Summary of IFRS 1

Objective
IFRS 1 First-time Adoption of International Financial Reporting Standards sets
out the procedures that an entity must follow when it adopts IFRSs for the
first time as the basis for preparing its general purpose financial statements.

Note: An entity that conducts rate-regulated activities and has recognised

amounts in its previous GAAP financial statements that meet the definition of
'regulatory deferral account balances' (sometimes referred to 'regulatory
assets' and 'regulatory liabilities') can optionally apply IFRS 14 Regulatory
Deferral Accounts in addition to IFRS 1. An entity that elects to apply IFRS 14
in its first IFRS financial statements must continue to apply it in subsequent
financial statements.

Definition of first-time adoption

A first-time adopter is an entity that, for the first time, makes an explicit and
unreserved statement that its general purpose financial statements comply
with IFRSs. [IFRS 1.3]

An entity may be a first-time adopter if, in the preceding year, it prepared

IFRS financial statements for internal management use, as long as those
IFRS financial statements were not made available to owners or external
parties such as investors or creditors. If a set of IFRS financial statements
was, for any reason, made available to owners or external parties in the
preceding year, then the entity will already be considered to be on IFRSs,
and IFRS 1 does not apply. [IFRS 1.3]

An entity can also be a first-time adopter if, in the preceding year, its
financial statements: [IFRS 1.3]

asserted compliance with some but not all IFRSs, or included only a
reconciliation of selected figures from previous GAAP to IFRSs. (Previous
GAAP means the GAAP that an entity followed immediately before adopting
to IFRSs.)
However, an entity is not a first-time adopter if, in the preceding year, its
financial statements asserted:

Compliance with IFRSs even if the auditor's report contained a qualification

with respect to conformity with IFRSs. Compliance with both previous GAAP
and IFRSs.
An entity that applied IFRSs in a previous reporting period, but whose most
recent previous annual financial statements did not contain an explicit and
unreserved statement of compliance with IFRSs can choose to:

apply the requirements of IFRS 1 (including the various permitted

exemptions to full retrospective application), or retrospectively apply IFRSs
in accordance with IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors, as if it never stopped applying IFRSs. [IFRS 1.4A]
Overview for an entity that adopts IFRSs for the first time in its annual
financial statements for the year ended 31 December 2014
Accounting policies

Select accounting policies based on IFRSs effective at 31 December 2014.

IFRS reporting periods

Prepare at least 2014 and 2013 financial statements and the opening
statement of financial position (as of 1 January 2013 or beginning of the first
period for which full comparative financial statements are presented, if
earlier) by applying the IFRSs effective at 31 December 2014. [IFRS 1.7]

Since IAS 1 requires that at least one year of comparative prior period
financial information be presented, the opening statement of financial
position will be 1 January 2013 if not earlier. This would mean that an entity's
first financial statements should include at least: [IFRS 1.21]
three statements of financial position two statements of profit or loss and
other comprehensive income two separate statements of profit or loss (if
presented) two statements of cash flows two statements of changes in
equity, and related notes, including comparative information
If a 31 December 2014 adopter reports selected financial data (but not full
financial statements) on an IFRS basis for periods prior to 2013, in addition to
full financial statements for 2014 and 2013, that does not change the fact
that its opening IFRS statement of financial position is as of 1 January 2013.
Adjustments required to move from previous GAAP to IFRSs at the time of
first-time adoption
Derecognition of some previous GAAP assets and liabilities

The entity should eliminate previous-GAAP assets and liabilities from the
opening statement of financial position if they do not qualify for recognition
under IFRSs. [IFRS 1.10(b)] For example:

IAS 38 does not permit recognition of expenditure on any of the following as

an intangible asset:
research start-up, pre-operating, and pre-opening costs training advertising
and promotion moving and relocation
If the entity's previous GAAP had recognised these as assets, they are
eliminated in the opening IFRS statement of financial position If the entity's
previous GAAP had allowed accrual of liabilities for "general reserves",
restructurings, future operating losses, or major overhauls that do not meet
the conditions for recognition as a provision under IAS 37, these are
eliminated in the opening IFRS statement of financial position If the entity's
previous GAAP had allowed recognition of contingent assets as defined in IAS
37.10, these are eliminated in the opening IFRS statement of financial
position
Recognition of some assets and liabilities not recognised under previous
GAAP

Conversely, the entity should recognise all assets and liabilities that are
required to be recognised by IFRS even if they were never recognised under
previous GAAP. [IFRS 1.10(a)] For example:
IAS 39 requires recognition of all derivative financial assets and liabilities,
including embedded derivatives. These were not recognised under many
local GAAPs. IAS 19 requires an employer to recognise a liability when an
employee has provided service in exchange for benefits to be paid in the
future. These are not just post-employment benefits (e.g., pension plans) but
also obligations for medical and life insurance, vacations, termination
benefits, and deferred compensation. In the case of 'over-funded' defined
benefit plans, this would be a plan asset. IAS 37 requires recognition of
provisions as liabilities. Examples could include an entity's obligations for
restructurings, onerous contracts, decommissioning, remediation, site
restoration, warranties, guarantees, and litigation. Deferred tax assets and
liabilities would be recognised in conformity with IAS 12.
Reclassification

The entity should reclassify previous-GAAP opening statement of financial

position items into the appropriate IFRS classification. [IFRS 1.10(c)]
Examples:

IAS 10 does not permit classifying dividends declared or proposed after the
statement of financial position date as a liability at the statement of financial
position date. If such liability was recognised under previous GAAP it would
be reversed in the opening IFRS statement of financial position. If the entity's
previous GAAP had allowed treasury stock (an entity's own shares that it had
purchased) to be reported as an asset, it would be reclassified as a
component of equity under IFRS. Items classified as identifiable intangible
assets in a business combination accounted for under the previous GAAP
may be required to be reclassified as goodwill under IFRS 3 because they do
not meet the definition of an intangible asset under IAS 38. The converse
may also be true in some cases. IAS 32 has principles for classifying items as
financial liabilities or equity. Thus mandatorily redeemable preferred shares
that may have been classified as equity under previous GAAP would be
reclassified as liabilities in the opening IFRS statement of financial position.
Note that IFRS 1 makes an exception from the "split-accounting" provisions
of IAS 32. If the liability component of a compound financial instrument is no
longer outstanding at the date of the opening IFRS statement of financial
position, the entity is not required to reclassify out of retained earnings and
into other equity the original equity component of the compound instrument.
The reclassification principle would apply for the purpose of defining
reportable segments under IFRS 8. Some offsetting (netting) of assets and
liabilities or of income and expense items that had been acceptable under
previous GAAP may no longer be acceptable under IFRS.
Measurement

