IFRS 9 Financial Instruments - The Accounting Library



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for Accounting Professionals

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IFRS 2 Share-based payment

2013

IFRS WORKBOOKS

(1 million downloaded)

Welcome to the EU Tacis IFRS Workbooks sixth (2013) edition! This is the tenth anniversary of the first edition in 2003. The changes from the 2012 edition are minimal, with no new standard issued in the past year. Major changes are anticipated to IFRS 9, IFRS 4, IAS 17 and IAS 18. Exposure drafts (proposals) have been issued, but have not yet been incorporated into the standards. To the books, we have added an article: ‘IFRS- grabbing the tiger by the tail’ which has been published by bankir.ru in Russian. This article covers IFRS teaching issues for each standard and a number of opinions and discussion points.

The set of books provides a book for every standard, plus three books on consolidation. Financial instrument bookkeeping is covered in IAS 32/39 (book 3) and in IFRS 9. IFRS 7 is complemented by FINREP, which illustrates practical use and presentation formats. An introduction to IFRS and transformation models from Russian accounting to IFRS complete the set.

Each workbook is a combination of Information, Examples, Self-Test Questions and Answers.

Thanks are due to those who made these publications possible and to you, our readers, for your continued support. I would like to express my gratitude to: Igor Sykharev and Tatiana Trifonova of the Ministry of Finance who provided a link from the Ministry’s site. Gulnara Makhmutova and Adel Valeev provided the updated Russian texts and editing. Marina Korf and Yulia Ykhanova of bankir.ru provided help, advice and space on its website. Sergey Dorozhkov and Elina Buzina of Association of Russian Bankers’ Institute of Banking ran excellent IFRS courses on all standards which enabled us to test this material and learn new insights from them and the participants. Please join us there for the best consolidation course in Russia.

World Bank courses for the Bank of Tanzania (‘BOT’) provided new IFRS and banking insights: thanks to Albert Mkenda BOT and my colleague Benson Mahenya among many others. IFRS assistance to the Bank of Mongolia (‘BOM’) with PricewaterhouseCoopers (thanks to Ekaterina Nekrasova, Jelena Pesic and Vladislav Kononenko) provided exposure to Mongolian commercial bank reporting and blending IFRS with bank prudential ratios. Oyungerel Gonchig, Project Manager at World Bank, Mongolia, and our counterparts at BOM: Oyuntsatsral Banid, Bunchinsuren Dagva, Borkhuu Gotovsuren, Batmaa Ochirbat and Gantsetseg Myagmarjay contributed to a memorable project.

On the back page are notes covering copyright details and the history of the series.

Please tell your friends and colleagues where to find our books. We hope that you find them useful.

Robin Joyce

Professor of the Chair of International Banking and Finance,

Financial University under the Government of the Russian Federation

Professor, Russian Academy of National Economy and Public

Administration under the President of the Russian Federation

Visiting Professor of the Siberian Academy of Finance and Banking Moscow, Russia 2013

IFRS 2 Share-based payment

CONTENTS

Background 3

UPDATE _ FRIC 11: IFRS 2 – Group and Treasury Share Transactions 5

Objective of IFRS 2 6

Definitions 6

Overview of IFRS 2 9

Measurement mechanisms 9

Scope 11

Recognition 11

Equity-settled share-based payment transactions - Overview 12

Modifications 16

Cash-settled share-based payment transactions 17

Disclosures 21

Multiple choice questions 23

Answers to multiple choice questions 26

Appendix 1 – aids to calculations 27

Appendix 2 – Valuation considerations 31

Appendix 3 - Tax effects of share-based payment transactions 34

Appendix 4 - Applying IFRS 2 in practice - Wayne Holdings 36

Note:

Material from the following PricewaterhouseCoopers publications has been used in this workbook:

Share-based Payment

Background

Undertakings often grant shares or share options to staff or other parties. Share plans and share option plans are a common feature of member of staff remuneration, for directors, senior executives and many other staff. Some undertakings issue shares or share options to pay suppliers, such as suppliers of professional services.

The reasons for granting shares are primarily for the undertaking to save cash, if the recipient can sell the shares in the market and the undertaking does not have to buy back the shares.

Share options also save cash, and are normally exercised only after a period of at least one year.

The share option fixes a price (grant price) for the shares at the start, and the recipient hopes that the market price will be higher than the grant price when the shares can be bought (when the option can be exercised).

If the market price is lower, the option is worthless, as it is cheaper to buy shares in the market. Share options are given to staff to motivate them to improve the performance of the undertaking to lift the market price of its shares.

Granting shares and options gives a part of the undertaking to the beneficiaries of the shares and options. Existing shareholders that sacrifice part of the undertaking hope that they will benefit from the cash saving and/or better performance of the company in the future.

It has been disputed whether there is a cost to the undertaking of these transactions. IFRS 2 says there is a cost to the undertaking and specifies its treatment.

IFRS 2 captures the purchase of all goods or services settled in an undertaking’s own equity instruments or in cash, if the amount payable depends on the price of the undertaking’s shares (or other equity instruments, such as options).

Estimates are now required of the number of options or other instruments expected to be exercised. Such estimates are complex to calculate where performance criteria, such as earnings targets, are involved. Specialist valuation skills are likely to be required in order to determine the amounts to be reported in the financial statements.

Companies using IFRS for the first time will now need to assess the impact of IFRS 2 and agree a strategy of how to convey this to stakeholders. Management should particularly consider the potential effect in the income statement from cash-settled schemes, and information about existing or planned share-based payment schemes.

IFRS 2 applies to all types of share-based payment transactions. These include:

1.Equity-settled An undertaking issues or transfers its own equity instruments, or those of another member of the same group, as consideration for goods or services.

2. Cash-settled An undertaking, or another member of the same group, pays cash calculated by reference to the price of its own equity instruments as consideration for goods or services.

3. Choice of equity-settled or An undertaking or the supplier may choose whether

cash-settled the undertaking settles in cash or by issuing or transferring equity instruments.

Goods acquired in share-based payment transactions include inventories, consumables, property, plant and equipment, and intangible and other non-financial assets.

Examples of arrangements that come under IFRS 2 are:

• Call options that give staff the right to purchase an undertaking’s shares in exchange for their services;

• Share appreciation rights that entitle staff to payments calculated by reference to the market price of an undertaking’s shares, or the shares of another undertaking in the same group;

• In-kind capital contributions of property, plant or equipment in exchange for shares or other

equity instruments;

• Share ownership schemes under which staff are entitled to receive an undertaking’s shares in exchange for their services; and

• Payments for services made to external consultants that are calculated by reference to the undertaking’s share price.

Until IFRS 2 was issued, there was no IFRS covering the recognition and measurement of these transactions. Concerns were raised about this gap in IFRSs, given the increasing prevalence of share-based payment transactions in many countries.

|UPDATE _ FRIC 11: IFRS 2 – Group and Treasury Share Transactions | |

| | |

|IFRIC 11 addresses equity-settled awards and group schemes, as follows: | |

| | |

|1. Equity-settled awards | |

| | |

|• Company issues the award, whether or not it (has to) buy: an arrangement requiring the delivery of own equity | |

|instruments is accounted for as an equity-settled arrangement regardless of whether the undertaking chooses or is | |

|required to buy those equity instruments from another party to satisfy its obligation to its employees. | |

| | |

|• Shareholder settles the award :arrangements are accounted for as an equity-settled share-based payment, whether | |

|the employee’s rights to the undertaking’s equity instruments are granted or settled by the undertaking or by the | |

|undertaking’s shareholders. | |

| | |

|2. Group schemes. The classification for share-based payment awards, which will | |

|be settled in parent company shares, granted to employees of a subsidiary: | |

| | |

|• if the parent grants the award, it is treated as equity settled in both the consolidated group accounts and the | |

|separate financial statements of the employing subsidiary; and | |

| | |

|• if the subsidiary grants the award, it is treated as cash settled in the separate | |

|financial statements of the employing subsidiary, even though it would be equity settled in the consolidated group | |

|accounts. | |

| | |

|The interpretation provides guidance on how to establish which undertaking has granted | |

|an award, as it focuses on the obligation to deliver the equity instruments. The | |

|presumption is that the undertaking that has taken on the obligation to deliver shares in | |

|settlement, either on vesting for a share award or on exercise for an option, is the | |

|grantor. | |

| | |

|IFRIC 11 also confirms that where the vesting of an award is based on service within a group – rather than with a | |

|specific undertaking within the group – an expense for an equity-settled arrangement is recognised in each group | |

|undertaking that the employee works for, based on the fair value of the equity instruments measured at grant date | |

|from a group perspective. | |

| | |

|If an employee fails to meet the service condition because he leaves the group, the previously recognised expense is| |

|reversed in each undertaking that he has worked for. | |

| | |

|Tracking this information is likely to be difficult in practice if employees move around between group undertakings.| |

| | |

|Additional considerations | |

|Funding arrangements between parent and subsidiary | |

| | |

|If the parent grants rights over its equity instruments to the employees of its subsidiary (accounted for as an | |

|equity-settled share-based payment), the debit | |

|(IFRS 2 expense) is recognised in the subsidiary’s income statement with a credit to equity (as a capital | |

|contribution) over the vesting period of the share-based payment arrangement. | |

| | |

|IFRIC 11 does not address the accounting within the parent undertaking for the capital contribution, unlike draft | |

|interpretation D17. | |

| | |

|D17 indicated that the parent undertaking would debit its investment in subsidiary and credit | |

|equity for the equity instruments it has granted (if it is satisfying the obligation). | |

| | |

|This guidance has not been included in IFRIC 11, but we believe that management should continue to apply it. | |

| | |

|Funding arrangements between the parent and the subsidiary in many territories are | |

|arranged to obtain a tax deduction. Where the income statement expense is based | |

|on the IFRS 2 charge rather than the funding payments, and the funding transaction is treated as a capital | |

|transaction rather than an expense, the tax deduction may not be available. | |

| | |

|Consolidation adjustments | |

|More complex accounting arises if a group has awards granted by a subsidiary that | |

|are settled in parent company shares. The expense in the subsidiary separate | |

|financial statements is based on cash-settled accounting – ie, marked to fair value. | |

| | |

|It will also require additional recordkeeping to ensure that the correct consolidation adjustments are made – in | |

|practice, management will need to keep track of two separate expense records. | |

| | |

|The separate financial statements of the parent undertaking reflect the terms of any agreement between the | |

|subsidiary and the parent regarding provision of the shares. | |

| | |

|This may mean no impact – for example, if the subsidiary buys shares on the market –or no impact until the shares | |

|are issued – for example, if the subsidiary pays the | |

|parent fair value for the issue of new shares. Other arrangements may be more difficult. | |

| | |

|The consolidation process will need to reverse any fair value adjustments applied in the subsidiary accounts. For | |

|example, if an award includes a market condition that | |

|is not met, the subsidiary records a cumulative expense of zero, the fair value of the liability. | |

| | |

|The group accounts would record the grant date fair value of the award. The consolidation process is also likely to | |

|impact the recognition of any tax deduction. For equity-settled awards where the (expected or actual) tax deduction | |

|exceeds the expense recognised, the excess tax benefit is recognised in equity. | |

| | |

|For cash-settled awards, any tax benefit is recognised in the income statement. | |

| | |

|Effective date | |

|IFRIC 11 applies to annual periods beginning on or after 1 March 2007 and should be applied retrospectively. Earlier| |

|adoption is permitted. Undertakings that apply it to an accounting period beginning before that date should disclose| |

|this fact. | |

| | |

|Practical considerations | |

|Getting the documentation trail for share-based payments clear and complete is | |

|critical, as recent experience in the US regarding the determination of grant date has shown. | |

| | |

|Establishing which undertaking has granted an award is now just as important as establishing when the award was | |

|granted. Experience with IFRS 2 demonstrates that having plan documentation that is unclear can have a significant | |

|accounting impact. | |

| | |

|The difference between classification as equity- or cash-settled or a difference of many months in the grant date | |

|are common problems, which would impact the expense measurement. Consideration of these issues is an integral part | |

|of the | |

|development of a share-based payment plan, not an after-thought. | |

| | |

|These are complex issues and preparers should seek advice from specialists. | |

| | |

|IFRS News – January 2007 | |

Objective of IFRS 2

The objective of IFRS 2 is to specify the financial reporting of a share-based payment transaction. It requires an undertaking to reflect in its income statement and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to staff.

Definitions

Binomial model

The Binomial model is an extension of the Black-Scholes model, allowing for the facility to exercise options within a time window. It is a numerical technique that will exactly reproduce the results of the Black-Scholes formula for an option that can only be exercised at the end of its term. The Binomial model has a number of limitations in relation to executive options:

• It is difficult to allow for performance conditions, turnover or exercise patterns in a Binomial model; and

• The Binomial model is not valid for executive options because in most cases the model assumes that the option will be sold rather than exercised. Early exercise is deemed to occur only in a few scenarios. An executive option cannot be sold in this way, so the Binomial model is not an appropriate way for dealing with early exerciseability of executive options.

Black-Scholes model

The Black-Scholes valuation model is a mathematical formula used to calculate the value of a European call option based on the underlying share price, exercise price, expiration date, risk-free rate of return, and the standard deviation (volatility) of the share price returns.

A European call option can only be exercised at the end of its life, unlike an American call option, which can be exercised at any time during its life. The model is also referred to as the Black-Scholes-Merton formula for pricing an option.

The Black-Scholes model has limitations. These are that performance conditions are not allowed for; and the option is assumed to be exercised at the end of a fixed term.

cash-settled share-based payment transaction

A share-based payment transaction in which the undertaking acquires goods or services by incurring a liability to transfer cash (or other assets) to a supplier for amounts that are based on the price (or value) of the undertaking’s shares or other equity instruments of the undertaking.

equity instrument

A contract that evidences a residual interest in the assets of an undertaking after deducting all of its liabilities.

equity instrument granted

The right (conditional or unconditional) to an equity instrument of the undertaking conferred by the undertaking on another party, under a share-based payment arrangement.

equity-settled share-based payment transaction

A share-based payment transaction in which the undertaking receives goods or services as consideration for equity instruments of the undertaking (including shares or share options).

fair value

The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. (IFRS 13)

grant date

The date at which the undertaking and another party (including a member of staff) agree to a share-based payment arrangement, being when the undertaking and the counterparty have agreed the terms and conditions of the arrangement.

At grant date, the undertaking confers on the counterparty the right to cash, other assets, or equity instruments of the undertaking, provided the specified vesting conditions, if any, are met.

If that agreement is subject to an approval process (for example, by shareholders), grant date is the date when that approval is obtained.

|EXAMPLE – grant date |

| |

|In February 2XX5, the company offered options to new staff, subject to shareholder approval. The awards were |

|approved by the shareholders in June 2XX5. The grant date is June 2XX5, when the approval was obtained. |

intrinsic value

The difference between the fair value of the shares to which the counterparty has the (conditional or unconditional) right to subscribe or which it has the right to receive, and the price (if any) the counterparty is required to pay for those shares.

