a transaction settled by another group entity (see Scenario 6 above), there is no such over-
riding guidance in respect of a transaction settled in cash by a non-group shareholder.
Nevertheless, we believe that the transaction should be treated as within the scope of
IFRS 2 for the consolidated financial statements of Parent and the individual financial
statements of Subsidiary. One of the original objectives of the project that led to the
issue of the June 2009 amendment to IFRS 2 was to address a concern that, as originally
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issued, IFRS 2 did not require an entity to account for a cash-settled share-based
payment transaction settled by an external shareholder.
In addition to the accounting treatment under IFRS 2, the group entities in this Scenario
would need to consider the requirements of IAS 24 – Related Party Disclosures – as
any payments by a shareholder would potentially need to be disclosed (see Chapter 35).
2.2.2.B
Transactions with employee benefit trusts and similar vehicles
In some jurisdictions, it is common for an entity to establish a trust to hold shares in the
entity for the purpose of satisfying, or ‘hedging’ the cost of, share-based awards to
employees. In such cases, it is often the trust, rather than any entity within the legal
group, that actually makes share-based awards to employees.
A sponsoring employer (or its wider group) will need to assess whether it controls the
trust in accordance with the requirements of IFRS 10 and therefore whether the trust
should be consolidated (see 12.3 below and Chapter 6).
Awards by employee benefit trusts and similar vehicles are within the scope of IFRS 2,
irrespective of whether or not the trust is consolidated, since:
• where the trust is consolidated, it is an award by a group entity; and
• where the trust is not consolidated, it is an award by a shareholder.
2.2.2.C
Transactions where the identifiable consideration received appears to be
less than the consideration given
A share-based payment transaction as defined (see 2.2.1 above) involves the receipt of
goods or services by the reporting entity or by another group entity. Nevertheless,
IFRS 2 also applies to share-based payment transactions where no specifically
identifiable goods or services have been (or will be) received. [IFRS 2.2].
IFRS 2 asserts that, if the identifiable consideration received (if any) appears to be less
than the fair value of consideration given, the implication is that, in addition to the
identifiable goods and services acquired, the entity must also have received some
unidentifiable consideration equal to the difference between the fair value of the share-
based payment and the fair value of any identifiable consideration received.
Accordingly, the cost of the unidentified consideration must be accounted for in
accordance with IFRS 2. [IFRS 2.13A].
For example, if an entity agrees to pay a supplier of services with a clearly identifiable
market value of £1,000 by issuing shares with a value of £1,500, IFRS 2 requires the entity
to recognise an expense of £1,500. This is notwithstanding the normal requirement of
IFRS 2 that an equity-settled share-based payment transaction with a non-employee be
recognised at the fair value of the goods or services received (see 5.1 and 5.4 below).
This requirement was introduced by IFRIC 8 (since incorporated into IFRS 2). The
reason for the change is alluded to in an illustrative example. [IFRS 2.IG5D, IG Example 1]. As
part of general economic reforms in South Africa, under arrangements generally
referred to as black economic empowerment or ‘BEE’ (discussed further at 15.5 below),
various entities issued or transferred significant numbers of shares to bodies
representing historically disadvantaged communities. Some took the view that these
transactions did not fall within the scope of IFRS 2 as originally drafted because the
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entities concerned were not purchasing goods or services. Rather, BEE arrangements
were simply meant to replicate a transfer of shares from one group of shareholders to
another. Accordingly, it was argued, such transactions did not fall within the scope of
IFRS 2, since it is intrinsic to the definition of a ‘share-based payment transaction’
(see 2.2.1 above) that goods or services are received.
IFRS 2 rejects this argument. It effectively takes the view that, since the directors of an
entity would not issue valuable consideration for nothing, something must have been
received. [IFRS 2.BC18C]. IFRS 2 suggests that a transfer of equity under BEE and similar
schemes is made ‘as a means of enhancing [the entity’s] image as a good corporate
citizen’. [IFRS 2 IG Example 1].
There seems little doubt that this aspect of IFRS 2 is in part an ‘anti-avoidance’ measure. As
discussed in 4 to 8 below, the general measurement rule in IFRS 2 is that share-based
payment transactions with employees are measured by reference to the fair value of the
consideration given and those with non-employees by reference to the fair value of the
consideration received. We argue at 5.2.2 below that the requirement to measure
transactions with employees by reference to the consideration given is essentially an anti-
avoidance provision. It prevents entities from recognising a low cost for employee share
options on the grounds that little incremental service is provided for them beyond that
already provided for cash-based remuneration. The changes introduced by IFRIC 8
removed the potential for a similar abuse in accounting for transactions with non-employees.
