Example 30.10:
Award with non-market vesting condition and variable
vesting period ...................................................................................... 2574
Example 30.11:
Award with non-market performance vesting condition
and variable number of equity instruments .................................. 2576
Example 30.12:
Award with non-market performance vesting condition
and variable exercise price ............................................................... 2577
Example 30.13:
Award with market condition .......................................................... 2579
Example 30.14:
Award with market condition and fixed vesting period ............ 2582
Example 30.15:
Award with market condition and variable vesting period ....... 2583
Example 30.16:
Award with market conditions and multiple outcomes............. 2584
Example 30.17:
Award with independent market conditions and non-
market vesting conditions ................................................................ 2585
Example 30.18:
Does a modification increase or decrease the value of an
award? .................................................................................................. 2592
Example 30.19:
Award modified by repricing .......................................................... 2593
Example 30.20:
Modification of non-market performance condition in
employee’s favour ............................................................................. 2594
Example 30.21:
Increase in number of equity instruments or modification
of vesting conditions? ....................................................................... 2595
Example 30.22:
Award modified by replacing a non-market condition with
a market condition ............................................................................ 2596
Example 30.23:
Award modified by changing non-market performance
conditions or service conditions ..................................................... 2597
Example 30.24:
Award modified by reducing the exercise price and
extending the vesting period ........................................................... 2598
Example 30.25:
Modification where number of equity instruments is
reduced but total fair value of award is unchanged .................... 2599
Example 30.26:
Modification where number of equity instruments is
reduced but total fair value of award is increased ...................... 2600
Share-based
payment
2511
Example 30.27:
Cancellation and settlement – basic accounting treatment ..... 2604
Example 30.28:
Cancellation and settlement – best estimate of cancellation
expense ................................................................................................ 2604
Example 30.29:
Replacement awards – is there an accounting arbitrage
between accounting for a modification and accounting for
cancellation and a new grant? ......................................................... 2607
Example 30.30:
Replacement award on termination of employment ................. 2610
Example 30.31:
Estimation of number of awards expected to vest –
treatment of anticipated future events ........................................... 2611
Example 30.32:
Two option awards running in parallel .......................................... 2613
Example 30.33:
Binomial model .................................................................................. 2623
Example 30.34:
Intrinsic value method ...................................................................... 2642
Example 30.35:
Award of shares to a fixed monetary value .................................. 2645
Example 30.36:
Equity-settled award satisfied with market purchase of
treasury shares ................................................................................... 2647
Example 30.37:
Cash-settled transaction with service condition .......................... 2651
Example 30.38:
Cash-settled transaction with service condition and non-
market performance condition ....................................................... 2654
Example 30.39:
Modification of equity-settled award to cash-settled
award .................................................................................................... 2659
Example 30.40:
Modification of cash-settled award to equity-settled
award .................................................................................................... 2664
Example 30.41:
Award with employee choice of settlement with different
fair values for cash-settlement and equity-settlement .............. 2668
Example 30.42:
Award with employee cash-settlement alternative
introduced after grant ....................................................................... 2670
Example 30.43:
Settlement of transaction treated as equity-settled where
fair value of cash settlement exceeds fair value of equity
settlement ............................................................................................ 2674
Example 30.44:
Settlement of transaction treated as equity-settled where
fair value of equity settlement exceeds fair value of cash
settlement ............................................................................................ 2674
Example 30.45:
Replacement award requiring no post-combination
service replacing vested acquiree award ...................................... 2684
Example 30.46:
Replacement award requiring no post-combination
service replacing unvested acquiree award ................................. 2684
Example 30.47:
Replacement award requiring post-combination service
replacing vested acquiree award .................................................... 2685
Example 30.48:
Replacement award requiring post-combination service
replacing unvested acquiree award ............................................... 2685
Example 30.49:
Accounting for post-acquisition changes in estimates
relating to replacement awards ...................................................... 2687
Example 30.50:
Interaction of IFRS 10, IAS 32 and IFRS 2 (market
purchase) ............................................................................................. 2700
2512 Chapter 30
Example 30.51:
Interaction of IFRS 10, IAS 32 and IFRS 2 (fresh issue of
shares) ................................................................................................... 2701
Example 30.52:
EBTs in separate financial statements of sponsoring entity ..... 2702
Example 30.53:
Group share scheme (market purchase of shares) ...................... 2704
Example 30.54:
Group share scheme (fresh issue of shares) ..........................