For example, a share option with an exercise price of $50, on a share with a fair value of $70, has an intrinsic value of $20.

market condition

A condition upon which the exercise price, vesting or exercisability of an equity instrument depends that is related to the market price of the undertaking’s equity instruments, such as attaining:

- a specified share price, or

- a specified amount of intrinsic value of a share option, or

- achieving a specified target that is based on the market price of the undertaking’s equity instruments relative to an index of market prices of equity instruments of other undertakings.

measurement date

The date at which the fair value of the equity instruments granted is measured for the purposes of IFRS 2. For transactions with staff and others providing similar services, the measurement date is grant date. For transactions with parties other than staff (and those providing similar services), the measurement date is the date the undertaking obtains the goods or the counterparty renders service.

|EXAMPLE – Measurement date for transactions with parties other than staff |

| |

|If the goods, or services, are received on more than one date, the undertaking should measure the fair value of the |

|equity instruments granted on each date when goods or services are received. The undertaking should apply that fair |

|value when measuring the goods or services received on that date. |

| |

|However, an approximation could be used in some cases. For example, if an undertaking received services continuously|

|during a three-month period, and its share price did not change significantly during that period, the undertaking |

|could use the average share price during the three-month period when estimating the fair value of the equity |

|instruments granted. |

Monte-Carlo model

The Monte-Carlo valuation model works by undertaking several thousand simulations of future outcomes for share price and other variables, calculating the option pay-out under each scenario, taking the average pay-out and discounting to the present day to give an option value.

Monte-Carlo models can incorporate even very complex performance conditions, turnover and exercise patterns that are a function of gain or time since grant. These models are generally the best type of model for valuing executive options.

The main disadvantages of Monte-Carlo models are the complexity and the computing power required.

reload feature

A feature that provides for an automatic grant of additional share options whenever the option holder exercises previously-granted options using the undertaking’s shares, rather than cash, to satisfy the exercise price.

reload option

A new share option granted when a share is used to satisfy the exercise price of a previous share option.

share-based payment arrangement

An agreement between the undertaking and another party (including a member of staff) to enter into a share-based payment transaction, which thereby entitles the other party:

- to receive cash or other assets of the undertaking for amounts that are based on the price of the undertaking’s shares or other equity instruments of the undertaking, or

- to receive equity instruments of the undertaking, provided the specified vesting conditions, if any, are met.

share-based payment transaction

A transaction in which the undertaking:

- receives goods or services as consideration for equity instruments of the undertaking (including shares or share options), or

- acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price of the undertaking’s shares or other equity instruments of the undertaking.

share option

A contract that gives the holder the right, but not the obligation, to subscribe to the undertaking’s shares at a fixed or determinable price for a specified period of time.

staff and others providing similar services

Individuals who render personal services to the undertaking and either:

(1) the individuals are regarded as staff for legal or tax purposes,

(2) the individuals work for the undertaking under its direction in the same way as individuals who are regarded as staff for legal or tax purposes, or

(3) the services rendered are similar to those rendered by staff.

For example, the term encompasses all management personnel, having authority and responsibility for planning, directing and controlling the activities of the undertaking, including non-executive directors.

vest

To become an entitlement. Under a share-based payment arrangement, a counterparty’s right to receive cash, other assets, or equity instruments of the undertaking vests when the counterparty's entitlement is no longer conditional on the satisfaction of any vesting conditions.

vesting conditions

The conditions that must be satisfied for the counterparty to become entitled to receive cash, other assets or equity instruments of the undertaking, under a share-based payment arrangement.

Vesting conditions are either service conditions or performance conditions. Service conditions require the counterparty to complete a specified period of service. Performance conditions require the counterparty to complete a specified period of service and specified performance targets to be met (such as a specified increase in the entity's profit over a specified period of time). A performance condition might include a market condition

vesting period

The period during which all the specified vesting conditions of a share-based payment arrangement are to be satisfied.

|EXAMPLE – Vesting period |

| |

|A company grants share options to its staff. Certain performance conditions need |

|to be satisfied over the next three years for the options to be exercisable. The employee has to remain working for |

|the company during this period to become entitled to the award. |

| |

|The staff provide their services over the three-year vesting period in exchange for the granted options. The expense|

|should therefore be recognised over this period. |

volatility

A statistical measure of the fluctuation in the investment return on a share.

Overview of IFRS 2

IFRS 2 requires an undertaking to recognise share-based payment transactions in its financial statements, including transactions with staff or other parties to be settled in cash, other assets, or equity instruments of the undertaking.

There are no exceptions to IFRS 2, other than for transactions to which other Standards apply.

IFRS 2 sets out measurement principles and specific requirements for three types of share-based payment transactions:

1. equity-settled share-based payment transactions, in which the undertaking receives goods or services as consideration for equity instruments of the undertaking (including shares or share options);

2. cash-settled share-based payment transactions, in which the undertaking acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price of the undertaking’s shares or other equity instruments of the undertaking; and

3. transactions in which the undertaking receives, or acquires, goods or services and either the undertaking, or the supplier of those goods or services, has a choice of whether the undertaking settles the transaction in cash or by issuing equity instruments.

For equity-settled share-based payment transactions, an undertaking must measure the goods or services received, and the corresponding increase in equity, directly, at fair value, unless that fair value cannot be estimated reliably.

If the undertaking cannot estimate reliably the fair value of the goods or services received, the undertaking is required to measure their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted.

Measurement mechanisms

1. for transactions with staff and others providing similar services, the undertaking must measure the fair value of the equity instruments granted, as it is usually not possible to estimate reliably the fair value of member of staff services received.

The fair value of the equity instruments granted is measured at grant date.

2. for transactions with parties other than staff (and those providing similar services), there is a rebuttable presumption that the fair value of the goods or services received can be estimated reliably.

That fair value is measured at the date the undertaking obtains the goods or services. If the presumption is rebutted, the transaction is measured by reference to the fair value of the equity instruments granted, measured at the date the undertaking obtains the goods or the counterparty renders service.

3. for goods or services measured by reference to the fair value of the equity instruments granted, IFRS 2 specifies that vesting conditions, other than market conditions, are not taken into account when estimating the fair value of the shares or options at the relevant measurement date (as specified above).

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Example – Market vesting conditions

|EXAMPLE – Market vesting conditions vesting conditions |

| |

|A company granted share options that become exercisable when the market price increases by at least 10% in each year|

|over the next three years. At the end of year three, this target has not been met. |

| |

|The company should not revise the grant date fair value and should not reverse the staff benefits expense already |

|recognised, because the increase in share price is a market-based criterion. It was included in determining the fair|

|value of the options at the grant date. |

Instead, vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognised for goods or services received as consideration for the equity instruments granted is based on the number of equity instruments that eventually vest.

| |

|EXAMPLE – Non-market vesting conditions Example – Non-market vesting condition |

| |

|Management introduced a new equity-settled compensation plan with a non-market performance condition. During the |

|following year, after a downturn in the company’s fortunes, it considers that there is no chance that it will meet |

|the target. |

| |

|The cumulative expense at the end of the second year will be adjusted to nil, and the charge is reversed in the |

|current year. |

Hence, on a cumulative basis, no amount is recognised for goods or services received if the equity instruments granted do not vest because of failure to satisfy a vesting condition (other than a market condition).

4. IFRS 2 requires the fair value of equity instruments granted to be based on market prices and to take into account the terms and conditions upon which those equity instruments were granted.

In the absence of market prices, fair value is estimated, using a valuation technique, to estimate what the price of those equity instruments would have been on the measurement date in an independent transaction between knowledgeable, willing parties.

5. IFRS 2 also sets out requirements if the terms and conditions of an option or share grant are modified (such as an option is repriced) or if a grant is cancelled, repurchased or replaced with another grant of equity instruments.

For example, irrespective of any modification, cancellation or settlement of a grant of equity instruments to staff, IFRS 2 generally requires the undertaking to record, as a minimum, the services received measured at the grant date fair value of the equity instruments granted.

For cash-settled share-based payment transactions, IFRS 2 requires an undertaking to measure the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the undertaking is required to remeasure the fair value of the liability at each reporting date and at the date of settlement, with any changes in value recognised in the income statement for the period.

For share-based payment transactions in which either party has a choice of whether the undertaking settles the transaction in cash or by issuing equity instruments, the undertaking is required to account for that transaction as a cash-settled share-based payment transaction if the undertaking has incurred a liability to settle in cash (or other assets), or as an equity-settled share-based payment transaction if no such liability has been incurred.

IFRS 2 prescribes various disclosure requirements to enable users to understand:

1. the nature and extent of share-based payment arrangements that existed during the period;

2. how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined; and

3. the effect of share-based payment transactions on the undertaking’s profit or loss for the period and on its financial position.

Scope

An undertaking shall apply IFRS 2 in accounting for all share-based payment transactions including:

1. equity-settled share-based payment transactions, in which the undertaking receives goods or services as consideration for equity instruments of the undertaking (including shares or share options),

2. cash-settled share-based payment transactions, in which the undertaking acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price of the undertaking’s shares or other equity instruments of the undertaking, and

3. transactions in which the undertaking receives or acquires goods or services and either the undertaking or the supplier of those goods or services has a choice of whether the undertaking settles the transaction in cash (or other assets) or by issuing equity instruments,

Transfers of an undertaking’s equity instruments by its shareholders to parties that have supplied goods or services to the undertaking (including staff) are share-based payment transactions, unless the transfer is clearly for a purpose other than payment for goods (or services) supplied to the undertaking.

This also applies to transfers of equity instruments of the undertaking’s parent, or equity instruments of another undertaking in the same group as the undertaking, to parties that have supplied goods or services to the undertaking.

A transaction with a member of staff (or other party) in his/her capacity as a holder of equity instruments of the undertaking is not a share-based payment transaction.

|EXAMPLE - the member of staff has received a right in his/her capacity as a shareholder |

| |

|An undertaking might grant all holders of a particular class of its equity instruments the right to acquire |

|additional equity instruments of the undertaking at a price that is less than the fair value of those equity |

|instruments. |

| |

|If a member of staff receives such a right because he/she is a holder of that particular class of equity |

|instruments, the granting or exercise of that right should not be subject to the requirements of IFRS 2, as the |

|member of staff has received that right in his/her capacity as a shareholder, rather than as a member of staff. |

| |

|This transaction is not subject to the requirements of IFRS 2. |

IFRS 2 applies to share-based payment transactions in which an undertaking acquires or receives goods or services. Goods include inventories, consumables, property, plant and equipment, intangible assets and other non-financial assets.

However, an undertaking shall not apply IFRS 2 to transactions in which the undertaking acquires goods as part a takeover, to which IFRS 3 Business Combinations applies.

Equity instruments granted to staff of a purchased undertaking in their capacity as staff (in return for continued service) are within the scope of IFRS 2. Similarly, the cancellation, replacement or other modification of share-based payment arrangements because of a business combination, or other restructuring, shall be accounted for under IFRS 2.

IFRS 2 does not apply to share-based payment transactions in which the undertaking 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.

Examples of these are contracts for the purchase of goods that are within the scope of IAS 39, such as commodity contracts entered into for speculative purposes, that is, other than to satisfy the reporting undertaking’s expected purchase or usage requirements.

Recognition

An undertaking shall recognise the goods or services acquired in a share-based payment transaction when it obtains the goods or as the services are received. The undertaking shall recognise a corresponding increase in equity if the goods or services were received in an equity-settled share-based payment transaction, or a liability if the goods or services were acquired in a cash-settled share-based payment transaction.

When the goods or services acquired in a share-based payment transaction do not qualify for recognition as assets, they shall be recorded as expenses.

Typically, an expense arises from the consumption of goods or services. For example, services are usually consumed immediately, in which case an expense is recorded as the counterparty renders service.

Goods might be consumed over a period of time or, in the case of inventories, sold at a later date, in which case an expense is recorded when the goods are consumed or sold. However, sometimes it is necessary to record an expense before the goods or services are consumed or sold, because they do not qualify for recognition as assets.

For example, an undertaking might acquire goods as part of the research phase of a project to develop a new product. Although those goods have not been consumed, they might not qualify for recognition as assets under the applicable IFRS.

The debit side of the transaction – grant date

The debit side of the IFRS 2 transaction measures the fair value of the resources received. This is consideration for the issue of equity instruments.

The goods or services received should be measured at their fair value at the date when the undertaking obtains those goods or as the services are received.

However, if the fair value of the services received is not readily determinable, then a surrogate measure must be used, such as the fair value of the share options or shares granted. This is the case for staff services.

If the fair value of the equity instruments granted is used, the fair value of the services received during a particular accounting period is not affected by subsequent changes in the fair value of the equity instrument.

|EXAMPLE - vesting date and exercise date measurement are inappropriate |

| |

|Services are received during years 1-3 as the consideration for share options that are exercised at the end of year |

|5. |

| |

|For services received in year 1, subsequent changes in the value of the share option in years 2-5 are unrelated to, |

|and have no effect on, the fair value of those services when received. |

Service date measurement measures the fair value of the equity instrument at the same time as the services are received. This means that changes in the fair value of the equity instrument during the vesting period affect the amount attributed to the services received.

IASB concluded that, at grant date, it is reasonable to presume that the fair value of both sides of the contract are substantially the same, ie the fair value of the services expected to be received is substantially the same as the fair value of the equity instruments granted.

Thus, the grant date is the most appropriate measurement date for the purposes of providing a surrogate measure of the fair value of the services received.

The credit side of the transaction – grant date

Although focusing on the debit side of the transaction is consistent with the primary accounting objective, some approach the measurement date question from the perspective of the credit side of the transaction: the issue of an equity instrument.

Staff must perform their side of the arrangement by providing the necessary services and meeting any other performance criteria before the undertaking is obliged to perform its side of the arrangement.

The provision of services is the consideration they use to 'pay' for the share option.

IASB concluded that, no matter which side of the transaction one focuses upon (ie the receipt of resources or the issue of an equity instrument), grant date is the appropriate measurement date, as it does not require remeasurement of equity interests and it provides a reasonable surrogate measure of the fair value of the services received from staff.

Equity-settled share-based payment transactions - Overview

For equity-settled share-based payment transactions, the undertaking shall measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably.

If the undertaking cannot estimate reliably the fair value of the goods or services received, the undertaking shall use the fair value of the equity instruments granted.

The undertaking shall measure the fair value of staff services received by reference to the fair value of the equity instruments granted, as typically it is not possible to estimate reliably the fair value of the services received. The fair value of those equity instruments shall be measured at the grant date.

Typically, shares, share options or other equity instruments are granted to staff as part of their remuneration package, in addition to a cash salary and other employment benefits.

Shares or share options are sometimes granted as part of a bonus arrangement, rather than as a part of basic remuneration, as an incentive to the staff to remain in the undertaking’s employ, or to reward them for their efforts in improving the undertaking’s performance.

For transactions with parties other than staff, there shall be a rebuttable presumption that the fair value of the goods or services received can be estimated reliably. That fair value shall be measured at the date the undertaking obtains the goods or the counterparty renders service.

If the undertaking rebuts this presumption, the undertaking shall measure the goods or services received, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted, measured at the date the undertaking obtains the goods or the counterparty renders service.

[pic]

Transactions in which services are received

If the equity instruments granted vest immediately, the counterparty is not required to complete a specified period of service before becoming unconditionally entitled to those equity instruments.

The undertaking shall presume that services rendered by the counterparty as consideration for the equity instruments have been received. In this case, on grant date the undertaking shall record the services received in full, with a corresponding increase in equity.

If the equity instruments granted do not vest until the counterparty completes a specified period of service, the undertaking shall presume that the services will be received in the future, during the vesting period. The undertaking shall account for those services as they are rendered by the counterparty during the vesting period, with a corresponding increase in equity. For example:

1. if a member of staff is granted share options conditional upon completing three years’ service, then the undertaking shall presume that the services will be received in the future, over that three-year vesting period.

2. if a member of staff is granted share options conditional upon the achievement of a performance condition and remaining in the undertaking’s employ until that performance condition is satisfied, and the length of the vesting period varies depending on when that performance condition is satisfied, the undertaking shall presume that the services will be received in the future, over the expected vesting period.