The general measurement principle – there are several significant exceptions

noted below – is to apply effective IFRSs in measuring all recognised assets
and liabilities. [IFRS 1.10(d)]

How to recognise adjustments required to move from previous GAAP to IFRSs

Adjustments required to move from previous GAAP to IFRSs at the date of
transition should be recognised directly in retained earnings or, if
appropriate, another category of equity at the date of transition to IFRSs.
[IFRS 1.11]

Estimates
In preparing IFRS estimates at the date of transition to IFRSs retrospectively,
the entity must use the inputs and assumptions that had been used to
determine previous GAAP estimates as of that date (after adjustments to
reflect any differences in accounting policies). The entity is not permitted to
use information that became available only after the previous GAAP
estimates were made except to correct an error. [IFRS 1.14]

Changes to disclosures
For many entities, new areas of disclosure will be added that were not
requirements under the previous GAAP (perhaps segment information,
earnings per share, discontinuing operations, contingencies and fair values
of all financial instruments) and disclosures that had been required under
previous GAAP will be broadened (perhaps related party disclosures).

Disclosure of selected financial data for periods before the first IFRS
statement of financial position
If a first-time adopter wants to disclose selected financial information for
periods before the date of the opening IFRS statement of financial position, it
is not required to conform that information to IFRS. Conforming that earlier
selected financial information to IFRSs is optional.[IFRS 1.22]
If the entity elects to present the earlier selected financial information based
on its previous GAAP rather than IFRS, it must prominently label that earlier
information as not complying with IFRS and, further, it must disclose the
nature of the main adjustments that would make that information comply
with IFRS. This latter disclosure is narrative and not necessarily quantified.
[IFRS 1.22]

Disclosures in the financial statements of a first-time adopter

IFRS 1 requires disclosures that explain how the transition from previous
GAAP to IFRS affected the entity's reported financial position, financial
performance and cash flows. [IFRS 1.23] This includes:

reconciliations of equity reported under previous GAAP to equity under IFRS

both (a) at the date of transition to IFRSs and (b) the end of the last annual
period reported under the previous GAAP. [IFRS 1.24(a)] (For an entity
adopting IFRSs for the first time in its 31 December 2014 financial
statements, the reconciliations would be as of 1 January 2013 and 31
December 2013.) reconciliations of total comprehensive income for the last
annual period reported under the previous GAAP to total comprehensive
income under IFRSs for the same period [IFRS 1.24(b)] explanation of
material adjustments that were made, in adopting IFRSs for the first time, to
the statement of financial position, statement of comprehensive income and
statement of cash flows (the latter if presented under previous GAAP) [IFRS
1.25] if errors in previous GAAP financial statements were discovered in the
course of transition to IFRSs, those must be separately disclosed [IFRS 1.26]
if the entity recognised or reversed any impairment losses in preparing its
opening IFRS statement of financial position, these must be disclosed [IFRS
1.24(c)] appropriate explanations if the entity has elected to apply any of the
specific recognition and measurement exemptions permitted under IFRS 1 –
for instance, if it used fair values as deemed cost
Disclosures in interim financial reports
If an entity is going to adopt IFRSs for the first time in its annual financial
statements for the year ended 31 December 2014, certain disclosure are
required in its interim financial statements prior to the 31 December 2014
statements, but only if those interim financial statements purport to comply
with IAS 34 Interim Financial Reporting. Explanatory information and a
reconciliation are required in the interim report that immediately precedes
the first set of IFRS annual financial statements. The information includes
reconciliations between IFRS and previous GAAP. [IFRS 1.32]

Exceptions to the retrospective application of other IFRSs

Prior to 1 January 2010, there were three exceptions to the general principle
of retrospective application. On 23 July 2009, IFRS 1 was amended, effective
1 January 2010, to add two additional exceptions with the goal of further
simplifying the transition to IFRSs for first-time adopters. The five exceptions
are: [IFRS 1.Appendix B]

IAS 39 – Derecognition of financial instruments

A first-time adopter shall apply the derecognition requirements in IAS 39

prospectively for transactions occurring on or after 1 January 2004. However,
the entity may apply the derecognition requirements retrospectively
provided that the needed information was obtained at the time of initially
accounting for those transactions. [IFRS 1.B2-3]

IAS 39 – Hedge accounting

The general rule is that the entity shall not reflect in its opening IFRS
statement of financial position a hedging relationship of a type that does not
qualify for hedge accounting in accordance with IAS 39. However, if an entity
designated a net position as a hedged item in accordance with previous
GAAP, it may designate an individual item within that net position as a
hedged item in accordance with IFRS, provided that it does so no later than
the date of transition to IFRSs. [IFRS 1.B5]

Note: Modified requirements apply when an entity applies IFRS 9 Financial

Instruments (2013).

IAS 27 – Non-controlling interest

IFRS 1.B7 lists specific requirements of IFRS 10 Consolidated Financial
Statements that shall be applied prospectively.

Full-cost oil and gas assets

Entities using the full cost method may elect exemption from retrospective
application of IFRSs for oil and gas assets. Entities electing this exemption
will use the carrying amount under its old GAAP as the deemed cost of its oil
and gas assets at the date of first-time adoption of IFRSs.

Determining whether an arrangement contains a lease

If a first-time adopter with a leasing contract made the same type of

determination of whether an arrangement contained a lease in accordance
with previous GAAP as that required by IFRIC 4 Determining whether an
Arrangement Contains a Lease, but at a date other than that required by
IFRIC 4, the amendments exempt the entity from having to apply IFRIC 4
when it adopts IFRSs.