Nevertheless, the IASB acknowledges that there may be rare circumstances in which a
transaction may occur in which no goods or services are received by the entity. For
example, a principal shareholder of an entity, for reasons of estate planning, may
transfer shares to a relative. In the absence of indications that the relative has provided,
or is expected to provide, goods or services to the entity in exchange for the shares,
such a transfer would be outside the scope of IFRS 2. [IFRS 2.BC18D].
See also the discussions at 2.2.3.A below relating to transactions with shareholders in
their capacity as such and at 2.2.4.K below relating to dual pricing on a share issue.
2.2.2.D
‘All employee’ share plans
Many countries encourage wider share-ownership by allowing companies to award a
limited number of free or discounted shares to employees without either the employee
or the employer incurring tax liabilities which would apply if other benefits in kind to
an equivalent value were given to employees.
Some national accounting standards exempt some such plans from their scope, to some
extent as the result of local political pressures. Prior to issuing IFRS 2, the IASB received
some strong representations that IFRS should give a similar exemption, on the grounds
that not to do so would discourage companies from continuing with such schemes.
The IASB concluded that such an exemption would be wrong in principle and difficult
to draft in practice. By way of concession, the Basis for Conclusions hints that if the
IFRS 2 charge for such schemes is (as asserted by some of t
he proponents of an
exemption) de minimis, then there would be no charge under IFRS 2 anyway, since, like
all IFRSs, it applies only to material items. [IFRS 2.BC8-17]. However, our experience is
that, in many cases, the charge is material.
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2.2.2.E Vested
transactions
Once a transaction accounted for under IFRS 2 has vested in the counterparty
(see 3 below), it does not necessarily cease to be in the scope of IFRS 2 just because the
entity has received the goods or services required for the award to vest. This is made
clear by the numerous provisions of IFRS 2 referring to the accounting treatment of
vested awards.
Once equity shares have been unconditionally delivered or beneficially transferred to
the counterparty (e.g. as the result of the vesting of an award of ordinary shares, or the
exercise of a vested option over ordinary shares), the holder of those shares will often
be in exactly the same position as any other holder of ordinary shares and the shares
will generally be accounted for under IAS 32 and IFRS 9 rather than IFRS 2.
If, however, the holder of a share or vested option enjoys rights not applicable to all
holders of that class of share, such as a right to put the share or the option to the entity for
cash, or holds a special class of share with rights that do not apply to other classes of
equity, the share or option might still remain in the scope of IFRS 2 as long as any such
rights continue to apply. The same is true of modifications made after vesting which add
such rights to a vested share or option or otherwise alter the life of the share-based
payment transaction. The special terms or rights will often be linked to the holder’s
employment with the entity but could also apply to an arrangement with a non-employee.
The significance of this is that issued equity instruments and financial liabilities not
within the scope of IFRS 2 would typically fall within the scope of IAS 32 and IFRS 9,
which might require a significantly different accounting treatment from that required by
IFRS 2. See, for example:
• the discussion at 2.2.4.B below of the treatment in consolidated financial
statements of an award with a right to put the share to the parent entity;
• the discussion at 2.2.4.G below which highlights that a share option with a foreign
currency strike price is accounted for as an equity instrument under IFRS 2, but as
a liability under IAS 32 and IFRS 9; and
• the discussion at 10.1.6 below of the treatment of convertible instruments issued in
exchange for goods and services and accounted for under IFRS 2 rather than under
IAS 32 and IFRS 9.
2.2.3
Transactions not within the scope of IFRS 2
The following transactions are outside the scope of IFRS 2:
• transactions with shareholders as a whole and with shareholders in their capacity
as such (see 2.2.3.A below);
• transfers of assets in certain group restructuring arrangements (see 2.2.3.B below);
• business combinations (see 2.2.3.C below);
• combinations of businesses under common control and the contribution of a
business to form a joint venture (see 2.2.3.D below); and
• transactions in the scope of IAS 32 and IFRS 9 (see 2.2.3.E below).
2530 Chapter 30
In addition, the scope exemptions in IFRS 2 combined with those in IAS 32 and IFRS 9
appear to have the effect that there is no specific guidance in IFRS for accounting for
certain types of investment when acquired in return for shares (see 2.2.3.F below).
As noted at 2.2.2.D above, there is no exemption from IFRS 2 for share schemes aimed
mainly at lower- and middle-ranking employees, referred to in different jurisdictions by
terms such as ‘all-employee share schemes’, ‘employee share purchase plans’ and
‘broad-based plans’.
