particularly with regard to

unlisted entities, the Board reconsidered this issue. The Board concluded that,
in rare cases only, in which the entity could not estimate reliably the grant date
22 ie vesting conditions other than market conditions.

IFRS 2 BC
fair value of the equity instruments granted, the entity should measure the
equity instruments at intrinsic value, initially at grant date and subsequently at
each reporting date until the final settlement of the share-based payment
arrangement, with the effects of the remeasurement recognised in profit or loss.
For a grant of share options, the share-based payment arrangement is finally
settled when the share options are exercised, are forfeited (eg upon cessation of
employment) or lapse (eg at the end of the option’s life). For a grant of shares,
the share-based payment arrangement is finally settled when the shares vest or
are forfeited. This requirement would apply to all entities, including listed and
unlisted entities.
Recognition and measurement of services received in an

equity-settled share-based payment transaction
During the vesting period

BC200 In an equity-settled share-based payment transaction, the accounting objective is
to recognise the goods or services received as consideration for the entity’s
equity instruments, measured at the fair value of those goods or services when
received. For transactions in which the entity receives employee services, it is
often difficult to measure directly the fair value of the services received. In this
case, the Board concluded that the fair value of the equity instruments granted
should be used as a surrogate measure of the fair value of the services received.
This raises the question how to use that surrogate measure to derive an amount
to attribute to the services received. Another related question is how the entity
should determine when the services are received.
BC201 Starting with the latter question, some argue that shares or share options are
often granted to employees for past services rather than future services, or
mostly for past services, irrespective of whether the employees are required to
continue working for the entity for a specified future period before their rights
to those shares or share options vest. Conversely, some argue that shares or
share options granted provide a future incentive to the employees and those
incentive effects continue after vesting date, which implies that the entity
receives services from employees during a period that extends beyond vesting
date. For share options in particular, some argue that employees render services
beyond vesting date, because employees are able to benefit from an option’s
time value between vesting date and exercise date only if they continue to work
for the entity (since usually a departing employee must exercise the share
options within a short period, otherwise they are forfeited).
BC202 However, the Board concluded that if the employees are required to complete a
specified service period to become entitled to the shares or share options, this
requirement provides the best evidence of when the employees render services
in return for the shares or share options. Consequently, the Board concluded
that the entity should presume that the services are received during the vesting
period. If the shares or share options vest immediately, it should be presumed
that the entity has already received the services, in the absence of evidence to
the contrary. An example of when immediately vested shares or share options
are not for past services is when the employee concerned has only recently
begun working for the entity, and the shares or share options are granted as a

IFRS 2 BC
signing bonus. But in this situation, it might nevertheless be necessary to

recognise an expense immediately, if the future employee services do not meet
the definition of an asset.
BC203 Returning to the first question in paragraph BC200, when the Board developed
ED 2 it developed an approach whereby the fair value of the shares or share
options granted, measured at grant date and allowing for all vesting conditions,
is divided by the number of units of service expected to be received to determine
the deemed fair value of each unit of service subsequently received.
BC204 For example, suppose that the fair value of share options granted, before taking
into account the possibility of forfeiture, is CU750,000. Suppose that the entity
estimates the possibility of forfeiture because of failure of the employees to
complete the required three-year period of service is 20 per cent (based on a
weighted average probability), and hence it estimates the fair value of the
options granted at CU600,000 (CU750,000 × 80%). The entity expects to receive
1,350 units of service over the three-year vesting period.
BC205 Under the units of service method proposed in ED 2, the deemed fair value per
unit of service subsequently received is CU444.44 (CU600,000/1,350). If
everything turns out as expected, the amount recognised for services received is
CU600,000 (CU444.44 × 1,350).
BC206 This approach is based on the presumption that there is a fairly bargained
contract at grant date. Thus the entity has granted share options valued at
CU600,000 and expects to receive services valued at CU600,000 in return. It does
not expect all share options granted to vest because it does not expect all
employees to complete three years’ service. Expectations of forfeiture because of
employee departures are taken into account when estimating the fair value of
the share options granted, and when determining the fair value of the services
to be received in return.
BC207 Under the units of service method, the amount recognised for services received
during the vesting period might exceed CU600,000, if the entity receives more
services than expected. This is because the objective is to account for the
services subsequently received, not the fair value of the share options granted.
In other words, the objective is not to estimate the fair value of the share options
granted and then spread that amount over the vesting period. Rather, the
objective is to account for the services subsequently received, because it is the
receipt of those services that causes a change in net assets and hence a change in
equity. Because of the practical difficulty of valuing those services directly, the
fair value of the share options granted is used as a surrogate measure to
determine the fair value of each unit of service subsequently received, and
therefore the transaction amount is dependent upon the number of units of
service actually received. If more are received than expected, the transaction
amount will be greater than CU600,000. If fewer services are received, the
transaction amount will be less than CU600,000.
BC208 Hence, a grant date measurement method is used as a practical expedient to

achieve the accounting objective, which is to account for the services actually
received in the vesting period. The Board noted that many who support grant
date measurement do so for reasons that focus on the entity’s commitments

IFRS 2 BC
under the contract, not the services received. They take the view that the entity
has conveyed to its employees valuable equity instruments at grant date and
that the accounting objective should be to account for the equity instruments
conveyed. Similarly, supporters of vesting date measurement argue that the
entity does not convey valuable equity instruments to the employees until
vesting date, and that the accounting objective should be to account for the
equity instruments conveyed at vesting date. Supporters of exercise date
measurement argue that, ultimately, the valuable equity instruments conveyed
by the entity to the employees are the shares issued on exercise date and the
objective should be to account for the value given up by the entity by issuing
equity instruments at less than their fair value.
BC209 Hence all of these arguments for various measurement dates are focused entirely
on what the entity (or its shareholders) has given up under the share-based
payment arrangement, and accounting for that sacrifice. Therefore, if ‘grant
date measurement’ were applied as a matter of principle, the primary objective
would be to account for the value of the rights granted. Depending on whether
the services have already been received and whether a prepayment for services to
be received in the future meets the definition of an asset, the other side of the
transaction would either be recognised as an expense at grant date, or
capitalised as a prepayment and amortised over some period of time, such as
over the vesting period or over the expected life of the share option. Under this
view of grant date measurement, there would be no subsequent adjustment for
actual outcomes. No matter how many share options vest or how many share
options are exercised, that does not change the value of the rights given to the
employees at grant date.
BC210 Therefore, the reason why some support grant date measurement differs from
the reason why the Board concluded that the fair value of the equity
instruments granted should be measured at grant date. This means that some
will have different views about the consequences of applying grant date
measurement. Because the units of service method is based on using the fair
value of the equity instruments granted, measured at grant date, as a surrogate
measure of the fair value of the services received, the total transaction amount is
dependent upon the number of units of service received.
BC211 Some respondents to ED 2 disagreed with the units of service method in

principle, because they did not accept that the fair value of the services received
should be the accounting focus. Rather, the respondents focused on accounting
for the ‘cost’ of the equity instruments issued (ie the credit side of the
transaction rather than the debit side), and took the view that if the share
options or shares are forfeited, no cost was incurred, and thus any amounts
recognised previously should be reversed, as would happen with a cash-settled
transaction.
BC212 Some respondents also disagreed with the treatment of performance conditions
under the units of service method, because if the employee completes the
required service period but the equity instruments do not vest because of the
performance condition not being satisfied, there is no reversal of amounts
recognised during the vesting period. Some argue that this result is
unreasonable because, if the performance condition is not satisfied, then the

IFRS 2 BC
employee did not perform as required, hence it is inappropriate to recognise an

expense for services received or consumed, because the entity did not receive the
specified services.
BC213 The Board considered and rejected the above arguments made against the units
of service method in principle. For example, the Board noted that the objective
of accounting for the services received, rather than the cost of the equity
instruments issued, is consistent with the accounting treatment of other issues
of equity instruments, and with the IASB Framework. With regard to
performance conditions, the Board noted that the strength of the argument in
paragraph BC212 depends on the extent to which the employee has control or
influence over the achievement of the performance target. One cannot
necessarily conclude that the non-attainment of the performance target is a
good indication that the employee has failed to perform his/her side of the
arrangement (ie failed to provide services).
BC214 Therefore, the Board was not persuaded by those respondents who disagreed
with the units of service method in principle. However, the Board also noted
that some respondents raised practical concerns about the method. Some
respondents regarded the units of service method as too complex and
burdensome to apply in practice. For example, if an entity granted share
options to a group of employees but did not grant the same number of share
options to each employee (eg the number might vary according to their salary or
position in the entity), it would be necessary to calculate a different deemed fair
value per unit of service for each individual employee (or for each subgroup of
employees, if there are groups of employees who each received the same number
of options). Then the entity would have to track each employee, to calculate the
amount to recognise for each employee. Furthermore, in some circumstances,
an employee share or share option scheme might not require the employee to
forfeit the shares or share options if the employee leaves during the vesting
period in specified circumstances. Under the terms of some schemes, employees
can retain their share options or shares if they are classified as a ‘good leaver’,
eg a departure resulting from circumstances not within the employee’s control,
such as compulsory retirement, ill health or redundancy. Therefore, in
estimating the possibility of forfeiture, it is not simply a matter of estimating
the possibility of employee departure during the vesting period. It is also
necessary to estimate whether those departures will be ‘good leavers’ or ‘bad
leavers’. And because the share options or shares will vest upon departure of
‘good leavers’, the expected number of units to be received and the expected
length of the vesting period will be shorter for this group of employees. These
factors would need to be incorporated into the application of the units of service
method.
BC215 Some respondents also raised practical concerns about applying the units of
service method to grants with performance conditions. These concerns include
the difficulty of incorporating non-market and complex performance conditions
into the grant date valuation, the additional subjectivity that this introduces,
and that it was unclear how to apply the method when the length of the vesting
period is not fixed, because it depends on when a performance condition is
satisfied.

IFRS 2 BC
BC216 The Board considered the practical concerns raised by respondents, and
obtained further advice from valuation experts concerning the difficulties
highlighted by respondents of including non-market performance conditions in
the grant date valuation. Because of these practical considerations, the Board
concluded that the units of service method should not be retained in the IFRS.
Instead, the Board decided to adopt the modified grant date method applied in
SFAS 123. Under this method, service conditions and non-market performance
conditions are excluded from the grant date valuation (ie the possibility of
forfeiture is not taken into account when estimating the grant date fair value of
the share options or other equity instruments, thereby producing a higher grant
date fair value), but are instead taken into account by requiring that the
transaction amount be based on the number of equity instruments that
eventually vest.23 Under this method, on a cumulative basis, no amount is
recognised for goods or services received if the equity instruments granted do
not vest because of failure to satisfy a vesting condition (other than a market
condition), eg the counterparty fails to complete a specified service period, or a
performance condition (other than a market condition) is not satisfied.
BC217 However, as discussed earlier (paragraphs BC180–BC182), the Board decided that
it should not permit the choice available in SFAS 123 to account for the effects of
expected or actual forfeitures of share options or other equity instruments
because of failure to satisfy a service condition. The Board decided that the IFRS
should require an entity to estimate the number of equity instruments expected
to vest and to revise that estimate, if necessary, if subsequent information
indicates that actual forfeitures are likely to differ from previous estimates.
Share options that are forfeited or lapse after the end of

the vesting period
BC218 Some share options might not be exercised. For example, a share option holder
is unlikely to exercise a share option if the share price is below the exercise price
throughout the exercise period. Once the last date for exercise is passed, the
share option will lapse.
BC219 The lapse of a share option at the end of the exercise period does not change the
fact that the original transaction occurred, ie goods or services were received as
consideration for the issue of an equity instrument (the share option). The
lapsing of the share option does not represent a gain to the entity, because there
is no change to the entity’s net assets. In other words, although some might see
such an event as being a benefit to the remaining shareholders, it has no effect
on the entity’s financial position. In effect, one type of equity interest (the share
option holders’ interest) becomes part of another type of equity interest (the
shareholders’ interest). The Board therefore concluded that the only accounting
entry that might be required is a movement within equity, to reflect that the
share options are no longer outstanding (ie as a transfer from one type of equity
interest to another).
23 The treatment of market conditions is discussed in paragraphs BC183 and BC184. As noted in
paragraph BC184, the practical difficulties that led the Board to conclude that non-market
conditions should be dealt with via the modified grant date method rather than being included in
the grant date valuation do not apply to market conditions, because market conditions can be
incorporated into option pricing models.

IFRS 2 BC
BC220 This is consistent with the treatment of other equity instruments, such as
warrants issued for cash. When warrants subsequently lapse unexercised, this is
not treated as a gain; instead the amount previously recognised when the
warrants were issued remains within equity.24
BC221 The same analysis applies to equity instruments that are forfeited after the end
of the vesting period. For example, an employee with vested share options
typically must exercise those options within a short period after cessation of
employment, otherwise the options are forfeited. If the share options are not in
the money, the employee is unlikely to exercise the options and hence they will
be forfeited. For the same reasons as are given in paragraph BC219, no
adjustment is made to the amounts previously recognised for services received
as consideration for the share options. The only accounting entry that might be
required is a movement within equity, to reflect that the share options are no
longer outstanding.
Modifications to the terms and conditions of share-based

payment arrangements
BC222 An entity might modify the terms of or conditions under which the equity
instruments were granted. For example, the entity might reduce the exercise
price of share options granted to employees (ie reprice the options), which
increases the fair value of those options. During the development of ED 2, the
Board focused mainly on the repricing of share options.
BC223 The Board noted that the IASC/G4+1 Discussion Paper argued that if the entity
reprices its share options it has, in effect, replaced the original share option with
a more valuable share option. The entity presumably believes that it will receive
an equivalent amount of benefit from doing so, because otherwise the directors
would not be acting in the best interests of the entity or its shareholders. This
suggests that the entity expects to receive additional or enhanced employee
services equivalent in value to the incremental value of the repriced share
options. The Discussion Paper therefore proposed that the incremental value
given (ie the difference between the value of the original share option and the
value of the repriced share option, as at the date of repricing) should be
recognised as additional remuneration expense. Although the Discussion Paper
discussed repricing in the context of vesting date measurement, SFAS 123,
which applies a grant date measurement basis for employee share-based
payment, contains reasoning similar to that in the Discussion Paper.
BC224 This reasoning seems appropriate if grant date measurement is applied on the
grounds that the entity made a payment to the employees on grant date by
granting them valuable rights to equity instruments of the entity. If the entity is
prepared to replace that payment with a more valuable payment, it must believe
it will receive an equivalent amount of benefit from doing so.
BC225 The same conclusion is drawn if grant date measurement is applied on the
grounds that some type of equity interest is created at grant date, and thereafter
24 However, an alternative approach is followed in some jurisdictions (eg Japan and the UK), where the
entity recognises a gain when warrants lapse. But under the Framework, recognising a gain on the
lapse of warrants would be appropriate only if warrants were liabilities, which they are not.