The undertaking shall estimate the length of the expected vesting period at grant date, based on the most likely outcome of the performance condition.

-If the performance condition is a market condition, the estimate of the length of the expected vesting period shall be consistent with the assumptions used in estimating the fair value of the options granted, and shall not be subsequently revised.

-If the performance condition is not a market condition, the undertaking shall revise its estimate of the length of the vesting period, if necessary, if subsequent information indicates that the length of the vesting period differs from previous estimates.

Transactions measured by reference to the fair value of the equity instruments granted

Determining the fair value of equity instruments granted

For transactions measured by the fair value of the equity instruments granted, an undertaking shall measure the fair value at the measurement date, based on market prices if available, taking into account the terms and conditions upon which those equity instruments were granted.

If market prices are not available, the undertaking shall estimate the fair value using a valuation technique to estimate what the price of those equity instruments would have been on the measurement date in an independent transaction between willing parties.

The valuation technique shall be consistent with generally-accepted valuation methodologies for pricing financial instruments, and shall incorporate all factors and assumptions that - willing market participants would consider in setting the price.

Treatment of vesting conditions

A grant of equity instruments might be conditional upon satisfying specified vesting conditions.

For example, a grant of shares or share options to a member of staff is typically conditional on the member of staff remaining in the undertaking’s employ for a specified period of time.

There might be performance conditions that must be satisfied, such as the undertaking achieving a specified growth in profit, or a specified increase in the undertaking’s share price.

Vesting conditions, other than market conditions, shall not be taken into account when estimating the fair value of the shares or share options at the measurement date.

Instead, vesting conditions shall be taken into account by adjusting the number of equity instruments included in the amount so that, ultimately, the amount recorded shall be based on the number of equity instruments that eventually vest.

Hence, on a cumulative basis, no amount is recorded for goods or services received if the equity instruments granted do not vest due to failure to satisfy a vesting condition, such as the counterparty fails to complete a specified service period, or a performance condition is not satisfied.

|EXAMPLE – Changes in vesting estimates |

| |

|A company granted options to its staff with a fair value of €300,000, determined using the Black-Scholes model, and |

|made the following estimates: |

| |

|Estimate at grant date of the percentage of staff leaving the company before the |

|end of the three-year vesting period; 10% |

| |

|Revised estimate, made in the second year, of the portion of staff leaving |

|the company before the end of three years; 5% |

| |

|Actual percentage of leavers; 6% |

| |

| |

|The expense in the first year should be €90,000 (€300,000 x 1/3 x 90%). As a result of a change in accounting |

|estimate of the percentage of staff expected to leave, an expense of €100,000 will be recognised in the second year.|

|The cumulative expense at the end of the second year is €190,000 (€300,000 x 2/3 x 95%). |

| |

|At the end of the third year, 94% of the options vest, so the cumulative expense over the vesting period is €282,000|

|(€300,000 x 3/3 x 94%), and the expense in the third year is €92,000 (€282,000-€190,000). |

The undertaking shall recognise an amount for the goods or services received during the vesting period based on the best available estimate of the number of equity instruments expected to vest and shall revise that estimate, if necessary, if subsequent information indicates that the number of equity instruments expected to vest differs from previous estimates.

On vesting date, the undertaking shall revise the estimate to equal the number of equity instruments that ultimately vested.

Market conditions, such as a target share price upon which vesting (when the option may be exercised and the shares purchased) is conditioned, shall be taken into account when estimating the fair value of the equity instruments granted.

Thus, for grants of equity instruments with market conditions, the undertaking shall record the goods or services received from a counterparty who satisfies all other vesting conditions (such as services received from a member of staff who remains in service for the specified period of service), irrespective of whether that market condition is satisfied.

Treatment of a reload feature

Reload features shall not be taken into account when estimating the fair value of options granted at the measurement date. Instead, a reload option shall be accounted for as a new option grant, if and when a reload option is subsequently granted.

After vesting date

Having recorded the goods or services received, and a corresponding increase in equity, the undertaking shall make no subsequent adjustment to total equity after vesting date.

For example, the undertaking shall not subsequently reverse the amount recorded for services received from a member of staff if the vested equity instruments are later forfeited or, in the case of share options, the options are not exercised.

However, this requirement does not preclude the undertaking from recording a transfer within equity, such as a transfer from one component of equity to another.

If the fair value of the equity instruments cannot be estimated reliably

The undertaking may be unable to estimate reliably the fair value of the equity instruments granted at the measurement date. In these rare cases only, the undertaking shall instead:

1. measure the equity instruments at their intrinsic value, initially at the date the undertaking obtains the goods or service and subsequently at each reporting date and at the date of final settlement, with any change in intrinsic value recognised in the income statement.

For a grant of share options, the share-based payment arrangement is finally settled when the options are exercised, are forfeited or lapse (at the end of the option’s life).

2. record the goods or services received based on the number of equity instruments that ultimately vest or are ultimately exercised. For share options, for example, the undertaking shall record the goods or services received during the vesting period, if any.

The amount recognised for goods or services received during the vesting period shall be based on the number of share options expected to vest. The undertaking shall revise that estimate, if necessary, if subsequent information indicates that the number of share options expected to vest differs from previous estimates.

On the vesting date, the undertaking shall revise the estimate to equal the number of equity instruments that ultimately vested. After vesting date, the undertaking shall reverse the amount recognised for goods or services received if the share options are later forfeited, or lapse at the end of the share option’s life.

1. If the settlement occurs during the vesting period, the undertaking shall account for the settlement as an acceleration of vesting, and shall therefore record immediately the amount that would otherwise have been recorded for services received over the remainder of the vesting period.

2. Any payment made on settlement shall be accounted for as the repurchase of equity instruments, as a deduction from equity, except to the extent that the payment exceeds the intrinsic value of the equity instruments, measured at the repurchase date. Any such excess shall be recognised as an expense.

Modifications

An undertaking might modify the terms and conditions on which the equity instruments were granted. For example, it might reduce the exercise price of options granted to staff (ie reprice the options), which increases the fair value of those options.

Modifications should be viewed as incremental instruments in their own right. IFRS 2 requires an undertaking to ignore a modification if it does not increase the total fair value of the share-based payment arrangement or is not otherwise beneficial to the member of staff or service provider. However, reductions in the number of options granted are treated as cancellations. The following diagram illustrates these transactions:

[pic]

If a modification increases the fair value of the equity instruments granted (for example, by reducing the exercise price of share options), the incremental fair value should be added to the amount being recognised for the services received.

If a modification increases the number of equity instruments granted, the fair value of these additional instruments is added to the amount recognised. This will be in addition to any amount recognised in respect of the original instrument, which should continue to be recognised over the remainder of the original vesting period unless there is a failure to satisfy the original non-market vesting conditions.

If a modification occurs during the vesting period, the incremental fair value should be recognised over the period from the modification date until the date on which the modified equity instruments vest. If the modification occurs after the vesting date, the incremental fair value should be recognised immediately, or over the revised vesting period if the employee is required to complete an additional period of service before becoming unconditionally entitled to the modified instruments.

If a modification provides some other benefit to staff, this should be taken into account in estimating the number of equity instruments that are expected to vest. For example, a vesting condition might be eliminated.

|EXAMPLE- Beneficial Modification |

| |

|An undertaking granted 100 share options to each of its five key executives. The share options vest only if the |

|undertaking achieves its next year’s sales target of €100 million. During the year the sales target was revised to |

|€90 million. |

| |

|A reduction in the sales target makes the options more likely to vest, and the undertaking recognises an increased |

|expense. |

Cancellations

An undertaking may cancel and replace a grant of equity instruments. In this case, the incremental fair value is the difference between the fair value of the replacement instruments and the fair value of the original instruments. The replacement is treated as a modification.

Early settlements

An undertaking may cancel, or early settle, an award without replacement. On early settlement, the undertaking should recognise immediately the balance that would have been charged over the remaining period.

When applied to share-based payment transactions with parties other than staff, any references in to grant date shall instead refer to the date the undertaking obtains the goods or the counterparty renders service.

The undertaking shall recognise, as a minimum, the services received measured at the grant date fair value of the equity instruments granted, unless those equity instruments do not vest because of failure to satisfy a vesting condition (other than a market condition) that was specified at grant date.

This applies irrespective of any modifications to the terms and conditions on which the equity instruments were granted, or a cancellation or settlement of that grant of equity instruments. In addition, the undertaking shall recognise the effects of modifications that increase the total fair value of the share-based payment arrangement, or are otherwise beneficial to the member of staff.

If the undertaking cancels or settles a grant of equity instruments during the vesting period (other than a grant cancelled by forfeiture when the vesting conditions are not satisfied):

1. the undertaking shall account for the cancellation or settlement as an acceleration of vesting, and shall therefore record immediately the amount that otherwise would have been recorded for services received over the remainder of the vesting period.

2. any payment made to the member of staff on the cancellation, or settlement, of the grant shall be accounted for as the repurchase of an equity interest: as a deduction from equity, except to the extent that the payment exceeds the fair value of the equity instruments granted, measured at the repurchase date. Any such excess shall be recognised as an expense.

3. if new equity instruments are granted to the member of staff and, on the date when those new equity instruments are granted, the undertaking identifies the new equity instruments granted as replacement equity instruments for those cancelled, the undertaking shall account for the granting of replacement equity instruments in the same way as a modification of the original grant of equity instruments.

The incremental fair value granted is the difference between:

- the fair value of the replacement equity instruments and

- the net fair value of the cancelled equity instruments,

at the date the replacement equity instruments are granted.

The net fair value of the cancelled equity instruments is their fair value, immediately before the cancellation, less the amount of any payment made to the member of staff on cancellation of the equity instruments that is accounted for as a deduction from equity.

If the undertaking does not identify new equity instruments granted as replacement equity instruments for the cancelled equity instruments, the undertaking shall account for those new equity instruments as a new grant of equity instruments.

If an undertaking repurchases vested equity instruments, the payment made to the member of staff shall be accounted for as a deduction from equity, except to the extent that the payment exceeds the fair value of the equity instruments repurchased, measured at the repurchase date. Any such excess shall be recognised as an expense.

Cash-settled share-based payment transactions

For cash-settled share-based payment transactions, the undertaking shall measure the goods or services acquired and the liability at the fair value of the liability. Until the liability is settled, the undertaking shall remeasure the fair value of the liability at each reporting date and at the date of settlement, with any changes in fair value recognised in the income statement for the period.

For example, an undertaking might grant share appreciation rights to staff as part of their remuneration package, whereby the staff will become entitled to a future cash payment (rather than an equity instrument), based on the increase in the undertaking’s share price from a specified level over a specified period of time.

|EXAMPLE– Share appreciation rights |

| |

|A company granted share appreciation rights to its 100 staff in March 2003, vesting in |

|March 2007. The following estimates were made by management in March 2004: |

| |

|Estimate of the awards that will vest |

|80% |

| |

|Fair value of each share appreciation right at March 2004 €5,000 |

| |

|The fair value of the liability to be recorded in March 2004 is €100,000 |

|(100 x €5,000 x 80% x 1/4). |

| |

|Management revised its estimates in March 2005 as follows: |

| |

|Estimate of the awards that will vest |

|90% |

|Fair value of each share appreciation right at March 2005 €6,000 |

| |

|The accrued liability at that reporting date is €270,000 (100 x €6,000 x 90% x 2/4). |

| |

|The increase in the liability of €170,000 (€270,000-€100,000) is recognised as an expense in the income statement |

|within ‘staff costs’. |

Or an undertaking might grant to its staff a right to receive a future cash payment by granting to them a right to shares (including in the form of share options) that are redeemable, either mandatorily (upon cessation of employment) or at the member of staff’s option.

The undertaking shall recognise the services received, and a liability to pay for those services, as the members of staff render service.

For example, some share appreciation rights vest immediately, and the staff are therefore not required to complete a specified period of service to become entitled to the cash payment.

In the absence of evidence to the contrary, the undertaking shall presume that the services rendered by the staff in exchange for the share appreciation rights have been received. Thus, the undertaking shall recognise immediately the services received and a liability to pay for them.

If the share appreciation rights do not vest until the staff have completed a specified period of service, the undertaking shall recognise the services received, and a liability to pay for them, as the staff render service during that period.

The liability shall be measured, initially and at each reporting date until settled, at the fair value of the share appreciation rights, by applying an option pricing model, taking into account the terms and conditions on which the share appreciation rights were granted, and the extent to which the staff have rendered service to date.

|EXAMPLE – Remeasurement of share appreciation rights after vesting |

| |

|A company granted share appreciation rights to 1,000 staff on 1 January 2005 based on 1 million shares. |

| |

|The rights vest on 31 December 2005, but payment is in January 2007. |

| |

|The share price at 1 January 2005 was €8, at 31 December 2005 it was €10, and at 31 December 2006 it was €9. |

| |

|A liability is recognised at 31 December 2005 of €2 million (1 million shares x (€10-€8)). |

| |

|In 2006 the company should recognise a gain of €1 million (1 million shares x (€10-€9)), and reduce the liability to|

|€1 million. |

Cash alternatives

For share-based payment transactions where either has the choice of whether the undertaking settles the transaction in cash or by issuing equity instruments, the undertaking shall account for that transaction, or the components of that transaction, as a cash-settled share-based payment transaction if the undertaking has incurred a liability to settle in cash or other assets, or as an equity-settled share-based payment transaction if no such liability has been incurred.

Counterparty has a choice of settlement

If an undertaking has granted the counterparty the right to choose whether a share-based payment transaction is settled in cash or by issuing equity instruments, the undertaking has granted a compound financial instrument, which includes a debt component (the right to demand payment in cash) and an equity component (the right to demand settlement in equity instruments rather than in cash).

[pic]

1 See also diagram on the right

2 See also ‘Undertaking chooses settlement method’ on the right.

3 If the counterparty chooses settlement in cash, any equity component previously recognised in equity will remain there, although there might be a transfer from one component of equity to another.

4 If the counterparty chooses settlement in equity instruments, the balance of the liability is transferred to equity as consideration for the equity instrument.

For transactions with parties other than staff, in which the fair value of the goods or services received is measured directly, the undertaking shall measure the equity component of the compound financial instrument as the difference between:

- the fair value of the goods or services received and

- the fair value of the debt component,

at the date when the goods or services are received.

[pic]

1,2 See also diagram on the left.

For other transactions, including transactions with staff, the undertaking shall measure the fair value at the measurement date, taking into account the terms and conditions on which the rights to cash, or equity instruments,

were granted.

The undertaking shall first measure the fair value of the debt component, and then measure the fair value of the equity component—taking into account that the counterparty must forfeit the right to receive cash in order to receive the equity instrument. The fair value of the compound financial instrument is the sum of the fair values of the two components.

[pic]

However, share-based payment transactions in which the counterparty has the choice of settlement are often structured so that the fair value of one settlement alternative is the same as the other.

For example, the counterparty might have the choice of receiving share options or cash-settled share appreciation rights. In such cases, the fair value of the equity component is zero, and hence the fair value of the compound financial instrument is the same as the fair value of the debt component.

|EXAMPLE – Goods or non-staff services with settlement alternatives |

| |

|An undertaking purchased 10kg of gold worth €80,000. The supplier can choose how the purchase price is settled. It |

|can: |

| |

|1) receive 100 of the undertaking’s shares two years after delivery (the fair value of this alternative is estimated|

|at €87,000 at the date of purchase); or |

| |

|2) obtain a payment equal to the market price of 90 shares at the end of the first year after delivery (fair value |

|of this alternative is estimated at €75,000 at the date of purchase). |

| |

|At the date of obtaining the 10kg of gold, the undertaking should record a liability of €75,000 and an increase in |

|equity of €5,000, determined as the difference between the value of 10kg of gold of €80,000 and fair value of the |

|liability of €75,000. |

Conversely, if the fair values of the settlement alternatives differ, the fair value of the equity component usually will be greater than zero, in which case the fair value of the compound financial instrument will be greater than the fair value of the debt component.

