International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 499
5.3.8.B
Interpretation of general terms ................................... 2561
5.3.8.C
Discretion to make further awards ............................. 2561
5.3.9
‘Good leaver’ arrangements ............................................................. 2562
5.3.9.A
Provision for ‘good leavers’ made in original
terms of award ............................................................... 2562
5.3.9.B Discretionary
awards to ‘good leavers’ ..................... 2563
5.3.9.C
Automatic full or pro rata entitlement on
leaving employment ..................................................... 2564
5.3.10 Special purpose acquisition companies (‘SPACs’) ...................... 2565
5.4
Transactions with non-employees ................................................................. 2566
5.4.1
Effect of change of status from employee to non-
employee (or vice versa) .................................................................. 2566
5.5
Determining the fair value of equity instruments ........................................ 2567
5.5.1
Reload features .................................................................................. 2568
6 EQUITY-SETTLED TRANSACTIONS – ALLOCATION OF EXPENSE .......... 2568
6.1
Overview ............................................................................................................. 2568
6.1.1
The continuous estimation process of IFRS 2 ............................. 2569
6.1.2
Vesting and forfeiture ....................................................................... 2570
6.1.3
Accounting after vesting .................................................................... 2571
6.2
Vesting conditions other than market conditions ........................................ 2571
2502 Chapter 30
6.2.1
Awards with service conditions ....................................................... 2571
6.2.2
Equity instruments vesting in instalments (‘graded’ vesting) ..... 2572
6.2.3
Transactions with variable vesting periods due to non-
market performance vesting conditions ........................................ 2574
6.2.4
Transactions with variable number of equity instruments
awarded depending on non-market performance vesting
conditions ............................................................................................. 2576
6.2.5
Transactions with variable exercise price due to non-
market performance vesting conditions ........................................ 2577
6.3
Market conditions ..............................................................................................2578
6.3.1
What is a ‘market condition’? ...........................................................2578
6.3.2
Summary of accounting treatment .................................................. 2579
6.3.3
Transactions with market conditions and known vesting
periods ................................................................................................. 2582
6.3.4
Transactions with variable vesting periods due to market
conditions ............................................................................................ 2583
6.3.5
Transactions with multiple outcomes depending on
market conditions .............................................................................. 2584
6.3.6
Transactions with independent market conditions, non-
market vesting conditions or non-vesting conditions ................ 2585
6.3.6.A
Independent market and non-market vesting
conditions ....................................................................... 2585
6.3.6.B
Independent market conditions and non-
vesting conditions ......................................................... 2586
6.3.7
Transactions with hybrid or interdependent market
conditions and non-market vesting conditions ........................... 2586
6.3.8
Awards based on the market value of a subsidiary or
business unit ........................................................................................2587
6.3.8.A
Awards with a condition linked to flotation
price ................................................................................. 2588
6.4
Non-vesting conditions .................................................................................... 2588
6.4.1
Awards with no conditions other than non-vesting
conditions ............................................................................................ 2588
6.4.2
Awards with non-vesting conditions and variable vesting
periods ................................................................................................. 2589
6.4.3
Failure to meet non-vesting conditions ........................................ 2589
7 EQUITY-SETTLED TRANSACTIONS – MODIFICATION,
CANCELLATION AND SETTLEMENT .......................................................... 2590
7.1
Background ......................................................................................................... 2590
7.2
Valuation requirements when an award is modified, cancelled or
settled .................................................................................................................... 2591
7.3 Modification
.......................................................................................................
2592
7.3.1
Modifications that increase the value of an award ..................... 2592
Share-based
payment
2503
7.3.1.A
Increase in fair value of equity instruments
granted ............................................................................ 2592
7.3.1.B
Increase in number of equity instruments
granted ............................................................................ 2594
7.3.1.C
Removal or mitigation of non-market vesting
conditions ....................................................................... 2594
7.3.2
Modifications that decrease the value of an award .................... 2595
7.3.2.A
Decrease in fair value of equity instruments
granted ............................................................................ 2595
7.3.2.B
Decrease in number of equity instruments
granted ............................................................................ 2596
7.3.2.C
Additional or more onerous non-market
vesting conditions .......................................................... 2597
7.3.3
Modifications with altered vesting period ..................................... 2597
7.3.4
Modifications that reduce the number of equity
instruments granted but maintain or increase the value of
an award (‘value for value’ exchanges and ‘give and take’
modifications) ..................................................................................... 2599
7.3.5
Modification of award from equity-settled to cash-settled
(and vice versa) ................................................................................... 2601
7.4
Cancellation and settlement ............................................................................ 2601
7.4.1
Distinction between cancellation and forfeiture ........................ 2602
7.4.1.A
Termination of employment by entity ..................... 2602
7.4.1.B Surrender
of
award by employee .............................. 2603
7.4.2
Distinction between cancellation and modification ................... 2603
7.4.3
Calculation of the expense on cancellation ................................. 2604
7.4.4 Replacement
awards ......................................................................... 2605
7.4.4.A
Designation of award as replacement award .......... 2605
7.4.4.B
Incremental fair value of replacement award ......... 2606
7.4.4.C Replacement
of
vested awards .................................. 2609
7.5
Replacement and ex gratia awards on termination of employment .......... 2610
7.6
Entity’s plans for future modification or replacement of award –
impact on estimation process at reporting date ........................................... 2611
7.7
Two awards running ‘in parallel’ ..................................................................... 2612
7.8
Share splits and consolidations ........................................................................ 2614
8 EQUITY-SETTLED TRANSACTIONS – VALUATION ...................................2615
8.1
Introduction ......................................................................................................... 2615
8.2 Options
.................................................................................................................. 2615
8.2.1
Call options – overview .................................................................... 2615
8.2.2
Call options – valuation .................................................................... 2616
8.2.3
Factors specific to employee share options .................................. 2618
8.2.3.A
Non-transferability ........................................................ 2618
2504 Chapter 30
8.2.3.B Continued
employment
requirement
........................
