Share-Based Payment (IFRS 2)

10.3.2

An

equity-settled share-based payment transaction

is a share-based payment trans-

action in which the entity receives goods or services (including shares or share options) as

consideration for the entity’s equity instruments. An equity instrument is a contract that evi-

dences a residual interest in the assets of an entity after deducting all of its liabilities. An equi-

ty instrument granted is the right to an equity instrument of the entity conferred by the enti-

ty on another party, under a share-based payment arrangement.

10.3.3

A

cash-settled share-based payment transaction

is a share-based payment transac-

tion in which the entity acquires goods or services by incurring a liability to transfer cash or

other assets to the supplier of those goods or services for amounts that are based on the price

or value of the entity’s shares or other equity instruments.

10.3.4

The grant date

is the date at which the entity and another party (including an

employee) agree to a share-based payment arrangement. At grant date the entity confers on

the counterparty the right to cash, other assets, or the entity’s equity instruments, provided

that the specified vesting conditions are met.

10.3.5

Employees and others providing similar services

are individuals who render per-

sonal or similar services to the entity.

10.3.6

Under a share-based payment arrangement, a counterparty’s right to receive the

entity’s cash, other assets, or equity instruments

vests

upon satisfaction of any specified vest-

ing conditions. Vesting conditions include service conditions. The

vesting period

is the peri-

od during which all the specified vesting conditions of a share-based payment arrangement

should be satisfied.

10.3.7

Fair value

is 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.

10.3.8

Intrinsic value

is the difference between the fair value of the shares to which the

counterparty has the right to subscribe or which it has the right to receive, and the price the

counterparty is required to pay for those shares.

10.3.9

Market condition

is a condition that is related to the market price of the entity’s

equity instruments.

10.3.10

A

share option

is 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.

10.4 ACCOUNTING TREATMENT

10.4.1

Share-based payments could be

• cash settled, that is, by a cash payment based on the value of equity instruments;

• equity settled, that is, by the issue of equity instruments; or

• cash or equity settlement (by choice of the entity or supplier)

10.4.2

An entity should recognize

the goods or services received or acquired

in a share-

based payment transaction when it obtains the goods or as the services are received.

10.4.3

Share-based payment transactions should be measured at

• the fair value of the goods or services received in the case of all third party, nonem-

ployee transactions, unless it is not possible to measure the fair value of those goods or

services reliably; or

• the fair value of the equity instruments in all other cases, including all employee

transactions.

EQUITY-SETTLED SHARE-BASED PAYMENT TRANSACTIONS

10.4.4

The fair value of the equity instruments issued or to be issued should be measured

• at grant date for transactions with employees and others providing similar services; and

• at the date on which the entity receives the goods or the counterparty renders the ser-

vices in all other cases.

10.4.5

The fair value of the equity instruments issued or to be issued should be based on

market prices, taking into account market vesting conditions (for example, market prices or

reference to an index) but not other vesting conditions (for example, service periods). Listed

shares should be measured at market price. Options should be measured

• on the basis of the market price of any equivalent traded options; or

• using an option pricing model in the absence of such market prices; or

• at intrinsic value when they cannot be measured reliably on the basis of market prices

or on the basis of an option pricing model.

10.4.6

In the rare cases where the entity is required to measure the equity instruments at

their

intrinsic value,

it remeasures the instruments at each reporting date until final settle-

ment and recognizes any

change in intrinsic value in profit or loss.

10.4.7

The entity should recognize an asset (for example, inventory) or an expense (for

example, services received or employee benefits) and a corresponding increase in equity if

the goods or services were received in an

equity-settled

share-based payment transaction.

Therefore, an entity recognizes an asset or expense and a corresponding increase in equity

• on grant date if there are no vesting conditions or if the goods or services have already

been received;

• as the services are rendered if nonemployee services are rendered over a period; or

• over the vesting period for employee and other share-based payment transactions

where there is a vesting period.

10.4.8

If the equity instruments granted do not

vest

until the counterparty completes a

specified period of service, the amount recognized should be adjusted over any vesting peri-

od for changes in the estimate of the number of securities that will be issued but not for

changes in the fair value of those securities. Therefore, on vesting date the amount recog-

nized is the exact number of securities that can be issued as of that date, measured at the fair

value of those securities at grant date.

10.4.9

If the entity

cancels or settles a grant

of equity instruments during the vesting peri-

od (other than a grant cancelled by forfeiture when the vesting conditions are not satisfied):

• The entity accounts for the cancellation or settlement as an acceleration of vesting by

recognizing immediately the amount that otherwise would have been recognized over

the remainder of the vesting period.

• The entity recognizes in equity any payment made to the employee on the cancellation

or settlement to the extent that the payment does not exceed the fair value at repur-

chase date of the equity instruments granted.

Share-Based Payment (IFRS 2)

• The entity recognizes as an expense the excess of any payment made to the employee

on the cancellation or settlement over the fair value at repurchase date of the equity

instruments granted.

• The entity accounts for new equity instruments granted to the employee as replace-

ment equity instruments for the cancelled equity instruments as a modification of the

original grant of equity instruments. The difference between the fair value of the

replacement equity instruments and the net fair value of the cancelled equity instru-

ments at the date the replacement equity instruments are granted is recognized as an

expense.

CASH-SETTLED SHARE-BASED PAYMENT TRANSACTION

10.4.10

The entity should recognize an asset (for example, inventory) or an expense (for

example, services received or employee benefits) and a liability if the goods or services were

received in a

cash-settled

share-based payment transaction.

