IFRS 2 specifies the financial reporting of share-based payment transactions. In practice, the most important types of share-based payment transactions are:

  • contributions in kind in which the entity acquires goods and settles the transaction by issuing equity instruments, and
  • employee share options in which the entity receives employee services and gives the employees the right (or the virtual right) to acquire equity instruments below their market price.

A share option is a contract that gives its holder the right, but not the obligation, to subscribe to the entity's shares at a fixed or determinable price. The vast majority of options are either European or American (style) options. A European option can be exercised only at the expiry date of the option, i.e. at a single pre-defined date. By contrast, an American option may be exercised on any trading day on or before expiry.

When measuring options, fair value is of particular importance. Fair value is the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged between knowledgeable, willing parties in an arm's length transaction. Fair value of a share option consists of the following components:

  • Intrinsic value: Intrinsic value of an option to acquire one share is the positive difference between fair value of the share and the price that has to be paid to acquire this share under the ...

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