IFRS 2 BC
changes in the value of that equity interest accrue to the option holders as
equity participants, not as employees. Repricing is inconsistent with the view
that share option holders bear changes in value as equity participants. Hence it
follows that the incremental value has been granted to the share option holders
in their capacity as employees (rather than equity participants), as part of their
remuneration for services to the entity. Therefore additional remuneration
expense arises in respect of the incremental value given.
BC226 It could be argued that if (a) grant date measurement is used as a surrogate
measure of the fair value of the services received and (b) the repricing occurs
between grant date and vesting date and (c) the repricing merely restores the
share option’s original value at grant date, then the entity may not receive
additional services. Rather, the repricing might simply be a means of ensuring
that the entity receives the services it originally expected to receive when the
share options were granted. Under this view, it is not appropriate to recognise
additional remuneration expense to the extent that the repricing restores the
share option’s original value at grant date.
BC227 Some argue that the effect of a repricing is to create a new deal between the
entity and its employees, and therefore the entity should estimate the fair value
of the repriced share options at the date of repricing to calculate a new measure
of the fair value of the services received subsequent to repricing. Under this
view, the entity would cease using the grant date fair value of the share options
when measuring services received after the repricing date, but without reversal
of amounts recognised previously. The entity would then measure the services
received between the date of repricing and the end of the vesting period by
reference to the fair value of the modified share options, measured at the date of
repricing. If the repricing occurs after the end of the vesting period, the same
process applies. That is to say, there is no adjustment to previously recognised
amounts, and the entity recognises—either immediately or over the vesting
period, depending on whether the employees are required to complete an
additional period of service to become entitled to the repriced share options—an
amount equal to the fair value of the modified share options, measured at the
date of repricing.
BC228 In the context of measuring the fair value of the equity instruments as a
surrogate measure of the fair value of the services received, after considering the
above points, the Board concluded when it developed ED 2 that the incremental
value granted on repricing should be taken into account when measuring the
services received, because:
(a) there is an underlying presumption that the fair value of the equity
instruments, at grant date, provides a surrogate measure of the fair value
of the services received. That fair value is based on the share option’s
original terms and conditions. Therefore, if those terms or conditions
are modified, the modification should be taken into account when
measuring the services received.
(b) a share option that will be repriced if the share price falls is more
valuable than one that will not be repriced. Therefore, by presuming at
grant date that the share option will not be repriced, the entity
underestimated the fair value of that option. The Board concluded that,

IFRS 2 BC
because it is impractical to include the possibility of repricing in the

estimate of fair value at grant date, the incremental value granted on
repricing should be taken into account as and when the repricing occurs.
BC229 Many of the respondents to ED 2 who addressed the issue of repricing agreed
with the proposed requirements. After considering respondents’ comments, the
Board decided to retain the approach to repricing as proposed in ED 2,
ie recognise the incremental value granted on repricing, in addition to
continuing to recognise amounts based on the fair value of the original grant.
BC230 The Board also discussed situations in which repricing might be effected by
cancelling share options and issuing replacement share options. For example,
suppose an entity grants at-the-money share options with an estimated fair value
of CU20 each. Suppose the share price falls, so that the share options become
significantly out of the money, and are now worth CU2 each. Suppose the entity
is considering repricing, so that the share options are again at the money, which
would result in them being worth, say, CU10 each. (Note that the share options
are still worth less than at grant date, because the share price is now lower.
Other things being equal, an at-the-money option on a low priced share is worth
less than an at-the-money option on a high priced share.)
BC231 Under ED 2’s proposed treatment of repricing, the incremental value given on
repricing (CU10 – CU2 = CU8 increment in fair value per share option) would be
accounted for when measuring the services rendered, resulting in the
recognition of additional expense, ie additional to any amounts recognised in
the future in respect of the original share option grant (valued at CU20). If the
entity instead cancelled the existing share options and then issued what were, in
effect, replacement share options, but treated the replacement share options as
a new share option grant, this could reduce the expense recognised. Although
the new grant would be valued at CU10 rather than incremental value of CU8,
the entity would not recognise any further expense in respect of the original
share option grant, valued at CU20. Although some regard such a result as
appropriate (and consistent with their views on repricing, as explained in
paragraph BC227), it is inconsistent with the Board’s treatment of repricing.
BC232 By this means, the entity could, in effect, reduce its remuneration expense if the
share price falls, without having to increase the expense if the share price rises
(because no repricing would be necessary in this case). In other words, the entity
could structure a repricing so as to achieve a form of service date measurement
if the share price falls and grant date measurement if the share price rises, ie an
asymmetrical treatment of share price changes.
BC233 When it developed ED 2, the Board concluded that if an entity cancels a share or
share option grant during the vesting period (other than cancellations because
of employees’ failing to satisfy the vesting conditions), it should nevertheless
continue to account for services received, as if that share or share option grant
had not been cancelled. In the Board’s view, it is very unlikely that a share or
share option grant would be cancelled without some compensation to the
counterparty, either in the form of cash or replacement share options.
Moreover, the Board saw no difference between a repricing of share options and
a cancellation of share options followed by the granting of replacement share
options at a lower exercise price, and therefore concluded that the accounting

IFRS 2 BC
treatment should be the same. If cash is paid on the cancellation of the share or
share option grant, the Board concluded that the payment should be accounted
for as the repurchase of an equity interest, ie as a deduction from equity.
BC234 The Board noted that its proposed treatment means that an entity would
continue to recognise services received during the remainder of the original
vesting period, even though the entity might have paid cash compensation to
the counterparty upon cancellation of the share or share option grant. The
Board discussed an alternative approach applied in SFAS 123: if an entity settles
unvested shares or share options in cash, those shares or share options are
treated as having immediately vested. The entity is required to recognise
immediately an expense for the amount of compensation expense that would
otherwise have been recognised during the remainder of the original vesting
period. Although the Board would have preferred to adopt this approach, it
would have been difficult to apply in the context of the proposed accounting
method in ED 2, given that there is not a specific amount of unrecognised
compensation expense—the amount recognised in the future would have
depended on the number of units of service received in the future.
BC235 Many respondents who commented on the treatment of cancellations disagreed

with the proposals in ED 2. They commented that it was inappropriate to
continue recognising an expense after a grant has been cancelled. Some
suggested other approaches, including the approach applied in SFAS 123. After
considering these comments, and given that the Board had decided to replace
the units of service method with the modified grant date method in SFAS 123,
the Board concluded that it should adopt the same approach as applied in
SFAS 123 to cancellations and settlements. Under SFAS 123, a settlement
(including a cancellation) is regarded as resulting in the immediate vesting of
the equity instruments. The amount of remuneration expense measured at
grant date but not yet recognised is recognised immediately at the date of
settlement or cancellation.
BC236 In addition to the above issues, during its redeliberation of the proposals in ED 2
the Board also considered more detailed issues relating to modifications and
cancellations. Specifically, the Board considered:
(a) a modification that results in a decrease in fair value (ie the fair value of
the modified instrument is less than the fair value of the original
instrument, measured at the date of the modification).
(b) a change in the number of equity instruments granted (increase and

decrease).
(c) a change in services conditions, thereby changing the length of the
vesting period (increase and decrease).
(d) a change in performance conditions, thereby changing the probability of
vesting (increase and decrease).
(e) a change in the classification of the grant, from equity to liabilities.
BC237 The Board concluded that having adopted a grant date measurement method,
the requirements for modifications and cancellations should ensure that the
entity cannot, by modifying or cancelling the grant of shares or share options,

IFRS 2 BC
avoid recognising remuneration expense based on the grant date fair values.
Therefore, the Board concluded that, for arrangements that are classified as
equity-settled arrangements (at least initially), the entity must recognise the
grant date fair value of the equity instruments over the vesting period, unless
the employee fails to vest in those equity instruments under the terms of the
original vesting conditions.
BC237A During the deliberations of its proposals in the exposure draft Vesting Conditions
and Cancellations published in February 2006, the Board considered how failure to
meet a non-vesting condition should be treated. The Board concluded that in
order to be consistent with the grant date measurement method, failure to meet
a non-vesting condition should have no accounting effect when neither the
entity nor the counterparty can choose whether that condition is met. The
entity should continue to recognise the expense, based on the grant date fair
value, over the vesting period unless the employee fails to meet a vesting
condition.
BC237B However, the Board concluded that the entity’s failure to meet a non-vesting
condition is a cancellation if the entity can choose whether that non-vesting
condition is met. Furthermore, the Board noted that no non-arbitrary or
unambiguous criteria exist to distinguish between a decision by the
counterparty not to meet a non-vesting condition and a cancellation by the
entity. The Board considered establishing a rebuttable presumption that a
counterparty’s failure to meet a non-vesting condition is (or is not) a
cancellation, unless it can be demonstrated that the entity had no (or had some)
influence over the counterparty’s decision. The Board did not believe that the
information about the entity’s decision-making processes that is publicly
available would be sufficient to determine whether the presumption has been
rebutted. Therefore, the Board concluded that a failure to meet a non-vesting
condition should be treated as a cancellation when either the entity or the
counterparty can choose whether that non-vesting condition is met.

transaction that changes its classification from cash-settled to
equity-settled (2016 amendments)25
BC237C This section summarises the Board’s considerations when finalising its proposals
to address the accounting for a modification to the terms and conditions of a
share-based payment that changes the classification of the transaction from
cash-settled to equity-settled. These changes were proposed in the Exposure
Draft Classification and Measurement of Share-based Payment Transactions (Proposed
amendments to IFRS 2) published in November 2014 (November 2014 ED).
BC237D The Board was informed that there are situations in which a cash-settled
share-based payment is modified by cancelling it and replacing it with a new
equity-settled share-based payment, and, at the replacement date, the fair value
of the replacement award is different from the recognised value of the original
award. Interested parties told the Board that there is diversity in practice
25 Paragraphs BC237C–BC237L are added as a consequence of amendments to IFRS 2 Classification and

Measurement of Share-based Payment Transactions, issued in June 2016.

IFRS 2 BC
because IFRS 2 does not provide specific requirements for these situations and
asked the Board to clarify the accounting.
BC237E The Board decided that paragraphs 27 and B42–B44 of IFRS 2, which set out the
requirements for modifications to the terms and conditions of equity-settled
share-based payments, should not be applied by analogy to account for the fact
patterns raised. This is because the requirement in paragraph 27 of IFRS 2 to
recognise a minimum amount for the equity-settled share-based payment
following a modification is inconsistent with the requirement in paragraph 30
of IFRS 2 to remeasure the liability for a cash-settled share-based payment at fair
value at the end of each reporting date until the liability is settled.
BC237F Accordingly, the Board decided to require that the equity-settled share-based
payment transaction be recognised in equity to the extent to which goods or
services have been received at the modification date. The Board required this
measurement to be made by reference to the modification-date fair value of the
equity instruments granted. The Board noted that, at the original grant date,
there was a shared understanding that the entity would pay cash for services to
be rendered by the counterparty. However, at the modification date, the entity
and the counterparty have a new shared understanding that the entity will issue
equity instruments to the counterparty. Therefore, the Board concluded that
the modification-date fair value should be used to measure the modified
equity-settled share-based payment.
BC237G Furthermore, the Board noted that the liability for the original cash-settled
share-based payment is derecognised on the modification date as it is considered
to be settled when the entity grants the replacement equity-settled share-based
payment. This is because, at the modification date, the entity is no longer
obliged to transfer cash (or other assets) to the counterparty.
BC237H The Board observed that any difference between the carrying amount of the
derecognised liability and the amount of recognised equity on the modification
date is recognised immediately in profit or loss. The Board observed that this is
consistent with how cash-settled share-based payments are measured in
accordance with paragraph 30 of IFRS 2. The Board further observed that
recognising the difference in value between the original and the replacement
award in profit or loss is also consistent with the requirements for the
extinguishment of a financial liability (that has been extinguished fully or
partially by the issue of equity instruments) in paragraph 3.3.3 of IFRS 9 Financial
Instruments and with paragraph 9 of IFRIC Interpretation 19 Extinguishing Financial
Liabilities with Equity Instruments.
BC237I Respondents to the November 2014 ED questioned whether the guidance in
paragraph B44A would also apply to a situation in which the modification
changes the vesting period of the share-based payment transaction. The Board
confirmed in paragraph B44B that the guidance in paragraph B44A is applied
when the modification occurs during or after the vesting period, and when the
vesting period is extended or shortened.
BC237J The Board provided guidance in paragraph B44C to account for a grant of equity
instruments that has been identified as a replacement for a cancelled
cash-settled share-based payment. The Board observed that if an entity does not

IFRS 2 BC
identify a grant of equity instruments as a replacement, the entity would have to

reverse the expense recognised for the cash-settled share-based payment and
recognise an expense for the new equity-settled share-based payment. The Board
noted that this accounting treatment is different from the accounting for
modifications of equity-settled awards when the entity does not identify new
equity instruments granted as replacement equity instruments for the cancelled
equity instrument (as set out in paragraph 28(c) of IFRS 2). In that case, the
entity does not reverse the expense recognised for the cancelled original
equity-settled award and recognises an expense for the new grant of equity
instruments.
BC237K Some respondents to the November 2014 ED suggested that the Board add
examples to the implementation guidance of IFRS 2 to illustrate the accounting
for other types of modifications of share-based payments (for example, a
modification from equity-settled to cash-settled). The Board decided that it was
not necessary to include additional examples (other than adding
paragraph IG19B and IG Example 12C which illustrates the application of
paragraphs B44A–B44C), because the existing implementation guidance in
IFRS 2 could be applied by analogy. For example, Example 9 illustrates a grant of
shares to which a cash settlement alternative is subsequently added.
Effective date and transition (2016 amendments)
BC237L In response to the comments received on the November 2014 ED, the Board
decided to provide specific transition requirements in paragraph 59A of IFRS 2
for each of the amendments. The Board also decided to permit an entity to apply
all of the amendments retrospectively if, (and only if), the necessary information
to do so is available without the use of hindsight.
Share appreciation rights settled in cash
BC238 Some transactions are ‘share-based’, even though they do not involve the issue of
shares, share options or any other form of equity instrument. Share
appreciation rights (SARs) settled in cash are transactions in which the amount
of cash paid to the employee (or another party) is based upon the increase in the
share price over a specified period, usually subject to vesting conditions, such as
the employee’s remaining with the entity during the specified period. (Note that
the following discussion focuses on SARs granted to employees, but also applies
to SARs granted to other parties.)
BC239 In terms of accounting concepts, share-based payment transactions involving an

outflow of cash (or other assets) are different from transactions in which goods
or services are received as consideration for the issue of equity instruments.
BC240 In an equity-settled transaction, only one side of the transaction causes a change
in assets, ie an asset (services) is received but no assets are disbursed. The other
side of the transaction increases equity; it does not cause a change in assets.
Accordingly, not only is it not necessary to remeasure the transaction amount
upon settlement, it is not appropriate, because equity interests are not
remeasured.