The undertaking shall account separately for the goods or services received or acquired in respect of each component of the compound financial instrument.

-For the debt component, the undertaking shall recognise the goods or services acquired, and a liability to pay for those goods or services, as the counterparty supplies goods or renders service, as in cash-settled share-based payment transactions.

-For any equity component, the undertaking shall recognise the goods or services received, and an increase in equity, as the counterparty supplies goods or renders service, as in equity-settled share-based payment transactions.

At the date of settlement, the undertaking shall remeasure the liability to its fair value. If the undertaking issues equity instruments on settlement rather than paying cash, the liability shall be transferred direct to equity, as the consideration for the equity instruments issued.

If the undertaking pays in cash on settlement rather than issuing equity instruments, that payment shall be applied to settle the liability in full. Any equity component previously recognised shall remain within equity.

|Example – Staff services with settlement alternatives |

| |

|Staff entitled to a bonus may choose between obtaining a cash payment equal to the market price of 100 of the |

|undertaking’s shares, or obtaining 100 shares. The quoted market price of one share is €5. |

| |

|The undertaking should record a liability of €500 for each entitled employee. The equity component is nil, being the|

|difference between the fair value of 100 shares (€500) and the fair value of the alternative cash payment (€500). |

By electing to receive cash on settlement, the counterparty forfeited the right to receive equity instruments. However, this requirement does not preclude the undertaking from recording a transfer within equity, (a transfer from one component of equity to another).

Undertaking has a choice of settlement

For a share-based payment transaction in which the terms of the arrangement provide an undertaking with the choice of whether to settle in cash or by issuing equity instruments, the undertaking shall determine whether it has a present obligation to settle in cash, and account for the share-based payment transaction accordingly.

The undertaking has a present obligation to settle in cash if the choice of settlement in equity instruments has no commercial substance (if the undertaking is legally prohibited from issuing shares), or the undertaking has a past practice or a stated policy of settling in cash, or usually settles in cash whenever the counterparty asks for cash settlement.

If the undertaking has a present obligation to settle in cash, it shall account for the transaction in accordance with the requirements applying to cash-settled share-based payment transactions.

If no such obligation exists, the undertaking shall account for the transaction in accordance with the requirements applying to equity-settled share-based payment transactions. Upon settlement:

1. if the undertaking elects to settle in cash, the cash payment shall be accounted for as the repurchase of an equity interest, ie as a deduction from equity, except as noted in (3) below.

2. if the undertaking elects to settle by issuing equity instruments, no further accounting is required (other than a transfer from one component of equity to another, to debit share options and credit issued equity shares), except as noted in (3) below.

3. if the undertaking elects the settlement alternative with the higher fair value, as at the date of settlement, the undertaking shall recognise an additional expense for the excess value given, the difference between:

-the cash paid and

-the fair value of the equity instruments that would otherwise have been issued,

or the difference between:

- the fair value of the equity instruments issued and

- the amount of cash that would otherwise have been paid,

whichever is applicable.

Disclosures

An undertaking shall disclose information that enables users to understand the nature and extent of share-based payment arrangements that existed during the period.

The undertaking shall disclose at least the following:

1. a description of each type of share-based payment arrangement that existed at any time during the period, including the general terms and conditions of each arrangement, such as:

- vesting requirements,

-the maximum term of options granted, and

-the method of settlement (eg whether in cash or equity).

An undertaking with substantially similar types of share-based payment arrangements may aggregate this information, if it does not mask the nature and extent of the arrangements.

2. the number and weighted-average exercise prices of share options for each of the following groups of options:

i. outstanding at the beginning of the period;

ii. granted during the period;

iii. forfeited during the period;

iv. exercised during the period;

v. expired during the period;

vi. outstanding at the end of the period; and

vii. exercisable at the end of the period.

3. for share options exercised during the period, the weighted-average share price at the date of exercise.

If options were exercised on a regular basis throughout the period, the undertaking may instead disclose the weighted-average share price during the period.

4. for share options outstanding at the end of the period, the range of exercise prices and weighted-average remaining contractual life.

If the range of exercise prices is wide, the outstanding options shall be divided into ranges that are meaningful for assessing the number and timing of additional shares that may be issued and the cash that may be received upon exercise of those options.

An undertaking shall disclose information that enables users 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.

If the undertaking has measured the fair value of goods or services received for equity instruments of the undertaking indirectly, by reference to the fair value of the equity instruments granted, the undertaking shall disclose at least the following:

1. 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, including:

i. 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;

ii. how expected volatility was determined, including an explanation of the extent to which forecast volatility was based on historical volatility; and

iii. whether and how any other features of the option grant were incorporated into the measurement of fair value, such as a market condition.

2. for other equity instruments granted during the period (ie other than share options), the number and weighted-average fair value of those equity instruments at the measurement date, and information on how that fair value was measured, including:

i. if fair value was not measured on the basis of an observable market price, how it was determined;

ii. whether and how expected dividends were incorporated into the measurement of fair value; and

iii. whether and how any other features of the equity instruments granted were incorporated into the measurement of fair value.

3. for share-based payment arrangements that were modified during the period:

i. an explanation of those modifications;

ii. the incremental fair value granted (as a result of those modifications); and

iii. information on how the incremental fair value granted was measured, consistently with the requirements set out in (1) and (2) above, where applicable.

If the undertaking has measured directly the fair value of goods or services received during the period, the undertaking shall disclose how that fair value was determined, (whether fair value was measured at a market price for those goods or services).

If the undertaking has rebutted the presumption that the fair value of goods and services can be reliably measured, it shall disclose that fact, and give an explanation of why the presumption was rebutted.

An undertaking shall disclose information that enables users to understand the effect of share-based payment transactions on the undertaking’s profit or loss for the period and on its financial position.

The undertaking shall disclose at least the following:

1. the total expense recognised for the period arising from share-based payment transactions in which the goods or services received did not qualify for recognition as assets and hence were recorded immediately as an expense, including separate disclosure of that portion of the total expense that arises from transactions accounted for as equity-settled share-based payment transactions;

2. for liabilities arising from share-based payment transactions:

i. the total carrying amount at the end of the period; and

ii. the total intrinsic value at the end of the period of liabilities for which the counterparty’s right to cash or other assets had vested by the end of the period (eg vested share appreciation rights).

Multiple choice questions

1. IFRS 2 applies to all types of share-based payment transactions. These include:

i. Equity-settled

ii. Cash-settled

iii. Choice of equity-settled or cash-settled

iv. Share sales in stock markets.

1. i

2. i-ii

3. i-iii

4. i-iv

2. Examples of arrangements that come under IFRS 2 are:

i Call options that give staff the right to purchase an undertaking’s shares in exchange for their services;

ii Share appreciation rights that entitle staff to payments calculated by reference to the market price of an undertaking’s shares or the shares of another undertaking in the same group;

iii In-kind capital contributions of property, plant or equipment in exchange for shares or other

equity instruments;

iv Share ownership schemes under which staff are entitled to receive an undertaking’s shares in exchange for their services; and

v Payments for services made to external consultants that are calculated by reference to the undertaking’s share price.

1. i

2 i-ii

3. i-iii

4. i-iv

5. i-v

3. In March, the undertaking offered options to new staff, subject to shareholder approval. The awards were approved by the shareholders in August. The scheme started in September.

The grant date is:

1. March.

2. August

3. September

4. Measurement date for transactions with parties other than staff

If the goods are received on more than one date, the undertaking should measure the fair value of the equity instruments granted on

1. the date that the first goods are received;

2. each date when goods or services are received;

3. the date that the last goods are received.

5. Vesting period

A undertaking grants share options to its staff. Certain performance conditions need

to be satisfied over the next four years for the options to be exercisable. The employee has to remain working for the undertaking during this period to become entitled to the award.

The expense should therefore be recognised:

1. at the grant date;

2. over the four-year period;

3. at the end of the four-year period.

6. If the undertaking cannot estimate reliably the fair value of the goods or services received, the undertaking:

1. is required to measure their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted;

2. should use the par value of the shares given;

3. should use the reload option.

7. Market vesting conditions vesting conditions

A undertaking granted share options that become exercisable when the market price increases by at least 10% in each year over the next three years. At the end of year three, this target has not been met.

1. The undertaking should revise the grant date fair value and should reverse the staff benefits expense already recognised.

2. The undertaking should not revise the grant date fair value and should not reverse the staff benefits expense already recognised.

3. The undertaking should transfer the staff benefits expense to equity.

8. Non-market vesting conditions Example – Non-market vesting condition

Management introduced a new equity-settled compensation plan with a non-market performance condition. During the following year, after a downturn in the undertaking’s fortunes, it considers that there is no chance that it will meet the target.

1. The cumulative expense at the end of the second year will be adjusted to nil, and the charge is reversed in the current year.

2. The undertaking should not revise the grant date fair value and should not reverse the staff benefits expense already recognised.

3. The undertaking should transfer the staff benefits expense to equity.

9. Fair value of equity instruments

In the absence of market prices:

1. The undertaking should revise the grant date fair value and should reverse the staff benefits expense already recognised;

2. The undertaking should use the par value of the shares given;

3. The undertaking should use the reload option;

4. Fair value is estimated, using a valuation technique, to estimate what the price of those equity instruments would have been on the measurement date in an independent transaction between willing parties.

10. For cash-settled share-based payment transactions, IFRS 2 requires an undertaking to measure the goods or services acquired and:

1. Establish a liability which remains unchanged;

2. Establish a liability. Until the liability is settled, the undertaking is required to remeasure the fair value of the liability at each reporting date and at the date of settlement, with any changes in value recognised in the income statement for the period;

3. Hold the cost in equity;

4. The undertaking should use the reload option.

11. IFRS 2 prescribes various disclosure requirements to enable users to understand:

i. the nature and extent of share-based payment arrangements that existed during the period;

ii. how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined;

iii. the effect of share-based payment transactions on the undertaking’s profit or loss for the period and on its financial position;

iv. the impact on clients of these transactions.

1. i

2 i-ii

3. i-iii

4. i-iv

12. IFRS 2 covers:

1. transfers of equity instruments of the undertaking’s parent to parties that have supplied goods or services to the undertaking;

2. transfers of equity instruments of another undertaking in the same group as the undertaking, to parties that have supplied goods or services to the undertaking;

3. Both 1+ 2;

4. Neither 1 nor 2.

13. Business Combinations

IFRS 2 covers:

i Equity instruments granted to staff of a purchased undertaking in their capacity as staff (in return for continued service);

ii The cancellation, replacement or other modification of share-based payment arrangements because of a business combination or other restructuring;

iii Transactions in which the undertaking acquires goods as part a takeover.

1. i

2 i-ii

3. i-iii

14. If the fair value of the equity instruments granted is used, the fair value of the services received during a particular accounting period:

1. is not affected by subsequent changes in the fair value of the equity instrument;

2. is adjusted by subsequent changes in the fair value of the equity instrument.

15. If the performance condition is a market condition, the estimate of the length of the expected vesting period shall be consistent with the assumptions used in estimating the fair value of the options granted, and:

1. the undertaking shall revise its estimate of the length of the vesting period;

2. shall not be subsequently revised.

16.If the performance condition is not a market condition, the estimate of the length of the expected vesting period shall be consistent with the assumptions used in estimating the fair value of the options granted, and:

1. the undertaking shall revise its estimate of the length of the vesting period;

2. shall not be subsequently revised.

17. If the vested equity instruments are later forfeited or, in the case of share options, the options are not exercised;

1. The undertaking should use the reload option.

2. The undertaking shall subsequently reverse the amount recorded for services received from staff.

3. The undertaking shall not subsequently reverse the amount recorded for services received from staff.

18. Treatment of a reload feature

Reload features shall:

1. be taken into account when estimating the fair value of options granted at the measurement date;

2. not be taken into account when estimating the fair value of options granted at the measurement date.

19. Modifications should be viewed as:

1. Cancellations;

2. Compound financial instruments.

3. Incremental instruments.

20. Modifications. If it does not increase the total fair value of the share-based payment arrangement or is not otherwise beneficial to the member of staff or service provider:

1. It should be treated as a compound financial instrument;

2. It should be treated as an incremental instrument;

3. It should be treated as a reload feature;

4. It should be ignored.

Answers to multiple choice questions

|Question |Answer |

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Appendix 1 – aids to calculations

Estimating the fair value of equity instruments granted

Shares

For shares granted to staff, the fair value of the shares shall be measured at the market price of the undertaking’s shares (or an estimated market price, if the undertaking’s shares are not publicly traded), adjusted to take into account the terms and conditions upon which the shares were granted.

For example, if the member of staff is not entitled to receive dividends during the vesting period, this factor shall be taken into account when estimating the fair value of the shares granted.

Similarly, if the shares are subject to restrictions on transfer after vesting date, that factor shall be taken into account, but only to the extent that the post-vesting restrictions affect the price that a knowledgeable, willing market participant would pay for that share.

For example, if the shares are actively traded in a deep and liquid market, post-vesting transfer restrictions may have little, if any, effect on the price that a knowledgeable, willing market participant would pay for those shares.

Restrictions on transfer or other restrictions that exist during the vesting period shall not be taken into account when estimating the grant date fair value of the shares granted, because those restrictions stem from the existence of vesting conditions.

Share options

For share options granted to staff, in many cases market prices are not available, because the options granted are subject to terms and conditions that do not apply to traded options. If traded options with similar terms and conditions do not exist, the fair value of the options granted shall be estimated by applying an option pricing model.

The undertaking shall consider factors that knowledgeable, willing market participants would consider in selecting the option pricing model to apply. For example, many staff options have long lives, are usually exercisable during the period between vesting date and the end of the options’ life, and are often exercised early.

For many undertakings, this might preclude the use of the Black-Scholes-Merton formula, which does not allow for the possibility of exercise before the end of the option’s life and may not adequately reflect the effects of expected early exercise. It also does not allow for the possibility that expected volatility and other model inputs might vary over the option’s life.

However, for share options with relatively short contractual lives, or that must be exercised within a short period of time after vesting date, the factors identified above may not apply. In these instances, the Black-Scholes-Merton formula may produce a value that is substantially the same as a more flexible option pricing model.

All option pricing models take into account, as a minimum, the following factors:

1. the exercise price of the option;

2. the life of the option;

3. the current price of the underlying shares;

4. the expected volatility of the share price;

5. the dividends expected on the shares (if appropriate); and

6. the risk-free interest rate for the life of the option.

Other factors that knowledgeable, willing market participants would consider in setting the price shall also be taken into account (except for vesting conditions and reload features that are excluded from the measurement of fair value).

For example, a share option granted to a member of staff typically cannot be exercised during specified periods (eg during the vesting period or during periods specified by securities regulators). This factor shall be taken into account if the option pricing model applied would otherwise assume that the option could be exercised at any time during its life.

However, if an undertaking uses an option pricing model that values options that can be exercised only at the end of the options’ life, no adjustment is required for the inability to exercise them during the vesting period (or other periods during the options’ life), because the model assumes that the options cannot be exercised during those periods.

Similarly, another factor common to member of staff share options is the possibility of early exercise of the option, for example, because the option is not freely transferable, or because the member of staff must exercise all vested options upon cessation of employment. The effects of expected early exercise shall be taken into account.

