Share-based payments – IFRS 2 handbook

1 Share-based paymentsIFRS 2 handbook November increases complexity 11 Introduction 22 Overview 83 Scope 154 Classification of Share-based payment transactions 495 Classification of conditions 666 Equity-settled Share-based payment transactions with employees 817 Cash-settled Share-based payment transactions with employees 1448 Employee transactions Choice of settlement 1619 Modifications and cancellations of employee Share-based payment transactions 17710 Group Share-based payments 20811 Share-based payment transactions with non-employees 25712 Replacement awards in a business combination 26813 Other application issues in practice 29914 Transition requirements and unrecognised Share-based payments 31715 First-time adoption of IFRS 320 Appendices I Key terms 333II Valuation aspects of accounting for Share-based payments 340 III Table of concordance between IFRS 2 and this handbook 374 Detailed contents 378 About this publication 385 Keeping in touch 386 Acknowledgements 388 2018 KPMG IFRG Limited, a UK company.

2 Limited by guarantee. All rights increases complexityIn October 2018, the International Accounting Standards Board (the Board) published the results of its research project on sources of complexity in applying IFRS 2 Share-based Board concluded that no further amendments to IFRS 2 are needed. It felt the main issues that have arisen in practice have been addressed and there are no significant financial reporting problems to address through changing the standard. However, it did acknowledge that a key source of complexity is the variety and complexity of terms and conditions included in Share-based payment arrangements, which cannot be solved through amendments to the standard.

3 Therefore, the core principles of the standard are likely to remain unchanged for the coming years. This updated handbook aims to help you apply IFRS 2 in practice and explains the conclusions that we have reached on many interpretative issues. It s based on actual questions that have arisen in practice around the world and includes illustrative examples and journal entries to elaborate or clarify the practical application of IFRS 2. We hope this handbook will help you apply the complex accounting and valuation requirements of this standard to Share-based payment HengAnthony Voigt KPMG s global IFRS employee benefits leadership team KPMG International Standards Group 2 | Share-based payments IFRS 2 handbook 2018 KPMG IFRG Limited, a UK company, limited by guarantee.

4 All rights Background Historically, the range of specific requirements for the accounting for Share-based payments in national GAAPs has been diverse. Some countries have a relatively long tradition of accounting for Share-based payments . For example, in the US, APB 25 Accounting for Stock Issued to Employees was issued in 1972, and in 2005 was superseded by ASC Topic 718 Compensation Stock Compensation (formerly known as FAS 123(R)). In Canada, HB 3870 Stock-Based Compensation and Other Stock-Based payments has been in effect for a number of years and contains recognition requirements for Share-based payment transactions.

5 In contrast, some countries in the EU still have no requirements for the recognition and measurement of Share-based payment transactions in place for entities not required to apply IFRS Standards .IFRS BC60 Share-based payments were first observed in the 1960s, primarily in the US. Consequently, the history of international requirements for the accounting for Share-based payments is relatively short compared with other areas of accounting. The development phase of these requirements internationally was accompanied by controversial discussions about whether the recognition of cost for Share-based payments that are settled in own equity instruments is justified at all whether such accounting would meet the objectives of financial reporting.

6 Some argued that transactions settled in equity are transactions between the shareholders and the third party, rather than between the entity and the third party. Some people still express concerns about accounting entries that result in a debit to expense and a credit to equity. Previously, IAS 19 Employee Benefits contained disclosure requirements for equity compensation issued to employees, but there were no recognition or measurement requirements in IFRS for such transactions before the publication of IFRS 2 Share-based Payment. The first milestone in the development of today s standard was in July 2000 when the G4+1, which included the predecessor of the Board, the International Accounting Standards Committee (IASC), issued a discussion paper on the topic.

7 The debates resulted in mandatory requirements for Share-based payment transactions IFRS 2 being issued in 2004. Modifications to address practice issues continue to the date of this for annual periods beginning on or afterDiscussion paper Accounting for Share-based PaymentJuly 2000-Exposure draft ED 2 Share-based Payment7 November 2002-IFRS 2 Share-based Payment19 February 20041 January 2005 IFRIC 8 Scope of IFRS 2 212 January 20061 May 2006 2018 KPMG IFRG Limited, a UK company, limited by guarantee. All rights for annual periods beginning on or afterIFRIC 11 IFRS 2 Group and Treasury Share Transactions 22 November 20061 March 2007 Amendments Vesting Conditions and Cancellations17 January 20081 January 2009 Improvements to IFRSs 200916 April 20091 July 2009 Amendments Group Cash-settled Share-based Payment Transactions18 June 20091 January 2010 Amendments within the Annual Improvements Project 20106 May 20101 July 2010 Amendments within the Annual Improvements to IFRSs 2010 2012 Cycle12 December 20131 July 2014 Amendments Classification and Measurement of Share-based Payment Transactions20 June 20161 January 2018 Notes1.

8 Besides the pronouncements listed in the table, IFRS 2 has been amended as a consequence of amendments to other standards, principally the revised version of IFRS 3 Business Combinations issued in 2008, which itself was amended by the Improvements to IFRSs 2010. Other standards, including IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 13 Fair Value Measurement issued in May 2011, and IFRS 9 Financial Instruments issued in July 2014, have also made minor consequential amendments to IFRS 2. 2. IFRIC 8 and IFRIC 11 were withdrawn by the amendments Group Cash-settled Share-based Payment Transactions issued in June 2009 .

9 IFRIC 8 addressed the issue of whether IFRS 2 applies to Share-based payment transactions in which the entity cannot specifically identify some or all of the goods or services received. Places where this issue arose included South Africa, where such payments were being made to historically disadvantaged individuals as a result of Black Economic Empowerment schemes. IFRIC 11 addressed the issue of whether transactions in which the entity chooses or is required to buy equity instruments from another party should be accounted for as equity-settled or as cash-settled. It further addressed the issue of how to account for a transaction in the separate or individual financial statements of a subsidiary, if the equity instruments of the parent are granted either by the parent or by the subsidiary.

10 For those countries applying IFRS 2 to separate financial statements of parents and subsidiaries, the interpretation also contained an important decision by the IFRS Interpretations Committee (formerly the International Financial Reporting Interpretations Committee (IFRIC)) that recharges between group entities should not be taken into account in determining the classification of a Share-based payment Introduction Background 4 | Share-based payments IFRS 2 handbook 2018 KPMG IFRG Limited, a UK company, limited by guarantee. All rights Both interpretations were withdrawn by the amendments Group Cash-settled Share-based Payment Transactions, which provided expanded guidance for group Share-based payments , in particular for cash-settled Share-based payment transactions, and incorporated the guidance from IFRIC 8 and IFRIC 11 into IFRS 2.