IFRS 2 BC
BC241 In contrast, in a cash-settled transaction, both sides of the transaction cause a

change in assets, ie an asset (services) is received and an asset (cash) is ultimately
disbursed. Therefore, no matter what value is attributed to the first asset
(services received), eventually it will be necessary to recognise the change in
assets when the second asset (cash) is disbursed. Thus, no matter how the
transaction is accounted for between the receipt of services and the settlement
in cash, it will be ‘trued up’ to equal the amount of cash paid out, to account for
both changes in assets.
BC242 Because cash-settled SARs involve an outflow of cash (rather than the issue of
equity instruments) cash SARs should be accounted for in accordance with the
usual accounting for similar liabilities. That sounds straightforward, but there
are some questions to consider:
(a) should a liability be recognised before vesting date, ie before the
employees have fulfilled the conditions to become unconditionally
entitled to the cash payment?
(b) if so, how should that liability be measured?

(c) how should the expense be presented in the income statement?
Is there a liability before vesting date?

BC243 It could be argued that the entity does not have a liability until vesting date,
because the entity does not have a present obligation to pay cash to the
employees until the employees fulfil the conditions to become unconditionally
entitled to the cash; between grant date and vesting date there is only a
contingent liability.
BC244 The Board noted that this argument applies to all sorts of employee benefits
settled in cash, not just SARs. For example, it could be argued that an entity has
no liability for pension payments to employees until the employees have met the
specified vesting conditions. This argument was considered by IASC in IAS 19
Employee Benefits. The Basis for Conclusions states:
Paragraph 54 of the new IAS 19 summarises the recognition and measurement of
liabilities arising from defined benefit plans … Paragraph 54 of the new IAS 19 is
based on the definition of, and recognition criteria for, a liability in IASC’s
Framework … The Board believes that an enterprise has an obligation under a
defined benefit plan when an employee has rendered service in return for the
benefits promised under the plan … The Board believes that an obligation exists
even if a benefit is not vested, in other words if the employee’s right to receive the
benefit is conditional upon future employment. For example, consider an
enterprise that provides a benefit of 100 to employees who remain in service for
two years. At the end of the first year, the employee and the enterprise are not in
the same position as at the beginning of the first year, because the employee will
only need to work for one year, instead of two, before becoming entitled to the
benefit. Although there is a possibility that the benefit may not vest, that
difference is an obligation and, in the Board’s view, should result in the
recognition of a liability at the end of the first year. The measurement of that

IFRS 2 BC
obligation at its present value reflects the enterprise’s best estimate of the
probability that the benefit may not vest. (IAS 19, Basis for Conclusions,
paragraphs BC11–BC14)26
BC245 Therefore, the Board concluded that, to be consistent with IAS 19, which covers
other cash-settled employee benefits, a liability should be recognised in respect
of cash-settled SARs during the vesting period, as services are rendered by the
employees. Thus, no matter how the liability is measured, the Board concluded
that it should be accrued over the vesting period, to the extent that the
employees have performed their side of the arrangement. For example, if the
terms of the arrangement require the employees to perform services over a
three-year period, the liability would be accrued over that three-year period,
consistently with the treatment of other cash-settled employee benefits.
How should the liability be measured?

BC246 A simple approach would be to base the accrual on the entity’s share price at the
end of each reporting period. If the entity’s share price increased over the
vesting period, expenses would be larger in later reporting periods compared
with earlier reporting periods. This is because each reporting period will
include the effects of (a) an increase in the liability in respect of the employee
services received during that reporting period and (b) an increase in the liability
attributable to the increase in the entity’s share price during the reporting
period, which increases the amount payable in respect of past employee services
received.
BC247 This approach is consistent with SFAS 123 (paragraph 25) and FASB
Interpretation No. 28 Accounting for Stock Appreciation Rights and Other Variable Stock
Option or Award Plans.
BC248 However, this is not a fair value approach. Like share options, the fair value of
SARs includes both their intrinsic value (the increase in the share price to date)
and their time value (the value of the right to participate in future increases in
the share price, if any, that may occur between the valuation date and the
settlement date). An option pricing model can be used to estimate the fair value
of SARs.
BC249 Ultimately, however, no matter how the liability is measured during the vesting
period, the liability—and therefore the expense—will be remeasured, when the
SARs are settled, to equal the amount of the cash paid out. The amount of cash
paid will be based on the SARs’ intrinsic value at the settlement date. Some
support measuring the SAR liability at intrinsic value for this reason, and
because intrinsic value is easier to measure.
BC250 The Board concluded that measuring SARs at intrinsic value would be
inconsistent with the fair value measurement basis applied, in most cases, in the
rest of the IFRS. Furthermore, although a fair value measurement basis is more
complex to apply, it was likely that many entities would be measuring the fair
value of similar instruments regularly, eg new SAR or share option grants,
which would provide much of the information required to remeasure the fair
26 IAS 19 Employee Benefits (as amended in June 2011) renumbered and amended paragraphs BC11–BC14
as paragraphs BC52–BC55. The amendments changed the terminology for consistency with IAS 19.

IFRS 2 BC
value of the SAR at each reporting date. Moreover, because the intrinsic value
measurement basis does not include time value, it is not an adequate measure of
either the SAR liability or the cost of services consumed.
BC251 The question of how to measure the liability is linked with the question how to
present the associated expense in the income statement, as explained below.
How should the associated expense be presented in the

income statement?
BC252 SARs are economically similar to share options. Hence some argue that the
accounting treatment of SARs should be the same as the treatment of share
options, as discussed earlier (paragraph BC113). However, as noted in
paragraphs BC240 and BC241, in an equity-settled transaction there is one
change in net assets (the goods or services received) whereas in a cash-settled
transaction there are two changes in net assets (the goods or services received
and the cash or other assets paid out). To differentiate between the effects of
each change in net assets in a cash-settled transaction, the expense could be
separated into two components:
● an amount based on the fair value of the SARs at grant date, recognised
over the vesting period, in a manner similar to accounting for
equity-settled share-based payment transactions, and
● changes in estimate between grant date and settlement date, ie all
changes required to remeasure the transaction amount to equal the
amount paid out on settlement date.
BC253 In developing ED 2, the Board concluded that information about these two
components would be helpful to users of financial statements. For example,
users of financial statements regard the effects of remeasuring the liability as
having little predictive value. Therefore, the Board concluded that there should
be separate disclosure, either on the face of the income statement or in the
notes, of that portion of the expense recognised during each accounting period
that is attributable to changes in the estimated fair value of the liability between
grant date and settlement date.
BC254 However, some respondents to ED 2 disagreed with the proposed disclosure,

arguing that it was burdensome and inappropriate to require the entity to
account for the transaction as a cash-settled transaction and also calculate, for
the purposes of the disclosure, what the transaction amount would have been if
the arrangement was an equity-settled transaction.
BC255 The Board considered these comments and also noted that its decision to adopt
the SFAS 123 modified grant date method will make it more complex for entities
to determine the amount to disclose, because it will be necessary to distinguish
between the effects of forfeitures and the effects of fair value changes when
calculating the amount to disclose. The Board therefore concluded that the
disclosure should not be retained as a mandatory requirement, but instead
should be given as an example of an additional disclosure that entities should
consider providing. For example, entities with a significant amount of
cash-settled arrangements that experience significant share price volatility will
probably find that the disclosure is helpful to users of their financial statements.

IFRS 2 BC

for withholding tax obligations (2016 amendments)27
BC255A This section summarises the Board’s considerations when it finalised its
proposals to address the classification of a share-based payment transaction with
a net settlement feature for withholding tax obligations, contained in the
November 2014 ED.
BC255B Some jurisdictions have tax laws or regulations that oblige an entity to withhold
an amount for an employee’s tax obligation associated with a share-based
payment and to transfer that amount, normally in cash, to the tax authority on
the employee’s behalf. Those tax withholding obligations vary from jurisdiction
to jurisdiction. To fulfill this obligation, many plans include a net settlement
feature that permits or requires the entity to deduct from the total number of
equity instruments that it otherwise would deliver to the employee, the number
of equity instruments needed to equal the monetary value of the tax obligation
that the employee incurs as a result of the share-based payment transaction. The
entity transfers the amount withheld to the tax authority in cash or other assets.
BC255C The Board received a request to address the classification of such a share-based
payment transaction. Specifically, the Board was asked whether the portion of
the share-based payment that the entity withholds to satisfy the employee’s tax
obligation should be classified as cash-settled or equity-settled, if the transaction
would otherwise have been classified as an equity-settled share-based payment
transaction.
BC255D There were two views on this issue:
(a) View 1—The share-based payment has two components and each
component is accounted for consistently with its manner of settlement.
The portion that the entity withholds, and for which it incurs a liability
to transfer cash (or other assets) to the tax authority, should be
accounted for as a cash-settled share-based payment transaction. The
portion of the share-based payment that the entity settles by issuing
equity instruments to the employee is accounted for as an equity-settled
share-based payment.
(b) View 2—The entire share-based payment transaction should be classified
as an equity-settled share-based payment transaction, because the net
settlement should be viewed as if the entity had repurchased some of the
equity instruments issued to the employee (ie the entity would apply the
requirements in paragraph 29 of IFRS 2 for a repurchase of vested equity
instruments).
BC255E View 1 is based on the view that the entity is settling part of the share-based
payment transaction in cash; ie the entity has an obligation to transfer cash (or
other assets) to the tax authority to settle the employee’s tax obligation on the
employee’s behalf. Paragraph 34 of IFRS 2 requires a share-based payment
27 Paragraphs BC255A–BC255P are added as a consequence of amendments to IFRS 2 Classification and

Measurement of Share-based Payment Transactions, issued in June 2016.

IFRS 2 BC
transaction, or components of that transaction, to be classified as cash-settled if,

and to the extent that, the entity has incurred a liability to settle in cash or other
assets.
BC255F View 2 is based on the view that the entity is acting as an agent when it transfers
cash to the tax authority because the employee has the tax obligation. Under
this view, it is as if the entity settles the share-based payment transaction in its
entirety by issuing equity instruments to the employee. As a separate (yet
simultaneous) transaction, the entity repurchases a portion of those equity
instruments from the employee. The entity then remits the cash value of the
repurchased equity instruments to the tax authority on behalf of the employee
to settle the employee’s tax obligation in relation to the share-based payment.
BC255G The Board observed that paragraph 34 of IFRS 2 indicates that a share-based
payment transaction, or components of that transaction, should be classified as
a cash-settled share-based payment transaction if, and to the extent that, the
entity has incurred a liability to settle in cash or other assets. Consequently a
transaction with such a net settlement feature would be divided into two
components and each component would be accounted for consistently with how
it is settled (View 1). Consequently, the component that reflects the entity’s
obligation to pay cash to the tax authority would be accounted for as a
cash-settled share-based payment and the component that reflects the entity’s
obligation to issue equity instruments to the employee would be accounted for
as an equity-settled share-based payment.
BC255H The Board observed that the entity’s payment to the tax authority represents, in
substance, a payment to the counterparty (ie the employee) for the services
received from the counterparty, despite the fact that the entity transfers the
cash to the tax authority. This is because:
(a) when the entity pays the amount withheld to the tax authority on behalf
of the employee, the entity is acting as an agent for the employee;
however,
(b) the entity is also acting as a principal because it is fulfilling its obligation
to the employee (ie the counterparty in the share-based payment
transaction) to transfer cash (or other assets) for the goods or services
received.
BC255I Nevertheless, despite the requirements in paragraph 34, the Board decided to
make an exception with the result that the transaction would be classified as
equity-settled in its entirety if it would have been so classified had it not
included the net settlement feature. The Board decided that this exception
should be limited to the share-based payment transaction described in
paragraph 33E.
BC255J The Board decided to make the exception because it observed that dividing the
specific transaction described in paragraph 33E into two components could be a
significant operational challenge for preparers and thus impose cost in excess of
the benefit of distinguishing the two components. This is because dividing the
transaction into two components requires an entity to estimate changes that
affect the amount that the entity is required to withhold and remit to the tax
authority on the employee’s behalf in respect of the share-based payment. As

IFRS 2 BC
that estimate changes, the entity would need to reclassify a portion of the
share-based payment between cash-settled and equity-settled.
BC255K Respondents to the November 2014 ED observed that this ED did not specifically
address the accounting for the amount paid by the entity to the tax authority.
In response to these concerns the Board decided to explain how the
requirements of paragraph 29 of IFRS 2 would be applied. Paragraph 33G
explains that the accounting for the amount transferred to the tax authority in
respect of the employee’s tax obligation associated with the share-based
payment is consistent with the accounting described in paragraph 29 of this
Standard (ie as if the entity had repurchased the vested equity instruments).
This amendment does not address the recognition and measurement of any
liability to the tax authority.
BC255L The Board observed that withholding shares to fund the payment (in cash or
other assets) to the tax authority could result in a significant difference between
the amount paid and the amount at which the share-based payment was
measured. This is because the amount payable to the tax authority may reflect
settlement-date fair value, whereas the amount recognised for the equity-settled
share-based payment during the vesting period would reflect grant-date fair
value.
BC255M The Board further observed that it could be necessary to inform users about the
future cash flow effects associated with the share-based payment arrangement as
the settlement of the tax payment to the tax authority approaches. Therefore,
the Board decided to require an entity to disclose the estimated amount that it
expects to transfer to the tax authority when this disclosure is needed to inform
users about the future cash-flow effects associated with the share-based payment.
The Board did not specify the basis for calculating such an estimate.
BC255N The Board also received questions about the accounting when the number of
equity instruments withheld exceeds the number of equity instruments needed
to equal the monetary value of the employee’s tax obligation in respect of the
share-based payment. The Board observed that the classification exception (in
paragraph 33F) for the classification of a share-based payment award with a net
settlement feature would not apply to any equity instruments withheld in excess
of the number required to equal the monetary value of the employee’s tax
obligation. Consequently, when that excess amount is paid to the employee in
cash (or other assets), and consistent with existing requirements, the excess
number of equity instruments withheld should be separated and accounted for
as a cash-settled share-based payment.
BC255O Some respondents to the November 2014 ED asked the Board to clarify whether
the exception in paragraph 33F (ie relief from dividing the share-based payment
into its different components) applies to arrangements other than those in
which an entity is obliged by tax laws or regulations to withhold an employee’s
tax obligation. For example, an entity may not be obliged by tax laws or
regulations to withhold an amount for an employee’s tax obligation but it is the
entity’s normal practice to withhold such an amount. The Board noted that its
intent is to limit the exception to circumstances in which the tax laws or

