IFRS 2

Definition

IFRS 2 is an International Financial Reporting Standard that governs the accounting for share-based payment transactions, including those where an entity receives goods or services as consideration for its equity instruments. This standard provides guidance on how to recognize, measure, and disclose such transactions, ensuring that financial statements reflect the true cost of these payments over their vesting periods. It also addresses aspects like the treatment of contingently issuable shares and non-cash transactions involving equity instruments.

5 Must Know Facts For Your Next Test

1. IFRS 2 requires entities to measure the fair value of share-based payments at the grant date, and this value is expensed over the vesting period.
2. Contingently issuable shares under IFRS 2 are treated as potential equity instruments that will only be recognized when specific conditions are met.
3. Non-cash transactions involving share-based payments must be measured based on the fair value of the goods or services received, or the fair value of the equity instruments granted, whichever is more reliably measurable.
4. The standard emphasizes disclosures related to share-based payment arrangements, providing users of financial statements with information about the nature and terms of such arrangements.
5. Entities are required to reassess the fair value of share-based payments if there are modifications in terms and conditions during the vesting period.

Review Questions

• How does IFRS 2 define the measurement and recognition of share-based payments, especially concerning contingently issuable shares?
  • IFRS 2 specifies that share-based payments should be measured at their fair value at the grant date and expensed over the vesting period. For contingently issuable shares, they are only recognized when the specified conditions for issuance are met, at which point they are treated as potential equity instruments. This ensures that companies accurately reflect their obligations related to these share-based payments in their financial statements.
• In what ways does IFRS 2 impact non-cash transactions involving equity instruments, and what specific measurement criteria must be followed?
  • Under IFRS 2, non-cash transactions involving equity instruments must be assessed based on the fair value of either the goods or services received or the equity instruments granted. The measurement should be based on whichever value can be determined more reliably. This guideline helps ensure that companies appropriately account for these types of transactions, reflecting their economic reality in financial reports.
• Evaluate how IFRS 2 influences corporate transparency in financial reporting through its disclosure requirements for share-based payment arrangements.
  • IFRS 2 enhances corporate transparency by mandating detailed disclosures regarding share-based payment arrangements. Companies must provide information about the nature and terms of these arrangements, including how they impact financial performance and position. This requirement not only aids investors and stakeholders in understanding potential future liabilities but also helps ensure that entities are held accountable for their compensation practices related to equity instruments. By fostering transparency, IFRS 2 contributes to improved decision-making among users of financial statements.

Related terms

Share-based Payment: A transaction in which an entity receives goods or services in exchange for equity instruments, typically stock options or shares.

Vesting Period: The time period during which an employee must fulfill certain conditions before they earn the right to the share-based payments.

Equity Instruments: Financial instruments that represent a residual interest in the assets of an entity after deducting liabilities, such as common stocks.