The Objective of IFRS 2 is to specify the financial reporting by an entity when it undertakes a share based payment transaction. In particular, it requires the entity to reflect in its Profit & Loss position – the effects of share based payment transactions, including expenses associates with transactions in which share options are granted to employees.
IFRS 2 requires an entity to recognise share based payment transactions in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity.
IFRS 2 as issued by the IASB requires share based payments to be treated as an expense. The amount charged as an expense will be measured at the fair value of goods or services received.
IFRS 2 sets out measurement principles and specific requirements for 3 types of share based transactions:-
- Equity settled share based transactions - in which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options);
- Cash settled Share Based Payment Transactions- in which the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price (or value) of the entity’s shares or other equity instruments of the entity
- Transactions with Cash Alternatives - in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash or by issuing equity instruments.
Depending on the type of share based payment, fair value may be determined by the value of the shares or the rights given up, or by the value of goods and services received
Recognition and Measurement
The Issuance of shares or rights, to shares requires an increase in a component of equity. IFRS 2 requires offsetting debit entry to be expensed when the payment for goods or services does not represent as asset. The expense should be recognised as the goods or services are consumed.
For eg – The issuance of shares or rights to shares to purchase inventory would be presented as an increase in inventory and would be expensed only once the inventory is sold or impaired.
Summary – Requirements of IFRS 2
IFRS 2 applies to all entities and there is no exemption for private or smaller entities. Furthermore, it also applies to transfers of equity instruments of the entity’s parent, or equity instruments of another entity in the same group as the entity, to parties that have supplied goods or services to the entity.
IFRS 2 Disclosure Requirements
This standard prescribes various disclosure requirements to enable the users of financial statements to understand:
- The nature and extent of Share based payment arrangements that existed during the priod
- How the fair value of goods or services received, or the fair value of the equity instruments granted , during the period was determined
- The effect of share based transactions on the entity’s profit or loss for the period and on its financial position.
The full version of IFRS 2 as issued by IASB can be downloaded from the following link –