Factors that a knowledgeable, willing market participant would not consider in setting the price of a share option (or other equity instrument) shall not be taken into account when estimating the fair value of share options (or other equity instruments) granted.

For example, for share options granted to staff, factors that affect the value of the option from the individual member of staff’s perspective only are not relevant to estimating the price that would be set by a knowledgeable, willing market participant.

Inputs to option pricing models

In estimating the expected volatility of and dividends on the underlying shares, the objective is to approximate the expectations that would be reflected in a current market or negotiated exchange price for the option. Similarly, when estimating the effects of early exercise of member of staff share options, the objective is to approximate the expectations that an outside party with access to detailed information about staff exercise behaviour would develop based on information available at the grant date.

When there is likely to be a range of reasonable expectations about future volatility, dividends and exercise behaviour, an expected value should be calculated, by weighting each amount within the range by its associated probability of occurrence.

Expectations about the future are generally based on experience, modified if the future is reasonably expected to differ from the past. In some circumstances, identifiable factors may indicate that unadjusted historical experience is a relatively poor predictor of future experience.

For example, if an undertaking with two distinctly different lines of business disposes of the one that was significantly less risky than the other, historical volatility may not be the best information on which to base reasonable expectations for the future.

In other circumstances, historical information may not be available. For example, a newly-listed undertaking will have little, if any, historical data on the volatility of its share price.

In summary, an undertaking should not simply base estimates of volatility, exercise behaviour and dividends on historical information without considering the extent to which the past experience is expected to be reasonably predictive of future experience.

Expected early exercise

Staff often exercise share options early, for a variety of reasons. For example, member of staff share options are typically non-transferable. This often causes staff to exercise their share options early, because that is the only way for the staff to liquidate their position. Also, staff who cease employment are usually required to exercise any vested options within a short period of time, otherwise the share options are forfeited. Other factors causing early exercise are risk aversion and lack of wealth diversification.

The means by which the effects of expected early exercise are taken into account depends upon the type of option pricing model applied. For example, expected early exercise could be taken into account by using an estimate of the option’s expected life (which, for a member of staff share option, is the period of time from grant date to the date on which the option is expected to be exercised) as an input into an option pricing model (eg the Black-Scholes-Merton formula). Alternatively, expected early exercise could be modelled in a binomial or similar option pricing model that uses contractual life as an input.

Factors to consider in estimating early exercise include:

1. the length of the vesting period, because the share option typically cannot be exercised until the end of the vesting period. Hence, determining the valuation implications of expected early exercise is based on the assumption that the options will vest.

2. the average length of time similar options have remained outstanding in the past.

3. the price of the underlying shares. Experience may indicate that the staff tend to exercise options when the share price reaches a specified level above the exercise price.

4. the member of staff’s level within the organisation. For example, experience might indicate that higher-level staff tend to exercise options later than lower-level staff.

5. expected volatility of the underlying shares. On average, staff might tend to exercise options on highly volatile shares earlier than on shares with low volatility.

When estimating the expected life of share options granted to a group of staff, the undertaking could base that estimate on an appropriately weighted-average expected life for the entire member of staff group or on appropriately weighted-average lives for subgroups of staff within the group, based on more detailed data about staff exercise behaviour.

Separating an option grant into groups for staff with relatively homogeneous exercise behaviour is likely to be important. Option value is not a linear function of option term; value increases at a decreasing rate as the term lengthens.

For example, if all other assumptions are equal, although a two-year option is worth more than a one-year option, it is not worth twice as much. That means that calculating estimated option value on the basis of a single weighted-average life that includes widely differing individual lives would overstate the total fair value of the share options granted. Separating options granted into several groups, each of which has a relatively narrow range of lives included in its weighted-average life, reduces that overstatement.

Similar considerations apply when using a binomial or similar model. For example, the experience of an undertaking that grants options broadly to all levels of staff might indicate that top-level executives tend to hold their options longer than middle-management staff hold theirs and that lower-level staff tend to exercise their options earlier than any other group.

In addition, staff who are encouraged or required to hold a minimum amount of their employer’s equity instruments, including options, might generally exercise options later than staff not subject to that provision. In those situations, separating options by groups of recipients with relatively homogeneous exercise behaviour will result in a more accurate estimate of the total fair value of the share options granted.

Expected volatility

Expected volatility is a measure of the amount by which a price is expected to fluctuate during a period. The measure of volatility used in option pricing models is the annualised standard deviation of the continuously compounded rates of return on the share over a period of time. Volatility is typically expressed in annualised terms that are comparable, regardless of the time period used in the calculation, for example, daily, weekly or monthly price observations.

The rate of return (which may be positive or negative) on a share for a period measures how much a shareholder has benefited from dividends and increase (or reduction) of the share price.

The expected annualised volatility of a share is the range within which the continuously compounded annual rate of return is expected to fall approximately two-thirds of the time.

For example, to say that a share with an expected continuously compounded rate of return of 12 per cent has a volatility of 30 per cent means that the probability that the rate of return on the share for one year will be between -18 per cent (12% - 30%) and 42 per cent (12% + 30%) is approximately two-thirds. If the share price is $100 at the beginning of the year and no dividends are paid, the year-end share price would be expected to be between $83.53 ($100 × e -0.18) and $152.20 ($100 × e 0.42) approximately two-thirds of the time.

Factors to consider in estimating expected volatility include:

1. implied volatility from traded share options on the undertaking’s shares, or other traded instruments of the undertaking that include option features (such as convertible debt), if any.

2. the historical volatility of the share price over the most recent period that is generally commensurate with the expected term of the option (taking into account the remaining contractual life of the option and the effects of expected early exercise).

3. the length of time an undertaking’s shares have been publicly traded. A newly-listed undertaking might have a high historical volatility, compared with similar undertakings that have been listed longer.

4. the tendency of volatility to revert to its mean, ie its long-term average level, and other factors indicating that expected future volatility might differ from past volatility.

For example, if an undertaking’s share price was extraordinarily volatile for some identifiable period of time because of a failed takeover bid or a major restructuring, that period could be disregarded in computing historical average annual volatility.

5. appropriate and regular intervals for price observations. The price observations should be consistent from period to period.

For example, an undertaking might use the closing price for each week or the highest price for the week, but should be consistent. Also, the price observations should be expressed in the same currency as the exercise price.

Newly-listed undertakings

If a newly-listed undertaking does not have sufficient information on historical volatility, it should nevertheless compute historical volatility for the longest period for which trading activity is available. It could also consider the historical volatility of similar undertakings following a comparable period in their lives.

For example, an undertaking that has been listed for only one year and grants options with an average expected life of five years might consider the pattern and level of historical volatility of undertakings in the same industry for the first six years in which the shares of those undertakings were publicly traded.

Unlisted undertakings

An unlisted undertaking will not have historical information to consider when estimating expected volatility. Some factors to consider instead are set out below.

In some cases, an unlisted undertaking that regularly issues options or shares to staff (or other parties) might have set up an internal market for its shares. The volatility of those share prices could be considered when estimating expected volatility.

Alternatively, the undertaking could consider the historical or implied volatility of similar listed undertakings, for which share price or option price information is available, to use when estimating expected volatility. This would be appropriate if the undertaking has based the value of its shares on the share prices of similar listed undertakings.

If the undertaking has used another valuation methodology to value its shares, the undertaking could derive an estimate of expected volatility consistent with that valuation methodology.

For example, the undertaking might value its shares on a net asset or earnings basis. It could consider the expected volatility of those net asset values or earnings.

Expected dividends

Whether expected dividends should be taken into account when measuring the fair value of shares or options depends on whether the counterparty is entitled to dividends.

Option pricing models generally call for expected dividend yield. However, the models may be modified to use an expected dividend amount rather than a yield. An undertaking may use either its expected yield or its expected payments. If the undertaking uses the latter, it should consider its historical pattern of increases in dividends.

For example, if an undertaking’s policy has generally been to increase dividends by approximately 3 per cent per year, its estimated option value should not assume a fixed dividend amount throughout the option’s life unless there is evidence that supports that assumption.

Generally, the assumption about expected dividends should be based on publicly-available information. An undertaking that does not pay dividends and has no plans to do so should assume an expected dividend yield of zero.

However, an emerging undertaking with no history of paying dividends might expect to begin paying dividends during the expected lives of its member of staff share options. Those undertakings could use an average of their past dividend yield (zero) and the mean dividend yield of an appropriately comparable peer group.

Risk-free interest rate

Typically, the risk-free interest rate is the implied yield currently available on zero-coupon government issues of the country in whose currency the exercise price is expressed, with a remaining term equal to the expected term of the option being valued (based on the option’s remaining contractual life and taking into account the effects of expected early exercise).

It may be necessary to use an appropriate substitute, if no such government issues exist or circumstances indicate that the implied yield on zero-coupon government issues is not representative of the risk-free interest rate (for example, in high inflation economies).

Also, an appropriate substitute should be used if market participants would typically determine the risk-free interest rate by using that substitute when estimating the fair value of an option with a life equal to the expected term of the option being valued.

Capital structure effects

Typically, third parties, not the undertaking, write traded share options. When these share options are exercised, the writer delivers shares to the option holder. Those shares are acquired from existing shareholders. Hence the exercise of traded share options has no dilutive effect.

In contrast, if share options are written by the undertaking, new shares are issued when those share options are exercised (either actually issued or issued in substance, if shares previously repurchased and held in treasury are used).

Given that the shares will be issued at the exercise price rather than the current market price at the date of exercise, this actual or potential dilution might reduce the share price, so that the option holder does not make as large a gain on exercise as on exercising an otherwise similar traded option that does not dilute the share price.

Whether this has a significant effect on the value of the share options granted depends on various factors, such as the number of new shares that will be issued on exercise of the options compared with the number of shares already issued. Also, if the market already expects that the option grant will take place, the market may have already factored the potential dilution into the share price at the date of grant.

However, the undertaking should consider whether the possible dilutive effect of the future exercise of the share options granted might have an impact on their estimated fair value at grant date. Option pricing models can be adapted to take into account this potential dilutive effect.

Modifications to equity-settled share-based payment arrangements

The undertaking should recognise the effects of modifications that increase the total fair value of the share-based payment arrangement, or are otherwise beneficial to the member of staff.

1. if the modification increases the fair value of the equity instruments granted (eg by reducing the exercise price), measured immediately before and after the modification, the undertaking shall include the incremental fair value granted in the measurement of the amount recognised for services received as consideration for the equity instruments granted.

The incremental fair value granted is the difference between the fair value of the modified equity instrument and that of the original equity instrument, both estimated as at the date of the modification. If the modification occurs during the vesting period, the incremental fair value granted is included in the measurement of the amount recognised for services received over the period from the modification date until the date when the modified equity instruments vest, in addition to the amount based on the grant date fair value of the original equity instruments, which is recognised over the remainder of the original vesting period.

If the modification occurs after vesting date, the incremental fair value granted is recognised immediately, or over the vesting period if the member of staff is required to complete an additional period of service before becoming unconditionally entitled to those modified equity instruments.

2. similarly, if the modification increases the number of equity instruments granted, the undertaking shall include the fair value of the additional equity instruments granted, measured at the date of the modification, in the measurement of the amount recognised for services received as consideration for the equity instruments granted, consistently with the requirements in (1) above.

For example, if the modification occurs during the vesting period, the fair value of the additional equity instruments granted is included in the measurement of the amount recognised for services received over the period from the modification date until the date when the additional equity instruments vest, in addition to the amount based on the grant date fair value of the equity instruments originally granted, which is recognised over the remainder of the original vesting period.

3. if the undertaking modifies the vesting conditions in a manner that is beneficial to the member of staff, for example, by reducing the vesting period or by modifying or eliminating a performance condition (other than a market condition, changes to which are accounted for in accordance with (a) above), the undertaking shall take the modified vesting conditions into account.

Furthermore, if the undertaking modifies the terms or conditions of the equity instruments granted in a manner that reduces the total fair value of the share-based payment arrangement, or is not otherwise beneficial to the member of staff, the undertaking shall nevertheless continue to account for the services received as consideration for the equity instruments granted as if that modification had not occurred (other than a cancellation of some or all the equity instruments granted). For example:

1. if the modification reduces the fair value of the equity instruments granted, measured immediately before and after the modification, the undertaking shall not take into account that decrease in fair value and shall continue to measure the amount recognised for services received as consideration for the equity instruments based on the grant date fair value of the equity instruments granted.

2. if the modification reduces the number of equity instruments granted to a member of staff, that reduction shall be accounted for as a cancellation of that portion of the grant.

3. if the undertaking modifies the vesting conditions in a manner that is not beneficial to the member of staff, for example, by increasing the vesting period or by modifying or adding a performance condition (other than a market condition, changes to which are accounted for in accordance with (1) above), the undertaking shall not take the modified vesting conditions into account.

Appendix 2 – Valuation considerations

Gathering the required information

The fair value of a share option is determined using valuation models when market prices are not available. The commonly used models are the Black-Scholes model, the Binomial model and the Monte-Carlo model. All these models are derived from the same underlying theories. However, they vary in the extent to which it is possible to reflect the specific terms of a particular award or variations in the assumptions.

The choice of modelling approach will be influenced by the details of the award. The Black-Scholes model will generally be appropriate for a simple option that has a three-year service vesting period and a six-month exercise period. The Binomial model is an extension of the Black-Scholes model and allows for an extended exercise window. The Monte-Carlo model may be the only way to value a complex option with, for example, a 10-year contractual term and market conditions for a newly listed company that expects share price volatility to be high following the IPO and then to reduce.

Most modelling approaches will need consideration of at least the following parameters:

• Share price at grant date: the market value of shares should be easy to ascertain if the share is traded. However, this may require some effort for unlisted undertakings. A value will be needed for tax purposes in most jurisdictions but that may not always be fair value.

• Exercise price: this should be clearly identifiable from the terms of the award. If it is not, it is unlikely that the parties to the award can be considered to have a ‘shared understanding of the terms’. This would mean the grant date has not yet been established.

• Share price volatility: a history of market prices will provide evidence of historical volatility for actively traded shares, but does that provide a reasonable guide to the future? What special events may have distorted that history? For other shares without a trading record, a comparator group or

a sector-specific index may provide an indication. How you choose a comparator or index will be a matter of judgement, but market data should be taken into account wherever possible.

• The risk-free rate of return: this should be based on zero-coupon government-bond yields of appropriate duration, which should be available from market indicators.

• The expected dividends: these can influence the value of awards, depending on how they will be treated. For example, for an option, dividends are effectively ‘lost’ until exercise; for

some forms of share awards, they are reinvested. Is the assumption consistent with any policy or forecasts given to markets? Could the assumption that is subject to stock-exchange regulations be considered a forecast by markets?

• Performance conditions: what are the possible outcomes? How can the likelihood of these possible outcomes be evaluated? What data are the performance conditions measured on?

• Expected life: the factors relevant to determining the expected life of an option are the contractual term, the possibility of an early exercise, and whether the option can be traded.

The majority of staff options cannot be traded, so staff only has the choice of either keeping or exercising the option. Exercising is the only way in which value can be realised. This means that most staff share options are exercised much earlier than their contractual term. As the value of an option is related to its duration, management needs to estimate how long that will be. This will be straightforward for some types of arrangement, as they have a limited exercise window. But this will be complex for many other types of arrangement, as staff may be able to exercise at any time between, for example, the third and 10th anniversary of the grant.

Factors to consider include: what has past experience been? Have staff exercised as soon as possible or held on to their options for as long as possible? What factors might influence the staff’ choices? Some examples of factors that may influence staff behaviour are:

• The intrinsic value of the option: staff might exercise their options once a certain level of gain has been reached, either in absolute or percentage terms.