Optional exemptions from the basic measurement principle in IFRS 1

There are some further optional exemptions to the general restatement and
measurement principles set out above. The following exceptions are
individually optional. They relate to:

business combinations [IFRS 1.Appendix C] and a number of others [IFRS

1.Appendix D]:
share-based payment transactions insurance contracts fair value, previous
carrying amount, or revaluation as deemed cost leases cumulative
translation differences investments in subsidiaries, jointly controlled entities,
associates and joint ventures assets and liabilities of subsidiaries, associated
and joint ventures compound financial instruments designation of previously
recognised financial instruments fair value measurement of financial assets
or financial liabilities at initial recognition decommissioning liabilities
included in the cost of property, plant and equipment financial assets or
intangible assets accounted for in accordance with IFRIC 12 Service
Concession Arrangements borrowing costs transfers of assets from
customers extinguishing financial liabilities with equity instruments severe
hyperinflation joint arrangements stripping costs in the production phase of a
surface mine
Some, but not all, of them are described below.

Business combinations that occurred before opening statement of financial

position date

IFRS 1 includes Appendix C explaining how a first-time adopter should

account for business combinations that occurred prior to transition to IFRS.

An entity may keep the original previous GAAP accounting, that is, not
restate:

previous mergers or goodwill written-off from reserves the carrying amounts

of assets and liabilities recognised at the date of acquisition or merger, or
how goodwill was initially determined (do not adjust the purchase price
allocation on acquisition)
However, should it wish to do so, an entity can elect to restate all business
combinations starting from a date it selects prior to the opening statement of
financial position date.

In all cases, the entity must make an initial IAS 36 impairment test of any
remaining goodwill in the opening IFRS statement of financial position, after
reclassifying, as appropriate, previous GAAP intangibles to goodwill.

The exemption for business combinations also applies to acquisitions of

investments in associates, interests in joint ventures and interests in a joint
operation when the operation constitutes a business.

Deemed cost
Assets carried at cost (e.g. property, plant and equipment) may be measured
at their fair value at the date of transition to IFRSs. Fair value becomes the
'deemed cost' going forward under the IFRS cost model. Deemed cost is an
amount used as a surrogate for cost or depreciated cost at a given date.
[IFRS 1.D6]

If, before the date of its first IFRS statement of financial position, the entity
had revalued any of these assets under its previous GAAP either to fair value
or to a price-index-adjusted cost, that previous GAAP revalued amount at the
date of the revaluation can become the deemed cost of the asset under IFRS.
[IFRS 1.D6]

If, before the date of its first IFRS statement of financial position, the entity
had made a one-time revaluation of assets or liabilities to fair value because
of a privatisation or initial public offering, and the revalued amount became
deemed cost under the previous GAAP, that amount would continue to be
deemed cost after the initial adoption of IFRS. [IFRS 1.D8]

This option applies to intangible assets only if an active market exists. [IFRS
1.D7]

If the carrying amount of property, plant and equipment or intangible assets

that are used in rate-regulated activities includes amounts under previous
GAAP that do not qualify for capitalisation in accordance with IFRSs, a first-
time adopter may elect to use the previous GAAP carrying amount of such
items as deemed cost on the initial adoption of IFRSs. [IFRS 1.D8B]

Eligible entities subject to rate-regulation may also optionally apply IFRS 14

Regulatory Deferral Accounts on transition to IFRSs, and in subsequent
financial statements.

IAS 19 – Employee benefits: actuarial gains and losses

An entity may elect to recognise all cumulative actuarial gains and losses for
all defined benefit plans at the opening IFRS statement of financial position
date (that is, reset any corridor recognised under previous GAAP to zero),
even if it elects to use the IAS 19 corridor approach for actuarial gains and
losses that arise after first-time adoption of IFRS. If a first-time adopter uses
this exemption, it shall apply it to all plans. [IFRS 1.D10]

Note: This exemption is not available where IAS 19 Employee Benefits (2011)
is applied. IAS 19 (2011) is effective for annual reporting periods beginning
on or after 1 January 2013.

IAS 21 – Accumulated translation reserves

An entity may elect to recognise all translation adjustments arising on the

translation of the financial statements of foreign entities in accumulated
profits or losses at the opening IFRS statement of financial position date (that
is, reset the translation reserve included in equity under previous GAAP to
zero). If the entity elects this exemption, the gain or loss on subsequent
disposal of the foreign entity will be adjusted only by those accumulated
translation adjustments arising after the opening IFRS statement of financial
position date. [IFRS 1.D13]

IAS 27 – Investments in separate financial statements

In May 2008, the IASB amended the standard to change the way the cost of
an investment in the separate financial statements is measured on first-time
adoption of IFRSs. The amendments to IFRS 1:

allow first-time adopters to use a 'deemed cost' of either fair value or the
carrying amount under previous accounting practice to measure the initial
cost of investments in subsidiaries, jointly controlled entities and associates
in the separate financial statements remove the definition of the cost
method from IAS 27 and add a requirement to present dividends as income
in the separate financial statements of the investor require that, when a new
parent is formed in a reorganisation, the new parent must measure the cost
of its investment in the previous parent at the carrying amount of its share of
the equity items of the previous parent at the date of the reorganisation
Assets and liabilities of subsidiaries, associates and joint ventures: different
IFRS adoption dates of investor and investee

If a subsidiary becomes a first-time adopter later than its parent, IFRS 1

permits a choice between two measurement bases in the subsidiary's
separate financial statements. In this case, a subsidiary should measure its
assets and liabilities as either: [IFRS 1.D16]

the carrying amount that would be included in the parent's consolidated

financial statements, based on the parent's date of transition to IFRSs, if no
adjustments were made for consolidation procedures and for the effects of
the business combination in which the parent acquired the subsidiary or the
carrying amounts required by IFRS 1 based on the subsidiary's date of
transition to IFRSs
A similar election is available to an associate or joint venture that becomes a
first-time adopter later than an entity that has significant influence or joint
control over it. [IFRS 1.D16]

If a parent becomes a first-time adopter later than its subsidiary, the parent
should in its consolidated financial statements, measure the assets and
liabilities of the subsidiary at the same carrying amount as in the separate
financial statements of the subsidiary, after adjusting for consolidation
adjustments and for the effects of the business combination in which the
parent acquired the subsidiary. The same approach applies in the case of
associates and joint ventures. [IFRS 1.D17]
Summary of IFRS 2
In June 2007, the Deloitte IFRS Global Office published an
updated version of our IAS Plus Guide to IFRS 2 Share-based
Payment 2007 (PDF 748k, 128 pages). The guide not only
explains the detailed provisions of IFRS 2 but also deals with its
application in many practical situations. Because of the
complexity and variety of share-based payment awards in
practice, it is not always possible to be definitive as to what is
the 'right' answer. However, in this guide Deloitte shares with
you our approach to finding solutions that we believe are in
accordance with the objective of the Standard.