10.4.11

Until the liability is settled, the entity should remeasure the fair value of the liabil-

ity at each reporting date and at the date of settlement, with any changes in fair value recog-

nized in profit or loss for the period.

SHARE-BASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVES

10.4.12

For

share-based payment transactions

in which the terms of the arrangement pro-

vide 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 should

account for that transaction, or the components of that transaction, as a cash-settled share-

based payment transaction if, and to the extent that, the entity has incurred a liability to set-

tle in cash or other assets, or as an equity-settled share-based payment transaction if, and to

the extent that, no such liability has been incurred.

10.5 PRESENTATION AND DISCLOSURE

10.5.1

An entity should 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.

10.5.2

An entity should disclose information that enables users of the financial statements

to

understand the nature and extent

of share-based payment arrangements that existed dur-

ing the period.

10.5.3

An entity should provide

a description

of

• each type of share-based payment arrangement that existed at any time during the

period; and

• the general terms and conditions of each arrangement, such as vesting requirements,

the maximum term of options granted, and the method of settlement (for example,

whether in cash or equity).

10.5.4

An entity should provide the

number and weighted average exercise prices

of share

options for each of the following groups of options:

• Outstanding at the beginning of the period

• Granted during the period

• Forfeited during the period

• Exercised during the period

• Expired during the period

• Outstanding at the end of the period

• Exercisable at the end of the period

10.5.5

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

should be disclosed, including:

• The option pricing model used and the inputs to that model, including

• the weighted average share price,

• exercise price,

• expected volatility,

• option life,

• expected dividends,

• the risk-free interest rate, and

• any other inputs to the model, including the method used and the assumptions

made to incorporate the effects of expected early exercise

• How expected volatility was determined, including an explanation of the extent to

which expected volatility was based on historical volatility

• Whether and how any other features of the option grant were incorporated into the

measurement of fair value, such as a market condition.

10.5.6

An entity should 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.

10.5.7

For share

options exercised

during the period an entity should

disclose

the weight-

ed average share price at the date of exercise.

10.5.8

For share

options outstanding

at the end of the period, an entity should disclose the

range of exercise prices and weighted average remaining contractual life.

10.6 FINANCIAL ANALYSIS AND INTERPRETATION

10.6.1

Share-based earnings complicate the analysis of various operating areas, in particu-

lar operating cash flow.

10.6.2

When an employee exercises such share options, the cash payment by the employ-

ees are typically classified as operating cash flows. This effect could be large and may not

necessarily be sustainable, especially if the options were to become out-of-the-money and

their exercise therefore no longer attractive.

10.6.3

The variables used to measure the fair value of an equity instrument issued under

IFRS 2 have a significant impact on that valuation, and the determination of these variables

requires significant professional judgment. A minor change in a variable, such as volatility or

expected life of an instrument, could have a quantitatively material impact on the fair value

of the instruments granted. In the end, the selection of variables must be based on entity-spe-

cific information.

10.6.4

One of the most difficult issues in applying IFRS 2 will be determining the fair value

of share-based payments. The determination of the fair value of share-based payment trans-

actions requires numerous estimates and the application of careful judgment. Measurement

Share-Based Payment (IFRS 2)

Example 10.1 (continued)

The weighted average share price at the date of exercise for share options exercised during

the Period was €53.69. The options outstanding at 31 December 20X5 had a weighted aver-

age exercise price of €66.33, and a weighted average remaining contractual life of 8.64 years.

The inputs into the Black-Scholes model were as follows:

20X4 20X5

Weighted average share price 68.34 69.68

Weighted average exercise price 68.34 69.68

Expected volatility 40% 35%

Expected life 3–8 years 4–9 years

Risk free rate 3% 3%

Expected dividends None none

Expected volatility was determined by calculating the historical volatility of the Group’s

share price over the previous 9 years. The expected life used in the model has been adjusted,

based on management’s best estimate, for the effects of nontransferability, exercise restric-

tions, and behavioral considerations.

During 20X5, the Group repriced certain of its outstanding options. The strike price was

reduced from €82.93 to the then current market price of €69.22. The incremental fair value of

€125,000 will be expensed over the remaining vesting period (2 years). The Group used the

inputs noted above to measure the fair value of the old and new shares.

The Group recognized total expenses of €775,000 and €750,000 related to equity-settled share-

based payment transactions in 20X4 and 20X5, respectively.

Cash-settled share-based payments

The Group issues to certain employees share appreciation rights (SARs) that require the

Group to pay the intrinsic value of the SAR to the employee at the date of exercise. The

Group has recorded liabilities of €1,325,000 and €1,435,000 in 20X4 and 20X5 respectively. Fair

value of the SARs is determined using the Black-Scholes model using the assumptions noted

in the above table. The Group recorded total expenses of €325,000 and €110,000 in 20X4 and

20X5, respectively. The total intrinsic value at 20X4 and 20X5 was €1,150,000 and €1,275,000,

respectively.

Other share-based payment plans

The employee share purchase plans are open to almost all employees and provide for a pur-

chase price equal to the daily average market price on the date of grant, less 15 percent. The

shares can be purchased during a two-week period each year. The shares so purchased are

generally placed in the employee share savings plan for a 5-year period. Pursuant to these

plans, the Group issued 2,123,073 ordinary shares in 20X5 at a weighted average share prices

of €64.35.