• General state of the equity market: if markets are generally climbing, staff might be more inclined to hold on to their options as long as possible. If markets are performing poorly, staff might decide to exercise as soon as they see a gain.

• The dividend yield on the share: when the share does not pay a dividend, the option holder does not lose anything by not exercising the option. For a dividend-paying share, the option holder is forgoing the dividends that exceed the risk-free rate of return on the cash that would be used to fund the exercise price of the options.

• Tax treatment of the benefits: this can vary significantly between territories. If a tax charge crystallises on vesting, staff may have to exercise to meet their tax liability.

Undertakings may find gathering the required information and tracking the awarded instruments a challenge, as there may have been less need for the information in the past and data may not have been kept in a form that permits the necessary detail to be extracted. The complexity of data gathering depends on the extent and complexity of awards and the availability of records that track the awarded instruments in the required form.

Appendix 3 - Tax effects of share-based payment transactions

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Whether expenses arising from share-based payment transactions are deductible, and if so, whether the amount of the tax deduction is the same as the reported expense and whether the tax deduction arises in the same accounting period, varies from country to country.

If the amount of the tax deduction is the same as the reported expense, but the tax deduction arises in a later accounting period, this will result in a deductible temporary difference under IAS 12 Income Taxes. Temporary differences usually arise from differences between the carrying amount of assets and liabilities and the amount attributed to those assets and liabilities for tax purposes.

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However, IAS 12 also deals with items that have a tax base but are not recognised as assets and liabilities in the balance sheet. It gives an example of research costs that are recognised as an expense in the financial statements in the period in which the costs are incurred, but are deductible for tax purposes in a later accounting period.

IAS 12 states that the difference between the tax base of the research costs, being the amount that will be deductible in a future accounting period, and the carrying amount of nil is a deductible temporary difference that results in a deferred tax asset.

Applying this guidance indicates that if an expense arising from a share-based payment transaction is recognised in the financial statements in one accounting period and is tax-deductible in a later accounting period, this should be accounted for as a deductible temporary difference.

A deferred tax asset is recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be used.

If the undertaking is able to claim a tax deduction for the total transaction amount at the date of grant but the undertaking records an expense arising from that transaction over the vesting period should be accounted for as a taxable temporary difference, and a deferred tax liability should be recognised.

However, the amount of the tax deduction might differ from the amount of the expense recognised in the financial statements. For example, the measurement basis applied for accounting purposes might not be the same as that used for tax purposes, for example intrinsic value might be used for tax purposes and fair value for accounting purposes.

Similarly, the measurement date might differ. For example, US undertakings receive a tax deduction based on intrinsic value at the date of exercise in respect of some share options, whereas for accounting purposes an undertaking applying SFAS 123 would recognise an expense based on the option's fair value, measured at the date of grant.

There could also be other differences in the measurement method applied for accounting and tax purposes, for example differences in the treatment of forfeitures or different valuation methodologies applied.

If grant date measurement is used for accounting purposes and exercise date measurement is used for tax purposes. Under grant date measurement, any changes in the value of the equity instrument after grant date accrue to the members of staff (or other party) in their capacity as equity participants. Therefore, some argue that any tax effects arising from those valuation changes should be credited to equity (or debited to equity, if the value of the equity instrument declines).

Similarly, some argue that the tax deduction arises from an equity transaction (the exercise of options), and hence the tax effects should be reported in equity. It can also be argued that this treatment is consistent with the requirement to account for the tax effects of transactions or events in the same way as the undertaking accounts for those transactions or events themselves.

If the tax deduction relates to both an income statement item and an equity item, the associated tax effects should be allocated between the income statement and equity.

Others disagree, arguing that the tax deduction relates to staff remuneration expense, that is an income statement item only, and therefore all of the tax effects of the deduction should be recognised in the income statement. The fact that the taxing authority applies a different method in measuring the amount of the tax deduction does not change this conclusion.

The IASB noted that, if one accepts that it might be appropriate to debit/credit to equity the tax effect of the difference between the amount of the tax deduction and the total recognised expense where that difference relates to changes in the value of equity interests, there could be other reasons why the amount of the tax deduction differs from the total recognised expense.

For example, grant date measurement may be used for both tax and accounting purposes, but the valuation methodology used for tax purposes might produce a higher value than the methodology used for accounting purposes (the effects of early exercise might be ignored when valuing an option for tax purposes).

Under IAS 12, the deferred tax asset for a deductible temporary difference is based on the amount the taxation authorities will permit as a deduction in future periods. Therefore, the measurement of the deferred tax asset should be based on an estimate of the future tax deduction. If changes in the share price affect that future tax deduction, the estimate of the expected future tax deduction should be based on the current share price.

If a later measurement date is applied for tax purposes, it is very unlikely that the tax deduction will ever equal the cumulative expense, except by coincidence.

For example, if share options are granted to staff, and the undertaking receives a tax deduction measured as the difference between the share price and the exercise price at the date of exercise, it is extremely unlikely that the tax deduction will ever equal the cumulative expense.

CONCLUSIONS

1. If the tax deduction expected to be received is less than or equal to the cumulative expense, the associated tax benefits expected to be received should be recorded as tax income and included in the income statement for the period.

2. If the tax deduction expected to be received exceeds the cumulative expense, the excess associated tax benefits expected to be received should be recognised directly in equity.

Appendix 4 - Applying IFRS 2 in practice - Wayne Holdings

(from PricewaterhouseCoopers publication: Share-based Payment)

This section illustrates the accounting for the various types of share-based payment transactions that were entered into by fictional multinational company Wayne Holdings, Inc. (Wayne Holdings).

It also provides the disclosures that Wayne Holdings is required to present for these transactions.

(The numbers in this section are provided for illustrative purposes only. They do not necessarily reflect the results that actual share-based payment transactions would produce.)

Wayne Holdings is a calendar-year IFRS preparer, and the recognition, measurement and disclosures are illustrated for its 31 December 2005 year-end.

Wayne Holdings applies IFRS 2 to all shares, share options and other equity instruments that were granted after 7 November 2002 and not vested as of 1 January 2005. Wayne Holdings also applies IFRS 2 to the modifications made after 1 January 2005 to the terms and conditions of equity instruments granted before 7 November 2002. Wayne Holdings applies IFRS 2 retrospectively to liabilities arising from share-based payment transactions existing at 1 January 2005.

A four-step approach has been taken in the analysis of the IFRS 2 transactions:

• Step A: Obtain the key data needed to perform the calculations;

• Step B: Make an initial estimate of the total amounts to be recorded;

• Step C: Determine the expense for each year and the corresponding journal entries; and

• Step D: Determine tax adjustments.

Details of factors to be considered in valuations of share-based payment transactions are included in Appendix A – ‘Valuation considerations’.

1. Share options granted to key executives

Wayne Holdings grants 100 share options to each of its 10 key executives at 1 January 2005, with the following conditions:

(1) they must complete three years of service, and

(2) there must be an 18% increase in share price by the end of 2007.

Wayne Holdings estimates that its 10 executives will complete the three-year service period. The fair value of one option at grant date is €5. The market condition of an 18% increase in the share price has been included in the fair value of €5. The exercise price of each option is €3. The options have a contractual life of 10 years, and Wayne Holdings has estimated their value using a Monte-Carlo model.

Step A: Obtain the key data needed to perform the calculations

Grant date 1 January 2005

Vesting date 31 December 2007

Options per key executive 100

Fair value per option at grant date €5

Number of staff entitled to options 10

Exercise price €3

Departure rate (estimated at grant date) 0%

Market-based performance condition 18% increase in share price

Step B: Make an initial estimate of the total amount to be recorded

Step Result Explanation

Total fair value of one award €500 100 options at a fair value of €5

Total number of awards expected to vest 10 10 x 100%

Total compensation expense €5,000 10 x 500

Step C: Determine the expense for each year and the corresponding journal entries

At grant date, Wayne Holdings expected that none of the key executives would leave the company during the vesting period.

No staff left Wayne Holdings during 2005, but two staff unexpectedly left the company during 2006. Wayne Holdings therefore revised its total compensation expense down to €4,000 (8 x €500). The increase in share price exceeded the increase in the share price threshold by the end of 2007.

As a result, eight staff vested their options at the end of 2007. These options are exercised on 5 January 2008, and Wayne Holdings issues shares with a par value of €1 to its staff.

Year ended Charge Explanation

31 December 2005 €1,667 5,000 x 1/3

31 December 2006 €1,000 4,000 x 2/3 – 1,667

The charge recognised in 2005 for the two staff that unexpectedly left the company is adjusted in 2006

31 December 2007 €1,333 4,000 x 3/3 – 2,667

Total €4,000 8 staff x 500

The journal entries are determined as follows:

(Amounts shown in euros)

Dr Cr

1) Recognition of staff benefits expense in 2005

Dr Staff benefits expense 1,667

Cr Equity (separate component) 1,667

2) Recognition of staff benefits expense in 2006

Dr Staff benefits expense 1,000

Cr Equity (separate component) 1,000

3) Recognition of staff benefits expense in 2007

Dr Staff benefits expense 1,333

Cr Equity (separate component) 1,333

4) Recognition of shares issued on exercise

(100 shares to 8 staff at a nominal value of €1)

Dr Equity (separate component) 4,000

Cr Equity (share capital) 800

Cr Equity (share premium) 3,200

5) Receipt of the exercise price (100 shares to 8 staff at €3 per share)

Dr Cash and cash equivalents 2,400

Cr Equity (share premium) 2,400

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that the tax deduction relating to an equity-settled share-based payment transaction involving share options is based on the difference between the share price and the exercise price of an option at exercise date, which represents the intrinsic value for tax purposes. The following information will need to be gathered in order to determine the tax consequences of the share options.

1 January 2005 31 December 2005 31 December 2006 31 December 2007 5 January 2008

(grant date) (vesting date) (exercise date)

Share price €7 €9 €15 €22 €23

Exercise price €3 €3 €3 €3 €3

Intrinsic value €4 €6 €12 €19 €20

Number of options 1,000 1,000 800 800 800

outstanding and expected to vest

Tax rate 40% 40% 40% 40% 40%

Compensation – €1,667 €2,667 €4,000 €4,000

expense (cumulative)

Benefit based on – €2,000 €6,400 €15,200 €16,000

intrinsic value (6 x 1,000) x 1/3 (12 x 800) x 2/3 (19 x 800) x 3/3 (20 x 800)

Deferred tax asset – €800 €2,560 €6,080 –

(at 40%)

Current tax receivable – – – – €6,400

(16,000 x 40%)

Change in deferred – €800 €1,760 €3,520 (€6,080)

tax asset

Deferred tax:

– recorded in profit – €667 €400 €533 (€1,600)

or loss (1,667 x 40%) (2,667 x 40% (4,000 x 40% (4,000 x 40%)

-667) -667-400)

– recorded in equity – €133 €1,360 €2,987 (€4,480)

(800-667) (1,760-400) (3,520-533) (133+1,360+

2,987)

The journal entries are determined as follows:

(Amounts shown in euros)

Dr Cr

1) Recognition of deferred tax asset at 31 December 2005

Dr Deferred tax asset 800

Cr Deferred tax income 667

Cr Equity (separate component) 133

2) Recognition of deferred tax asset at 31 December 2006

Dr Deferred tax asset 1,760

Cr Deferred tax income 400

Cr Equity (separate component) 1,360

3) Recognition of deferred tax asset at 31 December 2007

Dr Deferred tax asset 3,520

Cr Deferred tax income 533

Cr Equity (separate component) 2,987

4) Derecognition of deferred tax asset at the exercise date on 5 January 2008

Dr Deferred tax expense 1,600

Dr Equity (separate component) 4,480

Cr Deferred tax asset 6,080

5) Recognition of current income tax benefit at the exercise date on 5 January 2008

Dr Current income tax receivable 6,400

Cr Current tax income (profit or loss) 1,600

Cr Equity (share premium) 4,800

2. Performance conditions – an increase in earnings

Wayne Holdings grants 100 shares to each of its 500 management-level staff at 1 January

2005, conditional upon the staff remaining in Wayne Holdings’ employment during the vesting period.

The shares will vest at the end of year one if:

- the company’s earnings increase by more than 10%;

- at the end of year two if the company’s earnings increase by more than 15 % over the two- year period;

and

- at the end of year three if the undertaking’s earnings increase by more than 36% over the three-year period. The fair value of one share at grant date is €7.

Wayne Holdings’s earnings have increased by 8% by the end of 2005, and 30 staff have left.

The company expects that earnings will continue to increase at a similar rate in 2006 and therefore expects that the shares will vest at the end of 2006.

Wayne Holdings also expects that an additional 30 staff will leave in 2006, and that 440 staff will receive their shares at the end 2006.

Step A: Obtain the key data needed to perform the calculations

Grant date 1 January 2005

Estimated vesting date (estimated at grant date and re-estimated each period) 31 December 2006

Shares per employee 100

Fair value per share at grant date €7

Number of staff entitled to shares 500

Estimated departures 30 per year

Exercise price €0

(A grant of shares effectively represents a grant of options with an exercise price of nil.)

Step B: Make an initial estimate of the total amount to be recorded

Step Result Explanation

Total fair value of one award €700 100 shares at a fair value of €7

Total number of awards expected to vest 440 500-2 x 30

Total compensation expense €308,000 440 x €700

Step C: Determine the expense for each year and the corresponding journal entries

By the end of 2006, Wayne Holdings’ earnings in fact increase by 12% and the shares do not therefore vest. Additionally, only 28 staff leave during 2006, rather than 30 originally estimated by Wayne Holdings. Wayne Holdings believes that an additional 25 staff will leave in 2007

and earnings will increase so that the performance target will be achieved in 2007.

By the end of 2007, only 23 staff have left, compared with Wayne Holdings’ original estimation of 25, and the performance target has been met. Wayne Holdings therefore revised the total compensation expense as follows:

Year ended Charge Explanation

31 December 2005 €154,000 440 x €700 x 1/2

31 December 2006 €40,600 (417 x €700 x 2/3)-€154,000

31 December 2007 €98,700 419 x €700 x 3/3-€154,000-€40,600

Total €293,300 419 x €700

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of staff benefits expense for 2005

Dr Staff benefits expense 154,000

Cr Equity (separate component) 154,000

2) Recognition of staff benefits expense for 2006

Dr Staff benefits expense 40,600

Cr Equity (separate component) 40,600

3) Recognition of staff benefits expense for 2007

Dr Staff benefits expense 98,700

Cr Equity (separate component) 98,700

4) To record shares issued

Dr Equity (separate component) 293,300

Cr Equity (share capital at par value of €1 per share) 41,900

Cr Equity (share premium) 251,400

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that the tax deduction relating to this equity-settled share-based payment transaction is based on the share price at the vesting date. The following information will need to be gathered in order to determine the tax consequences of the compensation expense:

31 December 2005 31 December 2006 31 December 2007

(vesting date)

Share price at each year end €9 €15 €22

Number of shares expected 440 417 419

to vest (in hundreds)

Tax rate 40% 40% 40%

Compensation expense €154,000 €194,600 €293,300

(cumulative)

Tax benefit based on €198,000 €417,000 €921,800

intrinsic value (440 x 100 x 9 x 1/2) (417 x 100 x 15 x 2/3) (419 x 100 x 22 x 3/3)

Deferred tax asset (40%) €79,200 €166,800 –

Current income tax – – €368,720

(balance sheet) (921,800 x 40%)

Change in deferred tax asset €79,200 €87,600 (€166,800)

Deferred tax:

– recognised in the €61,600 €16,240 (€77,840)

income statement (154,000 x 40%) (194,600 – 154,000) x 40% (61,600+16,240)

– recognised in equity €17,600 €71,360 (€88,960)

(79,200-61,600) (87,600-16,240) (17,600+71,360)

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of deferred tax asset at 31 December 2005

Dr Deferred tax asset 79,200

Cr Deferred tax income 61,600

Cr Equity (separate component) 17,600

2) Recognition of deferred tax asset at 31 December 2006

Dr Deferred tax asset 87,600

Cr Deferred tax income 16,240

Cr Equity (separate component) 71,360

3) Derecognition of deferred tax asset at the vesting date

Dr Equity (separate component) 88,960

Dr Deferred tax expense 77,840

Cr Deferred tax asset 166,800

4) Recognition of current income tax benefit at the vesting date

Dr Current income tax receivable 368,720

Cr Current tax income (profit or loss) (293,300 x 40%) 117,320

Cr Equity (share premium) 251,400

3. Share options – repricing

Wayne Holdings granted 100 share options to each of its 600 management-level staff at

1 January 2002, conditional upon the staff remaining employed by Wayne Holdings over a five-year period.

The share price at grant date was €20. The exercise price is €25.

