Share-based payment is a method of compensating employees or other parties using the entity’s own equity instruments, such as shares or share options. International Financial Reporting Standard 2 (IFRS 2), “Share-Based Payment,” provides guidance on the accounting treatment of share-based payment transactions.
According to IFRS 2, a share-based payment arrangement is a contract between an entity and the recipient of the share-based payment, in which the entity agrees to provide the recipient with equity instruments of the entity, or cash in lieu of the equity instruments, in exchange for goods or services received. The equity instruments may be shares, share options, or other instruments that will be settled in the entity’s own shares or share options.
IFRS 2 requires entities to recognize the fair value of the goods or services received under a share-based payment arrangement as an expense in the income statement. The fair value of the goods or services is determined at the date at which the recipient completes the performance of the services or other conditions for vesting of the equity instruments.
The fair value of the equity instruments issued under a share-based payment arrangement is also recognized as an expense in the income statement. The fair value of the equity instruments is determined at the date at which the recipient completes the performance of the services or other conditions for vesting of the equity instruments.
IFRS 2 includes guidance on the measurement of the fair value of the goods or services received under a share-based payment arrangement. The fair value of the goods or services may be determined using either a fair value model or an attribution model.
The fair value model is based on the fair value of the equity instruments issued or to be issued under the share-based payment arrangement. The fair value of the equity instruments is determined using a valuation technique, such as a Black-Scholes option pricing model. The fair value of the goods or services is then determined by multiplying the number of equity instruments issued or to be issued by the fair value of the equity instruments.
The attribution model is based on the grant-date fair value of the goods or services received by the recipient. The grant-date fair value of the goods or services is determined using a valuation technique, such as a present value calculation based on the expected cash flows from the goods or services. The fair value of the goods or services is then determined by allocating the grant-date fair value of the goods or services to the vesting period of the equity instruments.
IFRS 2 also includes guidance on the accounting for modifications of share-based payment arrangements. A modification of a share-based payment arrangement is a change to the original terms of the arrangement that results in a change in the fair value of the goods or services received, or the number or fair value of the equity instruments issued or to be issued.
If a modification of a share-based payment arrangement results in a change in the fair value of the goods or services received, or the number or fair value of the equity instruments issued or to be issued, the entity is required to recognize the incremental fair value of the goods or services received as an expense in the income statement. The incremental fair value of the goods or services is determined by comparing the fair value of the goods or services received before and after the modification.
If a modification of a share-based payment arrangement does not result in a change in the fair value of the goods or services received, or the number or fair value of the equity instruments issued or to be issued, the entity is not required to recognize the modification as an expense in the income statement.
Black-Scholes model
The Black-Scholes model is a mathematical model used to determine the fair value of a European call or put option, using the current market price of the underlying asset, the option’s exercise price, the option’s time to expiration, the underlying asset’s volatility, and the risk-free interest rate.
To use the Black-Scholes model, the user inputs the current market price of the underlying asset, the option’s exercise price, the option’s time to expiration, the underlying asset’s volatility, and the risk-free interest rate. The model then uses a set of equations to calculate the fair value of the option.