Special edition of our IAS Plus newsletter

You will find a four-page summary of IFRS 2 in a special edition of
our IAS Plus newsletter (PDF 49k).

Definition of share-based payment

A share-based payment is a transaction in which the entity
receives goods or services either as consideration for its equity
instruments or by incurring liabilities for amounts based on the
price of the entity's shares or other equity instruments of the
entity. The accounting requirements for the share-based
payment depend on how the transaction will be settled, that is,
by the issuance of (a) equity, (b) cash, or (c) equity or cash.

Scope
The concept of share-based payments is broader than employee
share options. IFRS 2 encompasses the issuance of shares, or
rights to shares, in return for services and goods. Examples of
items included in the scope of IFRS 2 are share appreciation
rights, employee share purchase plans, employee share
ownership plans, share option plans and plans where the
issuance of shares (or rights to shares) may depend on market or
non-market related conditions.

IFRS 2 applies to all entities. There is no exemption for private or

smaller entities. Furthermore, subsidiaries using their parent's or
fellow subsidiary's equity as consideration for goods or services
are within the scope of the Standard.

There are two exemptions to the general scope principle:

First, the issuance of shares in a business combination should be

accounted for under IFRS 3 Business Combinations. However,
care should be taken to distinguish share-based payments
related to the acquisition from those related to continuing
employee services Second, IFRS 2 does not address share-based
payments within the scope of paragraphs 8-10 of IAS 32
Financial Instruments: Presentation, or paragraphs 5-7 of IAS 39
Financial Instruments: Recognition and Measurement. Therefore,
IAS 32 and IAS 39 should be applied for commodity-based
derivative contracts that may be settled in shares or rights to
shares.
IFRS 2 does not apply to share-based payment transactions other
than for the acquisition of goods and services. Share dividends,
the purchase of treasury shares, and the issuance of additional
shares are therefore outside its scope.
Recognition and measurement
The issuance of shares or rights to shares requires an increase in
a component of equity. IFRS 2 requires the offsetting debit entry
to be expensed when the payment for goods or services does not
represent an asset. The expense should be recognised as the
goods or services are consumed. For example, the issuance of
shares or rights to shares to purchase inventory would be
presented as an increase in inventory and would be expensed
only once the inventory is sold or impaired.

The issuance of fully vested shares, or rights to shares, is

presumed to relate to past service, requiring the full amount of
the grant-date fair value to be expensed immediately. The
issuance of shares to employees with, say, a three-year vesting
period is considered to relate to services over the vesting period.
Therefore, the fair value of the share-based payment,
determined at the grant date, should be expensed over the
vesting period.

As a general principle, the total expense related to equity-settled

share-based payments will equal the multiple of the total
instruments that vest and the grant-date fair value of those
instruments. In short, there is truing up to reflect what happens
during the vesting period. However, if the equity-settled share-
based payment has a market related performance condition, the
expense would still be recognised if all other vesting conditions
are met. The following example provides an illustration of a
typical equity-settled share-based payment.

Illustration – Recognition of employee share option grant

Company grants a total of 100 share options to 10 members of

its executive management team (10 options each) on 1 January
20X5. These options vest at the end of a three-year period. The
company has determined that each option has a fair value at the
date of grant equal to 15. The company expects that all 100
options will vest and therefore records the following entry at 30
June 20X5 - the end of its first six-month interim reporting period.
Dr. Share option expense 250
Cr. Equity 250
[(100 × 15) ÷ 6 periods] = 250 per period
If all 100 shares vest, the above entry would be made at the end
of each 6-month reporting period. However, if one member of the
executive management team leaves during the second half of
20X6, therefore forfeiting the entire amount of 10 options, the
following entry at 31 December 20X6 would be made:

Dr. Share option expense 150

Cr. Equity 150
[(90 × 15) ÷ 6 periods = 225 per period. [225 × 4] –
[250+250+250] = 150
Measurement guidance

Depending on the type of share-based payment, fair value may

be determined by the value of the shares or rights to shares
given up, or by the value of the goods or services received:

