IFRS 2 - Share Based Payments

IFRS 2 - Share-based payments
Executive summary
SBP:
The accounting for SBP is fairly well converged at this point. While there are a number of detailed
differences discussed below, the basics of accounting for SBP are the same under both IFRS and
US GAAP.
In the case of graded vesting, IFRS must recognize compensation expense by measuring each
tranche separately. Under US GAAP, companies have the choice between this accelerated
approach or the straight-line approach, which does not separate the tranches.
Share-based payments and earnings per share

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Page 2
Progress on convergence
SBP:
No further convergence planned at this time.

Page 3
SBP
Scope
US GAAP
IFRS
Guidance applies to transactions with

employees and non-employees and the
accounting is applicable to all companies.
Similar
Guidance applies to transactions whereby an

entity: (1) acquires goods or services in
exchange for issuing shares or share options or
other equity instruments, or (2) incurs liabilities
that are based, at least in part, on the price of
its shares or that may require settlement in its
shares.
Similar

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SBP
Stock compensation: measurement
US GAAP
IFRS
Requires a fair-value-based approach in

accounting for share-based payment
arrangements.
The fair value of the shares to be measured is
based on market price, if available, or is
estimated using an option-pricing model. The
intrinsic value can be used if the market value
cannot be determined.

Similar
Page 5
SBP

Entities that grant stock options or SBP, in many cases, decide to make modifications to the vesting terms
for a variety of reasons, such as to maintain high employee morale or reward outstanding employees. This
is especially true when it is improbable that the vesting conditions will be met and the entity wants to
provide compensation to an employee. For this scenario:
US GAAP
IFRS
The original grant-date fair value is no longer

used to measure compensation cost under any
circumstances. Rather, the fair value of the
options at the modification date is used to
measure the compensation expense.
If an entity modifies stock option vesting terms,

then the entity must, at a minimum, recognize
the original amount of the expense of the award
under its original terms.
If the fair value of the award at the modification

date is less than the fair value at the grant date,
then there is no reduction in cost.

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SBP

Entities that grant stock options or SBP, in many cases, decide to make modifications to the vesting terms
for a variety of reasons, such as to maintain high employee morale or reward outstanding employees. This
is especially true when it is improbable that the vesting conditions will be met and the entity wants to
provide compensation to an employee. For this scenario:
US GAAP
IFRS
Modification of terms (continued):
However, if the fair value at the modification date

is greater than the fair value of the award at the
grant date, then the incremental fair value (the
difference between the fair value at the original
grant date and the fair value at the modification
date) must be recognized at cost.

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Modification of vesting terms that are improbable of

achievement example
Example 1 Bulls Eye Inc. (BEI) granted 1,000 share options to certain sales employees on January 1, 2008. The share
options vest at the end of three years (cliff vesting) but are conditional upon selling 150,000 dartboard units over the threeyear service period. The grant-date fair value of each option is $15.00. No forfeitures are expected to occur, unless the sales
target of 150,000 units is not met. BEI is expensing the cost of the options on a straight-line basis over the three-year period
at $5,000 per year (1,000 options x $15 3 = $5,000).
On January 1, 2009, BEIs management believes the original sales target of 150,000 units will not be met because only
30,000 dartboard units were sold in 2008, and there has been a general economic business decline. Management modifies
the sales target to 100,000 units, which it believes is achievable. No other terms or conditions of the grant are modified. The
fair value of each option at January 1, 2009, is $8.00.
How should BEI account for the compensation expense under US

GAAP and IFRS in 2008, 2009 and 2010? Show the necessary journal
entries.
Page 8

achievement example
Example 1 solution:
US GAAP:
With the modification, there is a remeasurement of the fair value of the grant at the modification date, which leads to a fair value compensation cost of $8,000 (1,000 shares x $8.00 = $8,000) over the vesting
period or $2,667 ($8,000 3 = $2,667) per year. Since BEI already recognized $5,000 of compensation cost in 2008, the only costs to be recognized in 2009 and 2010 would be $1,500 ($8,000 - $5,000 = $3,000
2 = $1,500), for a total recognized compensation cost of $8,000.
IFRS:
BEI must recognize, at a minimum, the original amount of the expense under the award, even if the modification reduces the fair value of the award. In this example, under IFRS, BEI would continue to recognize
the original expense of $15,000 as $5,000 per year for each of the three years.

