Disclosure and presentation

Paragraphs 44 to 52 of IFRS 2 include detailed disclosure requirements for share-based payments.

These requirements are set out in full in Appendix 3 to this guide. The main provisions are summarised below. Additional information should be disclosed if the detailed information required to be disclosed by the IFRS does not satisfy the principles in paragraphs 44, 46 and 50 of the Standard (see sections 8.1, 8.2 and 8.3 below). [IFRS 2.52]

Where separate financial statements of the parent are presented using IFRSs, these disclosures will be required for both the parent entity’s separate financial statements and for the

consolidated financial statements of the group. Some of the disclosures (e.g. regarding the nature of the schemes and the option pricing models used) will be common to both and need not be repeated. However, some details (e.g. the numerical details regarding the options outstanding etc.) will have to be given separately for the parent entity as well as for the group.

8.1 Nature and extent of share-based payments

An entity should disclose information that enables users of the financial statements to understand the nature and extent of share-based payment arrangements that existed during the period. [IFRS 2.44]

To give effect to this principle, IFRS 2 specifies that at least the following should be disclosed: [IFRS 2.45]

• 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:

– the vesting requirements;

– the maximum term of options granted; and

– the method of settlement (e.g. whether in cash or equity).

An entity with substantially similar types of share-based payment arrangements may aggregate this information, unless separate disclosure of each arrangement is necessary to satisfy the principle in paragraph 44 of the Standard;

• the number and weighted average exercise prices of share options for each of the following groups of options:

– outstanding at the beginning of the period;

– granted during the period;

– forfeited during the period;

– exercised during the period;

– expired during the period;

– outstanding at the end of the period; and – exercisable at the end of the period;

• 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 weighted average share price during the period may instead be disclosed; and

• for share options outstanding at the end of the period, the range of exercise prices and weighted average contractual life. If the range of exercise prices is wide, the outstanding options should 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.

8.2 How fair value is determined

An entity should disclose information that enables users of the financial statements 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. [IFRS 2.46]

To give effect to this principle, IFRS 2 specifies that at least the following should be disclosed if the entity has measured the fair value of goods and services received indirectly, by reference to the fair value of the equity instruments granted: [IFRS 2.47]

• for share options granted during the period, the weighted average fair value of those options at the measurement date and information on how the fair value was measured, including:

– 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;

– how expected volatility was determined, including an explanation of the extent to which it was based on historical volatility; and

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

• for other equity instruments granted during the period (i.e. 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 determined, including:

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

– whether and how expected dividends were incorporated into the measurement of fair value; and – whether and how any other features of the equity instruments granted were incorporated into

the measurement of fair value; and

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

– an explanation of those modifications;

– the incremental fair value granted as a result of those modifications; and – information on how the incremental fair value was measured.

If the entity has measured directly the fair value of goods or services received during the period, disclosure is required of how that fair value was determined (e.g. whether fair value was measured at a market price for those goods or services). [IFRS 2.48]

If the presumption in paragraph 13 of the Standard has been rebutted, that fact should be disclosed together with an explanation of why the presumption was rebutted. The presumption in paragraph 13 is that in the case of transactions with parties other than employees, the fair value of the goods or services received can be estimated reliably (see section 4.1 above). [IFRS 2.49]

8.3 Effect of share-based payment transactions on the profit or loss and financial position

An entity should disclose information that enables users of the financial statements to understand the effect of share-based payment transactions on its profit or loss for the period and on its financial position. [IFRS 2.50] To give effect to this principle, IFRS 2 specifies that at least the following should be disclosed: [IFRS 2.51]

• 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 recognised 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; and

• for liabilities arising from share-based payment transactions:

– the total carrying amount at the end of the period; and

– 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 (e.g. vested share appreciation rights).

8.4 Illustrative disclosures

Illustrative disclosures for share-based payment transactions are included in the IFRS 2

Implementation Guidance at paragraph IG32 and also in Deloitte’s IFRS Model Financial Statements, available for download from www.iasplus.com.

8.5 Movements in reserves 8.5.1 Entries arising from IFRS 2

For the IFRS 2 expense, the Standard requires a “corresponding increase in equity”. There is nothing in IFRSs to require or prohibit the credit entry going to a separate component of equity.

There is also nothing in IFRSs to prevent the credit entry being taken to retained earnings.

Paragraph 48W of the Basis for Conclusions to IAS 19 explains that the phrase ‘retained earnings’ is not a defined term and, in particular, it is not defined as the cumulative total of profit or loss less amounts distributed to owners.

Local legal and regulatory requirements may have to be taken into account when determining the most appropriate treatment. Local and regulatory requirements in some jurisdictions may require the credit entry to be regarded as capital and therefore prohibit its inclusion in retained earnings The position becomes more complicated where an ESOP trust is involved, which is often the case with employee share schemes. For example, it may appear to be attractive to take the IFRS 2 credit entry to the ‘ESOP reserve’ which represents the deduction within equity for own shares held. However, the IFRS 2 credit entry based on grant date fair value is unlikely to equal the purchase price of the shares in the trust less any exercise price, so a difference will build up.

These issues are addressed at section 8.5.2 below.

8.5.2 Entries relating to ESOP trusts

The use of ESOP trusts is considered in Chapter 10 of this guide. This section considers the accounting entries that may be required within consolidated reserves when an entity’s own shares are held by the trust. From the perspective of the consolidated financial statements, such shares are ‘treasury shares’ and are deducted from equity in accordance with IAS 32.33. In accordance with IAS 32.34, the amount of treasury shares held may be disclosed either on the face of the balance sheet (e.g. as a separate component of equity) or in the notes (e.g. as a component of retained earnings).

If the deduction is not shown as a separate reserve, (e.g. because it is deducted from the balance of retained earnings) the amount included should be shown by way of note. It will generally be clearer to use a separate reserve where the amount is material.

For the purposes of the following illustration, it is assumed that a separate ESOP reserve is maintained.

Where shares are purchased in the market by an ESOP trust, they will initially be recorded as a debit to the ESOP reserve for the price paid. For example, assuming that the price paid is CU1,000:

Dr ESOP reserve CU1,000

Now if options are granted over these shares with an exercise price of CU800, the following entry will be necessary on exercise:

Dr Cash CU800

Dr Retained earnings CU200

Cr ESOP reserve CU1,000

This is because it is illogical to leave a balance on the ESOP reserve which relates to shares that are no longer held. The difference must go somewhere and retained earnings will generally be the most appropriate caption.

However, this does not deal with the accounting entries in reserves that may be required by IFRS 2. These are discussed at section 8.5.1 above. They will generally involve a credit to equity equal to the expense recognised. This credit will usually be taken to retained earnings but there is nothing to prohibit it from being credited to a separate reserve.

It may be tempting to take this credit entry to the ESOP reserve where one exists and the options are to be satisfied by using the shares held by the trust. But, in practice, this does not generally make sense. The credit entry is based on fair value at grant date and is unlikely to coincide with the difference between the purchase price of the shares by the trust and the option exercise price (if any). Therefore, taking the credit entry to the ESOP reserve would be likely to result in that reserve increasing each year and never being eliminated. It is therefore generally preferable for the credit entry arising from IFRS 2 to be taken to retained earnings and for the effects of any purchase of own shares through the ESOP trust to be considered

separately.