General fair value measurement principle. In principle,

transactions in which goods or services are received as
consideration for equity instruments of the entity should be
measured at the fair value of the goods or services received.
Only if the fair value of the goods or services cannot be
measured reliably would the fair value of the equity instruments
granted be used. Measuring employee share options. For
transactions with employees and others providing similar
services, the entity is required to measure the fair value of the
equity instruments granted, because it is typically not possible to
estimate reliably the fair value of employee services received.
When to measure fair value - options. For transactions measured
at the fair value of the equity instruments granted (such as
transactions with employees), fair value should be estimated at
grant date. When to measure fair value - goods and services. For
transactions measured at the fair value of the goods or services
received, fair value should be estimated at the date of receipt of
those goods or services. Measurement guidance. For goods or
services measured by reference to the fair value of the equity
instruments granted, IFRS 2 specifies that, in general, vesting
conditions are not taken into account when estimating the fair
value of the shares or options at the relevant measurement date
(as specified above). Instead, vesting conditions are taken into
account by adjusting the number of equity instruments included
in the measurement of the transaction amount so that,
ultimately, the amount recognised for goods or services received
as consideration for the equity instruments granted is based on
the number of equity instruments that eventually vest. More
measurement guidance. IFRS 2 requires the fair value of equity
instruments granted to be based on market prices, if available,
and to take into account the terms and conditions upon which
those equity instruments were granted. In the absence of market
prices, fair value is estimated using a valuation technique to
estimate what the price of those equity instruments would have
been on the measurement date in an arm's length transaction
between knowledgeable, willing parties. The standard does not
specify which particular model should be used. If fair value
cannot be reliably measured. IFRS 2 requires the share-based
payment transaction to be measured at fair value for both listed
and unlisted entities. IFRS 2 permits the use of intrinsic value
(that is, fair value of the shares less exercise price) in those "rare
cases" in which the fair value of the equity instruments cannot
be reliably measured. However this is not simply measured at
the date of grant. An entity would have to remeasure intrinsic
value at each reporting date until final settlement. Performance
conditions. IFRS 2 makes a distinction between the handling of
market based performance conditions from non-market
performance conditions. Market conditions are those related to
the market price of an entity's equity, such as achieving a
specified share price or a specified target based on a comparison
of the entity's share price with an index of share prices of other
entities. Market based performance conditions are included in
the grant-date fair value measurement (similarly, non-vesting
conditions are taken into account in the measurement).
However, the fair value of the equity instruments is not adjusted
to take into consideration non-market based performance
features - these are instead taken into account by adjusting the
number of equity instruments included in the measurement of
the share-based payment transaction, and are adjusted each
period until such time as the equity instruments vest.
Note: Annual Improvements to IFRSs 2010–2012 Cycle amends
the definitions of 'vesting condition' and 'market condition' and
adds definitions for 'performance condition' and 'service
condition' (which were previously part of the definition of 'vesting
condition'). The amendments are effective for annual periods
beginning on or after 1 July 2014.

Modifications, cancellations, and settlements

The determination of whether a change in terms and conditions

has an effect on the amount recognised depends on whether the
fair value of the new instruments is greater than the fair value of
the original instruments (both determined at the modification
date).

Modification of the terms on which equity instruments were

granted may have an effect on the expense that will be
recorded. IFRS 2 clarifies that the guidance on modifications also
applies to instruments modified after their vesting date. If the
fair value of the new instruments is more than the fair value of
the old instruments (e.g. by reduction of the exercise price or
issuance of additional instruments), the incremental amount is
recognised over the remaining vesting period in a manner similar
to the original amount. If the modification occurs after the
vesting period, the incremental amount is recognised
immediately. If the fair value of the new instruments is less than
the fair value of the old instruments, the original fair value of the
equity instruments granted should be expensed as if the
modification never occurred.

The cancellation or settlement of equity instruments is

accounted for as an acceleration of the vesting period and
therefore any amount unrecognised that would otherwise have
been charged should be recognised immediately. Any payments
made with the cancellation or settlement (up to the fair value of
the equity instruments) should be accounted for as the
repurchase of an equity interest. Any payment in excess of the
fair value of the equity instruments granted is recognised as an
expense

New equity instruments granted may be identified as a

replacement of cancelled equity instruments. In those cases, the
replacement equity instruments are accounted for as a
modification. The fair value of the replacement equity
instruments is determined at grant date, while the fair value of
the cancelled instruments is determined at the date of
cancellation, less any cash payments on cancellation that is
accounted for as a deduction from equity.

Disclosure
Required disclosures include:

the nature and extent of share-based payment arrangements

that existed during the period how the fair value of the goods or
services received, or the fair value of the equity instruments
granted, during the period was determined the effect of share-
based payment transactions on the entity's profit or loss for the
period and on its financial position.
Effective date
IFRS 2 is effective for annual periods beginning on or after 1
January 2005. Earlier application is encouraged.

Transition
All equity-settled share-based payments granted after 7
November 2002, that are not yet vested at the effective date of
IFRS 2 shall be accounted for using the provisions of IFRS 2.
Entities are allowed and encouraged, but not required, to apply
this IFRS to other grants of equity instruments if (and only if) the
entity has previously disclosed publicly the fair value of those
equity instruments determined in accordance with IFRS 2.
The comparative information presented in accordance with IAS 1
shall be restated for all grants of equity instruments to which the
requirements of IFRS 2 are applied. The adjustment to reflect this
change is presented in the opening balance of retained earnings
for the earliest period presented.

IFRS 2 amends paragraph 13 of IFRS 1 First-time Adoption of

International Financial Reporting Standards to add an exemption
for share-based payment transactions. Similar to entities already
applying IFRS, first-time adopters will have to apply IFRS 2 for
share-based payment transactions on or after 7 November 2002.
Additionally, a first-time adopter is not required to apply IFRS 2
to share-based payments granted after 7 November 2002 that
vested before the later of (a) the date of transition to IFRS and
(b) 1 January 2005. A first-time adopter may elect to apply IFRS 2
earlier only if it has publicly disclosed the fair value of the share-
based payments determined at the measurement date in
accordance with IFRS 2.

Differences with FASB Statement 123 Revised 2004

In December 2004, the US FASB published FASB Statement 123
(revised 2004) Share-Based Payment. Statement 123(R) requires
that the compensation cost relating to share-based payment
transactions be recognised in financial statements. Click for FASB
Press Release (PDF 17k). Deloitte (USA) has published a special
issue of its Heads Up newsletter summarising the key concepts
of FASB Statement No. 123(R). Click to download the Heads Up
Newsletter (PDF 292k). While Statement 123(R) is largely
consistent with IFRS 2, some differences remain, as described in
a Q&A document FASB issued along with the new Statement:

Q22. Is the Statement convergent with International Financial

Reporting Standards?

