06 - IFRS 2: Share-based Payment

Flashcards covering critical aspects of IFRS 2 and share-based payments for exam preparation.

What is a share-based transaction?

A transaction in which an entity transfers equity instruments in exchange for goods and services.

What are equity instruments?

Equity instruments include shares and share options.

Define share options.

Options that give the holder the right to acquire shares in the entity at a certain price.

What does IFRS 2 cover?

Transactions with both employees and third parties.

What types of transactions are excluded from IFRS 2?

Rights issues, bonus issues of shares based on existing holdings, share exchanges for control, contracts to buy/sell non-financial items.

What are equity-settled share-based payments?

Transactions where the entity receives goods/services in exchange for equity instruments.

What are cash-settled share-based payments?

Transactions where the entity receives goods/services in exchange for cash amounts based on share value.

What are transactions with a choice of settlement?

Transactions where either the entity or supplier can settle in cash or equity instruments.

What is a grant date?

The date the entity and another party agree to the share-based payment arrangement.

Define vesting conditions.

Conditions that must be met for the other party to receive the share-based payment.

What is a vesting period?

The period during which the vesting conditions are to be satisfied.

Define vesting date.

The date when all vesting conditions have been met.

What are non-market-based vesting conditions?

Conditions other than those relating to the market value of the entity’s shares.

Give examples of non-market-based conditions.

Minimum service period, minimum sales target, completion of a project.

What are market-based vesting conditions?

Conditions linked to the market price of the entity’s shares.

Provide examples of market-based conditions.

Minimum share price increase, minimum shareholder return.

How are equity-settled SBPs recognized?

Recognize as an expense like any other transaction, typically crediting equity.

How are equity-settled SBPs measured?

Measured at their fair value at the grant date.

What is the indirect method in measuring fair value?

Measure the fair value at the grant date and recognize evenly over the vesting period.

What happens if no vesting period is stipulated?

The whole fair value is recognized immediately.

What to ignore when determining vesting conditions?

Changes to fair value for non-market-based conditions.

In a pro forma calculation, what is subtracted to find the current period's expense?

Cumulative amount already recognized.

How to calculate total fair value for an equity-settled SBP?

Multiply the number of shares per employee, number of employees expected to vest, and fair value at grant date.

What happens if employees leave during the vesting period?

The expected number of options to vest is updated based on the new estimate.

In the end of year calculations, how is recognition structured?

Based on actual options that vest rather than initial estimates.

How does cancellation of equity instruments affect accounting?

Charged immediately for any remaining fair value not recognized.

What is the treatment if the share options are canceled?

Recognize the remaining fair value as an expense.

How should companies treat share buybacks?

Recognize as a deduction from equity and any excess paid over fair value charged to profit or loss.

What influences auditing shares based on fair value?

Appropriateness of methods, independence of experts, supported documentation.

What happens when cash-settled SBPs are exercised?

Recognize the corresponding cash outflow as a liability and calculate based on market price changes.

What is the duplication in accounting for cash-settled SBPs?

Remeasurement of fair value each reporting date.

What should entities disclose under IFRS 2?

Description of share-based payment arrangements, fair value determination, effect on profit/loss.

What must be considered for distributing profits?

Realized profits minus realized losses; affects dividend payments.

What constitutes distributable profits for public companies?

Must not pay dividends if net assets are less than share capital and undistributable reserves.

What are the reasons a company might purchase its own shares?

Cash dividends without profit constraints, improve share metrics, and manage shareholder influence.

How does the capital redemption reserve protect creditors?

Requires companies buying back shares to transfer an equivalent amount to reserve to maintain net asset integrity.

Define share appreciation rights (SARs).

Employees are entitled to cash payment based on an increase in the employer’s share price.

How should modifications to share options be treated?

Original fair value is recognized as normal, and increases are recognized over the vesting period.

What happens in case of modifications or repricing of share options?

Recognize original fair value and any increase over the remaining vesting period.

How are entity-specific transaction treatments applied between parent and subsidiary?

Parent grants rights treated as equity-settled; subsidiary grants rights treated as cash-settled.

What are the key conditions for an option to be treated as cash-settled?

Existence of legal or constructive obligations to deliver cash.

