Share-based Payment

Assurance & Advisory

March 2004

. Share-based Payment

A guide to IFRS 2

. . . . Audit Tax Consulting Financial Advisory

Contacts

Global IFRS Leadership Team IFRS Global Office Global IFRS Leader Ken Wild kwild@deloitte.co.uk

IFRS Centres of Excellence Americas D. J. Gannon iasplusamericas@

Asia-Pacific Stephen Taylor iasplus@.hk

Europe-Africa Johannesburg Graeme Berry iasplus@deloitte.co.za

Copenhagen Stig Enevoldsen dk_iasplus@deloitte.dk

London Veronica Poole iasplus@deloitte.co.uk

Paris Laurence Rivat iasplus@deloitte.fr

Foreword

A Guide to IFRS 2 Share-based Payment

The issuance of IFRS 2 Share-based Payment in February 2004 completes one of the first major objectives of the International Accounting Standards Board (IASB) and fills a gap that has existed in International Financial Reporting Standards (IFRS). This gap was noted by the International Organization of Securities Commissions (IOSCO) in its 2000 report to the IASC ? giving the IASB extra motivation for solving the difficulties in this area.

IFRS 2 has been developed and designed to take a leadership position in what has historically been a difficult area for standard setters. Several standard-setting bodies around the world are expected to follow the IASB's lead.

The IASB has published 13 examples in the Implementation Guidance of IFRS 2. The matters addressed in this book are intended to supplement the IASB's own guidance.

Large as this book may seem, it does not address all fact patterns. Moreover, the guidance is subject to change as new IFRS are issued or as the IFRIC issues interpretations of IFRS 2. You are encouraged to consult a Deloitte Touche Tohmatsu professional regarding your specific issues and questions.

It is our intention to use our website, , to update the guidance in this book as it evolves. We hope you will find this information useful in implementing IFRS 2.

Ken Wild Global Leader, IFRS Deloitte Touche Tohmatsu

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A Guide to IFRS 2 Share-based Payment

Acknowledgements This document is the result of the dedication and quality of several members of the Deloitte team. By far the most significant contribution has come from Aaron Anderson who not only was the main author, but also was the person who pushed to have this book produced. We also owe a special debt of gratitude to Sandra Guillon who spent hours pouring through reams of filings to find the information necessary to develop the benchmark study and for the technical and editorial reviews performed by Deloitte professionals in Denmark, France, Hong Kong, South Africa, United Kingdom, and United States. These Deloitte professionals include advisors in audit, tax, and valuation services in order to provide you the multi-disciplinary information required to implement IFRS 2.

Abbreviations AICPA American Institute of Certified Public Accountants (U.S.)

APB Accounting Principles Board (U.S.)

FASB Financial Accounting Standards Board (U.S.)

GAAP Generally Accepted Accounting Principles

IASB International Accounting Standards Board

IFRIC International Financial Reporting Interpretations Committee

IFRS International Financial Reporting Standards

IPO

Initial Public Offering

SFAS Statement of Financial Accounting Standards (U.S.)

SOP Statement of Position (U.S.)

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Contents

A Guide to IFRS 2 Share-based Payment

I. Executive summary

4

II. Summary of IFRS 2

6

A. Scope

6

B. Recognition

7

1. Equity-settled share-based payments

2. Cash-settled share-based payments

3. Share-based payments with cash alternatives

4. Accounting for deferred taxes

C. Modifications, cancellations, and settlements

18

D. Measurement

19

1. Fair value by reference to the fair value of goods or services

2. Fair Value by reference to the equity instruments 3. Use of the intrinsic value 4. Selection of accounting policies

E. Disclosure requirements

22

F. Effective date and transition provisions

25

III. Questions and responses ? Implementation

28

IV. Factors affecting the fair value measurement of share-based payments

36

A. Measurements of share-based payments

B. Black-Scholes model versus the Binomial model

C. Basic factors affecting the valuation of share-based payments

D. Other factors that may affect the valuation of share-based payments

E. Application of the factors affecting the value of share-based payments

V. Benchmark study of key measurement variables

46

A. Expected volatility

B. Expected life

C. Risk-free interest rate

VI. Comparison of IFRS 2 and FASB Statement 123 Accounting for

57

Stock-Based Compensation

Appendix A. Illustrative disclosure

61

Appendix B. Illustration of the Black-Scholes calculation

64

Appendix C. Illustration of the measurement of employee share options

67

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