The Statement is largely convergent with International Financial

Reporting Standard (IFRS) 2, Share-based Payment. The
Statement and IFRS 2 have the potential to differ in only a few
areas. The more significant areas are briefly described below.
IFRS 2 requires the use of the modified grant-date method for
share-based payment arrangements with nonemployees. In
contrast, Issue 96-18 requires that grants of share options and
other equity instruments to nonemployees be measured at the
earlier of (1) the date at which a commitment for performance by
the counterparty to earn the equity instruments is reached or (2)
the date at which the counterparty's performance is complete.
IFRS 2 contains more stringent criteria for determining whether
an employee share purchase plan is compensatory or not. As a
result, some employee share purchase plans for which IFRS 2
requires recognition of compensation cost will not be considered
to give rise to compensation cost under the Statement. IFRS 2
applies the same measurement requirements to employee share
options regardless of whether the issuer is a public or a
nonpublic entity. The Statement requires that a nonpublic entity
account for its options and similar equity instruments based on
their fair value unless it is not practicable to estimate the
expected volatility of the entity's share price. In that situation,
the entity is required to measure its equity share options and
similar instruments at a value using the historical volatility of an
appropriate industry sector index. In tax jurisdictions such as the
United States, where the time value of share options generally is
not deductible for tax purposes, IFRS 2 requires that no deferred
tax asset be recognized for the compensation cost related to the
time value component of the fair value of an award. A deferred
tax asset is recognized only if and when the share options have
intrinsic value that could be deductible for tax purposes.
Therefore, an entity that grants an at-the-money share option to
an employee in exchange for services will not recognize tax
effects until that award is in-the-money. In contrast, the
Statement requires recognition of a deferred tax asset based on
the grant-date fair value of the award. The effects of subsequent
decreases in the share price (or lack of an increase) are not
reflected in accounting for the deferred tax asset until the
related compensation cost is recognized for tax purposes. The
effects of subsequent increases that generate excess tax
benefits are recognized when they affect taxes payable. The
Statement requires a portfolio approach in determining excess
tax benefits of equity awards in paid-in capital available to offset
write-offs of deferred tax assets, whereas IFRS 2 requires an
individual instrument approach. Thus, some write-offs of deferred
tax assets that will be recognized in paid-in capital under the
Statement will be recognized in determining net income under
IFRS 2.
Differences between the Statement and IFRS 2 may be further
reduced in the future when the IASB and FASB consider whether
to undertake additional work to further converge their respective
accounting standards on share-based payment.

March 2005: SEC Staff Accounting Bulletin 107

On 29 March 2005, the staff of the US Securities and Exchange
Commission issued Staff Accounting Bulletin 107 dealing with
valuations and other accounting issues for share-based payment
arrangements by public companies under FASB Statement 123R
Share-Based Payment. For public companies, valuations under
Statement 123R are similar to those under IFRS 2 Share-based
Payment. SAB 107 provides guidance related to share-based
payment transactions with nonemployees, the transition from
nonpublic to public entity status, valuation methods (including
assumptions such as expected volatility and expected term), the
accounting for certain redeemable financial instruments issued
under share-based payment arrangements, the classification of
compensation expense, non-GAAP financial measures, first-time
adoption of Statement 123R in an interim period, capitalisation of
compensation cost related to share-based payment
arrangements, accounting for the income tax effects of share-
based payment arrangements on adoption of Statement 123R,
the modification of employee share options prior to adoption of
Statement 123R, and disclosures in Management's Discussion
and Analysis (MD&A) subsequent to adoption of Statement 123R.
One of the interpretations in SAB 107 is whether there are
differences between Statement 123R and IFRS 2 that would
result in a reconciling item:

Question: Does the staff believe there are differences in the

measurement provisions for share-based payment arrangements
with employees under International Accounting Standards Board
International Financial Reporting Standard 2, Share-based
Payment ('IFRS 2') and Statement 123R that would result in a
reconciling item under Item 17 or 18 of Form 20-F?
Interpretive Response: The staff believes that application of the
guidance provided by IFRS 2 regarding the measurement of
employee share options would generally result in a fair value
measurement that is consistent with the fair value objective
stated in Statement 123R. Accordingly, the staff believes that
application of Statement 123R's measurement guidance would
not generally result in a reconciling item required to be reported
under Item 17 or 18 of Form 20-F for a foreign private issuer that
has complied with the provisions of IFRS 2 for share-based
payment transactions with employees. However, the staff
reminds foreign private issuers that there are certain differences
between the guidance in IFRS 2 and Statement 123R that may
result in reconciling items. [Footnotes omitted]

Click to download:

SEC Press Release (PDF 30k) Staff Accounting Bulletin 107 (PDF
362k)
March 2005: Bear, Stearns Study on Impact of Expensing Stock
Options in the United States
If US public companies had been required to expense employee
stock options in 2004, as will be required under FASB Statement
123R Share-Based Payment starting in third-quarter 2005:

the reported 2004 post-tax net income from continuing

operations of the S&P 500 companies would have been reduced
by 5%, and 2004 NASDAQ 100 post-tax net income from
continuing operations would have been reduced by 22%.
Those are key findings of a study conducted by the Equity
Research group at Bear, Stearns & Co. Inc. The purpose of the
study is to help investors gauge the impact that expensing
employee stock options will have on the 2005 earnings of US
public companies. The Bear, Stearns analysis was based on the
2004 stock option disclosures in the most recently filed 10Ks of
companies that were S&P 500 and NASDAQ 100 constituents as
of 31 December 2004. Exhibits to the study present the results
by company, by sector, and by industry. Visitors to IAS Plus are
likely to find the study of interest because the requirements of
FAS 123R for public companies are very similar to those of IFRS
2. We are grateful to Bear, Stearns for giving us permission to
post the study on IAS Plus. The report remains copyright Bear,
Stears & Co. Inc., all rights reserved. Click to download 2004
Earnings Impact of Stock Options on the S&P 500 & NASDAQ 100
Earnings (PDF 486k).

November 2005: Standard & Poor's Study on Impact of

Expensing Stock Options
In November 2005 Standard & Poor's published a report of the
impact of expensing stock options on the S&P 500 companies.
FAS 123(R) requires expensing of stock options (mandatory for
most SEC registrants in 2006). IFRS 2 is nearly identical to FAS
123(R). S&P found:

Option expense will reduce S&P 500 earnings by 4.2%.

