Clarifying (some aspects of) share-based payment transactions

The IASB has issued an exposure draft of proposed amendments to IFRS 2, Classification and Measurement of Share-based Payment Transactions, with comments to be received by March 25, 2015.

The issues it addresses are quite specific, but many of us will have encountered at least the first item in practice, stumbling through it as best we can.

IFRS 2.30 currently says: “For cash-settled share-based payment transactions, the entity shall measure the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the entity shall remeasure the fair value of the liability at the end of each reporting period and at the date of settlement, with any changes in fair value recognized in profit or loss for the period.” IFRS 2.32 goes on to specify that the entity recognizes the services rendered, and a liability to pay for those services, as the employees render service, and IFRS 2.33 says the liability is measured, initially and at the end of each reporting period until settled, at the fair value of the instruments, by applying an option pricing model, taking into account the terms and conditions on which the instruments were granted, and the extent to which the employees have rendered service to date.

However, none of this specifies how the fair value measurement process should address various kinds of vesting conditions; in contrast, for equity-settled awards, the standard sets out that vesting conditions, other than market conditions, aren’t taken into account in estimating the fair value of the cash-settled share-based payment at the measurement date, and provides further guidance on what does or doesn’t constitute a market condition. Consequently, some preparers might have interpreted IFRS 2 as requiring a broader fair value measurement for cash-settled transactions, encompassing all features of the award. The exposure draft proposes clarifying that the mechanism should be similar to that for equity-settled instruments, dealing with vesting conditions other than market conditions not as part of the fair value measurement, but rather by adjusting the number of awards included in the measurement of the transaction amount so that, ultimately, the amount recognized for goods and services received as consideration for the awards granted is based on the number of awards that eventually vest and are settled.

The second proposed amendment addresses “net settlement” situations where an entity is obliged by tax laws or regulations to withhold an amount for an employee’s tax obligation associated with share-based payments and to transfer the amount, normally in cash, to the taxation authorities, and where the entity fulfills this obligation by deducting – from the total number of equity instruments it would otherwise issue to the employee upon exercise (or vesting) of the share-based payment – the number of equity instruments needed to equal the monetary value of the tax obligation. Some users have regarded that latter portion as a cash-settled share-based payment, in that the entity will actually be paying cash (albeit not to the employee). The exposure draft proposes adding language to IFRS 2 to specify that in such cases, if the entire share-based payment transaction would have been classified as an equity-settled share-based payment in the absence of such a net settlement feature, then it’s accounted for in accordance with the requirements applying to equity-settled share-based payment transactions.

The final proposed amendment relates to a cash-settled share-based payment that changes to an equity-settled share-based payment because of modifications to the terms and conditions of the arrangement, and to other transactions in which a cash-settled share-based payment is settled and replaced by a new equity-settled share-based payment. IFRS 2 doesn’t currently address such transactions specifically, leading to diversity in practice. The exposure draft proposes to set out the following:

  • (a) the share-based payment transaction is measured by reference to the modification-date fair value of the equity instruments granted as a result of the modification;
  • (b) the liability recognized in respect of the original cash-settled share-based payment is derecognized upon the modification, and the equity-settled share-based payment is recognized to the extent that the services have been rendered up to the modification date; and
  • (c) the difference between the carrying amount of the liability as at the modification date and the amount recognized in equity at the same date is recorded in profit or loss immediately.

An entity would apply all the proposed amendments prospectively (from a date yet to be determined), with the choice of applying them retrospectively if it has the information necessary to do so “and this information is available without the use of hindsight.”

It seems unlikely that any existing diversity between entities on these matters has had a particularly serious impact on comparability, given that the amounts recorded for share-based payments are hard for users to grapple with in any substantive way. Still, to the extent that the changes clarify things for preparers, and reduce the time spent in head-scratching and musing, they’re presumably welcome…

The opinions expressed are solely those of the author

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