What you need to know about share-based payments

A transaction where the counterparty is also a holder of equity instruments of the entity.

It is common practice for employees to be shareholders. If the entity and the employee enter into a transaction that is in the employee's capacity as a shareholder and not as an employee, then the share-based payment is not within the scope of IFRS 2.

• An entity grants all of its common shareholders the right to acquire additional shares at a price of $10, which is less than the fair value of the shares of $12. If an employee receives such a right because he is a common shareholder, then that transaction is not within the scope of IFRS 2.

• If the entity granted the same option to employees at a further discounted price of $8, then the arrangement would be within the scope of IFRS 2. The favorable terms indicate that the transaction is in their capacity as an employee and not a shareholder.
• If an entity grants all of its common shareholders the right to acquire additional shares at a price less than fair value and employees are required to sell their shares back to the entity when they resign, then this would be included in the scope of IFRS 2. The resignation condition implies the transaction is in the employee's capacity as an employee and not a shareholder.

• An entity receives marketing services from a consultant and agrees to a cash payment that is a percentage of the sales the consultant generates. Since this is not based on the price of the equity instruments, this transaction would not be within the scope of IFRS 2.

• If an entity grants its employees the right to purchase shares at a discount, then the arrangement would be included in the scope of IFRS 2.
• A stock appreciation right (SAR) would be included in the scope of IFRS 2.

An entity receives or acquires goods or services under a contract within the scope of paragraphs 8-10 of IAS 32 Financial Instruments: Presentation or paragraphs 5-7 of IAS 39 Financial Instruments: Recognition and Measurement.

Consider the following example:

An entity enters into a private placement to raise funds. As part of the placement, the entity issues 1000 units to the general public. Each unit consists of 1 common share and 1 warrant. The warrant entitles the holder to buy 1 common share of the entity at a future date at a price of USD SS. The entity also issues 250 warrants to the broker who facilitated the private placement that vest immediately. The functional currency of the entity is Canadian dollars.

• The warrants that are issued as part of the unit are within the scope of IAS 32 since it meets the definition of a financial contract. Furthermore, since the exercise price is in USD and the functional currency is in Canadian dollars, this would violate the fixed-for-fixed criteria in IAS 32. As such, these warrants would be classified as a financial liability.

• The warrants that are issued to the broker in exchange for facilitating the private placement would be within the scope of IFRS 2 since the entity is issuing equity for a service.
• Careful consideration should be given to the terms of equity instruments to determine whether they represent a financing transaction which would be in the scope of IAS 32 or whether they represent equity issued for a service received. The determination of which standard is applicable is important because it drives the classification, recognition and measurement of the instruments. For example, while IAS 32 has a requirement for an instrument to meet the fixed-for-fixed criteria to be classified as equity, there is no such requirement in IFRS 2.

• An entity repurchases some of its own equity instruments. No gain or loss shall be recognized in profit or loss on the purchase, sale, issue or cancellation of an entity's own equity instruments. Consideration paid or received shall be recognized directly in equity.

• Equity instruments issued in a business combination in exchange for control of the acquiree are not within the scope of IFRS 2.

• Equity instruments granted to employees of the acquiree in their capacity as employees, for example in return for continued service, are within the scope of IFRS 2.
• 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.