This blog aims to provide a clear view of the International Financial Reporting Standard (IFRS 2) Share-Based Payment, and to demystify the standard by explaining the basics of accounting for share-based payments using relatively simple language that helps entities navigate some of the complexities associated with accounting for such international standards.
If you would like to learn more about the International Financial Reporting Standard – Share-Based Payment, please contact us with any questions you may have. The team of experienced accountants at Farhat & Co. will help you understand all the requirements necessary to prepare financial reports in accordance with the Share-Based Payment Standard.
What is the share-based payment standard (IFRS 2)?
IFRS 2 Share Based Payment is an international accounting and financial services standard . Share-based payment is a transaction in which an entity receives goods or services either in exchange for its equity instruments, or by incurring obligations for amounts based on the price of the entity’s shares or other equity instruments.
Applying this standard requires an entity to recognize share-based payment standards, such as granted shares, stock options, or stock appreciation rights, in its financial statements. This applies to all types of transactions that the entity enters into, whether with employees or other parties.
Why apply share-based payments?
One of the most compelling reasons why companies can implement a share-based compensation standard is that it allows businesses to better align the interests of their employees with those of shareholders. If a company rewards its employees based on shares, stock options and other ownership instruments will be a key factor in motivating employees to work in the best interests of the company and create wealth for shareholders in the long term.
In addition, implementing the share-based payment standard is an attractive payment method, especially for companies experiencing cash flow problems. For example, startups often face cash flow difficulties or an inability to finance traditional debt, which forces them to pay salaries to both their employees and suppliers using share-based payment.
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When does the share-based payment standard apply?
In practice, the share-based payment standard applies to a variety of situations as follows:
- Employees who are granted stock or other equity instruments such as stock options in exchange for services they provide.
- Non-employees, such as external suppliers, are issued or paid shares or other equity instruments in exchange for goods or services.
- Suppliers or employees, who are paid in cash for goods or services provided (as applicable), and the value of the payment is determined based on the price of equity instruments such as cash stock appreciation rights.
Scope of application of the share-based payment standard
The share-based payment standard is broader than other employee stock options. It applies to stock rights and the issuance of stock in exchange for services or goods, such as stock appreciation rights, employee stock purchase plans, and stock option plans. It doesn’t matter if the company is small, private, or affiliated. The share-based payment standard can be applied to all of them without granting any related exemptions.
However, the following arrangements are excluded from the scope of application of the share-based payment standard:
- Issuing shares for acquisitions.
- Issuance of shares of financial instruments.
- Stock dividends.
- Purchase of treasury stock.
- Issuance of additional shares to the entity.
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Does the share-based payment standard apply to all stock transactions with employees?
Typically, some employees may receive equity instruments in their capacity as shareholders rather than as employees. For example, an employee may own shares in an entity from previous share-based payments. If an entity decides to grant its shareholders (including its employees to the extent that the instruments issued are not subject to any service conditions) an option to purchase additional shares for less than their fair value, this transaction is not within the scope of the share-based payment criterion, as the employee here receives payment in his capacity as a shareholder rather than as an employee.
In some cases, share-based payment arrangements may be settled by another group entity or a shareholder of any group entity on behalf of the party receiving the goods or services.
This applies, for example, to the situation where a shareholder in the parent company grants shares in the parent company as compensation for goods or services received by the subsidiary.
Do you have any questions about the share-based payment standard?
Often, a lack of familiarity with accounting and financial matters can lead businesses and companies to make numerous errors that affect the transparency and reliability of their financial data and reports. Therefore, it is important for businesses, when implementing any of the international financial reporting standards, to seek professional accounting expertise to undertake all reporting tasks and ensure their accuracy.
Farhat & Co. is one of the leading providers of accounting and financial services in the UAE.
Research and Studies Department
Farahat & Co.
Dubai, United Arab Emirates
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