Define the obligation existing for cash-settled SBPs.

Can be legal or based on historical practices of cash payments.

What aspects become significant in audit risks related to SBPs?

Estimating fair value, number of employees whose options are expected to vest, and completing disclosures.

What is the accounting treatment when market conditions for share prices are not met?

No adjustment needed to expenses previously charged.

If the holder of a share option chooses not to exercise it, what happens?

No adjustments required; the amount can be transferred to another equity reserve.

How should modifications relating to changes in exercise prices be accounted for?

Recognize fair value changes over the remaining vesting period.

What care must be taken if cash-settled SBPs payments exceed fair value?

The excess payment should be recognized immediately in profit or loss.

Define the key outcomes when an entity has a choice of share-based settlement for an SBP.

Consider it a compound financial instrument with both debt and equity components.

What must be established when the entity has a present obligation to deliver cash?

Determine if it leads to classification of the SBP as cash-settled.

What must be included in the disclosures for the different types of share-based payments?

Descriptions, number of share options, how fair value was derived, and profit effects.

What procedures should auditors follow regarding vesting period estimations?

Inspect contracts, prior estimates, and ensure proper disclosures.

What is the journal entry for recognizing an expense related to share options?

Dr Expense or asset; Cr Liability (in case of cash-settled) or Equity (for equity-settled).

What is the potential impact of share buybacks on financial ratios?

Can improve EPS and ROCE by reducing the number of outstanding shares.

How are the rights granted to subsidiaries compared to those granted by parents handled?

Varies depending on the type of SBP, cash-settled vs equity-settled.

When might a company decide to sell another company's share option rights?

To manage liabilities or redistribute equity among stakeholders.

What are the primary components of a company's equity structure influenced by SBPs?

Share capital, retained earnings, and capital redemption reserve.

What should a company account for when issuing equity instruments during recruiting?

Costs related to share-based payments and the fair value of those instruments.

What impact do employee departures have on the valuation of share options?

Require adjustments to the expected number of options to vest.

Define capital redemption reserve in relation to share buybacks.

A reserve to protect creditors when share capital is reduced.

What are typical audit risks associated with the recognition of SBPs?

Inadequate estimates of fair value at grant date or incorrect details about vesting conditions.

What must be substantively documented concerning employee share schemes?

All schemes and their accounting treatments must be disclosed comprehensively.

What conditions must be evaluated if a share price condition is part of an SBP?

The market condition should influence the grant date value but should not require adjustment during periods.

What steps must be followed when reviewing documentation for share-based payments?

Ensure all relevant contracts, fair value models, and inputs are accurately documented.

What should be re-evaluated each reporting date for cash-settled SBPs?

The fair value of the SARs must be recalculated.

What distinguishes equity-settled from cash-settled SBPs in terms of accounting?

Equity-settled involves equity accounts, while cash-settled involves recognizing a liability.

When are modifications to fair value of share options recognized?

When there’s an increase due to repricing or changes in terms.

What happens at the end of the reporting period concerning SBPs?

Review and adjust the recognized expenses to align with new estimates.

What is an important consideration regarding the underlying shares for SARs?

They remain unchanged, unlike the cash component which fluctuates with market price.

How does the amount recognized for the share options upon cancellation affect profits?

Recognition is accelerated if an SBP is canceled prior to vesting.

What method should be used to determine fair value for options at the grant date?

An appropriate options pricing model.

What are the consequences if a performance target condition of an option is not met?

No changes are made to previously recognized expenses.

How should modifications or cancellations of share options be accounted for in terms of profits?

Immediate recognition of any remaining fair value and adjustments for compensation paid.

What must be established if the share options are granted mid-year?

Pro-rated recognition of the expense should be done to the nearest month.

What ensures that risks associated with financial disclosures of SBPs are mitigated?

Comprehensive auditing, management validation, and adherence to IFRS 2 standards.

How should adjustments for the expected number of employees be handled during the vesting period?

Regular updates based on employee turnover rates should be documented.

What determines whether an SBP is equity or cash settled?

The present obligation of the entity to deliver cash or shares.

What defines a compound financial instrument in relation to SBPs?

An SBP that results in both a debt component and an equity component.