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achievement example
Example 1 solution: (continued):
US GAAP
IFRS
2008
Compensation expense $5,000

Additional paid-in capital $5,000
Compensation expense
$5,000
Additional paid-in capital
$5,000
2009

$1,500

$5,000
2010

$1,500

$5,000
Total expense
Total expense
$8,000

$15,000
Page 10
SBP
Stock compensation: cost allocation
US GAAP
IFRS
Compensation expense is recognized over the

service period. The service period is assumed
to be the vesting period, unless specified
otherwise.
Similar
In the case of cliff vesting (the entire award
vests at the end of the vesting period), the
expense is recognized using a straight-line
approach.

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SBP
Stock compensation: allocation
US GAAP
IFRS
In the case of graded vesting (portions of

the award vest at different dates
throughout the vesting period), for awards
containing only service conditions, entities
make an accounting policy election to
recognize compensation expense either
on a straight-line basis (the award is
valued as a single award with an average
expected life) or on an accelerated basis
(each tranche is measured as a separate
award with its own expected life).
In the case of graded vesting, companies

must recognize compensation expense on
an accelerated basis.

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Graded vesting of stock compensation expense example

Example 2
On January 2, 2010, ABCs Board of Directors approved granting 3,000 stock options to a select
group of senior employees. The requisite service period is three years, with 33% of the options
vesting each calendar year in 2010, 2011 and 2012 (graded vesting). An option-pricing model
was used (Black-Scholes-Merton) to calculate fair value, which was determined to be $10 on the
grant date. No forfeitures are assumed.
How should ABC account for the compensation

expense under US GAAP (assuming the straight-line
election has been made) and IFRS in 2010, 2011
and 2012? Show the necessary journal entries.

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Example 2 solution:
Year
US GAAP:
ABC would recognize $30,000 of compensation
expense calculated as 3,000 shares at $10 each
multiplied by a 0% forfeiture rate. The expense each
year would be as follows under the straight-line
method ($30,000/3 years = $10,000 per year).
2010
$10,000
2011
10,000
2012
10,000

Compensation
expense
$30,000
Page 14

Example 2 solution (continued):
IFRS:
ABC would recognize the same total expense of $30,000 as under US GAAP. ABC would allocate the expense to
three tranches equally since there are three vesting periods. Each tranche is then allocated equally over its vesting
period as follows:
Year
Compensation
expense
2009
2010
$
2011
2010
$10,000
$10,000
2011
10,000
5,000
5,000
2012
10,000
3,333
3,333
3,333
$30,000
$18,333
$8,333
$3,333
Note that these amounts have been rounded for presentation purposes.
The 2010 tranche is 100% expensed in 2010 since it is wholly vested at the end of year one.
The 2011 tranche is 50% expensed in 2010 and 2011 since it vests in two years.
The 2012 tranche is 33% expensed in 2010, 2011 and 2012 since it vests in three years.

Page 15

US GAAP
IFRS
2010

$10,000
$18,333
2011

$10,000
$8,333
2012

$10,000
$3,333
Total expense
$30,000
Total expense
$30,000*
* Rounded for presentation purposes.

Page 16
SBP
Employee stock purchase plans
US GAAP
IFRS
Addresses employee share purchase plans,

which allow employees to purchase shares of
an entity, at a discount, less than market price.

Similar
Page 17
SBP
Employee stock purchase plans
US GAAP
IFRS
If a plan is deemed to be non-compensatory, no

compensation expense is recorded. A plan
would be deemed non-compensatory if:
The proceeds received by the employer are not

less than the proceeds it would receive in an
offering of shares through an underwriter (or the
discount is consistent with that offered to all
shareholders 5% is generally accepted as the
usual discount).
Substantially all eligible employees may

participate on an equitable basis.
The plan does not include option features to allow

employees to cancel their participation.
All employee purchase plans are deemed to be

compensatory, thus compensation expense is
recorded for the amount of the discount.