IFRS 2 BC
regulations impose the obligation on the entity to withhold an amount for the
employee’s tax obligation associated with a share-based payment for the
exception in paragraph 33F to apply.
BC255P Furthermore, the Board added paragraph IG19A and IG Example 12B to the
Guidance on Implementing IFRS 2 to illustrate a share-based payment
transaction with a net settlement feature for withholding tax obligations.
Share-based payment transactions with cash alternatives
BC256 Under some employee share-based payment arrangements the employees can
choose to receive cash instead of shares or share options, or instead of exercising
share options. There are many possible variations of share-based payment
arrangements under which a cash alternative may be paid. For example, the
employees may have more than one opportunity to elect to receive the cash
alternative, eg the employees may be able to elect to receive cash instead of
shares or share options on vesting date, or elect to receive cash instead of
exercising the share options. The terms of the arrangement may provide the
entity with a choice of settlement, ie whether to pay the cash alternative instead
of issuing shares or share options on vesting date or instead of issuing shares
upon the exercise of the share options. The amount of the cash alternative may
be fixed or variable and, if variable, may be determinable in a manner that is
related, or unrelated, to the price of the entity’s shares.
BC257 The IFRS contains different accounting methods for cash-settled and
equity-settled share-based payment transactions. Hence, if the entity or the
employee has the choice of settlement, it is necessary to determine which
accounting method should be applied. The Board considered situations when
the terms of the arrangement provide (a) the employee with a choice of
settlement and (b) the entity with a choice of settlement.
The terms of the arrangement provide the employee with

a choice of settlement
BC258 Share-based payment transactions without cash alternatives do not give rise to
liabilities under the Framework, because the entity is not required to transfer
cash or other assets to the other party. However, this is not so if the contract
between the entity and the employee gives the employee the contractual right to
demand the cash alternative. In this situation, the entity has an obligation to
transfer cash to the employee and hence a liability exists. Furthermore, because
the employee has the right to demand settlement in equity instead of cash, the
employee also has a conditional right to equity instruments. Hence, on grant
date the employee was granted rights to a compound financial instrument, ie a
financial instrument that includes both debt and equity components.
BC259 It is common for the alternatives to be structured so that the fair value of the
cash alternative is always the same as the fair value of the equity alternative, eg
where the employee has a choice between share options and SARs. However, if
this is not so, then the fair value of the compound financial instrument will
usually exceed both the individual fair value of the cash alternative (because of
the possibility that the shares or share options may be more valuable than the

IFRS 2 BC
cash alternative) and that of the shares or options (because of the possibility that
the cash alternative may be more valuable than the shares or options).
BC260 Under IAS 32, a financial instrument that is accounted for as a compound
instrument is separated into its debt and equity components, by allocating the
proceeds received for the issue of a compound instrument to its debt and equity
components. This entails determining the fair value of the liability component
and then assigning the remainder of the proceeds received to the equity
component. This is possible if those proceeds are cash or non-cash consideration
whose fair value can be reliably measured. If that is not the case, it will be
necessary to estimate the fair value of the compound instrument itself.
BC261 The Board concluded that the compound instrument should be measured by
first valuing the liability component (the cash alternative) and then valuing the
equity component (the equity instrument)—with that valuation taking into
account that the employee must forfeit the cash alternative to receive the equity
instrument—and adding the two component values together. This is consistent
with the approach adopted in IAS 32, whereby the liability component is
measured first and the residual is allocated to equity. If the fair value of each
settlement alternative is always the same, then the fair value of the equity
component of the compound instrument will be zero and hence the fair value of
the compound instrument will be the same as the fair value of the liability
component.
BC262 The Board concluded that the entity should separately account for the services
rendered in respect of each component of the compound financial instrument,
to ensure consistency with the IFRS’s requirements for equity-settled and
cash-settled share-based payment transactions. Hence, for the debt component,
the entity should recognise the services received, and a liability to pay for those
services, as the employees render services, in the same manner as other
cash-settled share-based payment transactions (eg SARs). For the equity
component (if any), the entity should recognise the services received, and an
increase in equity, as the employees render services, in the same way as other
equity-settled share-based payment transactions.
BC263 The Board concluded that the liability should be remeasured to its fair value as
at the date of settlement, before accounting for the settlement of the liability.
This ensures that, if the entity settles the liability by issuing equity instruments,
the resulting increase in equity is measured at the fair value of the consideration
received for the equity instruments issued, being the fair value of the liability
settled.
BC264 The Board also concluded that, if the entity pays cash rather than issuing equity
instruments on settlement, any contributions to equity previously recognised in
respect of the equity component should remain in equity. By electing to receive
cash rather than equity instruments, the employee has surrendered his/her
rights to receive equity instruments. That event does not cause a change in net
assets and hence there is no change in total equity. This is consistent with the
Board’s conclusions on other lapses of equity instruments (see
paragraphs BC218–BC221).

IFRS 2 BC
The terms of the arrangement provide the entity with a

choice of settlement
BC265 For share-based payment transactions in which the terms of the arrangement
provide the entity with a choice of whether to settle in cash or by issuing equity
instruments, the entity would need first to determine whether it has an
obligation to settle in cash and therefore does not, in effect, have a choice of
settlement. Although the contract might specify that the entity can choose
whether to settle in cash or by issuing equity instruments, the Board concluded
that the entity will have an obligation to settle in cash if the choice of settlement
in equity has no commercial substance (eg because the entity is legally
prohibited from issuing shares), or if the entity has a past practice or a stated
policy of settling in cash, or generally settles in cash whenever the counterparty
asks for cash settlement. The entity will also have an obligation to settle in cash
if the shares issued (including shares issued upon the exercise of share options)
are redeemable, either mandatorily (eg upon cessation of employment) or at the
counterparty’s option.
BC266 During its redeliberations of the proposals in ED 2, the Board noted that the
classification as liabilities or equity of arrangements in which the entity appears
to have the choice of settlement differs from the classification under IAS 32,
which requires such an arrangement to be classified either wholly as a liability
(if the contract is a derivative contract) or as a compound instrument (if the
contract is a non-derivative contract). However, consistently with its conclusions
on the other differences between IFRS 2 and IAS 32 (see paragraphs
BC106–BC110), the Board decided to retain this difference, pending the outcome
of its longer-term Concepts project, which includes reviewing the definitions of
liabilities and equity.
BC267 Even if the entity is not obliged to settle in cash until it chooses to do so, at the
time it makes that election a liability will arise for the amount of the cash
payment. This raises the question how to account for the debit side of the entry.
It could be argued that any difference between (a) the amount of the cash
payment and (b) the total expense recognised for services received and
consumed up to the date of settlement (which would be based on the grant date
value of the equity settlement alternative) should be recognised as an
adjustment to the employee remuneration expense. However, given that the
cash payment is to settle an equity interest, the Board concluded that it is
consistent with the Framework to treat the cash payment as the repurchase of an
equity interest, ie as a deduction from equity. In this case, no adjustment to
remuneration expense is required on settlement.
BC268 However, the Board concluded that an additional expense should be recognised
if the entity chooses the settlement alternative with the higher fair value
because, given that the entity has voluntarily paid more than it needed to,
presumably it expects to receive (or has already received) additional services
from the employees in return for the additional value given.

IFRS 2 BC

(2009 amendments)28
BC268A This section summarises the Board’s considerations when finalising its proposals
contained in the exposure draft Group Cash-settled Share-based Payment Transactions
published in December 2007. Until the Board amended IFRS 2 in 2009, IFRIC 11
provided guidance on how an entity that received the goods or services from its
suppliers should account for some specific group equity-settled share-based
payment transactions in its separate or individual financial statements.
Therefore, the amendments issued in June 2009 incorporated substantially the
same consensus contained in IFRIC 11. The relevant matters the IFRIC
considered when reaching the consensus contained in IFRIC 11, as approved by
the Board, are also carried forward in this section.
BC268B The exposure draft published in December 2007 addressed two arrangements in
which the parent (not the entity itself) has an obligation to make the required
cash payments to the suppliers of the entity:
(a) Arrangement 1 – the supplier of the entity will receive cash payments
that are linked to the price of the equity instruments of the entity.
(b) Arrangement 2 – the supplier of the entity will receive cash payments
that are linked to the price of the equity instruments of the parent of the
entity.
BC268C The Board noted that like those group equity-settled share-based payment
transactions originally addressed in IFRIC 11, the two arrangements described in
paragraph BC268B did not meet the definition of either an equity-settled or a
cash-settled share-based payment transaction. The Board considered whether a
different conclusion should be reached for such arrangements merely because
they are cash-settled rather than equity-settled. Paragraphs BC22A–BC22F
explain the Board’s considerations in finalising the amendments to clarify the
scope of IFRS 2. The section below summarises the Board’s considerations in
finalising the amendments relating to the measurement of such transactions.
BC268D The Board noted that the arrangements described in paragraph BC268B are
(a) for the purpose of providing benefits to the employees of the subsidiary
in return for employee services, and
(b) share-based and cash-settled.

In addition, the Board noted that the guidance in paragraph 3 (now superseded
by paragraph 3A) already stated that when a shareholder transferred equity
instruments of the entity (or another group entity), the transaction would be
within the scope of IFRS 2 for the entity receiving the goods or services.
BC268E For these reasons, in the exposure draft published in December 2007 the Board
proposed to amend IFRS 2 and IFRIC 11 to require that, in the separate or
individual financial statements of the entity receiving the goods or services, the
entity should measure the employee services in accordance with the
28 Paragraphs BC268A–BC268O are added as a consequence of amendments to IFRS 2 Group Cash-settled

Share-based Payment Transactions issued in June 2009.

IFRS 2 BC
requirements applicable to cash-settled share-based payment transactions on the

basis of the fair value of the corresponding liability incurred by the parent.
Specifically, until the liability incurred by the parent is settled, the entity should
recognise any changes in the fair value of the liability in profit or loss and
changes in the entity’s equity as adjustments to contributions from the parent.
BC268F Because group cash-settled share-based payment transactions did not meet the
definition of either an equity-settled or a cash-settled share-based payment
transaction, some respondents did not object to measuring them as cash-settled
on the basis that the accounting reflects the form of the payment received by the
entity’s suppliers. However, many respondents questioned the basis for the
conclusions reached, citing reasons that included:
(a) the lack of a ‘push-down’ accounting concept in current IFRSs that would
require the parent’s costs incurred on behalf of the subsidiary to be
attributed to the subsidiary,
(b) conflicts with the Framework and with other IFRSs that prohibit
remeasurement of equity, and
(c) conflicts with the rationale in the Basis for Conclusions on IFRS 2 related
to the remeasurement of cash-settled share-based payment transactions
when the entity itself has no obligation to its suppliers.
BC268G The Board agreed with respondents that the entity receiving goods or services
has no obligation to distribute assets and that the parent’s settlement is an
equity contribution to the entity. The Board noted that regardless of how such
group transactions are structured or accounted for in the separate or individual
financial statements of the group entities, the accounting measurement in the
consolidated financial statements of the group will be the same. The Board also
noted that the share-based payment expense measured on grant date results in
the same fair value for both the entity receiving goods or services and the entity
settling the transaction, regardless of whether it is measured as equity-settled or
as cash-settled.
BC268H To address the comments received from respondents, the Board reviewed two
issues to determine the appropriate subsequent measurement in the separate or
individual financial statements of the entity receiving the goods or services. The
first issue was whether the entity should recognise in its separate or individual
financial statements:
(a) Approach 1 – an expense of the same amount as in the consolidated
financial statements, or
(b) Approach 2 – an expense measured by classifying the transaction as
equity-settled or cash-settled evaluated from its own perspective, which
may not always be the same as the amount recognised by the
consolidated group.
BC268I The Board noted that IFRSs have no broad-based guidance to address push-down
accounting or the accounting in separate or individual financial statements for
the allocation of costs among group entities. When addressing defined benefit
plans that share risks between entities under common control, IAS 19 requires
an expense to be recognised by the subsidiary on the basis of the cash amount

IFRS 2 BC
charged by the group plan. When there are no repayment arrangements, in the
separate or individual financial statements, the subsidiary should recognise a
cost equal to its contribution payable for the period. This is consistent with
Approach 2 described in paragraph BC268H.
BC268J The Board therefore decided to adopt Approach 2. [Refer: paragraph 43A] However,
the approach adopted in IFRS 2 is different from that in IAS 19 in that the entity
receiving goods or services in a share-based payment transaction recognises an
expense even when it has no obligation to pay cash or other assets. The Board
concluded that this approach is consistent with the expense attribution
principles underlying IFRS 2.
BC268K The Board noted that Approach 2 is consistent with the rationale that the
information provided by general purpose financial reporting should ‘reflect the
perspective of the entity rather than the perspective of the entity’s equity
investors ….’ because the reporting entity is deemed to have substance of its own,
separate from that of its owners. Approach 1 reflects the perspective of the
entity’s owners (the group) rather than the rights and obligations of the entity
itself.
BC268L The Board also noted that the consensus reached in IFRIC 11 reflected
Approach 1 described in paragraph BC268H for some scenarios and Approach 2
for others. The Board concluded that this was undesirable and decided that
there should be a single approach to measurement that would apply in all
situations.
BC268M The second issue the Board considered was identifying the criteria for classifying
group share-based payment transactions as equity-settled or cash-settled. How a
transaction is classified determines the subsequent measurement in the separate
or individual financial statements of both the entity receiving the goods or
services and the entity settling the transaction, if different. The Board reviewed
the two classification criteria set out in the consensus in IFRIC 11 for group
equity-settled transactions:
(a) based on the nature of the award given to the employees—therefore,

classified as equity-settled if the entity’s own equity instruments are given,
regardless of which entity grants or settles it; otherwise classified as
cash-settled even when the entity receiving the goods or services has no
obligation.
(b) based on the entity’s own rights and obligations—therefore, classified as

cash-settled if the entity has an obligation to settle, regardless of the
nature of the consideration; otherwise classified as equity-settled.
BC268N The Board noted that, on its own, either of the two criteria described above
would not consistently reflect the entity’s perspective when assessing the
appropriate classification for transactions described in paragraph BC268B. The
Board concluded that the entity should consider both criteria in IFRIC 11,
ie equity-settled when suppliers are given the entity’s own equity instruments or
when the entity receiving the goods or services has no obligation to settle and
cash-settled in all other circumstances. The Board also noted that when the entity
receiving goods or services has no obligation to deliver cash or other assets to its
suppliers, accounting for the transaction as cash-settled in its separate or

