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IFRS 2: Share-Based Payments – Lecture Slide Deck Core Learning Outcomes Identify transactions within the scope of IFRS 2 and distinguish them from ordinary equity transactions Classify share-based payments as equity-settled or cash-settled and apply the correct accounting treatment Apply vesting conditions, particularly market-based conditions, to expense recognition timing Account for modifications, cancellations, and early settlements during the vesting period Calculate share-based payment expense over multiple periods for both equity-settled and cash-settled arrangements Key Terms (Plain Language) • Share-Based Payment (SBP): Compensation given using shares or share value instead of cash • Vesting Period: Time employees must work before earning the right to shares/options • Grant Date: The day the entity and employee agree to the share-based payment arrangement • Fair Value (FV): Market-determined value of the share option or right at measurement date • Equity-Settled: Payment made by issuing company shares (fixed at grant date FV) • Cash-Settled: Payment made in cash, calculated based on share value (remeasured each period) • Market Condition: Vesting requirement linked to share price performance (e.g., "stock must reach $50") • Share Appreciation Rights (SARs): Right to receive cash equal to increase in share value SLIDE 1: IFRS 2 – Share-Based Payments Introduction and Scope • Standard applies when acquiring goods/services for equity or cash • Compensation based on entity's share value • Common in employee remuneration packages • Ensures transparent expense recognition in financial statements Visual suggestion: Title slide with IFRS 2 logo/icon and simple share certificate graphic SLIDE 2: What's IN and OUT of Scope ✓ Included: • Goods or services acquired for equity instruments • Parent acquires subsidiary using shares • Employee share options (spread over vesting period) ✗ Excluded: • Shares issued to existing shareholders (dividend alternatives) • Normal shareholder transactions (not for goods/services) Visual suggestion: Two-column table or Venn diagram showing included vs. excluded items SLIDE 3: Two Types of Settlement Equity-Settled • Settled by issuing shares or options • Measured at grant date fair value (fixed) • Entry: Dr Expense / Cr Equity Cash-Settled • Settled by paying cash based on share value • Liability remeasured at each reporting date • Entry: Dr Expense / Cr Liability Visual suggestion: Side-by-side comparison table with journal entries SLIDE 4: Equity-Settled Arrangements Key Features: • Fair value determined at grant date only • No remeasurement after grant date • Expense recognized over vesting period • Recorded in "Other Components of Equity" Example: 100 options granted, FV $4 each, 3-year vesting = $133.33/year expense Visual suggestion: Timeline showing grant date → vesting period → exercise date SLIDE 5: Cash-Settled Arrangements Key Features: • Creates a financial liability (not equity) • Fair value remeasured at each reporting date • Expense changes as share price changes • Liability settled in cash at vesting Example: Share Appreciation Rights (SARs) – value changes with stock price Visual suggestion: Flowchart showing repeated remeasurement cycles SLIDE 6: Vesting Conditions – Market-Based Special Rules for Market Conditions: • Estimate expected vesting period at grant date • If vests earlier: Accelerate remaining expense immediately • If vests later: Continue using original estimate (don't extend) • Reflects uncertainty already priced into grant date FV Visual suggestion: Decision tree for early vs. late vesting scenarios SLIDE 7: Modifications to Terms During Vesting Period: • Continue recognizing original grant date expense • If FV increases: Recognize incremental value over remaining period • Entry: Additional Dr Expense / Cr Equity Example: Exercise price reduced from $10 to $8 → option worth more Visual suggestion: Before/after comparison showing incremental fair value SLIDE 8: Cancellations & Early Settlements Immediate Recognition Required: • Accelerate all remaining unrecognized expense • Payment up to FV: Dr Equity / Cr Cash • Payment above FV: Dr Expense / Cr Cash (extra as new expense) Example: Cancel $60 arrangement in Year 2, pay $70 cash ($10 extra expense) Visual suggestion: Flowchart showing payment amount vs. FV decision points SLIDE 9: Calculation Example – Equity-Settled Facts: 16 directors, $4 grant FV, 3-year vest, 1 leaves Year 2 | Year | Calculation | Cumulative | Annual Expense | |------|-------------|------------|----------------| | 1 | 16 × $4 × 1/3 | $21.3 | $21.3 | | 2 | 15 × $4 × 2/3 | $40.0 | $18.7 | | 3 | 15 × $4 × 3/3 | $60.0 | $20.0 | Key: FV locked at grant date ($4) Visual suggestion: Table with progressive calculation steps highlighted SLIDE 10: Calculation Example – Cash-Settled Facts: Same scenario, but FV changes: Y1=$4.20, Y2=$4.60, Y3=$5.00 | Year | Calculation | Cumulative | Annual Expense | |------|-------------|------------|----------------| | 1 | 16 × $4.2 × 1/3 | $22.4 | $22.4 | | 2 | 15 × $4.6 × 2/3 | $46.0 | $23.6 | | 3 | 15 × $5.0 × 3/3 | $75.0 | $29.0 | Key: Liability remeasured each period Visual suggestion: Table showing FV changes highlighted in each row SLIDE 11: Key Differences Summary | Feature | Equity-Settled | Cash-Settled | |---------|----------------|--------------| | Measurement | Grant date FV (fixed) | Remeasured each period | | Balance Sheet | Equity | Liability | | Volatility | Stable expense | Variable expense | | Settlement | Shares issued | Cash paid | Visual suggestion: Comparison table with contrasting colors SLIDE 12: Lecture Recap What We Covered: • IFRS 2 applies to goods/services for equity-based compensation • Two types: equity-settled (fixed FV) vs cash-settled (remeasured) • Market vesting conditions have special timing rules • Modifications add incremental value over remaining period • Cancellations require immediate full expense recognition Visual suggestion: Circular flow diagram connecting all concepts SLIDE 13: Quick Check Questions Test Your Understanding: MCQ: Shares issued to existing shareholders as a dividend alternative are: - a) Equity-settled IFRS 2 - b) Cash-settled IFRS 2 - c) Outside scope of IFRS 2 ✓ - d) Recorded as expense MCQ: In equity-settled arrangements, fair value is measured: - a) At each reporting date - b) At grant date only ✓ - c) At vesting date - d) At exercise date Short Answer: What journal entry records an equity-settled share option expense? MCQ: If market conditions cause earlier-than-expected vesting, you should: - a) Ignore the change - b) Accelerate remaining expense ✓ - c) Extend the vesting period - d) Reverse previous expense Short Answer: Company cancels options with FV of $50 but pays employee $60. How is the $10 excess treated? Visual suggestion: Numbered list with answer key on separate handout Additional Notes • Practice Required: Work through full 3-year examples for both types • Common Exam Traps: Confusing grant date vs. remeasurement, forgetting to adjust for leavers • Real-World Application: Tech companies extensively use equity-settled options; banks often use cash-settled SARs End of Slide Deck Answers to Q3: Dr Expense (P&L) / Cr Equity Answer to Q5: The $10 excess is recorded as additional expense (Dr Expense / Cr Cash)