Page 18
Noncompensatory share purchase plans example

Example 3
The Delicious Doughnuts Company (DDC) adopted an employee share purchase plan effective January
1, 2010. The plan provides all DDC employees who have worked for DDC more than 90 days, the right to
purchase DDC common stock ($1 par value per share) at a 5% discount from the market price at the end
of each payroll period, based on the average market price of the common stock during the same period.
The plan does not allow cancellation of any purchase subsequent to the payroll period.
During the first quarter of 2010, 4,500 employees elected to participate in the plan (75% of eligible
employees) and purchased 45,000 shares of common stock at an average market price of $50 per share,
with an average discount of $2.50 per share.
How should DDC account for the compensation expense under

US GAAP and IFRS during the first quarter of 2010? Show the
necessary journal entries.
Page 19

Example 3 solution:
US GAAP:
As the plan is deemed non-compensatory, DDC does not record any compensation expense.
Common stock: 45,000 shares x $47.50 ($50 - 2.50) = $2,137,500
Cash
$2,137,500
Common stock $ 45,000
2,092,500

Page 20

Example 3 solution (continued)
IFRS:
All employee purchase plans are deemed compensatory so DDC must record an expense for the amount of the discount for the shares issued, or $112,500 calculated as 45,000 shares x $2.50 discount per share.
Common stock: 45,000 shares x $50 per share = $2,250,000
Cash $2,137,500
Compensation expense
112,500
Common stock $
45,000
2,205,000

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SBP
SBP to nonemployees
US GAAP
IFRS
Share-based awards to non-employees should

be measured and recognized using the fair
value method.

Similar
Page 22
SBP
SBP to non-employees
US GAAP
IFRS
The share-based award should be valued at

either the fair value of the goods or services
received or the fair value of the equity
instruments issued, whichever is more reliable.
If the fair value of the equity instruments issued
is used, then the fair value is measured at the
earlier of:
(a) The date at which a commitment for
performance by the counterparty is
reached.
(b) The date at which the counterpartys
performance is complete (i.e., goods or
services fully received).
The fair value of the transaction should be based

on the fair value of the goods or services received
and only on the fair value of the equity instruments
if the fair value of the goods or services cannot be
reliably determined.
If using the fair value of the equity instruments,

the measurement date is based on a service
model approach using the date the entity
obtains the goods or as the counterparty
renders the services. If the goods or services
are received on a number of dates over a
period, the fair value at each date should be
used. There is no performance commitment
concept under IFRS.

Page 23
Measurement basis for non-employees example

Example 4 On January 15, 2010, the purchasing manager of a large computer manufacturer, Supercomputer (Super), obtained
approval from management and the Board of Directors to enter into a contract with a manufacturing software supplier to issue
1,000 shares of Supers common stock ($1.00 par value per share) for delivery of a newly completed software program to be used
in Supers manufacturing process. The fair market value of the common stock was $50 per share on January 15, 2010. The
purchasing manager reached an agreement with the vendor on January 31, 2009, and a contract was signed that day. The fair
market value of the common stock was $52 per share on January 31, 2010. The vendor agreed to deliver the completed software
on February 28, 2010.
The vendor has sold similar software to other manufacturers,

sometimes for common stock and sometimes for cash, usually at a
negotiated amount. The vendor believes the selling price of the
software should be about $75,000, or around that range (which, for
this example, is an unreliable estimate).
Assuming the software is delivered on February 28, 2010, at

which time the fair market value of the common stock was $48
per share, what amount would Super record for this purchase
under US GAAP and IFRS? Show the necessary journal
entries.
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Example 4 solution:
US GAAP:
Because the purchase price of the vendors software can vary, the fair market value of the manufacturing entitys common stock would seem to be a better indicator of the value. Under US GAAP, according to ASC
505-50-30-11, the earlier of either the date at which a commitment for performance is reached or when the performance is complete is used. Therefore, the commitment date is used, which is January 31, 2010 (1,000
shares x $52 = $52,000).
Purchased manufacturing software
Par value common stock
$52,000
$ 1,000
51,000