Information Technology is affected the most, reducing earnings
by 18%.... P/E ratios for all sectors will be increased, but will
remain below historical averages. The impact of option
expensing on the Standard & Poor's 500 will be noticeable, but in
an environment of record earnings, high margins and historically
low operating price-to-earnings ratios, the index is in its best
position in decades to absorb the additional expense.
S&P takes issue with those companies that try to emphasise
earnings before deducting stock option expense and with those
analysts who ignore option expensing. The report emphasises
that:

Standard & Poor's will include and report option expense in all of
its earnings values, across all of its business lines. This includes
Operating, As Reported and Core, and applies to its analytical
work in the S&P Domestic Indices, Stock Reports, as well as its
forward estimates. It includes all of its electronic products.... The
investment community benefits when it has clear and consistent
information and analyses. A consistent earnings methodology
that builds on accepted accounting standards and procedures is
a vital component of investing. By supporting this definition,
Standard & Poor's is contributing to a more reliable investment
environment.

The current debate as to the presentation by companies of

earnings that exclude option expense, generally being referred
to as non-GAAP earnings, speaks to the heart of corporate
governance. Additionally, many equity analysts are being
encouraged to base their estimates on non-GAAP earnings. While
we do not expect a repeat of the EBBS (Earnings Before Bad
Stuff) pro-forma earnings of 2001, the ability to compare issues
and sectors depends on an accepted set of accounting rules
observed by all. In order to make informed investment decisions,
the investing community requires data that conform to accepted
accounting procedures. Of even more concern is the impact that
such alternative presentation and calculations could have on the
reduced level of faith and trust investors put into company
reporting. The corporate governance events of the last two-years
have eroded the trust of many investors, trust that will take
years to earn back. In an era of instant access and carefully
scripted investor releases, trust is now a major issue.

January 2008: Amendment of IFRS 2 to clarify vesting conditions

and cancellations
On 17 January 2008, the IASB published final amendments to
IFRS 2 Share-based Payment to clarify the terms 'vesting
conditions' and 'cancellations' as follows:

Vesting conditions are service conditions and performance

conditions only. Other features of a share-based payment are not
vesting conditions. Under IFRS 2, features of a share-based
payment that are not vesting conditions should be included in
the grant date fair value of the share-based payment. The fair
value also includes market-related vesting conditions. All
cancellations, whether by the entity or by other parties, should
receive the same accounting treatment. Under IFRS 2, a
cancellation of equity instruments is accounted for as an
acceleration of the vesting period. Therefore any amount
unrecognised that would otherwise have been charged is
recognised immediately. Any payments made with the
cancellation (up to the fair value of the equity instruments) is
accounted for as the repurchase of an equity interest. Any
payment in excess of the fair value of the equity instruments
granted is recognised as an expense.
The Board had proposed the amendment in an exposure draft on
2 February 2006. The amendment is effective for annual periods
beginning on or after 1 January 2009, with earlier application
permitted.

Click for Press Release (PDF 47k).

Deloitte has published a Special Edition of our IAS Plus

Newsletter explaining the amendments to IFRS 2 for vesting
conditions and cancellations (PDF 126k).

June 2009: IASB amends IFRS 2 for group cash-settled share-

based payment transactions, withdraws IFRICs 8 and 11
On 18 June 2009, the IASB issued amendments to IFRS 2 Share-
based Payment that clarify the accounting for group cash-settled
share-based payment transactions. The amendments clarify how
an individual subsidiary in a group should account for some
share-based payment arrangements in its own financial
statements. In these arrangements, the subsidiary receives
goods or services from employees or suppliers but its parent or
another entity in the group must pay those suppliers. The
amendments make clear that:

An entity that receives goods or services in a share-based

payment arrangement must account for those goods or services
no matter which entity in the group settles the transaction, and
no matter whether the transaction is settled in shares or cash. In
IFRS 2 a 'group' has the same meaning as in IAS 27 Consolidated
and Separate Financial Statements, that is, it includes only a
parent and its subsidiaries.
The amendments to IFRS 2 also incorporate guidance previously
included in IFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2–Group
and Treasury Share Transactions. As a result, the IASB has
withdrawn IFRIC 8 and IFRIC 11. The amendments are effective
for annual periods beginning on or after 1 January 2010 and must
be applied retrospectively. Earlier application is permitted. Click
for IASB press release (PDF 103k).

June 2016: IASB clarifies the classification and measurement of

share-based payment transactions
On 20 June 2016, the International Accounting Standards Board
(IASB) published final amendments to IFRS 2 that clarify the
classification and measurement of share-based payment
transactions:

Accounting for cash-settled share-based payment transactions

that include a performance condition

Until now, IFRS 2 contained no guidance on how vesting

conditions affect the fair value of liabilities for cash-settled share-
based payments. IASB has now added guidance that introduces
accounting requirements for cash-settled share-based payments
that follows the same approach as used for equity-settled share-
based payments.

Classification of share-based payment transactions with net

settlement features

IASB has introduced an exception into IFRS 2 so that a share-

based payment where the entity settles the share-based
payment arrangement net is classified as equity-settled in its
entirety provided the share-based payment would have been
classified as equity-settled had it not included the net settlement
feature.
Accounting for modifications of share-based payment
transactions from cash-settled to equity-settled

Until now, IFRS 2 did not specifically address situations where a

cash-settled share-based payment changes to an equity-settled
share-based payment because of modifications of the terms and
conditions. The IASB has intoduced the following clarifications:

On such modifications, the original liability recognised in respect

of the cash-settled share-based payment is derecognised and the
equity-settled share-based payment is recognised at the
modification date fair value to the extent services have been
rendered up to the modification date. Any difference between
the carrying amount of the liability as at the modification date
and the amount recognised in equity at the same date would be
recognised in profit and loss immediately.
Summary of IAS 34
0903ias34guide.gif

Deloitte's publication Interim Financial Reporting: A Guide to IAS

34 (2009 edition) provides an overview of IAS 34, application
guidance and examples, a model interim financial report, and an
IAS 34 compliance checklist. Contents:

1. Introduction and scope 2. Content of an interim financial

report 3. Condensed or complete interim financial statements 4.
Selected explanatory notes 5. Accounting policies for interim
reporting 6. General principles for recognition and measurement
7. Applying the recognition and measurement principles 8.
Impairment of assets 9. Measuring interim income tax expense
10. Earnings per share 11. First-time adoption of IFRSs Model
interim financial report IAS 34 compliance checklist
Click to Download the Deloitte Guide to IAS 34 (PDF 1,205k,
March 2009, 76 pages).

