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Equity Settled Share Based Payment Transactions IFRS 2

Equity Settled Share Based Payment Transactions IFRS 2 : 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.

Equity Settled Share Based Payment Transactions IFRS 2

Equity Settled Share Based Payment Transactions IFRS 2 : 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.

Equity Settled Share Based Payment Transactions IFRS 2

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Equity Settled Share Based Payment Transactions IFRS 2 : 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?

Equity Settled Share Based Payment Transactions IFRS 2 

Equity Settled Share Based Payment Transactions IFRS 2 : 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.

Equity Settled Share Based Payment Transactions IFRS 2

Equity Settled Share Based Payment Transactions IFRS 2 : 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.

Equity Settled Share Based Payment Transactions IFRS 2

Equity Settled Share Based Payment Transactions IFRS 2 : 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?

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:

  1. adopted a case-by-case approach and was inconsistent with the definitions of share-based payment transactions in IFRS 2.
  2. was unclear and increased the inconsistency in the scope requirements among the applicable IFRSs, including IFRIC 11.

Equity Settled Share Based Payment Transactions IFRS 2

Equity Settled Share Based Payment Transactions IFRS 2 : 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).

Arguments commonly made against expense recognition include:

  1.  the transaction is between the shareholders and the employees, not the entity and the employees.
  2. the employees do not provide services for the options.
  3. 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.

Equity Settled Share Based Payment Transactions IFRS 2

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