....... 2709
Example 30.55:
Cash-settled scheme not settled by receiving entity .................. 2714
Example 30.56:
Share-based payment to employees of associate ........................ 2718
Example 30.57:
Recovery of employment tax on share-based payment
from employee .................................................................................... 2732
Example 30.58:
Surrendering of vested shares by employee to indemnify
liability of entity to pay employee’s tax liability (net
settlement where IFRS 2 exception does not apply) .................. 2734
Example 30.59:
Share-based payment transactions with a net settlement
feature for withholding tax obligations (application of
IFRS 2 exception) ............................................................................... 2737
Example 30.60:
Mandatory investment by employee of cash bonus into
shares with mandatory matching award by employer ................2739
Example 30.61:
Mandatory investment by employee of cash bonus into
shares with discretionary matching award by employer ........... 2740
Example 30.62:
Discretionary investment by employee of cash bonus into
shares with no matching award ....................................................... 2741
Example 30.63:
Discretionary investment by employee of cash bonus into
shares with mandatory matching award by employer ................ 2741
Example 30.64:
Discretionary investment by employee of cash bonus into
shares with discretionary matching award by employer ........... 2742
Example 30.65:
Award with rights to receive (and retain) dividends during
vesting period ..................................................................................... 2746
Example 30.66:
Receipt of BEE credentials with no service or
performance condition ...................................................................... 2756
2513
Chapter 30
Share-based payment
1 INTRODUCTION
1.1 Background
Share-based payment is one of the most controversial projects so far tackled by the
IASB. Most share-based payment transactions undertaken by entities are awards of
shares and options as remuneration to employees, in particular senior management and
directors. In a number of countries, shares and options now comprise the greatest
element of the total remuneration package of senior personnel, a trend encouraged by
the current consensus that it is a matter of good corporate governance to promote
significant long-term shareholdings by senior management, so as to align their economic
interests with those of shareholders.
One advantage of shares and options as remuneration is that they need not entail any
cash cost to the entity. If an executive is entitled under a bonus scheme to a free share,
the entity can satisfy this award simply by printing another share certificate, which the
executive can sell, so that the cash cost of the award is effectively borne by shareholders
rather than by the entity itself. However, this very advantage was the source of the
controversy surrounding share-based remuneration.
Investors became increasingly concerned that share-based remuneration was resulting
in a significant cost to them, through dilution of their existing shareholdings. As a result,
there emerged an increasing consensus among investors that awards of shares and share
options should be recognised as a cost in the financial statements.
The opposing view, held by most entities, was that the financial statements were simply
reflecting the economic reality that such awards are ultimately a cost to other
shareholders and not to the entity. Another powerful argument for those opposed to
expensing options was to point out that some clearly successful companies, particularly
in the new technology sector, would never have shown a profit if they had been
required to book an accounting expense for options.
The strength of feeling amongst opponents of expensing share-based remuneration was
graphically illustrated in the early 1990s when the FASB in the United States attempted
to issue an accounting standard requiring options to be expensed, only to be forced into
a partial climb-down by an unprecedented political campaign. As a result, the US
standard issued by the FASB at that stage, FAS 123 – Accounting for Stock-Based
2514 Chapter 30
Compensation, was a compromise which required the fair value of shares or options
issued to employees to be disclosed, but merely recommended, without requiring, those
fair values to be expensed in the financial statements. Eventually, however, in
December 2004, following the issue of IFRS 2 – Share-based Payment – earlier that
year (see 1.2 below), the FASB issued FASB ASC 718 – Compensation – Stock
Compensation (formerly FAS 123(R) – Share-Based Payment) – which requires the fair
value of share awards to be expensed.
