IFRS 2 Flashcards Share-based Payment Revision Questions
IFRS Revision
IFRS 2 Share-based Payment Flashcards
Use this expandable IFRS 2 flashcard page to revise share-based payment basics, equity-settled and cash-settled awards, vesting conditions, modifications, valuation models, group arrangements, and tax issues.
Table of contents
- Objective and basics (5 questions)
- Equity-settled and cash-settled (22 questions)
- Vesting conditions and measurement dates (18 questions)
- Modifications and cancellations (6 questions)
- Group share-based payments (1 questions)
- Valuation models and assumptions (7 questions)
- Tax and special topics (5 questions)
Objective and basics
What is the primary objective of IFRS 2 Share-based Payment?
To specify the financial reporting requirements for an entity when it undertakes a share-based payment transaction.
Term: Intrinsic Value
Definition: The difference between the fair value of the shares and the price the counterparty is required to pay for them.
What defines a 'compound financial instrument' in a share-based payment context?
An arrangement where the counterparty has the right to choose between settlement in cash or equity instruments.
Term: Share Appreciation Right (SAR)
Definition: A right entitling the employee to a cash payment based on the increase in the entity's share price over a period.
What is the 'residual interest' in a compound financial instrument?
The equity component calculated as the total fair value minus the debt component's fair value.
Equity-settled and cash-settled
In an equity-settled share-based payment, what is the credit entry when services are received?
An increase in equity.
In a cash-settled share-based payment, what is the credit entry when services are received?
The recognition of a liability.
At what date is the fair value of an equity-settled share-based payment to employees measured?
The grant date.
How often is the fair value of a cash-settled share-based payment liability remeasured?
At each reporting date and at the date of final settlement.
Under what circumstance does a receiving entity classify a group arrangement as equity-settled?
When the awards are its own equity instruments or it has no obligation to settle the transaction.
In a cash-settled arrangement, how are changes in the fair value of the liability recognised?
Through profit or loss for the period.
If an entity settles a compound instrument in cash, how is the previously recognised equity component treated?
It remains within equity, though it may be transferred between different components of equity.
What determines the classification of a share-based payment when the entity (not the employee) has the settlement choice?
Whether the entity has a present obligation to settle in cash.
Under what condition is an entity considered to have a 'present obligation' to settle in cash?
If the equity settlement has no commercial substance or the entity has a past practice of cash settlement.
How does an entity account for shares withheld to fund an employee's tax obligation under a net settlement feature?
As a deduction from equity for the shares withheld, treated as an equity-settled transaction.
In a group share-based payment, how does the settling entity classify the transaction if it provides its parent's shares?
As a cash-settled share-based payment transaction.
What does a 'constructive obligation' for cash settlement imply for the accounting classification?
The transaction must be treated as a cash-settled share-based payment.
In the separate financial statements of a subsidiary, what is the credit entry for a parent-settled equity award?
A capital contribution from the parent recognised in equity.
Why is 'grant date fair value' described as being 'stuck like a magnet' in equity-settled accounting?
Because once determined, it is never remeasured regardless of share price changes.
What is the typical journal entry to record the annual expense for a cash-settled share-based payment?
Debit Remuneration Expense and Credit Share-based Payment Liability.
What happens to the liability of a compound instrument if the employee chooses to receive shares?
The liability is transferred directly to equity as consideration for the shares issued.
For equity-settled awards, what does 'total expected cost' represent in annual calculations?
The product of the number of employees expected to vest, options per employee, and grant-date fair value.
What is the impact on equity-settled expense recognition if an employee meets a service condition but the share price target fails?
The entity continues to recognise the full expense because market conditions do not affect vesting for accounting purposes.
How does an entity account for the 'time value' of money in cash-settled payments?
By using an option pricing model that discounts expected future pay-outs to the present value.
In the context of ethics, what is a common manipulation regarding share-based payments?
Delaying the grant date or misclassifying cash-settled awards as equity-settled to avoid liability recognition.
What is the deferred tax 'temporary difference' for equity-settled share-based payments?
The difference between the carrying amount of the expense (zero) and the estimated future tax deduction.
If an entity repurchases shares on the open market to satisfy a share-based award, how is this classified?
As an equity-settled share-based payment transaction.
Vesting conditions and measurement dates
Define the 'vesting period' for a share-based payment arrangement.
The period during which all specified vesting conditions must be satisfied.
What are the two sub-categories of vesting conditions identified in IFRS 2?