Wayne Holdings decides to reprice the options at 2 January 2005, at an exercise price of €10.

At the repricing date, Wayne Holdings estimates that the fair value of the original award (before taking into account the repricing) is €1.50, and the fair value of the repriced award is €3.

The incremental value is therefore €1.50. The repriced options will vest at the end of 2006.

Wayne Holdings has 500 staff left at the date of repricing and estimates that 440 staff will receive their share options at the end 2006. It estimates that 30 staff will leave in 2005, and that another 30 will leave in 2006.

The actual number of leavers was 30 for 2005, and 28 for 2006.

The options are all exercised on 31 December 2007.

Step A: Obtain the key data needed to perform the calculations

Modification date 2 January 2005

Vesting date 31 December 2006

Share options per employee 100

Incremental fair value per option at the modification date €1.50

Number of staff entitled to options 500

Estimated departures over a two-year period 60

Step B: Make an initial estimate of the total amount to be recorded

Compensation expense under the old arrangement (from 2002 through 2006):

Wayne Holdings is not required to apply IFRS 2 to the original grant, as the instruments were granted prior to 7 November 2002. However, it is required to apply IFRS 2 to the modification, as the repricing occurred after 1 January 2005.

Compensation expense for the incremental value arising from the repriced award (from 2005 through 2006):

Step Result Explanation

Total fair value of each award €150 100 options at an incremental value of €1.50

Total number of awards expected to vest 440 500-60

Total compensation expense €66,000 440 x €150

Step C: Determine the expense for each year and the corresponding journal entries

The compensation expense arising from the repricing, considering the revised estimates of the number of staff expected to leave, is determined as follows:

Year Charge Explanation

31 December 2005 €33,000 440 staff x €150 x 1/2

31 December 2006 €33,300 442 staff x €150 x 2/2 – €33,000

Total €66,300 442 staff x 150

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of staff benefits expense for 2005

Dr Staff benefits expense 33,000

Cr Equity (separate component) 33,000

2) Recognition of staff benefits expense for 2006

Dr Staff benefits expense 33,300

Cr Equity (separate component) 33,300

3) Recognition of shares issued on exercise

Dr Cash and cash equivalents 442,000

Cr Equity (share capital) (44,200 shares at par value of €1 per share) 44,200

Cr Equity (share premium) 397,800

Dr Equity (separate component) 66,300

Cr Equity (share premium) 66,300

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that the tax deduction relating to this equity-settled share-based payment transaction involving share options is based on the difference between the share price and the exercise price of an option at exercise date, which represents the intrinsic value for tax purposes. The information that will need to be gathered in order to determine the tax consequences of the compensation expense is overleaf.

1 December 2005 31 December 2006 31 December 2007

(vesting date) (exercise date)

Share price at each year end €9 €15 €22

Exercise price €10 €10 €10

Intrinsic value €0 €5 €12

Number of options expected 440 442 442

to vest (in hundreds)

Tax rate 40% 40% 40%

Compensation expense €33,000 €66,300 €66,300

(cumulative)

Tax benefit based on – €221,000 €530,400

intrinsic value (442 x 100 x 5 x 2/2) (442 x 100 x 12)

Current tax receivable (40%) – – €212,160

Deferred tax asset (40%) – €88,400 –

Change in deferred tax asset – €88,400 (€88,400)

Deferred tax:

– recognised in the – €26,520 (€26,520)

income statement (66,300 x 40%)

– recognised in equity – €61,880 (€61,880)

(88,400-26,520)

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of deferred tax asset at 31 December 2005

Dr Deferred tax asset –

Cr Deferred tax income –

Cr Equity (separate component) –

2) Recognition of deferred tax asset at 31 December 2006

Dr Deferred tax asset 88,400

Cr Deferred tax income 26,520

Cr Equity (separate component) 61,880

3) Derecognition of deferred tax asset on exercise

Dr Equity (separate component) 61,880

Dr Deferred tax expense 26,520

Cr Deferred tax asset 88,400

4) Recognition of current tax receivable

Dr Current tax receivable 212,160

Cr Current tax income 26,520

Cr Equity (share premium) 185,640

4. Share appreciation rights

Wayne Holdings granted 10 share appreciation rights (SARs) to each member of a group of 40 management staff on 1 January 2004. The SARs provide the staff, at the date the rights are exercised, the right to receive cash equal to the appreciation in the undertaking’s share price since the grant date. All of the rights vest on 31 December 2005.

They can be exercised during 2006 and 2007. The undertaking estimates that at grant date, the fair value of each SAR granted is €11, and 10% of the staff will leave evenly during the two-year period.

The fair values and intrinsic values are shown below. In 2006, six staff exercise the SARs at 31 December 2006; the remaining 30 staff exercise the SARs in 2007.

Date Fair value Intrinsic value

31 December 2004 €12 €10

31 December 2005 €8 €7

31 December 2006 €13 €10

31 December 2007 €12 €12

Intrinsic value equals fair value at the end of the life of a SAR because there is no time value.

Step A: Obtain the key data needed to perform the calculations

Grant date 1 January 2004

Vesting date 31 December 2005

SAR per employee 10

Fair value per SAR at grant date €11

Number of staff entitled to SARs 40

Departure rate (evenly) 10%

Number of staff at 31 December 2004 38

Number of staff at 31 December 2005 36

Step B: Make initial estimate of the total amount to be recorded

This step is not applicable to cash-settled transactions.

Step C: Calculate the expense for each year and determine the corresponding journal entries

Year Expense Liability Explanation

31 Dec 2004 €2,160 €2,160 36 staff x 10 SARs x €12 (fair value) x 50% (vesting period)

31 Dec 2005 €720 €2,880 36 staff x 10 SARs x €8 (fair value) x 100% (vesting period)

The expense for 2005 is calculated by the difference between the fair value of the liability at 31 December 2004 and 31 December 2005.

31 Dec 2006 €1,620 €3,900 30 staff x 10 SARs x €13 (fair value).

(1,020+600)

The expense for 2006 includes the cash paid to the six staff that exercised their options at 31 December 2006 (6 staff x 10 SARs x €10).

31 Dec 2007 (€300) – The liability is nil as all staff have exercised their SARs.

The cash paid is €3,600 (30 x 10 x 12). The income is the difference between the liability at 31 December 2005 (€3,900)

and the cash paid (€3,600).

Total €4,200 n/a

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of staff benefits expense in 2004

Dr Staff benefits expense 2,160

Cr Liability 2,160

2) Recognition of staff benefits expense in 2005

Dr Staff benefits expense 720

Cr Liability 720

3) Recognition of staff benefits expense in 2006

Dr Staff benefits expense 1,620

Cr Liability 1,620

4) To record the cash paid to six staff who exercised their options in 2006

Dr Liability 600

Cr Cash and cash equivalents 600

5) Staff benefits expense in 2007 and exercise of the share appreciation rights by the 30 staff.

Dr Liability 3,900

Cr Staff benefits expense 300

Cr Cash and cash equivalents 3,600

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that the tax deduction relating to a cash- settled share-based payment transaction involving SARs is based on the intrinsic value for tax purposes. The intrinsic value for tax purposes was determined as follows:

Date Intrinsic value

31 December 2004 €10

31 December 2005 €7

31 December 2006 €10

31 December 2007 €12

The tax consequences of the SARs would then be determined as follows:

31 December 2004 31 December 2005 31 December 2006 31 December 2007

Intrinsic value €10 €7 €10 €12

Number of SARs 360 360 300 0

expected to vest or outstanding after vesting

Tax rate 40% 40% 40% 40%

Vesting 50% 100% 100% 100%

Deferred tax asset €720 €1,008 €1,200 –

(360 x 10 x 40%x (360 x 7 x 40% (300 x 10 x 40%

50%) x 100%) x 100%)

Current income – – €240 €1,440

tax receivable (60 x €10 x 40%) (300 x €12 x 40%)

Changes in deferred €720 €288 €192 (€1,200)

tax asset

Tax recognised in the €720 €288 €432 €240

income statement (current and deferred)

The journal entries would be determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of deferred tax asset at 31 December 2004

Dr Deferred tax asset 720

Cr Deferred tax income 720

2) Recognition of deferred tax asset at 31 December 2005

Dr Deferred tax asset 288

Cr Deferred tax income 288

3) Recognition of deferred tax asset at 31 December 2006

Dr Deferred tax 192

Cr Deferred tax income 192

4) Recognition of current tax benefit at 31 December 2006

Dr Current tax receivable 240

Cr Current tax income (profit and loss) 240

5) Derecognition of deferred tax asset at 31 December 2007

Dr Deferred tax expense 1,200

Cr Deferred tax asset 1,200

6) Recognition of current income tax benefit at 31 December 2007

Dr Current tax receivable 1,440

Cr Current tax income (profit or loss) 1,440

5. Transactions with settlement alternatives

At 1 January 2005, Wayne Holdings grants its CEO the right to choose either 1,000 phantom shares

(ie, the right to receive a cash payment equal to the value of 1,000 shares) or 1,500 shares. The grant

is conditional upon the completion of two years of service. If the CEO chooses the share alternative, he must keep the shares for a period of five years. The share price is as follows:

Date Fair value

1 January 2005 €7

31 December 2005 €9

31 December 2006 €15

31 December 2007 €22

After taking into account the effects of the post-vesting transfer restrictions, the undertaking estimates that the grant date fair value of the share alternative is €6.50 per share.

Step A: Obtain the key data needed to perform the calculations

Grant date 1 January 2005

Vesting date 31 December 2006

Fair value of share alternative at grant date €6.50

Step B: Make the initial estimate of the total amounts to be recorded

Calculate the fair values of the equity and debt alternatives.

Alternatives Fair value Calculation

Equity alternative €9,750 1,500 x €6.50

Cash alternative €7,000 1,000 x €7

The fair value of the equity component of the compound financial instrument is therefore €2,750.

Step C: Determine the expense for each year and the corresponding journal entries

The CEO exercises his cash option at the end of 2006. The equity and liability components to be recorded in 2005 and 2006 are determined as follows:

Year ended Expense Liability Equity Explanation

31 December 2005 €4,500 €4,500 1,000 x €9 x 1/2

31 December 2005 €1,375 €1,375 €2,750 x 1/2

31 December 2006 €10,500 €10,500 (1,000 x €15)-4,500

31 December 2006 €1,375 €1,375 €2,750 x 1/2

Total €17,750 €15,000 €2,750

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of staff benefits expense in 2005

Dr Staff benefits expense 5,875

Cr Liability 4,500

Cr Equity (separate component) 1,375

2) Recognition of staff benefits expense in 2006

Dr Staff benefits expense 11,875

Cr Liability 10,500

Cr Equity (separate component) 1,375

3) Settlement of the phantom shares

Dr Liability 15,000

Cr Cash and cash equivalents 15,000

Dr Equity (separate component) 2,750

Cr Equity (retained earnings) 2,750

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that the tax deduction relating to an arrangement with settlement alternatives is based on the share price at the date of settlement for the phantom shares.

The tax consequences of the arrangement would be determined as follows:

Year ended 31 December 2005 31 December 2006

Share price €9 €15

Number of SARs outstanding at each year end 1,000 1,000

Tax rate 40% 40%

Vesting 50% 100%

Deferred tax asset €1,800 –

(1,000 x €9 x 40%) x 50%

Current income tax receivable – €6,000

(1,000 x €15 x 40%) x 100%

The journal entries would be determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of deferred tax asset at 31 December 2005

Dr Deferred tax asset 1,800

Cr Deferred tax income 1,800

2) Derecognition of the deferred tax asset at 31 December 2006

Dr Deferred tax expense 1,800

Cr Deferred tax asset 1,800

3) Recognition of current tax benefit at 31 December 2006

Dr Current tax receivable 6,000

Cr Current tax income (profit and loss) 6,000

6. ‘Save as you earn’ schemes

500 Wayne Holdings staff participate in a share purchase plan on the following terms:

• Staff invest a fixed amount of €100 per month in a savings plan, operated by an independent investment manager, by deductions from their pay for a period of three years from 1 April 2005.

• The savings plan provides a fixed return of 10% of the final invested amount at the end of three years. This return is guaranteed by the investment manager operating the savings plan and has no cost to the employer. Each employee will have accumulated savings of €3,960 after three years (€100 x 36 months, ie €3,600, plus 10% return = €3,960).

• In addition to the 10% return, staff will receive options with an exercise price of €6 if they remain staff. Each employee will therefore use the saved amount to acquire 660 shares (€3,960/€6 = 660 shares).

• At the end of the savings period, staff have a six-month exercise window.

Step A: Obtain the key data needed to perform the calculations

Grant date 1 April 2005

Vesting date 31 March 2008

Options per employee 660

Fair value per option at grant date €4

Number of staff entitled to options 500

Exercise price €6

Share price at grant date €8

Departures (estimated at grant date) 50

Step B: Make an initial estimate of the total amounts to be recorded

Step Result Explanation

Total fair value of one award €2,640 660 options x €4

Total number of awards expected to vest 450 500-50

Total compensation expense €1,188,000 450 x €2,640

Step C: Determine the expense for each year and the corresponding journal entries

At grant date, Wayne Holdings expected that 50 staff would leave the company during the vesting period. This estimate was not revised during the vesting period, as the number of staff leaving during 2005, 2006 and 2007 was in line with expectations.

In 2008, more staff left the company than expected, and by 1 April 2008, 120 of the 500 staff had either left the company or stopped their saving and therefore forfeited their option rights.

As a result, 380 staff vested their options at the end of March 2008. These options are exercised on 5 April 2008, and Wayne Holdings issues shares with a par value of €1 to its staff.