Page 25

IFRS: The fair market value of the goods or services or the fair market value of the common stock is also used to determine fair value, whichever is more reliable. Again, in this situation, the fair market value of the common stock would appear to be a better
measure of fair value. However, under IFRS, the transaction is recorded when the entity obtains the software, which is February 28, 2010, and the fair value of the software at that time is determined to be $48,000 (1,000 shares x $48 = $48,000).
Purchased manufacturing software $48,000
$ 1,000
47,000
If the vendors estimate was reliable and thus the measure of fair value, the basis of the software would be $75,000 and Super would prepare the following journal entry using either US GAAP or IFRS:
Purchased manufacturing software $75,000
$ 1,000
74,000

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Presentation and disclosure

SBP
US GAAP
IFRS
Has extensive disclosure requirements related to share compensation

plans, including measurement and recognition criteria. The
pronouncements contain basic requirements to disclose the:
Type and scope of arrangements existing during the period.
Description of the agreements (settlement methods, vesting

conditions, etc.).
Number
and average exercise price of share options by category,
including:
Options outstanding at the beginning of the period.
Options outstanding at the end of the period.
Options granted, vested, exercised and forfeited during the period.
Options exercisable at the end of period.

Similar, although the

pronouncements are
less detailed than
those under US
GAAP.
Page 27

SBP
US GAAP
IFRS
Basic requirements (continued):
Average share price of exercised options.
Range of exercise prices and remaining contractual life of options

outstanding at the balance sheet date.
Method of calculating the fair value of the transactions.
Valuation methods (model and input values, etc.) and their

impact on the statement of income and the financial position of SBP
transactions (expense and carrying amount of debts, etc.).

Similar, although the

pronouncements are
less detailed than
those under US
GAAP.
Page 28

SBP
US GAAP
IFRS
Although the disclosures are similar, US

GAAP has more detailed and specific
disclosures.
Has less detailed and less specific

disclosures.

Page 29

IFRS 2 - Share Based Payments

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IFRS 2 - Share-based payments

Share-based payments and earnings per share

No further convergence planned at this time.

Share-based payments and earnings per share

Guidance applies to transactions with

Guidance applies to transactions whereby an

Share-based payments and earnings per share

Stock compensation: measurement

Requires a fair-value-based approach in

Share-based payments and earnings per share

Stock compensation: measurement

The original grant-date fair value is no longer

If an entity modifies stock option vesting terms,

If the fair value of the award at the modification

Share-based payments and earnings per share

Stock compensation: measurement

Modification of terms (continued):

However, if the fair value at the modification date

Share-based payments and earnings per share

Modification of vesting terms that are improbable of

How should BEI account for the compensation expense under US

Academic Resource Center

Modification of vesting terms that are improbable of

Share-based payments and earnings per share

Modification of vesting terms that are improbable of

Compensation expense $5,000

Compensation expense $1,500

Compensation expense $5,000

Compensation expense $1,500

Compensation expense $5,000

Share-based payments and earnings per share

Stock compensation: cost allocation

Compensation expense is recognized over the

Share-based payments and earnings per share

Stock compensation: allocation

In the case of graded vesting (portions of

In the case of graded vesting, companies

Share-based payments and earnings per share

Graded vesting of stock compensation expense example

How should ABC account for the compensation

Share-based payments and earnings per share

Graded vesting of stock compensation expense example

Share-based payments and earnings per share

Graded vesting of stock compensation expense example

Share-based payments and earnings per share

Graded vesting of stock compensation expense example

Compensation expense $10,000

Compensation expense $10,000

Compensation expense $10,000

* Rounded for presentation purposes.

Employee stock purchase plans

Addresses employee share purchase plans,

Share-based payments and earnings per share

Employee stock purchase plans

If a plan is deemed to be non-compensatory, no

The proceeds received by the employer are not

Substantially all eligible employees may

The plan does not include option features to allow

All employee purchase plans are deemed to be

Share-based payments and earnings per share

Noncompensatory share purchase plans example

How should DDC account for the compensation expense under

Academic Resource Center