1.2
Development of IFRS 2 and amendments to the standard
In November 2002, the IASB issued an exposure draft ED 2 – Share-based Payment –
proposing that share-based payments for goods and services should be expensed. The
exposure draft proved highly controversial. Those who supported it in principle
nevertheless had concerns on nearly every detail of the accounting treatment proposed,
in particular the fact that it did not permit any ‘truing up’, i.e. reversing any expense
previously charged for an award that never actually crystallises. More fundamentally,
many questioned whether there yet existed a methodology sufficiently robust for valuing
shares and share options subject to the restrictions and performance conditions typically
associated with employee share awards. There also remained a significant minority who
still questioned the whole principle of expensing options and other share awards.
Despite these comments, the IASB finalised its proposals with the publication of IFRS 2
on 19 February 2004, although some significant changes had been necessary to the
prohibition on ‘truing up’ in the ED. In particular, IFRS 2 requires an expense to be
recognised only for awards that vest (or are considered by IFRS 2 to vest), but (in the
case of awards settled in shares) based on their fair value at the date of grant.
Nevertheless, IFRS 2 remains contentious: for example, there is still only limited
provision for ‘truing up’, with the result that significant costs can potentially be
recognised for awards that ultimately have no value to their recipients, and give rise to
no dilution of the interests of other shareholders. Some commentators continue to
question whether existing option valuation models can produce a reliable valuation of
employee share awards.
The IASB has issued the following amendments to the original version of IFRS 2:
• Vesting Conditions and Cancellations,1 issued in January 2008 (‘the January 2008
amendment’). Entities are required to apply IFRS 2 as modified by this amendment
for periods beginning on or after 1 January 2009; [IFRS 2.62]
• Group Cash-settled Share-based Payment Transactions,2
issued in June 2009 (‘the
June 2009 amendment’). Entities are required to apply IFRS 2 as modified by this
amendment for periods beginning on or after 1 January 2010; [IFRS 2.63]
• Improvements to IFRSs, issued in April 2009 (‘the April 2009 amendment’). This
made a minor amendment to the scope of IFRS 2, as discussed at 2.2.3.D below;
• Annual Improvements to IFRSs 2010-2012 Cycle, issued in December 2013, which
made amendments to the definitions in Appendix A of IFRS 2 relating to vesting
conditions. Entities are required to apply these amendments prospectively to
share-based payment transactions with a grant date on or after 1 July 2014 although
Share-based
payment
2515
earlier application is permitted. [IFRS 2.63B]. These amendments are discussed at 3
and at 7.4.1.A below; and
• Classification and Measurement of Share-based Payment Transactions,3 issued in
June 2016 (‘the June 2016 amendments’). Entities are required to apply these
amendments for accounting periods beginning on or after 1 January 2018 although
earlier application is permitted if disclosed. [IFRS 2.63D]. Application is generally on
a prospective basis and subject to specific transitional provisions which are
covered in more detail in the later sections dealing with the amendments and
at 16.2 below. The amendments addressed the following three topics:
• treatment of vesting and non-vesting conditions in the measurement of a
cash-settled share-based payment (see 9.3.2 below);
• classification of share-based payment transactions with a net settlement
feature for withholding tax obligations (see 14.3.1 below); and
• accounting for a modification of a share-based payment that changes its
classification from cash-settled to equity-settled (see 9.4.2 below).
There have also been two interpretations of IFRS 2 by the IFRS Interpretations
Committee, IFRIC 8 – Scope of IFRS 2 – and IFRIC 11 – IFRS 2 – Group and Treasury
Share Transactions, but these were incorporated into IFRS 2 as part of the June 2009
amendment and the separate interpretations withdrawn. [IFRS 2.64].
Revision of, and amendments to, IFRS 3 – Business Combinations – in 2008 and 2010
respectively, led to consequential amendments to IFRS 2. The revised and amended
IFRS 3 provides guidance on the replacement of share-based payment awards in a
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 501