The staff benefits expense is as follows:

Period ended Expense Explanation

31 December 2005 €297,000 €2,640 x 450 x 9/36

31 December 2006 €396,000 €2,640 x 450 x 12/36

31 December 2007 €396,000 €2,640 x 450 x 12/36

31 March 2008 (€85,800) €2,640 x 380 less expense recognised in 2005 to 2007

This is the adjustment for actual forfeitures at end March 2008

Total €1,003,200 380 staff x €2,640

The journal entries are as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of staff benefits expense in 2005

Dr Staff benefits expense 297,000

Cr Equity (separate component) 297,000

2) Recognition of staff benefits expense in 2006

Dr Staff benefits expense 396,000

Cr Equity (separate component) 396,000

3) Recognition of staff benefits expense in 2007

Dr Staff benefits expense 396,000

Cr Equity (separate component) 396,000

4) Staff benefits expense, including adjustment for actual forfeitures

Dr Equity (separate component) 85,800

Cr Staff benefits expense 85,800

5) Recognition of shares issued to staff at exercise price

Dr Cash and cash equivalents 1,504,800

Cr Equity (share capital) 250,800

Cr Equity (share premium) 1,254,000

Dr Equity (separate component) 1,003,200

Cr Equity (share premium) 1,003,200

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that the tax deduction relating to an equity-settled share-based payment transaction involving share options is based on the difference between the share price and the exercise price of an option at exercise date, which represents the intrinsic value for tax purposes. In order to determine the tax consequences of accounting for the expense, the following information will need to be gathered:

1 April 2005 31 December 2005 31 December 2006 31 December 2007 5 April 2008

(grant date) (exercise date)

Share price €7 €9 €15 €22 €20

Exercise price €6 €6 €6 €6 €6

Intrinsic value €1 €3 €9 €16 €14

Number of options 297,000 297,000 297,000 297,000 250,800

expected to vest

Tax rate 40% 40% 40% 40% 40%

Compensation expense – €297,000 €693,000 €1,089,000 €1,003,200

(cumulative)

Benefit based on €222,750 €1,559,250 €4,356,000 €3,511,200

intrinsic value (3 x 297,000 x 9/36) (9 x 297,000 x 21/36) (16 x 297,000 x 33/36) (250,800 x 14)

Deferred tax asset – €89,100 €623,700 €1,742,400 –

(at 40%)

Current tax asset (40%) – – – – €1,404,480

Current tax:

– recognised in profit – – – – €401,280

and loss (1,003,200 x 40%)

– recognised in equity – – – €1,003,200

Change in deferred – €89,100 €534,600 €1,118,700 (€1,742,400)

tax asset

Deferred tax:

– recognised in profit – €89,100 €188,100 €158,400 (€435,600)

and loss (693,000 x 40%- (1,089,000 x 40%- 89,100) 89,100-188,100)

– recognised in equity – – €346,500 €960,300 (€1,306,800)

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of deferred tax asset at 31 December 2005

Dr Deferred tax asset 89,100

Cr Deferred tax income 89,100

2) Recognition of the deferred tax asset at 31 December 2006

Dr Deferred tax asset 534,600

Cr Deferred tax income 188,100

Cr Equity (separate component) 346,500

3) Recognition of the deferred tax asset at 31 December 2007

Dr Deferred tax asset 1,118,700

Cr Deferred tax income 158,400

Cr Equity (separate component) 960,300

4) Derecognition of the deferred tax asset at exercise date

Dr Deferred tax expense 435,600

Dr Equity (separate component) 1,306,800

Cr Deferred tax asset 1,742,400

5) Recognition of current tax benefit at exercise date

Dr Current tax receivable 1,404,480

Cr Equity (share premium) 1,003,200

Cr Current tax income (profit and loss) 401,280

7. In-kind capital contributions

Wayne Holdings issued 100,000 shares in exchange for a capital contribution of an office building. The ownership of the building was transferred to Wayne Holdings on 15 January 2005 when the shares were issued. The fair value of the building on that date was €5,500,000.

Step A: Obtain the key data needed to perform the calculations

Date the goods or services were obtained 15 January 2005

Vesting 100%

Valuation report showing fair value of the building €5,500,000

Step B: Make an initial estimate of the total amounts to be recorded

The fair value of the building was determined to be €5,500,000 based on a report prepared by a professional valuer.

Step C: Determine the journal entries

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of Property, plant and equipment at 15 January 2005

Dr Property, plant and equipment 5,500,000

Cr Equity (share premium) 5,400,000

Cr Equity (share capital) (at par value of €1 per share) 100,000

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that the tax deduction is equal to tax consequences for 2005 and following years would be determined as follows (amounts expressed in thousands):

31 December 2005 31 December 2006 Following years

Carrying value of the building €4,950 €4,400 –

Tax base of the building €4,950 €4,400 –

Tax rate 40% 40% 40%

Vesting 100% 100% 100%

Current income tax received/receivable €220 €440 €2,200

(5,500/10 x 40%) x 100%

Tax recognised in the income statement €220 €220 €1,760

The journal entries would be determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of current tax benefit at 31 December 2005

Dr Current tax receivable 220,000

Cr Current tax income (profit or loss) 220,000

2) Recognition of current tax benefit at 31 December 2006

Dr Current tax receivable 220,000

Cr Current tax income (profit or loss) 220,000

3) Recognition of current tax benefit rateably over the period of 2007 to 2014

Dr Current tax receivable 1,760,000

Cr Current tax income (profit or loss) 1,760,000

8. Shares for services

Wayne Holdings is establishing a media business and has hired a marketing agency to provide consultancy services. The services will be settled by issuing 50,000 shares.

Step A: Obtain the key data needed to perform the calculations

Period over which the service is provided 1 January to 28 February 2005

Fair value of the service €400,000

Fair value of the service was determined based on bids submitted by other marketing agencies to provide the consulting services.

Step B: Make an initial estimate of the total amount to be recorded at the grant date

The total amount to be recorded is the service’s fair value of €400,000.

Step C: Determine the expense for each period and the corresponding journal entries

Period Expense Equity Explanation

31 January 2005 €200,000 €200,000 €400,000 x 50%

28 February 2005 €200,000 €200,000 €400,000 x 100%-€200,000

Total €400,000 €400,000

The journal entries are determined as follows:

(Amounts shown in euros) Dr Cr

1) Recognition of the services rendered in January 2005

Dr Operating expenses 200,000

Cr Equity (separate component) 200,000

2) Recognition of the services for February 2005

Dr Operating expenses 200,000

Cr Equity (separate component) 200,000

3) Issuance of shares

Dr Equity (separate component) 400,000

Cr Equity (share premium) 350,000

Cr Equity (share capital, at par value €1 per share) 50,000

Step D: Determine the tax adjustments

The tax legislation applicable to Wayne Holdings provides that there is no tax deduction for non-cash costs incurred in connection with consultancy services settled by issuing shares. No tax effects are recognised as a result.

Illustrative disclosures

This section provides examples of the disclosures required under IFRS 2. For illustration purposes, we have included disclosures for all of the examples included in this section.

Accounting policy

Wayne Holdings regularly enters into equity-settled or cash-settled share-based payment transactions with staff and other third parties.

• Staff services settled in equity instruments

The fair value of the staff services received in exchange for the grant of options or shares is recognised as an expense. The total amount to be expensed rateably over the vesting period is determined by reference to the fair value of the options or shares determined at the grant date, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable or the number of shares that the employee will ultimately receive. This estimate is revised at each balance sheet date and the difference is charged or credited to the income statement, with a corresponding adjustment to equity. The proceeds received on exercise of the options net of any directly attributable transaction costs are credited to equity.

• Other goods or services settled in equity instruments

Goods or services (other than staff services) received in exchange for an equity-settled share-based payment are measured directly at their fair value and are recognised as an expense when consumed or capitalised as assets. The proceeds received on exercise of the options, net of any directly attributable transaction costs, are credited to share capital (nominal value) and share premium when the options are exercised.

• Goods or services settled in cash

Goods or services, including staff services received in exchange for cash-settled share- based payments, are recognised at the fair value of the liability incurred and are expensed when consumed or capitalised as assets, which are depreciated or amortised. The liability is remeasured at each balance sheet date to its fair value, with all changes recognised immediately in profit or loss.

Share-based payment arrangements – disclosures in the notes

During the period ended 31 December 2005, Wayne Holdings had six share-based payment arrangements with staff and entered into two other share-based transactions. The details of the arrangements are described on this and the following pages.

|Arrangement |1: Share options granted |2: Performance conditions –|3: Share options – |

| |to key executives |increase in earnings |repricing |

|Nature of the arrangement | Grant of share options | Grant of share options | Grant of share options |

|Date of grant |1 January 2005 |1 January 2005 |1 January 2002 |

|Number of instruments |1,000 |50,000 |50,0001 |

|granted | | | |

|Exercise price |€3 |n/ a |€25 (repriced at €10 at 2|

| | | |January 2005) |

|Share price at the date of|€7 |€7 |€20 |

|grant | | | |

|Contractual life (years) |10 |10 |10 |

|Vesting conditions |Three years of service |Variable vesting based on |Five-year service period |

| |and 18% increase in share|the achievement of |(two years remaining |

| |price by end of 2007 |non-market-based |after repricing) |

| | |performance conditions | |

|Settlement |Shares |Shares |Shares |

|Expected volatility |40% |n/a |40% |

|Expected option life at |4 |n/a |42 |

|grant date (years) | | | |

|Risk-free interest rate |4.8% |n/a |4.8% |

|Expected dividend |0% |0% |0% |

|(dividend yield) | | | |

|Expected departures (grant|0% |30 departures/year |30 departures/ year after|

|date) | | |2004 |

|Expected outcome of |n/a (allowed for in |100% by 2006 |n/a |

|meeting performance |determining fair value) | | |

|criteria (at the grant | | | |

|date) | | | |

|Fair value per granted |€5 |€7 |Incremental value from |

|instrument determined at | | |repricing is €1.5 |

|the grant date | | | |

|Valuation model |Monte-Carlo model |n/a |Binomial model |

|1. The undertaking originally granted 60,000 options on 1 January 2002. The options were repriced at 2 |

|January 2005 when the number of outstanding options was 50,000. |

|2 The expected life of the option at grant date (1 January 2002) was seven years. At the date of |

|modification (2 January 2005), the expected remaining life was estimated at four years. |

The undertaking uses a Black-Scholes model to value options with no vesting conditions other than time less there is an extended exercise period. It uses the Monte-Carlo or Binomial models to value options with performance conditions. The expected volatility for the share option arrangements is based on historical volatility determined by the analysis of daily share price movements over the past three years.

|Arrangement |4: Share appreciation |5: A transaction with |6: Save as you earn |

| |rights |settlement alternatives |scheme |

|Date of grant |1 January 2004 |1 January 2005 |1 April 2005 |

|Number of instruments |400 |1,000 (cash) |330,000 |

|granted | |-1,500 (shares) | |

|Exercise price |n/a |n/a |€6 |

|Share price at the date of|€15 |€7 |€8 |

|grant | | | |

|Contractual life (years) |4 |10 |3.5 |

|Vesting conditions |Two-year service period |Two-year service period |Three-year service |

| | | |service |

| | | |period and savings |

| | | |requirement |

|Settlement |Cash |Cash or shares |Shares |

|Expected volatility |40% |40% |40% |

|Expected option life at |4 |3 |3.2 |

|grant date (years) | | | |

|Risk-free interest rate |4.8% |4.8% |4.8% |

|Expected dividend |0% |0% |0% |

|(dividend yield) | | | |

|Expected departures (grant|10% evenly over two-year |0% |50 over 3 years |

|date) |period | | |

|Expected outcome of |n/a |n/a |n/a |

|meeting performance | | | |

|criteria (at the grant | | | |

|date) | | | |

|Fair value per granted |€11 |Fair value of share |€4 |

|instrument determined at | |alternative €6.5; Fair | |

|the grant date | |value of cash alternative| |

| | |€7 | |

|Valuation model |Black-Scholes |Binomial model |Black-Scholes |

No share options were exercised during the period. The following information applies to options outstanding at the end of each period:

31 December 2005 31 December 2004

Range of Weighted Number of Weighted-average Weighted Number Weighted average

exercise average options remaining life -average of shares remaining life

prices exercise (’000) Expected Contractual exercise (’000) Expected Contractual

€15-27 €25 – – – €25 50,000 1.8 7.3

€8-15 €10 47,000 2.2 7.7 – – – –

€5-8 €6 321,420 2.45 2.75 – – – –

€0-5 €3 1,000 3.3 9.3 – – – –

A reconciliation of movements in the number of share options (Arrangement 1 – ‘Share options granted to key executives’, Arrangement 3 – ‘Share-options – repricing,’ and Arrangement 6 – ‘Save as you earn scheme’) can be summarised as follows:

2005 2004

Weighted-average Weighted-average

Number of options exercise price Number of options exercise price

Outstanding at start of year 50,000 €25 50,000 €25

Effect of modifications (50,000) €25 – –

and cancellations

Granted 381,0001 €6.5 – –

Forfeited (11,580) €7 – –

Exercised – – – –

Outstanding at end of year 369,420 €6.5 50,000 €25

Exercisable at year-end – – – –

The amounts recognised in the financial statements (before taxes) for share-based payment transactions with staff can be summarised as follows:

Expense 2005 2004

Equity-settled arrangements

a) Share options granted to key executives €1,667 –

b) Performance conditions – an increase in earnings €154,000 –

c) Repriced share options €33,000 –

d) ‘Save as you earn’ scheme €297,000 –

Sub-total €485,667 –

Cash-settled arrangements

e) Share appreciation rights €720 €2,160

Arrangements with settlement alternatives

f) Transactions with settlement alternatives €5,875 –

Total expense €492,262 €2,160

Liability for cash-settled arrangements 31 December 2005 31 December 2004

a) Share appreciation rights €2,880 €2,160 b) Transactions with settlement alternatives €4,500 – Total liability €7,380 €2,160

1 Wayne Holdings also granted the CEO a compound financial instrument, giving the CEO the right to receive 1,500 shares subject to a five-year holding restriction or a cash payment equivalent to the value of 1,000 shares.

The fair value of the shares for the arrangements in which shares are granted was based on the quoted share price. No dividend payments were expected; consequently, the measurement of the options’ fair value did not consider dividends.

Share options granted in 2002 were repriced at 2 January 2005 due to the decrease in share price.

The exercise price at 2 January 2005 is €10 instead of the original exercise price of €25.

The incremental value as a result of the repricing was determined to be €1.50.

All of the rights arising from Arrangement 4 – ‘Share appreciation rights’, are fully vested at

31 December 2005. The intrinsic value of these rights is €7 (for each right).

In addition to the arrangements described above, the undertaking issued 100,000 shares on 15 January

2005 in exchange for an in-kind contribution of an office building with a fair value of €5,500,000. The fair value was based on a report prepared by an independent professional valuer.

The undertaking also issued 50,000 shares in exchange for consulting services recognised as an expense and a corresponding increase in equity at a fair value of €400,000. The fair value of the service was determined based on bids submitted by other potential suppliers.

IFRS WORKBOOKS (History and Copyright)

(1 million downloaded)

This is the latest version of the legendary workbooks in Russian and English produced by 3 TACIS projects, sponsored by the European Union (2003-2009) and led by PricewaterhouseCoopers. They have also appeared on the website of the Ministry of Finance of the Russian Federation.

The workbooks cover all standards of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade their knowledge, understanding and skills.

Each workbook is a self-standing short course designed for approximately three hours of study. Although the workbooks are part of a series, each one is independent of the others. Each workbook is a combination of Information, Examples, Self-Test Questions and Answers. A basic knowledge of accounting is assumed, but if any additional knowledge is required this is mentioned at the beginning of the section.

Having written the first three editions, we continue to update them and provide them to you free to download. Please tell your friends and colleagues. Relating to the first three editions and updated texts, the copyright of the material contained in each workbook belongs to the European Union and according to its policy may be used free of charge for any non-commercial purpose. The copyright and responsibility of later books and the updates are ours. Our copyright policy is the same as that of the European Union.

We wish to especially thank Elizabeth Appraxine (European Union) who administered these TACIS projects, Richard J. Gregson (Partner, PricewaterhouseCoopers) who led the projects and all friends at bankir.ru for hosting the books.

TACIS project partners included Rosexpertiza (Russia), ACCA (UK), Agriconsulting (Italy), FBK (Russia), and European Savings Bank Group (Brussels).

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