Incentivising your employees with share options/share-based awards is regulated by the International Financial Reporting Standards (IFRS 2). For employees, it means that there is a central regulatory body making sure that their employers are awarding incentives at a fair, market-related value. But what it means for the employer’s finance department to comply with IFRS 2’s complicated provisions, is sleepless nights and a lot of manual calculations and preparation.
Technology (and specifically RegTech) has come a long way within the share incentive scheme arena and automating the calculation and compliance with financial standards – in particular IFRS 2 – has actually never been easier. Specialised share scheme platforms can assist listed and private companies to adhere to IFRS 2 standards and reflect the effects of share-based payments accurately without the burden of trying to perform these complex calculations manually.
This article will explore the areas that IFRS 2 compliance can be achieved.
What is the accounting standard for share-based payments?
Employee share-based payment transactions fall within the scope of IFRS 2. And it requires that a company’s financial statements disclose and report-on the effects of share-based payment transactions. These share-based payments are recognised and measured in the company’s financial statements at fair value and are expensed over the period that the employee services are received in exchange for equity instruments granted.
IFRS 2 provides the guidelines to help companies to account for cash, equity or other types of share-based payment transactions. These guidelines specify:
- When to measure these transactions.
- Which valuations models can be used to measure the share-based payments.
- Accounting treatments for market and non-market vesting conditions.
- Modifications to share-based payment arrangements.
- Other provisions.
When is it correct to apply IFRS 2?
IFRS 2 applies when:
- Share-based payments transactions are with employees or other parties whether settled in equity or cash.
- Share-based payment transactions are for the acquisition of goods and services.
- You’re a public company within an IFRS jurisdiction.
IFRS 2 doesn’t apply when:
- A company purchases treasury shares, issues a share dividend, or issues additional shares to current shareholders.
- An entity enters into a contract to buy or sell non-financial items that may be settled net in shares or rights to shares, or if the entity does not intend to take physical delivery.
- You’re not within a IFRS jurisdiction.
How can technology help ease IFRS 2 compliance?
Setting up the terms
Maintaining 100% compliancy and standardized, easy-to-produce financial reporting begins, well at the beginning. Often the rewards and accounting teams are split and are both responsible for managing various aspects of the company’s share awards resulting in potential duplication and increasing the risk of human error.
Having a single source of award information on a cloud-based platform, means that the accounting rules are automatically applied using terms that have been ratified by the team that is responsible for issuing the awards.
The salient dates, settlement classifications and retention & performance conditions are now set, centrally, and inform the way in which the IFRS 2 should be measured and disclosed.
Fair value modelling
Depending on an award’s T&Cs, the fair value calculation often requires the application of highly complex derivative pricing techniques taking into account current share price conditions and exercise assumptions.
Imagine there was an algorithm set to do this all for you…
Well, technology platforms such as ShareForce enable your business to:
- Calculate current share prices, dividend yields, volatilities, and correlations
- Apply exercise assumptions; and
- Use the most appropriate market-accepted methodology to calculate the fair value at the measurement date.
Ultimately, using technology, you’d be able to measure your share-based payment expense on the measurement date in accordance with IFRS 2 guidelines.
Calculating the net expense
To calculate the amount to be expensed at each financial reporting period prior to the vesting date, IFRS 2 requires that the fair value be adjusted to reflect the number of awards that are expected to vest at vesting date
The adjustment to the fair value is made with reference to:
- The number of outstanding awards after truing up for actual forfeits.
- Management’s expectations of achieving any non-market performance conditions; and
- Expected staff attrition or forfeiture over the remaining service period.
Technology platforms not only facilitates the correct calculations and application of the expense at each reporting date but enable a strategic analysis to be performed for budgeting, remuneration and accounting purposes.
More importantly, with technology, you are providing your company with the comfort that complex calculations and reporting need not rely on key individuals.
With the help of technology, a company could access IFRS 2 audit-ready reports and vesting reports detailing all methodologies and calculations at the click of a button. Ultimately, the onerous internal accounting process of disaggregating gross fair values (as well as net of expected pre-vesting forfeitures) to various levels and divisions within the organisation, is simplified.