2618
8.2.3.C
Vesting and non-vesting conditions ........................... 2618
8.2.3.D
Periods during which exercise is restricted ............. 2619
8.2.3.E
Limited ability to hedge option values ...................... 2619
8.2.3.F Dilution
effects
...............................................................
2619
8.3
Selection of an option-pricing model ............................................................. 2619
8.3.1
The Black-Scholes-Merton formula ............................................. 2620
8.3.2
The binomial model .......................................................................... 2622
8.3.2.A
Lattice models – number of time steps .................... 2625
8.3.3
Monte Carlo Simulation ................................................................... 2626
8.4
Adapting option-pricing models for share-based payment
transactions ......................................................................................................... 2628
8.4.1
Non-transferability ............................................................................ 2628
8.4.2
Treatment of vesting and non-vesting conditions ...................... 2628
8.4.2.A
Market-based performance conditions and
non-vesting conditions ................................................ 2629
8.4.2.B Non-market
vesting
conditions
.................................
2629
8.5
Selecting appropriate assumptions for option-pricing models ................ 2629
8.5.1
Expected term of the option ........................................................... 2630
8.5.1.A
Expected term under the Black-Scholes-
Merton formula .............................................................. 2631
8.5.2
Exercise and termination behaviour ............................................. 2632
8.5.2.A
Grouping employees with homogeneous
exercise behaviour ....................................................... 2633
8.5.2.B Post-vesting
termination
behaviour..........................
2634
8.5.3
Expected volatility of share price .................................................. 2634
8.5.3.A
Newly listed entities ..................................................... 2636
8.5.3.B Unlisted
entities
.............................................................
2636
8.5.3.C
Listed entities that have undergone significant
restructuring ................................................................... 2636
8.5.3.D
Expected volatility under the Black-Scholes-
Merton formula ............................................................. 2636
8.5.3.E
Expected volatility under lattice models ..................2637
8.5.4
Expected dividends ............................................................................2637
8.5.4.A
Expected dividends under the Black-Scholes-
Merton formula ............................................................. 2638
8.5.4.B
Expected dividends under the binomial model
and other lattice models .............................................. 2638
8.5.5
Risk-free interest rate ....................................................................... 2638
8.5.5.A
Risk-free interest rate under the Black-
Scholes-Merton formula ............................................. 2639
Share-based
payment
2505
8.5.5.B
Risk-free interest rate under binomial and
other lattice models ...................................................... 2639
8.6
Capital structure effects and dilution ............................................................ 2639
8.7
Valuation of equity-settled awards other than options ............................. 2640
8.7.1
Shares ................................................................................................... 2640
8.7.2 Non-recourse loans ...........
................................................................ 2640
8.7.3 Share
appreciation
rights (SARs) ..................................................... 2641
8.7.4 Performance
rights
.............................................................................
2641
8.8
Awards whose fair value cannot be measured reliably ............................... 2641
8.8.1
Intrinsic value method – the basic accounting treatment ......... 2641
8.8.2 Modification,
cancellation and settlement ................................... 2643
8.9
Awards with reload features ............................................................................ 2643
8.10 Awards of equity instruments to a fixed monetary value .......................... 2644
9 CASH-SETTLED TRANSACTIONS ............................................................... 2646
9.1
Scope of requirements ...................................................................................... 2646
9.2
What constitutes a cash-settled award? ........................................................ 2646
9.2.1
Formal and informal arrangements for the entity to
purchase illiquid shares or otherwise settle in cash
(awards to be treated as cash-settled, including unlisted
company schemes) ............................................................................ 2647
9.2.2
Market purchases of own equity used to satisfy awards ........... 2647
9.2.3
Market purchases of own equity following equity-
settlement of award ........................................................................... 2648
9.2.4
Arrangements to sell employees’ shares including ‘broker
settlement’ ........................................................................................... 2649
9.3
Cash-settled transactions: required accounting .......................................... 2650
9.3.1
Basic accounting treatment ............................................................. 2650
9.3.2
Application of the accounting treatment ....................................... 2651
9.3.2.A
Determining the vesting period ................................. 2653
9.3.2.B
Periodic allocation of cost .......................................... 2653
9.3.2.C Non-market
vesting
conditions
.................................
2653
9.3.2.D
Market conditions and non-vesting conditions ...... 2655