Example 5 - Share-based Payment Transactions
Editorial note: Example 5 inserted by IFRS 2 with effect for accounting periods beginning on or after 1 January 2005. If an entity applies IFRS 2 for an earlier period, these amendments shall be applied for that earlier period.
In accordance with IFRS 2 Share-based Payment, an entity has recognised an expense for the consumption of employee services received as consideration for share options granted. A tax deduction will not arise until the options are exercised, and the deduction is based on the options' intrinsic value at exercise date.
As explained in paragraph 68B of the Standard, the difference between the tax base of the employee services received to date (being the amount the taxation authorities will permit as a deduction in future periods in respect of those services), and the carrying amount of nil, is a deductible temporary difference that results in a deferred tax asset. Paragraph 68B requires that, if the amount the taxation authorities will permit as a deduction in future periods is not known at the end of the period, it should be estimated, based on information available at the end of the period. If the amount that the taxation authorities will permit as a deduction in future periods is dependent upon the entity's share price at a future date, the measurement of the deductible temporary difference should be based on the entity's share price at the end of the period. Therefore, in this example, the estimated future tax deduction (and hence the measurement of the deferred tax asset) should be based on the options' intrinsic value at the end of the period.

As explained in paragraph 68C of the Standard, if the tax deduction (or estimated future tax deduction) exceeds the amount of the related cumulative remuneration expense, this indicates that the tax deduction relates not only to remuneration expense but also to an equity item. In this situation, paragraph 68C requires that the excess of the associated current or deferred tax should be recognised directly in equity.
The entity's tax rate is 40 per cent. The options were granted at the start of year 1, vested at the end of year 3 and were exercised at the end of year 5. Details of the expense recognised for employee services received and consumed in each accounting period, the number of options outstanding at each year-end, and the intrinsic value of the options at each year-end, are as follows:

     Employee services expense    Number of options at year-end    Intrinsic value per option
Year 1    188,000    50,000    5
Year 2    185,000    45,000    8
Year 3    190,000    40,000    13
Year 4    0    40,000    17
Year 5    0    40,000    20
The entity recognises a deferred tax asset and deferred tax income in years 1-4 and current tax income in year 5 as follows. In years 4 and 5, some of the deferred and current tax income is recognised directly in equity, because the estimated (and actual) tax deduction exceeds the cumulative remuneration expense.

Year 1
Deferred tax asset and deferred tax income:
(50,000 5 1/3* 0.40) =    33,333
*The tax base of the employee services received is based on the intrinsic value of the options, and those options were granted for three years' services. Because only one year's services have been received to date, it is necessary to multiply the option's intrinsic value by one-third to arrive at the tax base of the employee services received in year 1.
The deferred tax income is all recognised in profit or loss, because the estimated future tax deduction of 83,333 (50,000 × 5 × 1/3) is less than the cumulative remuneration expense of 188,000.
Year 2
Deferred tax asset at year-end:
(45,000 8 2/3 0.40) =    96,000    
Less deferred tax asset at start of year    (33,333)    
Deferred tax income for year         62,667*

*This amount consists of the following:
Deferred tax income for the temporary difference between the tax base of the employee services received during the year and their carrying amount of nil:
(45,000 × 8 × 1/3 × 0.40)    48,000
Tax income resulting from an adjustment to the tax base of employee services received in previous years:
(a) increase in intrinsic value:
(45,000 3 1/3 0.40)    18,000    
(b) decrease in number of options:
(5,000 5 1/3 0.40)    (3,333)    
Deferred tax income for year         62,667
The deferred tax income is all recognised in profit or loss, because the estimated future tax deduction of 240,000 (45,000 × 8 × 2/3) is less than the cumulative remuneration expense of 373,000 (188,000 + 185,000).

Year 3
Deferred tax asset at year-end:
(40,000 13 0.40) =    208,000    
Less deferred tax asset at start of year    (96,000)    
Deferred tax income for year         112,000
The deferred tax income is all recognised in profit or loss, because the estimated future tax deduction of 520,000 (40,000 × 13) is less than the cumulative remuneration expense of 563,000 (188,000 + 185,000 + 190,000).
Year 4
Deferred tax asset at year-end:
(40,000 17 0.40) =    272,000    
Less deferred tax asset at start of year    (208,000)    
Deferred tax income for year         64,000

The deferred tax income is recognised partly in profit or loss and partly directly in equity as follows:
Estimated future tax deduction (40,000 17) =    680,000    
Cumulative remuneration expense    563,000    
Excess tax deduction         117,000
Deferred tax income for year    64,000    
Excess recognised directly in equity (117,000 0.40) =    46,800    
Recognised in profit or loss         17,200

Year 5
Deferred tax expense (reversal of deferred tax asset)    272,000    
Amount recognised directly in equity (reversal of cumulative deferred tax income recognised directly in equity)    46,800    
Amount recognised in profit or loss         225,200
Current tax income based on intrinsic value of options at exercise date (40,000 20 0.40) =    320,000    
Amount recognised in profit or loss (563,000 0.40) =    225,200    
Amount recognised directly in equity         94,800

Summary
     Income statement    Balance sheet
     Employee services expense    Current tax expense (income)    Deferred tax expense (income)    Total tax expense (income)    Equity    Deferred tax asset
Year 1    188,000    0    (33,333)    (33,333)    0    33,333
Year 2    185,000    0    (62,667)    (62,667)    0    96,000
Year 3    190,000    0    (112,000)    (112,000)    0    208,000
Year 4    0    0    (17,200)    (17,200)    (46,800)    272,000
Year 5    0    (225,200)    225,200    0    46,800    0
                         (94,800)    
Totals    563,000    (225,200)    0    (225,200)    (94,800)    0

[1] Under this analysis, there is no taxable temporary difference. An alternative analysis is that the accrued dividends receivable have a tax base of nil and that a tax rate of nil is applied to the resulting taxable temporary difference of 100. Under both analyses, there is no deferred tax liability.

[2] Under this analysis, there is no deductible temporary difference. An alternative analysis is that the accrued fines and penalties payable have a tax base of nil and that a tax rate of nil is applied to the resulting deductible temporary difference of 100. Under both analyses, there is no deferred tax asset.

[3] paragraph 91 refers to "annual financial statements" in line with more explicit language for writing effective dates adopted in 1998 paragraph 89 refers to "financial statements"