IFRS 2 BC
individual financial statements is not appropriate. The equity-settled basis is

more consistent with the principles and rationales in both IFRS 2 and IFRIC 11.
Therefore, the Board decided that the entity receiving the goods or services
should classify both of the group cash-settled share-based payment transactions
described in paragraph BC268B as equity-settled in its separate or individual
financial statements.
[Refer: paragraph 43B]
BC268O This conclusion is the main change to the proposals in the exposure draft. The
Board concluded that the broader principles it developed during its
redeliberations addressed the three main concerns expressed by respondents
described in paragraph BC268F. Those principles apply to all group share-based
payment transactions, whether they are cash-settled or equity-settled. The
Board’s conclusions do not result in any changes to the guidance in IFRIC 11 that
addressed similar group equity-settled share-based payment transactions. Other
than the change described above, the Board reaffirmed the proposals in the
exposure draft. Therefore, the Board concluded that it was not necessary to
re-expose the amendments before finalising them.
Transfers of employees between group entities

(paragraphs B59–B61)
BC268P When it developed the consensus in IFRIC 11, the IFRIC noted that some
share-based payment arrangements involve a parent granting rights to the
employees of more than one subsidiary with a vesting condition that requires
the employees to work for the group for a particular period. Sometimes, an
employee of one subsidiary transfers employment to another subsidiary during
the vesting period, without the employee’s rights under the original share-based
payment arrangements being affected.
BC268Q The IFRIC noted that the terms of the original share-based payment arrangement
require the employees to work for the group, rather than for a particular group
entity. Thus, the IFRIC concluded that the change of employment should not
result in a new grant of equity instruments in the financial statements of the
subsidiary to which the employees transferred employment. The subsidiary to
which the employee transfers employment should measure the fair value of the
services received from the employee by reference to the fair value of the equity
instruments at the date those equity instruments were originally granted to the
employee by the parent. For the same reason, the IFRIC concluded that the
transfer itself should not be treated as an employee’s failure to satisfy a vesting
condition. Thus, the transfer should not trigger any reversal of the charge
previously recognised in respect of the services received from the employee in
the separate or individual financial statements of the subsidiary from which the
employee transfers employment.
BC268R The IFRIC noted that paragraph 19 of the IFRS requires the cumulative amount
recognised for goods or services as consideration for the equity instruments
granted to be based on the number of equity instruments that eventually vest.
Accordingly, on a cumulative basis, no amount is recognised for goods or
services if the equity instruments do not vest because of failure to satisfy a
vesting condition other than a market condition as defined in Appendix A.
Applying the principles in paragraph 19, the IFRIC concluded that when the

IFRS 2 BC
employee fails to satisfy a vesting condition other than a market condition, the
services from that employee recognised in the financial statements of each
group entity during the vesting period should be reversed.
BC268S When finalising the 2009 amendments to IFRS 2 for group share-based payment
transactions, the Board concluded that the guidance in IFRIC 11 should apply to
all group share-based payment transactions classified as equity-settled in the
entity’s separate or individual financial statements in accordance with
paragraphs 43A–43C.
Overall conclusions on accounting for employee share options
BC269 The Board first considered all major issues relating to the recognition and
measurement of share-based payment transactions, and reached conclusions on
those issues. It then drew some overall conclusions, particularly on the
treatment of employee share options, which is one of the most controversial
aspects of the project. In arriving at those conclusions, the Board considered the
following issues:
● convergence with US GAAP
● recognition versus disclosure of expenses arising from employee

share-based payment transactions
● reliability of measurement of the fair value of employee share options.
Convergence with US GAAP

BC270 Some respondents to the Discussion Paper and ED 2 urged the Board to develop
an IFRS that was based on existing requirements under US generally accepted
accounting principles (US GAAP).
BC271 More specifically, respondents urged the Board to develop a standard based on
SFAS 123. However, given that convergence of accounting standards was
commonly given as a reason for this suggestion, the Board considered US GAAP
overall, not just one aspect of it. The main pronouncements of US GAAP on
share-based payment are Accounting Principles Board Opinion No. 25 Accounting
for Stock Issued to Employees, and SFAS 123.
APB 25
BC272 APB 25 was issued in 1972. It deals with employee share plans only, and draws a
distinction between non-performance-related (fixed) plans and
performance-related and other variable plans.
BC273 For fixed plans, an expense is measured at intrinsic value (ie the difference
between the share price and the exercise price), if any, at grant date. Typically,
this results in no expense being recognised for fixed plans, because most share
options granted under fixed plans are granted at the money. For
performance-related and other variable plans, an expense is measured at
intrinsic value at the measurement date. The measurement date is when both
the number of shares or share options that the employee is entitled to receive
and the exercise price are fixed. Because this measurement date is likely to be

IFRS 2 BC
much later than grant date, any expense is subject to uncertainty and, if the
share price is increasing, the expense for performance-related plans would be
larger than for fixed plans.
BC274 In SFAS 123, the FASB noted that APB 25 is criticised for producing anomalous
results and for lacking any underlying conceptual rationale. For example, the
requirements of APB 25 typically result in the recognition of an expense for
performance-related share options but usually no expense is recognised for fixed
share options. This result is anomalous because fixed share options are usually
more valuable at grant date than performance-related share options. Moreover,
the omission of an expense for fixed share options impairs the quality of
financial statements:
The resulting financial statements are less credible than they could be, and the
financial statements of entities that use fixed employee share options extensively
are not comparable to those of entities that do not make significant use of fixed
options. (SFAS 123, paragraph 56)
BC275 The Discussion Paper, in its discussion of US GAAP, noted that the different
accounting treatments for fixed and performance-related plans also had the
perverse effect of discouraging entities from setting up performance-related
employee share plans.
SFAS 123
BC276 SFAS 123 was issued in 1995. It requires recognition of share-based payment
transactions with parties other than employees, based on the fair value of the
shares or share options issued or the fair value of the goods or services received,
whichever is more reliably measurable. Entities are also encouraged, but not
required, to apply the fair value accounting method in SFAS 123 to share-based
payment transactions with employees. Generally speaking, SFAS 123 draws no
distinction between fixed and performance-related plans.
BC277 If an entity applies the accounting method in APB 25 rather than that in
SFAS 123, SFAS 123 requires disclosures of pro forma net income and earnings
per share in the annual financial statements, as if the standard had been
applied. Recently, a significant number of major US companies have voluntarily
adopted the fair value accounting method in SFAS 123 for transactions with
employees.
BC278 The FASB regards SFAS 123 as superior to APB 25, and would have preferred
recognition based on the fair value of employee options to be mandatory, not
optional. SFAS 123 makes it clear that the FASB decided to permit the
disclosure-based alternative for political reasons, not because it thought that it
was the best accounting solution:
… the Board … continues to believe that disclosure is not an adequate substitute for
recognition of assets, liabilities, equity, revenues and expenses in financial
statements … The Board chose a disclosure-based solution for stock-based employee
compensation to bring closure to the divisive debate on this issue–not because it
believes that solution is the best way to improve financial accounting and
reporting.
(SFAS 123, paragraphs 61 and 62)

IFRS 2 BC
BC279 Under US GAAP, the accounting treatment of share-based payment transactions

differs, depending on whether the other party to the transaction is an employee
or non-employee, and whether the entity chooses to apply SFAS 123 or APB 25 to
transactions with employees. Having a choice of accounting methods is
generally regarded as undesirable. Indeed, the Board recently devoted much
time and effort to developing improvements to existing international standards,
one of the objectives of which is to eliminate choices of accounting methods.
BC280 Research in the US demonstrates that choosing one accounting method over the
other has a significant impact on the reported earnings of US entities. For
example, research by Bear Stearns and Credit Suisse First Boston on the S&P 500
shows that, had the fair value measurement method in SFAS 123 been applied
for the purposes of recognising an expense for employee stock-based
compensation, the earnings of the S&P 500 companies would have been
significantly lower, and that the effect is growing. The effect on reported
earnings is substantial in some sectors, where companies make heavy use of
share options.
BC281 The Canadian Accounting Standards Board (AcSB) recently completed its project
on share-based payment. In accordance with the AcSB’s policy of harmonising
Canadian standards with those in the US, the AcSB initially proposed a standard
that was based on US GAAP, including APB 25. After considering respondents’
comments, the AcSB decided to delete the guidance drawn from APB 25. The
AcSB reached this decision for various reasons, including that, in its view, the
intrinsic value method is flawed. Also, incorporating the requirements of
APB 25 into an accounting standard would result in preparers of financial
statements incurring substantial costs for which users of financial statements
would derive no benefit—entities would spend a great deal of time and effort on
understanding the rules and then redesigning option plans, usually by deleting
existing performance conditions, to avoid recognising an expense in respect of
such plans, thereby producing no improvement in the accounting for share
option plans.
BC282 The Canadian standard was initially consistent with SFAS 123. That included
permitting a choice between fair value-based accounting for employee
stock-based compensation expense in the income statement and disclosure of
pro forma amounts in the notes to both interim and annual financial
statements. However, the AcSB recently amended its standard to remove the
choice between recognition and disclosure, and therefore expense recognition is
mandatory for financial periods beginning on or after 1 January 2004.
BC283 Because APB 25 contains serious flaws, the Board concluded that basing an IFRS
on it is unlikely to represent much, if any, improvement in financial reporting.
Moreover, the perverse effects of APB 25, particularly in discouraging
performance-related share option plans, may cause economic distortions.
Accounting standards are intended to be neutral, not to give favourable or
unfavourable accounting treatments to particular transactions to encourage or
discourage entities from entering into those transactions. APB 25 fails to
achieve that objective. Performance-related employee share plans are common
in Europe (performance conditions are often required by law) and in other parts
of the world outside the US, and investors are calling for greater use of

IFRS 2 BC
performance conditions. Therefore, the Board concluded that introducing an

accounting standard based on APB 25 would be inconsistent with its objective of
developing high quality accounting standards.
BC284 That leaves SFAS 123. Comments from the FASB, in the SFAS 123 Basis for
Conclusions, and from the Canadian AcSB when it developed a standard based
on SFAS 123, indicate that both standard-setters regard it as inadequate, because
it permits a choice between recognition and disclosure. (This issue is discussed
further below.) The FASB added to its agenda in March 2003 a project to review
US accounting requirements on share-based payment, including removing the
disclosure alternative in SFAS 123, so that expense recognition is mandatory.
The Chairman of the FASB commented:
Recent events have served as a reminder to all of us that clear, credible and
comparable financial information is essential to the health and vitality of our
capital market system. In the wake of the market meltdown and corporate
reporting scandals, the FASB has received numerous requests from individual and
institutional investors, financial analysts and many others urging the Board to
mandate the expensing of the compensation cost relating to employee stock
options … While a number of major companies have voluntarily opted to reflect
these costs as an expense in reporting their earnings, other companies continue to
show these costs in the footnotes to their financial statements. In addition, a move
to require an expense treatment would be consistent with the FASB’s commitment
to work toward convergence between U.S. and international accounting
standards. In taking all of these factors into consideration, the Board concluded
that it was critical that it now revisit this important subject. (FASB News Release,
12 March 2003)
BC285 During the Board’s redeliberations of the proposals in ED 2, the Board worked
with the FASB to achieve convergence of international and US standards, to the
extent possible, bearing in mind that the FASB was at an earlier stage in its
project—the FASB was developing an Exposure Draft to revise SFAS 123 whereas
the IASB was finalising its IFRS. The Board concluded that, although
convergence is an important objective, it would not be appropriate to delay the
issue of the IFRS, because of the pressing need for a standard on share-based
payment, as explained in paragraphs BC2–BC5. In any event, at the time the
IASB concluded its deliberations, a substantial amount of convergence had been
achieved. For example, the FASB agreed with the IASB that all share-based
payment transactions should be recognised in the financial statements,
measured on a fair value measurement basis, including transactions in which
share options are granted to employees. Hence, the FASB agreed that the
disclosure alternative in SFAS 123 should be eliminated.
BC286 The IASB and FASB also agreed that, once both boards have issued final
standards on share-based payment, the two boards will consider undertaking a
convergence project, with the objective of eliminating any remaining areas of
divergence between international and US standards on this topic.
Recognition versus disclosure

BC287 A basic accounting concept is that disclosure of financial information is not an
adequate substitute for recognition in the financial statements. For example,
the Framework states:

IFRS 2 BC
Items that meet the recognition criteria should be recognised in the balance sheet
or income statement. The failure to recognise such items is not rectified by
disclosure of the accounting policies used nor by notes or explanatory material.
(paragraph 82)29
BC288 A key aspect of the recognition criteria is that the item can be measured with
reliability. This issue is discussed further below. Therefore, this discussion
focuses on the ‘recognition versus disclosure’ issue in principle, not on
measurement reliability. Once it has been determined that an item meets the
criteria for recognition in the financial statements, failing to recognise it is
inconsistent with the basic concept that disclosure is not an adequate substitute
for recognition.
BC289 Some disagree with this concept, arguing that it makes no difference whether
information is recognised in the financial statements or disclosed in the notes.
Either way, users of financial statements have the information they require to
make economic decisions. Hence, they believe that note disclosure of expenses
arising from particular employee share-based payment transactions (ie those
involving awards of share options to employees), rather than recognition in the
income statement, is acceptable.
BC290 The Board did not accept this argument. The Board noted that if note disclosure
is acceptable, because it makes no difference whether the expense is recognised
or disclosed, then recognition in the financial statements must also be
acceptable for the same reason. If recognition is acceptable, and recognition
rather than mere disclosure accords with the accounting principles applied to
all other expense items, it is not acceptable to leave one particular expense item
out of the income statement.
BC291 The Board also noted that there is significant evidence that there is a difference
between recognition and disclosure. First, academic research indicates that
whether information is recognised or merely disclosed affects market prices
(eg Barth, Clinch and Shibano, 2003).30 If information is disclosed only in the
notes, users of financial statements have to expend time and effort to become
sufficiently expert in accounting to know (a) that there are items that are not
recognised in the financial statements, (b) that there is information about those
items in the notes, and (c) how to assess the note disclosures. Because gaining
that expertise comes at a cost, and not all users of financial statements will
become accounting experts, information that is merely disclosed may not be
fully reflected in share prices.
BC292 Second, both preparers and users of financial statements appear to agree that
there is an important difference between recognition and disclosure. Users of
financial statements have strongly expressed the view that all forms of
share-based payment, including employee share options, should be recognised
in the financial statements, resulting in the recognition of an expense when the
goods or services received are consumed, and that note disclosure alone is
inadequate. Their views have been expressed by various means, including:
29 now paragraph 4.37 of the Conceptual Framework

30 M E Barth, G Clinch and T Shibano. 2003. Market Effects of Recognition and Disclosure. Journal of
Accounting Research 41(4): 581–609.