2.2.3.A
Transactions with shareholders in their capacity as such
IFRS 2 does not apply to transactions with employees (and others) purely in their
capacity as shareholders. For example, an employee may already hold shares in the
entity as a result of previous share-based payment transactions. If the entity then raises
funds through a rights issue, for example, whereby all shareholders (including the
employee) can acquire additional shares for less than the current fair value of the shares,
such a transaction is not a share-based payment transaction for the purposes of IFRS 2.
[IFRS 2.4].
2.2.3.B
Transfer of assets in group restructuring arrangements
In some group restructuring arrangements, one entity will transfer a group of net assets,
which does not meet the definition of a business, to another entity in return for shares.
Careful consideration of the precise facts and circumstances is needed in order to
determine whether, for the separate or individual financial statements of any entity
affected by the transfer, such a transfer falls within the scope of IFRS 2. If the transfer
is considered primarily to be a transfer of goods by their owner in return for payment
in shares then, in our view, this should be accounted for under IFRS 2. However, if the
transaction is for another purpose and is driven by the group shareholder in its capacity
as such, the transaction may be outside the scope of IFRS 2 (see 2.2.3.A above).
Accounting for intra-group asset transfers in return for shares is considered further in
Chapter 8 at 4.4.1.
2.2.3.C Business
combinations
IFRS 2 does not apply to share-based payments to acquire goods (such as inventories or
property, plant and equipment) as part of a business combination to which IFRS 3 applies.
However, the Interpretations Committee has clarified that in a reverse acquisition
involving an entity that does not constitute a business (i.e. an asset acquisition or the
provision of a service), IFRS 2 rather than IFRS 3 is likely to apply (see Chapter 9
at 14.8).12
Transactions in which equity instruments are issued to acquire goods as part of the net assets
in a business combination are outside the scope of IFRS 2 but equity instruments granted to
the employees of the acquiree in their capacity as employees (e.g. in return for continued
service following the business combination) are within its scope, as are the cancellation,
replacement or modification of a share-based payment transaction as the result of a business
combination or other equity restructuring (see 11 and 12.8 below). [IFRS 2.5].
Thus, if a vendor of an acquired business remains as an employee of that business
following the business combination and receives a share-based payment for transferring
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control of the entity and for remaining in continuing employment, it is necessary to
determine how much of the share-based payment relates to the acquisition of control
(which forms part of the cost of the combination, accounted for under IFRS 3) and how
much relates to the provision of future services (which is a post-combination operating
expense accounted for under IFRS 2). Guidance on this issue is given in IFRS 3 – see
Chapter 9 at 11.2 – and there is discussion of related issues at 2.2.4.B below
.
2.2.3.D
Common control transactions and formation of joint arrangements
IFRS 2 also does not apply to a combination of entities or businesses under common
control (see Chapter 10), or the contribution of a business on the formation of a joint
venture as defined by IFRS 11 – Joint Arrangements (see Chapter 12). [IFRS 2.5].
The exemption for common control combinations took effect for annual periods
beginning on or after 1 July 2009. [IFRS 2.61]. The exemption based on IFRS 11 takes effect
from the date of application of that standard. [IFRS 2.63A].
It should be noted that the contribution of non-financial assets (which do not constitute
a business) to a joint venture in return for shares is within the scope of IFRS 2 and the
assets should be accounted for at fair value in accordance with IFRS 2 (see 2.2.2 above).
IFRS 2 does not directly address other types of transactions involving joint ventures or
transactions involving associates, particularly arrangements relating to the employees of
associates or joint ventures. These are discussed further at 12.9 below.
2.2.3.E
Transactions in the scope of IAS 32 and IFRS 9
IFRS 2 does not apply to transactions within the scope of IAS 32 and IFRS 9
(see Chapter 41). For example, if an entity enters into a share-based payment
transaction to purchase a commodity surplus to its production requirements or with a
view to short-term profit taking, the contract is treated as a financial instrument under
IAS 32 and IFRS 9 rather than a share-based payment transaction under IFRS 2.
[IFRS 2.6].
Some practical examples of scope issues involving IFRS 2 and IAS 32/IFRS 9 are
discussed at 2.2.4 below.
2.2.3.F
Transactions in financial assets outside the scope of IAS 32 and IFRS 9
As noted at 2.2.2 above, IFRS 2 applies to share-based payment transactions involving
goods or services, with ‘goods’ defined so as to exclude financial assets, presumably on
the basis that these fall within IAS 32 and IFRS 9. However, investments in subsidiaries,
associates and joint ventures in the separate financial statements of the investing entity
are financial assets as defined in IAS 32 (and hence outside the scope of IFRS 2) but are
outside the scope of IFRS 9 where the entity chooses to account for them at cost (see
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 504