Objective of IAS 34
The objective of IAS 34 is to prescribe the minimum content of an
interim financial report and to prescribe the principles for
recognition and measurement in financial statements presented
for an interim period.

Key definitions
Interim period: a financial reporting period shorter than a full
financial year (most typically a quarter or half-year). [IAS 34.4]

Interim financial report: a financial report that contains either a

complete or condensed set of financial statements for an interim
period. [IAS 34.4]
Matters left to local regulators
IAS 34 specifies the content of an interim financial report that is
described as conforming to International Financial Reporting
Standards. However, IAS 34 does not mandate:

which entities should publish interim financial reports, how

frequently, or how soon after the end of an interim period.
Such matters will be decided by national governments, securities
regulators, stock exchanges, and accountancy bodies. [IAS 34.1]

However, the Standard encourages publicly-traded entities to

provide interim financial reports that conform to the recognition,
measurement, and disclosure principles set out in IAS 34, at least
as of the end of the first half of their financial year, such reports
to be made available not later than 60 days after the end of the
interim period. [IAS 34.1]

Minimum content of an interim financial report

The minimum components specified for an interim financial
report are: [IAS 34.8]

a condensed balance sheet (statement of financial position)

either (a) a condensed statement of comprehensive income or
(b) a condensed statement of comprehensive income and a
condensed income statement a condensed statement of changes
in equity a condensed statement of cash flows selected
explanatory notes
If a complete set of financial statements is published in the
interim report, those financial statements should be in full
compliance with IFRSs. [IAS 34.9]

If the financial statements are condensed, they should include, at

a minimum, each of the headings and sub-totals included in the
most recent annual financial statements and the explanatory
notes required by IAS 34. Additional line-items or notes should be
included if their omission would make the interim financial
information misleading. [IAS 34.10]

If the annual financial statements were consolidated (group)

statements, the interim statements should be group statements
as well. [IAS 34.14]

The periods to be covered by the interim financial statements

are as follows: [IAS 34.20]

balance sheet (statement of financial position) as of the end of

the current interim period and a comparative balance sheet as of
the end of the immediately preceding financial year statement of
comprehensive income (and income statement, if presented) for
the current interim period and cumulatively for the current
financial year to date, with comparative statements for the
comparable interim periods (current and year-to-date) of the
immediately preceding financial year statement of changes in
equity cumulatively for the current financial year to date, with a
comparative statement for the comparable year-to-date period of
the immediately preceding financial year statement of cash flows
cumulatively for the current financial year to date, with a
comparative statement for the comparable year-to-date period of
the immediately preceding financial year
If the company's business is highly seasonal, IAS 34 encourages
disclosure of financial information for the latest 12 months, and
comparative information for the prior 12-month period, in
addition to the interim period financial statements. [IAS 34.21]

Note disclosures
The explanatory notes required are designed to provide an
explanation of events and transactions that are significant to an
understanding of the changes in financial position and
performance of the entity since the last annual reporting date.
IAS 34 states a presumption that anyone who reads an entity's
interim report will also have access to its most recent annual
report. Consequently, IAS 34 avoids repeating annual disclosures
in interim condensed reports. [IAS 34.15]

Examples of specific disclosure requirements of IAS 34

Examples of events and transactions for which disclosures are
required if they are significant [IAS 34.15A-15B]

write-down of inventories recognition or reversal of an

impairment loss reversal of provision for the costs of
restructuring acquisitions and disposals of property, plant and
equipment commitments for the purchase of property, plant and
equipment litigation settlements corrections of prior period
errors changes in business or economic circumstances affecting
the fair value of financial assets and liabilities unremedied loan
defaults and breaches of loan agreements transfers between
levels of the 'fair value hierarchy' or changes in the classification
of financial assets changes in contingent liabilities and
contingent assets.
Examples of other disclosures required [IAS 34.16A]

changes in accounting policies explanation of any seasonality or

cyclicality of interim operations unusual items affecting assets,
liabilities, equity, net income or cash flows changes in estimates
issues, repurchases and repayment of debt and equity securities
dividends paid particular segment information (where IFRS 8
Operating Segments applies to the entity) events after the end of
the reporting period changes in the composition of the entity,
such as business combinations, obtaining or losing control of
subsidiaries, restructurings and discontinued operations
disclosures about the fair value of financial instruments

Accounting policies
The same accounting policies should be applied for interim
reporting as are applied in the entity's annual financial
statements, except for accounting policy changes made after the
date of the most recent annual financial statements that are to
be reflected in the next annual financial statements. [IAS 34.28]

A key provision of IAS 34 is that an entity should use the same

accounting policy throughout a single financial year. If a decision
is made to change a policy mid-year, the change is implemented
retrospectively, and previously reported interim data is restated.
[IAS 34.43]

Measurement
Measurements for interim reporting purposes should be made on
a year-to-date basis, so that the frequency of the entity's
reporting does not affect the measurement of its annual results.
[IAS 34.28]

Several important measurement points:

Revenues that are received seasonally, cyclically or occasionally

within a financial year should not be anticipated or deferred as of
the interim date, if anticipation or deferral would not be
appropriate at the end of the financial year. [IAS 34.37] Costs
that are incurred unevenly during a financial year should be
anticipated or deferred for interim reporting purposes if, and only
if, it is also appropriate to anticipate or defer that type of cost at
the end of the financial year. [IAS 34.39] Income tax expense
should be recognised based on the best estimate of the weighted
average annual effective income tax rate expected for the full
financial year. [IAS 34 Appendix B12]
An appendix to IAS 34 provides guidance for applying the basic
recognition and measurement principles at interim dates to
various types of asset, liability, income, and expense.

Materiality
 In deciding how to recognise, measure, classify, or disclose an
item for interim financial reporting purposes, materiality is to be
assessed in relation to the interim period financial data, not
forecast annual data. [IAS 34.23]

Disclosure in annual financial statements

If an estimate of an amount reported in an interim period is
changed significantly during the financial interim period in the
financial year but a separate financial report is not published for
that period, the nature and amount of that change must be
disclosed in the notes to the annual financial statements. [IAS
34.26]