IFRS 2 BC
(a) users’ responses to the Discussion Paper and ED 2.

(b) the 2001 survey by the Association for Investment Management and
Research of analysts and fund managers—83 per cent of survey
respondents said the accounting method for all share-based payment
transactions should require recognition of an expense in the income
statement.
(c) public comments by users of financial statements, such as those reported
in the press or made at recent US Senate hearings.
BC293 Preparers of financial statements also see a major difference between

recognition and disclosure. For example, some preparers who responded to the
Discussion Paper and ED 2 were concerned that unless expense recognition is
required in all countries, entities that are required to recognise an expense
would be at a competitive disadvantage compared with entities that are
permitted a choice between recognition and disclosure. Comments such as
these indicate that preparers of financial statements regard expense recognition
as having consequences that are different from those of disclosure.
Reliability of measurement
BC294 One reason commonly given by those who oppose the recognition of an expense
arising from transactions involving grants of share options to employees is that
it is not possible to measure those transactions reliably.
BC295 The Board discussed these concerns about reliability, after first putting the issue
into context. For example, the Board noted that when estimating the fair value
of share options, the objective is to measure that fair value at the measurement
date, not the value of the underlying share at some future date. Some regard the
fair value estimate as inherently uncertain because it is not known, at the
measurement date, what the final outcome will be, ie how much the gain on
exercise (if any) will be. However, the valuation does not attempt to estimate the
future gain, only the amount that the other party would pay to obtain the right
to participate in any future gains. Therefore, even if the share option expires
worthless or the employee makes a large gain on exercise, this does not mean
that the grant date estimate of the fair value of that option was unreliable or
wrong.
BC296 The Board also noted that accounting often involves making estimates, and
therefore reporting an estimated fair value is not objectionable merely because
that amount represents an estimate rather than a precise measure. Examples of
other estimates made in accounting, which may have a material effect on the
income statement and the balance sheet, include estimates of the collectability
of doubtful debts, estimates of the useful life of fixed assets and the pattern of
their consumption, and estimates of employee pension liabilities.
BC297 However, some argue that including in the financial statements an estimate of
the fair value of employee share options is different from including other
estimates, because there is no subsequent correction of the estimate. Other
estimates, such as employee pension costs, will ultimately be revised to equal
the amount of the cash paid out. In contrast, because equity is not remeasured,
if the estimated fair value of employee share options is recognised, there is no

IFRS 2 BC
remeasurement of the fair value estimate—unless exercise date measurement is

used—so any estimation error is permanently embedded in the financial
statements.
BC298 The FASB considered and rejected this argument in developing SFAS 123. For
example, for employee pension costs, the total cost is never completely trued up
unless the scheme is terminated, the amount attributed to any particular year is
never trued up, and it can take decades before the amounts relating to particular
employees are trued up. In the meantime, users of financial statements have
made economic decisions based on the estimated costs.
BC299 Moreover, the Board noted that if no expense (or an expense based on intrinsic
value only, which is typically zero) is recognised in respect of employee share
options, that also means that there is an error that is permanently embedded in
the financial statements. Reporting zero (or an amount based on intrinsic value,
if any) is never trued up.
BC300 The Board also considered the meaning of reliability. Arguments about whether
estimates of the fair value of employee share options are sufficiently reliable
focus on one aspect of reliability only—whether the estimate is free from
material error. The Framework, in common with the conceptual frameworks of
other accounting standard-setters, makes it clear that another important aspect
of reliability is whether the information can be depended upon by users of
financial statements to represent faithfully what it purports to represent.
Therefore, in assessing whether a particular accounting method produces
reliable financial information, it is necessary to consider whether that
information is representationally faithful. This is one way in which reliability is
linked to another important qualitative characteristic of financial information,
relevance.
BC301 For example, in the context of share-based payment, some commentators

advocate measuring employee share options at intrinsic value rather than fair
value, because intrinsic value is regarded as a much more reliable measure.
Whether intrinsic value is a more reliable measure is doubtful—it is certainly
less subject to estimation error, but is unlikely to be a representationally faithful
measure of remuneration. Nor is intrinsic value a relevant measure, especially
when measured at grant date. Many employee share options are issued at the
money, so have no intrinsic value at grant date. A share option with no intrinsic
value consists entirely of time value. If a share option is measured at intrinsic
value at grant date, zero value is attributed to the share option. Therefore, by
ignoring time value, the amount attributed to the share option is 100 per cent
understated.
BC302 Another qualitative characteristic is comparability. Some argue that, given the
uncertainties relating to estimating the fair value of employee share options, it
is better for all entities to report zero, because this will make financial
statements more comparable. They argue that if, for example, for two entities
the ‘true’ amount of expense relating to employee share options is CU500,000,
and estimation uncertainties cause one entity to report CU450,000 and the other
to report CU550,000, the two entities’ financial statements would be more
comparable if both reported zero, rather than these divergent figures.

IFRS 2 BC
BC303 However, it is unlikely that any two entities will have the same amount of
employee share-based remuneration expense. Research (eg by Bear Stearns and
Credit Suisse First Boston) indicates that the expense varies widely from industry
to industry, from entity to entity, and from year to year. Reporting zero rather
than an estimated amount is likely to make the financial statements much less
comparable, not more comparable. For example, if the estimated employee
share-based remuneration expense of Company A, Company B and Company C is
CU10,000, CU100,000 and CU1,000,000 respectively, reporting zero for all three
companies will not make their financial statements comparable.
BC304 In the context of the foregoing discussion of reliability, the Board addressed the
question whether transactions involving share options granted to employees can
be measured with sufficient reliability for the purpose of recognition in the
financial statements. The Board noted that many respondents to the Discussion
Paper asserted that this is not possible. They argue that option pricing models
cannot be applied to employee share options, because of the differences between
employee options and traded options.
BC305 The Board considered these differences, with the assistance of the project’s
Advisory Group and other experts, and has reached conclusions on how to take
account of these differences when estimating the fair value of employee share
options, as explained in paragraphs BC145–BC199. In doing so, the Board noted
that the objective is to measure the fair value of the share options, ie an estimate
of what the price of those equity instruments would have been on grant date in
an arm’s length transaction between knowledgeable, willing parties. The
valuation methodology applied should therefore be consistent with valuation
methodologies that market participants would use for pricing similar financial
instruments, and should incorporate all factors and assumptions that
knowledgeable, willing market participants would consider in setting the price.
BC306 Hence, factors that a knowledgeable, willing market participant would not
consider in setting the price of an option are not relevant when estimating the
fair value of shares, share options or other equity instruments granted. For
example, for share options granted to employees, factors that affect the value of
the option from the individual employee’s perspective only are not relevant to
estimating the price that would be set by a knowledgeable, willing market
participant. Many respondents’ comments about measurement reliability, and
the differences between employee share options and traded options, often
focused on the value of the option from the employee’s perspective. Therefore,
the Board concluded that the IFRS should emphasise that the objective is to
estimate the fair value of the share option, not an employee-specific value.
BC307 The Board noted that there is evidence to support a conclusion that it is possible
to make a reliable estimate of the fair value of employee share options. First,
there is academic research to support this conclusion (eg Carpenter 1998,
Maller, Tan and Van De Vyver 2002).31 Second, users of financial statements
regard the estimated fair values as sufficiently reliable for recognition in the
financial statements. Evidence of this can be found in a variety of sources, such
31 J N Carpenter. 1998. The exercise and valuation of executive stock options. Journal of Financial
Economics 48: 127–158. R A Maller, R Tan and M Van De Vyver. 2002. How Might Companies Value
ESOs? Australian Accounting Review 12 (1): 11–24.

IFRS 2 BC
as the comment letters received from users of financial statements who

responded to the Discussion Paper and ED 2. Users’ views are important,
because the objective of financial statements is to provide high quality,
transparent and comparable information to help users make economic
decisions. In other words, financial statements are intended to meet the needs
of users, rather than preparers or other interest groups. The purpose of setting
accounting standards is to ensure that, wherever possible, the information
provided in the financial statements meets users’ needs. Therefore, if the people
who use the financial statements in making economic decisions regard the fair
value estimates as sufficiently reliable for recognition in the financial
statements, this provides strong evidence of measurement reliability.
BC308 The Board also noted that, although the FASB decided to permit a choice
between recognition and disclosure of expenses arising from employee
share-based payment transactions, it did so for non-technical reasons, not
because it agreed with the view that reliable measurement was not possible:
The Board continues to believe that use of option-pricing models, as modified in

this statement, will produce estimates of the fair value of stock options that are
sufficiently reliable to justify recognition in financial statements. Imprecision in
those estimates does not justify failure to recognize compensation cost stemming
from employee stock options. That belief underlies the Board’s encouragement to
entities to adopt the fair value based method of recognizing stock-based employee
compensation cost in their financial statements. (SFAS 123, Basis for Conclusions,
paragraph 117)
BC309 In summary, if expenses arising from grants of share options to employees are
omitted from the financial statements, or recognised using the intrinsic value
method (which typically results in zero expense) or the minimum value method,
there will be a permanent error embedded in the financial statements. So the
question is, which accounting method is more likely to produce the smallest
amount of error and the most relevant, comparable information—a fair value
estimate, which might result in some understatement or overstatement of the
associated expense, or another measurement basis, such as intrinsic value
(especially if measured at grant date), that will definitely result in substantial
understatement of the associated expense?
BC310 Taking all of the above into consideration, the Board concluded that, in virtually
all cases, the estimated fair value of employee share options at grant date can be
measured with sufficient reliability for the purposes of recognising employee
share-based payment transactions in the financial statements. The Board
therefore concluded that, in general, the IFRS on share-based payment should
require a fair value measurement method to be applied to all types of
share-based payment transactions, including all types of employee share-based
payment. Hence, the Board concluded that the IFRS should not allow a choice
between a fair value measurement method and an intrinsic value measurement
method, and should not permit a choice between recognition and disclosure of
expenses arising from employee share-based payment transactions.

IFRS 2 BC
Transitional provisions

BC310A The Board noted a potential difficulty when an entity retrospectively applies the
amendments made by Group Cash-settled Share-based Payment Transactions issued in
June 2009. An entity might not have accounted for some group share-based
payment transactions in accordance with IFRS 2 in its separate or individual
financial statements. In a few cases, an entity that settles a group share-based
payment transaction may have to apply hindsight to measure the fair value of
awards now required to be accounted for as cash-settled. However, the Board
noted that such transactions would have been accounted for in accordance with
IFRS 2 in the group’s consolidated financial statements. For these reasons and
those outlined in paragraph BC268G, if the information necessary for
retrospective application is not available, the Board decided to require an entity
to use amounts previously recognised in the group’s consolidated financial
statements when applying the new requirements retrospectively in the entity’s
separate or individual financial statements.
[Refer: paragraph 63]
Consequential amendments to other Standards
Tax effects of share-based payment transactions

BC311 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.
BC312 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. 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. The Standard 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 (IAS 12, paragraph 9).
BC313 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 under IAS 12. Under that
Standard, 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 (IAS 12,
paragraph 24).