Service conditions and performance conditions.
What type of condition requires an employee to complete a specified period of employment?
A service condition.
How is a market-based performance condition defined under IFRS 2?
A performance condition related to the market price or value of the entity's equity instruments.
How does an entity account for market conditions after the grant date fair value is determined?
The fair value is not subsequently adjusted, even if the market condition is never met.
How does an entity account for non-market vesting conditions after the grant date?
The entity adjusts the number of equity instruments expected to vest based on latest estimates.
If a grant of equity instruments vests immediately, when should the entity recognise the services?
In full on the grant date.
How is the equity component of a compound share-based payment measured at the grant date?
As the difference between the fair value of the equity alternative and the fair value of the debt alternative.
How are share options with a 'reload feature' accounted for under IFRS 2?
The feature is ignored at grant date and any reload option is treated as a new grant when issued.
How is the expense allocated when an employee transfers between subsidiaries during the vesting period?
Each subsidiary recognises services based on the proportion of the vesting period served with that specific entity.
What is the 'grant date' if an agreement is subject to shareholder approval?
The date when shareholder approval is officially obtained.
How are 'non-vesting conditions' treated when measuring the fair value of equity instruments?
They are factored into the estimate of the fair value at the measurement date.
What is a major limitation of the Black-Scholes model regarding executive share options?
It does not allow for performance conditions or exercise before the end of the term.
What input should be used for expected dividends if employees are entitled to receive them during the vesting period?
Zero.
How should an entity treat a failure to meet a non-vesting condition during the vesting period?
As a cancellation of the share-based payment arrangement.
What is the accounting result if an employee leaves the group before completing a service condition?
No amount is recognised on a cumulative basis for services received from that employee.
Which date is used as the measurement date for share-based payments to employees?
The grant date.
How is a 'service condition' distinguished from a 'performance condition'?
A service condition only requires employment duration, while a performance condition also requires meeting targets.
Modifications and cancellations
How is 'incremental fair value' calculated during a modification of a share-based payment?
The difference between the fair value of the modified instrument and the original instrument, both measured at the modification date.
When a share-based payment is cancelled, how is the remaining unrecognised expense treated?
It is recognised immediately in profit or loss as an accelerated charge.
How should an entity account for a replacement award identifying a cancelled award?
As a modification of the original share-based payment grant.
What is the treatment for an unfavourable modification (e.g., increasing the exercise price)?
The entity continues to account for the services as if the modification had not occurred.
Formula: Incremental Fair Value
FV_{modified - FV_{original at the date of modification.
How should an entity account for a share-based payment modification that is NOT beneficial to the employee?
The entity continues to recognise the original grant as if the modification had never occurred.
Group share-based payments
When a subsidiary is required to reimburse its parent for share-based payments, how does this affect classification?
It does not change the classification; the subsidiary follows the primary IFRS 2 classification rules.
Valuation models and assumptions
What is the measurement objective when estimating the expected life of an option?
To approximate the expectations that an outside party with access to employee behaviour information would develop.
Which valuation model is specifically mentioned as a mathematical formula for European call options?
The Black-Scholes-Merton formula.
How does the Monte-Carlo valuation model estimate option value?
By simulating thousands of future outcomes for share prices and averaging the resulting pay-outs.
Define 'volatility' as used in option pricing models.
A measure of the amount by which a share price is expected to fluctuate during a period.
What risk-free interest rate is typically used for option valuation?
The implied yield on zero-coupon government issues in the relevant currency for the expected term.
How does an increase in share price volatility affect the fair value of a share option?
It generally increases the fair value of the option.
Under what condition can an unlisted entity estimate volatility using similar listed entities?
If the entity bases its share value on the share prices of those similar listed entities.
Tax and special topics
Which standard provides the definition of a 'group' for IFRS 2 purposes?
IFRS 10 Consolidated Financial Statements.
At what date is the fair value of equity instruments measured for transactions with parties other than employees?
The date the entity obtains the goods or the counterparty renders the service.
If an entity repurchases vested equity instruments, how is the payment accounted for?
As a deduction from equity, except for any payment exceeding the fair value at the repurchase date.
Where is the excess deferred tax recognised if the tax deduction for a share-based payment exceeds the cumulative expense?
Directly in equity.
When estimating the fair value of shares, how are post-vesting transfer restrictions handled?
They are taken into account only to the extent they affect the price a market participant would pay.