IFRS 2 BC
BC314 Whilst IAS 12 does not discuss reverse situations, the same logic applies. For
example, suppose the entity is able to claim a tax deduction for the total
transaction amount at the date of grant but the entity recognises an expense
arising from that transaction over the vesting period. Applying the guidance in
IAS 12 suggests that this should be accounted for as a taxable temporary
difference, and hence a deferred tax liability should be recognised.
BC315 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, eg intrinsic value might be used for tax purposes and fair value for
accounting purposes. Similarly, the measurement date might differ. For
example, US entities receive a tax deduction based on intrinsic value at the date
of exercise in respect of some share options, whereas for accounting purposes an
entity 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, eg differences in
the treatment of forfeitures or different valuation methodologies applied.
BC316 SFAS 123 requires that, if the amount of the tax deduction exceeds the total
expense recognised in the financial statements, the tax benefit for the excess
deduction should be recognised as additional paid-in capital, ie as a direct credit
to equity. Conversely, if the tax deduction is less than the total expense
recognised for accounting purposes, the write-off of the related deferred tax
asset in excess of the benefits of the tax deduction is recognised in the income
statement, except to the extent that there is remaining additional paid-in capital
from excess tax deductions from previous share-based payment transactions
(SFAS 123, paragraph 44).
BC317 At first sight, it may seem questionable to credit or debit directly to equity
amounts that relate to differences between the amount of the tax deduction and
the total recognised expense. The tax effects of any such differences would
ordinarily flow through the income statement. However, some argue that the
approach in SFAS 123 is appropriate if the reason for the difference between the
amount of the tax deduction and the recognised expense is that a different
measurement date is applied.
BC318 For example, suppose 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 employee (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).
BC319 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 in
IAS 12 to account for the tax effects of transactions or events in the same way as
the entity accounts for those transactions or events themselves. If the tax

IFRS 2 BC
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.
BC320 Others disagree, arguing that the tax deduction relates to employee
remuneration expense, ie 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. A further
argument is that this treatment is consistent with the Framework, because
reporting amounts directly in equity would be inappropriate, given that the
government is not an owner of the entity.
BC321 The Board 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 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 (eg the effects
of early exercise might be ignored when valuing an option for tax purposes).
The Board saw no reason why, in this situation, the excess tax benefits should be
credited to equity.
BC322 In developing ED 2, the Board concluded that the tax effects of share-based
payment transactions should be recognised in the income statement by being
taken into account in the determination of tax expense. It agreed that this
should be explained in the form of a worked example in a consequential
amendment to IAS 12.
[Refer: Appendix B accompanying IAS 12—Illustrative computations and presentation
example 5—Share-based payment transactions]
BC323 During the Board’s redeliberation of the proposals in ED 2, the Board

reconsidered the points above, and concluded that the tax effects of an
equity-settled share-based payment transaction should be allocated between the
income statement and equity. The Board then considered how this allocation
should be made and related issues, such as the measurement of the deferred tax
asset.
BC324 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 Board concluded that 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.
BC325 These conclusions are consistent with the proposals in ED 2 concerning the
measurement of the deferred tax asset. However, this approach differs from
SFAS 123, which measures the deferred tax asset on the basis of the cumulative
recognised expense. The Board rejected the SFAS 123 method of measuring the
deferred tax asset because it is inconsistent with IAS 12. As noted above, under

IFRS 2 BC
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. 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 employees, and the
entity 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. By basing the
measurement of the deferred tax asset on the cumulative expense, the SFAS 123
method is likely to result in the understatement or overstatement of the
deferred tax asset. In some situations, such as when share options are
significantly out of the money, SFAS 123 requires the entity to continue to
recognise a deferred tax asset even when the possibility of the entity recovering
that asset is remote. Continuing to recognise a deferred tax asset in this
situation is not only inconsistent with IAS 12, it is inconsistent with the
definition of an asset in the Framework, and the requirements of other IFRSs for
the recognition and measurement of assets, including requirements to assess
impairment.
BC326 The Board also concluded that:
(a) if the tax deduction received (or expected to be received, measured as

described in paragraph BC324) is less than or equal to the cumulative
expense, the associated tax benefits received (or expected to be received)
should be recognised as tax income and included in profit or loss for the
period.
(b) if the tax deduction received (or expected to be received, measured as

described in paragraph BC324) exceeds the cumulative expense, the
excess associated tax benefits received (or expected to be received) should
be recognised directly in equity.
BC327 The above allocation method is similar to that applied in SFAS 123, with some
exceptions. First, the above allocation method ensures that the total tax benefits
recognised in the income statement in respect of a particular share-based
payment transaction do not exceed the tax benefits ultimately received. The
Board disagreed with the approach in SFAS 123, which sometimes results in the
total tax benefits recognised in the income statement exceeding the tax benefits
ultimately received because, in some situations, SFAS 123 permits the
unrecovered portion of the deferred tax asset to be written off to equity.
BC328 Second, the Board concluded that the above allocation method should be
applied irrespective of why the tax deduction received (or expected to be
received) differs from the cumulative expense. The SFAS 123 method is based on
US tax legislation, under which the excess tax benefits credited to equity (if any)
arise from the use of a later measurement date for tax purposes. The Board
agreed with respondents who commented that the accounting treatment must
be capable of being applied in various tax jurisdictions. The Board was
concerned that requiring entities to examine the reasons why there is a
difference between the tax deduction and the cumulative expense, and then
account for the tax effects accordingly, would be too complex to be applied
consistently across a wide range of different tax jurisdictions.

IFRS 2 BC
BC329 The Board noted that it might need to reconsider its conclusions on accounting
for the tax effects of share-based payment transactions in the future, for
example, if the Board reviews IAS 12 more broadly.
Accounting for own shares held

BC330 IAS 32 requires the acquisition of treasury shares to be deducted from equity,
and no gain or loss is to be recognised on the sale, issue or cancellation of
treasury shares. Consideration received on the subsequent sale or issue of
treasury shares is credited to equity.
BC331 This is consistent with the Framework. The repurchase of shares and their
subsequent reissue or transfer to other parties are transactions with equity
participants that should be recognised as changes in equity. In accounting
terms, there is no difference between shares that are repurchased and cancelled,
and shares that are repurchased and held by the entity. In both cases, the
repurchase involves an outflow of resources to shareholders (ie a distribution),
thereby reducing shareholders’ investment in the entity. Similarly, there is no
difference between a new issue of shares and an issue of shares previously
repurchased and held in treasury. In both cases, there is an inflow of resources
from shareholders, thereby increasing shareholders’ investment in the entity.
Although accounting practice in some jurisdictions treats own shares held as
assets, this is not consistent with the definition of assets in the Framework and
the conceptual frameworks of other standard-setters, as explained in the
Discussion Paper (footnote to paragraph 4.7 of the Discussion Paper, reproduced
earlier in the footnote to paragraph BC73).
BC332 Given that treasury shares are treated as an asset in some jurisdictions, it will be
necessary to change that accounting treatment when this IFRS is applied,
because otherwise an entity would be faced with two expense items—an expense
arising from the share-based payment transaction (for the consumption of goods
and services received as consideration for the issue of an equity instrument) and
another expense arising from the write-down of the ‘asset’ for treasury shares
issued or transferred to employees at an exercise price that is less than their
purchase price.
BC333 Hence, the Board concluded that the requirements in the relevant paragraphs of
IAS 32 regarding treasury shares should also be applied to treasury shares
purchased, sold, issued or cancelled in connection with employee share plans or
other share-based payment arrangements.
Definition of vesting condition (2013 amendments)
BC334 The Board decided to clarify the definition of ‘vesting conditions’ in IFRS 2 to
ensure the consistent classification of conditions attached to a share-based
payment. Previously, this Standard did not separately define ‘performance
condition’ or ‘service condition’, but instead described both concepts within the
definition of vesting conditions.
BC335 The Board decided to separate the definitions of performance condition and
service condition from the definition of vesting condition to make the
description of each condition clearer.

IFRS 2 BC
BC336 In response to the comments received on the Exposure Draft Annual Improvements
to IFRSs 2010–2012 Cycle (Proposed amendments to International Financial
Reporting Standards) (the ‘ED’), published in May 2012, the Board addressed the
following concerns that had been raised about the definitions of performance
condition, service condition and market condition:
(a) whether a performance target can be set by reference to the price (or
value) of another entity (or entities) that is (are) within the group;
(b) whether a performance target that refers to a longer period than the
required service period may constitute a performance condition;
(c) whether the specified period of service that the counterparty is required
to complete can be either implicit or explicit;
(d) whether a performance target needs to be influenced by an employee;
(e) whether a share market index target may constitute a performance

condition or a non-vesting condition;
(f) whether the definition of performance condition should indicate that it

includes a market condition;
(g) whether a definition of non-vesting condition is needed; and
(h) whether the employee’s failure to complete a required service period due
to termination of employment is considered to be a failure to satisfy a
service condition.
Whether a performance target can be set by reference to

the price (or value) of another entity (or entities) that is
(are) within the group
[Refer: Appendix A (definition of performance condition)]
BC337 The Board decided to clarify that within the context of a share-based payment
transaction that involves entities in the same group, a performance target can be
defined by the price (or value) of the equity instruments of another entity in that
group. This amendment is consistent with the guidance in paragraphs 3A
and 43A–43D of IFRS 2. Paragraph 3A, which provides guidance about the scope
of IFRS 2, states that “a share-based payment transaction may be settled by
another group entity (or a shareholder of any group entity) on behalf of the
entity receiving or acquiring the goods or services”.
BC338 The Board decided to make a similar amendment to the definition of market
condition to indicate that a market condition can be based on the market price
of the entity’s equity instruments or the equity instruments of another entity in
the same group.
Whether a performance target that refers to a longer

period than the required service period may constitute a
performance condition
BC339 The Board observed that IFRS 2 was not clear about the duration of a
performance target relative to the duration of the related service condition.
Some understood IFRS 2 to require that the duration of the performance has to
be wholly within the period of the related service requirement; others

IFRS 2 BC
understood that a performance target could be achieved over a period that

extends beyond the period for which the employee is required to provide a
service.
BC340 During its deliberations prior to the issue of the ED, the Board decided to clarify
that the duration of the performance condition needed to be wholly within the
period of the related service requirement. This meant that the period of
achieving the performance target could not start before, or end after, the service
period. This requirement was reflected in the ED.
BC341 Some respondents to the ED disagreed with the requirement that the duration
of the performance condition needed to be wholly within the period of the
related service, because they asserted that it was common for a performance
target to start before the service period. For example, a performance target
could be set as a measure of the growth in earnings per share (the ‘EPS target’)
between the most recently published financial statements on the grant date and
the most recently published financial statements before the vesting date.
BC342 Other respondents noted that if the beginning of the period for achieving the
performance target was restricted, then a relatively minor difference in the way
that the awards are structured could lead to a different classification of the
performance target (ie as either a non-vesting condition or a performance
(vesting) condition), which could consequently lead to differences in the way in
which the award would be accounted for in accordance with the guidance in
IFRS 2. [Refer: Appendix A (definition of performance condition)]
BC343 In response to the comments received on the ED, the Board decided to revise the
proposed definition of performance condition. In this revision, the Board
decided to ease the restriction on when the period for a performance target
could start. It therefore decided to clarify that the start of the period of
achieving the performance target could be before the service period, provided
that the commencement date of the performance target is not substantially
before the commencement of the service period. [Refer: Appendix A (definition of
performance condition)]
BC344 However, the Board decided to retain the proposal in the ED that the period over
which the performance target is achieved should not extend beyond the service
period. It thought that this decision was consistent with the definition of a
performance condition, which was previously included within the definition of
a vesting condition. The definition of a performance condition requires the
counterparty to complete a specified period of service and to meet the
performance target(s) while the counterparty is rendering the service required.
The definition of performance condition reflects the principle in paragraph 7 of
IFRS 2, which states that “An entity shall recognise the goods or services received
or acquired in a share-based payment transaction when it obtains the goods or
as the services are received”. [Refer: Appendix A (definition of performance condition)]
BC345 The Board also decided to add the words “ie a service condition” to criterion (a)
of the definition of performance condition in order to create a cross-reference to
the definition of service condition.

IFRS 2 BC
Whether the specified period of service that the

counterparty is required to complete can be either
implicit or explicit
BC346 In the definition of performance condition, the Board decided to highlight a
feature that distinguishes a performance condition from a non-vesting condition
in accordance with paragraph BC171A of IFRS 2; namely, that a performance
condition has an explicit or implicit service requirement and a non-vesting
condition does not. This is so that, in order to constitute a performance
condition, a performance target needs to be accompanied by a service
requirement, which can be implicit or explicit. The Board observed that if the
share-based payment arrangement does not contain an explicit requirement to
provide services, the arrangement may still contain an implicit service
condition. [Refer: Appendix A (definition of performance condition)]
Whether a performance target needs to be influenced by

an employee
BC347 During its deliberations the Board observed that for a target to constitute a
performance condition it needs to be both ‘within the influence’ of the
employee and in the interest of the entity. Consequently, the Board proposed
that the definition of performance condition should make clear that a
performance target is defined by reference to the entity’s own operations (or
activities) or the price (or value) of its equity instruments (including shares and
share options).
BC348 In response to the ED, some respondents indicated that the reason why the
performance target needed to be within the influence of the employee was
unclear and found it to be contradictory to the proposed definition of
performance condition. This is because in the proposed definition, the
performance target was defined by reference to the performance of the entity,
that is, by reference to the entity’s own operations (or activities) or the price
(or value) of its equity instruments. Some other respondents also raised some
difficulties that they expected to encounter when applying the proposed
guidance. In this respect, the respondents stated that determining whether a
performance target is within the influence of the employee would be difficult to
apply in the case of a group of entities; for example, the profit or share price of
a group of companies could be seen to be ‘remote from the influence of’ an
employee of a particular subsidiary of the group.
BC349 The Board observed that requiring a performance target to be within the
influence of the employee could be misinterpreted as meaning that the Board’s
intention was to challenge management to explain how the performance of the
employee affects the performance target. The Board confirmed that it was not
its intention to do so. It observed that the link between the employee’s
service/performance against a given performance target is management’s
responsibility. It noted that each employee has, in varying degrees, an influence
over an entity’s (or group’s) overall performance, that is, over an entity’s
(or group’s) own operations (or activities) or the price (or value) of its equity
instruments. Consequently, the Board decided to omit the requirement that the
target “needs to be within the influence of the employee” to avoid further
confusion.

IFRS 2 BC
BC350 In its review of the definition of performance condition the Board also
considered what, if any, level of correlation is required between an employee’s
responsibility and the performance target. Potential diversity in practice had
emerged because some were of the view that if share based payment awards are
granted to employees conditional on the entity-wide profit, it is not clear that
the profit target constitutes a performance condition on the basis that the
employee might have so little influence on the entity-wide profit that it is not
clear whether the target is able to sufficiently incentivise an individual
employee’s actions. Others held the view that because the entity is in business
in order to make a profit, it is reasonable to assume that all employees
contribute directly or indirectly to the entity-wide profit, ie that the whole body
of employees contribute towards the entity-wide profit.
BC351 In the ED the Board observed that it is reasonable to assume that the
performance target that is set by management for an employee’s share-based
payment appropriately incentivises the employee to provide an increased
quality and/or quantity of service to benefit the entity. Consequently, the Board
decided that the definition of performance condition should make clear that a
performance target may relate either to the performance of the entity as a whole
or to some part of it, such as a division or an individual employee. [Refer:
Appendix A (definitions of market condition and performance condition)]
BC352 Respondents to the ED questioned whether it was the Board’s intention to

require an entity to demonstrate, or provide evidence of, the correlation
between an employee’s responsibility and the performance target in order for
that target to be a performance condition. During its deliberations, the Board
confirmed that it was not its intention to require an entity to prove this
correlation. [Refer: Appendix A (definitions of market condition and performance
condition)]
Whether a share market index target may constitute a

performance condition or a non-vesting condition
BC353 The Board analysed the case in which a share-based payment is conditional on a
share market index target and whether it would be considered a performance
condition or a non-vesting condition. For example, a grant might be conditional
on a stock exchange index (of which the entity’s shares are a part) reaching a
specified target and the employee remaining in service up to the date that the
target is met.
BC354 The Board observed that some might argue that the share market index target
with the implicit service requirement constitutes a performance condition,
because an employee is required to provide service to the entity, and that the
time estimated to affect the share market index target implicitly determines
how long the entity receives the required service. Others might argue that the
share market index target is a non-vesting condition because it is not related to
the performance of the entity (ie instead it is related to, or based on, not only the
entity’s share price but also the share price of other unrelated entities).
BC355 In the ED the Board observed that the share market index target would be
considered a non-vesting condition because it is not related to the performance
of the entity or of another entity in the same group, even if the shares of the

IFRS 2 BC
entity or of another entity in the same group form part of that index. The Board
also observed that a share market index target may be predominantly affected
by many external variables or factors involved in its determination, including
macroeconomic factors such as the risk-free interest rate or foreign exchange
rates and, consequently, it is remote from the influence of the employee.
BC356 Respondents to the ED agreed that it would be reasonable to assume that the
share market index target is a non-vesting condition but some thought that it
should not be based on the level of influence exercised by an employee over the
performance target or on whether the target is affected by external variables or
factors. This is because, in their view, the level of influence and the effect of
external variables are subjective reasons that are difficult to measure.
BC357 The Board decided to reaffirm its position that a share market index is a
non-vesting condition but, on the basis of the comments received, it is clarifying
that the reason why it is a non-vesting condition is because a share market index
not only reflects the performance of an entity but, in addition, also reflects the
performance of other entities outside the group. [Link to Appendix A (definition of
market condition)]
BC358 The Board also considered a similar case in which the entity’s share price makes
up a substantial part of the share market index. The Board determined that even
in such a case the condition should still be considered a non-vesting condition
because it reflects the performance of other entities that are outside the group.
Whether the definition of performance condition should

indicate that it includes a market condition
BC359 A respondent to the ED noted that the final sentence of the definition of vesting
conditions, which states that “a performance condition might include a market
condition”, is contradictory. This is because a market condition:
(a) is a target that is related to the market price of the entity’s equity
instruments; and
(b) includes no explicit requirement for the counterparty to complete a

specified period of service.
BC360 The Board observed that, on the basis of the definition of performance
condition, a performance target that is related to the market price of an entity’s
equity instruments and to the completion of a specified period of service is
considered a market (performance) condition. Consequently, the Board
disagreed that an inconsistency existed in the definitions of performance
condition and market condition. To avoid confusion in the definitions of
performance condition and market condition, the Board decided to:
(a) delete the last sentence in the definition of vesting condition
(ie “a performance condition might include a market condition”); and
(b) indicate within the definition of performance condition that
performance conditions are either market conditions or non-market
conditions.
[Refer: Appendix A (definition of performance condition)]

IFRS 2 BC
BC361 The Board decided to confirm that a market condition is a type of performance
condition. The Board considered that a condition that is not subject to a service
requirement is not a performance condition, and instead, is considered a
non-vesting condition. In making this clarification, the Board did not change
the measurement requirements in IFRS 2 for a market condition. [Refer:
Appendix A (definition of market condition)]
Whether a definition of ‘non-vesting condition’ is needed

BC362 Respondents to the ED thought that clarity could be further improved in IFRS 2
by defining a ‘non-vesting condition’.
BC363 The Board noted that there is no formal definition of non-vesting condition in
IFRS 2, but Implementation Guidance on the split between vesting and
non-vesting conditions is provided in a flowchart in paragraph IG24 of IFRS 2.
BC364 The Board determined that the creation of a stand-alone definition of

non-vesting condition would not be the best alternative for providing clarity on
this issue. This is because the Board observed that the concept of a non-vesting
condition can be inferred from paragraphs BC170–BC184 of IFRS 2, which clarify
the definition of vesting conditions. In accordance with this guidance it can be
inferred that a non-vesting condition is any condition that does not determine
whether the entity receives the services that entitle the counterparty to receive
cash, other assets or equity instruments of the entity under a share-based
payment arrangement. In other words, a non-vesting condition is any condition
that is not a vesting condition. On the basis of its analysis the Board decided to
not add a definition of non-vesting condition.
Whether the employee’s failure to complete a required

service period due to termination of employment is
considered to be a failure to satisfy a service condition
BC365 When considering a possible revision of the definition of service condition, the
Board observed that in IFRS 2 there is no specific guidance on how to account for
a share-based payment award when the entity terminates an employee’s
employment.
BC366 The Board noted, however, that paragraph 19 of this Standard regards the
employee’s failure to complete a specified service period as a failure to satisfy a
service condition. In the ED the Board proposed to clarify within the definition
of service condition that if the employee fails to complete a specified service
period, the employee thereby fails to satisfy a service condition, regardless of the
reason for that failure. The Board also noted that the accounting consequence is
that the compensation expense would be reversed if an employee fails to
complete a specified service period.
BC367 Some respondents to the ED thought that more clarity could be provided in the
proposed guidance. This is because they noted that in some circumstances in
which an employee is unable to perform the service condition by completing the
stipulated service period (such as when the employee is ill or dies in service), it
would normally be expected that part of the award would vest and that the

IFRS 2 BC
related compensation expense should not be reversed. They noted that, to the
extent that a portion of the award vests, that portion should be recognised as an
expense.
BC368 In response to the comments received, the Board noted that the objective of the
proposed amendment to the definition of service condition is to clarify that the
termination of an employee’s employment is a situation in which the employee
fails to complete a specified service period and, consequently, is considered a
situation in which the service condition is not met.
BC369 The Board observed that in circumstances in which equity instruments do not
vest because of failure to satisfy a vesting condition, paragraph 19 of IFRS 2
states that “on a cumulative basis, no amount is recognised for goods or services
received if the equity instruments granted do not vest because of a failure to
satisfy a vesting condition”. The Board observed that in circumstances in which
the equity instruments either partly or fully vest on cessation of employment,
paragraph 23 of IFRS 2 states that “the entity shall make no subsequent
adjustment to total equity after vesting date”. The Board also noted that, in
accordance with paragraph 28, “if a grant of equity instruments is cancelled or
settled during the vesting period (other than a grant cancelled by forfeiture
when the vesting conditions are not satisfied) the entity shall account for the
cancellation or settlement as an acceleration of vesting, and shall therefore
recognise immediately the amount that otherwise would have been recognised
for services received over the remainder of the vesting period”. Noting the
guidance already provided in IFRS 2, the Board concluded that further guidance
was not necessary.
Transition provisions
BC370 The Board considered the transition provisions and effective date of the
amendment to IFRS 2. The Board noted that the changes to the definitions of
vesting conditions and market condition and the addition of performance
condition and service condition might result in changes to the grant-date fair
value of share-based payment transactions for which the grant date was in
previous periods. To avoid the use of hindsight, it decided that an entity would
apply the amendments to IFRS 2 prospectively to share-based payment
transactions for which the grant date is on or after 1 July 2014. Earlier
application should be permitted. [Refer: paragraph 63B]
Effects of vesting conditions on the measurement of a

cash-settled share-based payment (2016 amendments)32
BC371 This section summarises the Board’s considerations when it finalised its
proposals to address the accounting for the effects of vesting conditions on the
measurement of a cash-settled share-based payment, contained in the
November 2014 ED.
32 Paragraphs BC371–BC382 are added as a consequence of amendments to IFRS 2 Classification and

Measurement of Share-based Payment Transactions issued in June 2016.

IFRS 2 BC
BC372 The Board received a request regarding the measurement requirements in IFRS 2
for cash-settled share-based payment transactions that include a performance
condition.
BC373 The Board noted that IFRS 2 requires the use of fair value as a principle in
measuring share-based payment transactions. The Board observed that
paragraphs 19–21A of IFRS 2 provide the requirements for measuring the fair
value of equity-settled share-based payment transactions that include vesting
and non-vesting conditions. The Board also observed that, in the case of
cash-settled share-based payment transactions, paragraph 33 of IFRS 2 requires
an entity to measure the liability, initially and at the end of each reporting
period until settled, at fair value. The entity is required to apply an option
pricing model, taking into account the terms and conditions on which the
cash-settled share-based payments were granted and the extent to which the
employees have rendered service to date.
BC374 However, IFRS 2 does not specifically address the impact of vesting and
non-vesting conditions on the measurement of the fair value of the liability
incurred in a cash-settled share-based payment transaction. Specifically, it was
unclear whether an entity should apply, by analogy, the requirements in
paragraphs 19–21A of IFRS 2 for measuring equity-settled share-based payment
transactions when measuring cash-settled share-based payment transactions
that include vesting and non-vesting conditions.
BC375 The Board observed that, in accordance with paragraph 6A, IFRS 2 uses the term
‘fair value’ in a way that differs in some respects from the definition of fair value
in IFRS 13 Fair Value Measurement. When applying IFRS 2, an entity is required to
measure fair value in accordance with that Standard (and not in accordance
with IFRS 13) for cash-settled and equity-settled awards. Consequently, the Board
decided to add paragraphs 33A–33D on how market and non-market vesting
conditions and non-vesting conditions should be reflected in the measurement
of a cash-settled share-based payment transaction. The Board decided that those
conditions should be reflected in the measurement of cash-settled share-based
payments in a manner consistent with how they are reflected in the
measurement of an equity-settled share-based payment transaction.
BC376 The Board further observed that measuring the fair value of the liability
incurred in a cash-settled share-based payment transaction by analogy to the
requirements for equity-settled share-based payment transactions would avoid
the practical difficulties of measuring the effects of vesting conditions (other
than market conditions) on the fair value of the awards. Those practical
difficulties were identified by the Board when it originally issued IFRS 2, and are
explained in paragraph BC184 of IFRS 2.
BC377 Consequently the Board decided to amend paragraphs 30–31, and 33 and added
paragraphs 33A–33D to clarify the effect that market and non-market vesting
conditions and non-vesting conditions have on the measurement of the liability
incurred in a cash-settled share-based payment transaction.
BC378 The Board observed that if an employee does not receive the payment because of
a failure to satisfy any condition, this should result in remeasuring the liability
to zero. The amendments make clear that the cumulative amount ultimately

IFRS 2 BC
recognised for goods or services received as consideration for a cash-settled

share-based payment will be equal to the amount of cash (or other assets) that is
paid.
BC379 Furthermore, the Board amended paragraph IG19 and added IG Example 12A to
the Guidance on Implementing IFRS 2 to illustrate the impact of a performance
condition on the measurement of a cash-settled share-based payment
transaction.
BC380 Respondents to the November 2014 ED questioned the meaning of ‘best available
estimate’, as that notion was used in the proposal, for estimating the fair value
of a cash-settled share-based payment. The Board noted that the term ‘best
available estimate’ is already used in IFRS 2 and is not a new notion. This term is
also used in paragraph 20 of IFRS 2 for estimating the number of equity
instruments expected to vest of an equity-settled share-based payment. The
Board further observed that analysing such a notion would potentially involve
examining similar notions in other Standards and observed that such notions
would be better examined as part of a broader project.
BC381 Respondents to the November 2014 ED suggested that the Board should add an
explicit requirement for the disclosure of a contingent liability when vesting is
not probable (and thus no liability is recognised, as illustrated in Year 1 of
Example 12A). The Board observed that adding such a requirement is not
necessary because the general requirement in paragraph 50 of IFRS 2 already
requires entities to
…disclose information that enables users of the financial statements to understand

the effect of share-based payment transactions on the entity’s profit or loss for the
period and on its financial position.
BC382 Some respondents to the November 2014 ED suggested that the Board should
add other examples to the Guidance on Implementing IFRS 2 to illustrate the
effects of vesting and non-vesting conditions on the measurement of cash-settled
awards. The Board did not think this was necessary because of the existing
examples in the implementation guidance that illustrate the effects of market
and non-market vesting conditions and of non-vesting conditions on
equity-settled awards. These examples also serve to illustrate the effects of such
conditions on cash-settled awards because the amendments require consistent
treatment for both types of awards.

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IFRS 2

姝 IFRS Foundation A97

A98 姝 IFRS Foundation

FOR THE BASIS FOR CONCLUSIONS, SEE PART C OF THIS EDITION

BASIS FOR CONCLUSIONS

姝 IFRS Foundation A99

International Financial Reporting Standard 2 Share-based Payment (IFRS 2) is set out in

A100 姝 IFRS Foundation

International Financial Reporting Standard 2

(a) equity-settled share-based payment transactions,

except as noted in paragraphs 3A–6. In the absence of specifically identifiable

姝 IFRS Foundation A101

3A A share-based payment transaction may be settled by another group entity (or a

5 As noted in paragraph 2, this IFRS applies to share-based payment transactions

A102 姝 IFRS Foundation

1 The title of IAS 32 was amended in 2005.

姝 IFRS Foundation A103

7 An entity shall recognise the goods or services received or acquired in a

8 When the goods or services received or acquired in a share-based payment

9 Typically, an expense arises from the consumption of goods or services. For

A104 姝 IFRS Foundation

Equity-settled share-based payment transactions

11 To apply the requirements of paragraph 10 to transactions with employees and

12 Typically, shares, share options or other equity instruments are granted to

13 To apply the requirements of paragraph 10 to transactions with parties other

姝 IFRS Foundation A105

service [Refer: Basis for Conclusions paragraphs BC88–BC105 and Implementation

A106 姝 IFRS Foundation

Transactions in which services are received

14 If the equity instruments granted vest immediately, the counterparty is not

(b) if an employee is granted share options conditional upon the

姝 IFRS Foundation A107

subsequent information indicates that the length of the vesting period

Transactions measured by reference to the fair value of

Determining the fair value of equity instruments granted

16 For transactions measured by reference to the fair value of the equity

18 Appendix B [Refer: paragraphs B2–B41] contains further guidance on the

A108 姝 IFRS Foundation

Treatment of vesting conditions

19 A grant of equity instruments might be conditional upon satisfying specified

21 Market conditions, such as a target share price upon which vesting

Treatment of non-vesting conditions

姝 IFRS Foundation A109

Treatment of a reload feature

After vesting date

23 Having recognised the goods or services received in accordance with

If the fair value of the equity instruments cannot be estimated

24 The requirements in paragraphs 16–23 apply when the entity is required to

A110 姝 IFRS Foundation

25 If an entity applies paragraph 24, it is not necessary to apply paragraphs 26–29,

(b) any payment made on settlement shall be accounted for as the

Modifications to the terms and conditions on which

姝 IFRS Foundation A111

28 If a grant of equity instruments is cancelled or settled during the vesting period

(b) any payment made to the employee on the cancellation or settlement of

28A If an entity or counterparty can choose whether to meet a non-vesting condition,

29 If an entity repurchases vested equity instruments, the payment made to the

A112 姝 IFRS Foundation

Cash-settled share-based payment transactions