wrongdoing or underperformance be identified.
The impact of such clauses on the accounting treatment required by IFRS 2 depends on
the precise terms of a particular arrangement. Aspects of arrangements that entities will
need to consider include the following:
• whether the terms are sufficiently clear at the inception of the arrangement that
there can still be a grant in IFRS 2 terms (see 5.3 below for further discussion of the
requirements relating to grant date);
• whether the malus clause relates only to the actions of the individual employee
(so-called ‘at fault’ malus) and whether the relevant period for consideration of the
condition is limited to the vesting period or extends over a longer period;
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• whether the malus clause relates only to the overall performance of the entity (so-
called ‘not at fault’ malus) and, again, the applicable period during which the clause
may be invoked; and
• whether the associated clawback arrangements are clear or depend on further
decisions by the entity at the time the relevant ‘malus’ clause is invoked.
Broadly, it is likely to be the case that there will be a grant at inception provided the
terms of the malus and clawback arrangements are sufficiently clear for there to be a
shared understanding of the arrangements by both parties.
If the employee’s ultimate entitlement to an award depends on an ‘at fault’ malus clause
not being invoked, this is generally likely to be taken into account as part of any service
vesting condition. If the condition extends beyond the usual vesting date of the award
and the employee breaches the condition after the end of the vesting period, the vested
awards will be treated as a cancellation under IFRS 2 (but there would be no impact on
the expense already recognised for a vested award).
Depending on the precise terms, the assessment of a ‘not at fault’ malus clause is likely
to require greater judgement. To the extent that the entity’s overall performance formed
part of the conditions on which the award would vest, it seems appropriate to treat the
condition as part of a performance vesting condition. To the extent that a ‘not at fault’
malus clause could result in the clawback of an award after the end of the vesting period,
there would need to be an assessment of how the identified fault or wrongdoing
interacted with the position of the entity as previously determined at the end of the
vesting period. The fault might relate solely to a situation that should have prevented
the original vesting of the award (for example, a restatement of accounts relating to the
vesting period) or it might be a more general condition relating to the ongoing
performance of the entity.
If the condition extended beyond the service period, the entity would need to consider
whether the award had a non-vesting condition from inception (see 3.2 below).
However, given the nature of the condition, in our view it would be unlikely that there
would be a significant reduction, if any, in the fair value of the award as a consequence
of the non-vesting condition.
3.2
Non-vesting conditions (conditions that are neither service
conditions nor performance conditions)
3.2.1 Background
Some share-based payment transactions, particularly those with employees, require the
satisfaction of conditions that are neither service conditions nor performance
conditions. For example, an employee might be given the right to 100 shares in three
years’ time, subject only to the employee not working in competition with the reporting
entity during that time. An undertaking not to work for another entity does not
‘determine whether the entity receives ... services’ – the employee could sit on a beach
for three years and still be entitled to collect the award. Accordingly, such a condition
is not regarded as a vesting condition for the purposes of IFRS 2, but is instead referred
to as a ‘non-vesting condition’. The accounting treatment of non-vesting conditions is
discussed in detail at 6.4 below.
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IFRS 2 does not explicitly define a ‘non-vesting condition’ (see 3.2.2 below), but uses the
term to describe a condition that is neither a service condition nor a performance
condition. Sometimes the condition will be wholly within the control of the counterparty
and unconnected with the delivery of services, such as a requirement to save (see below).
However, the identification of such conditions is not always straightforward.
The concept of a ‘non-vesting condition’, like much of IFRS 2 itself, had its origins as an
anti-avoidance measure. It arose from a debate on how to account for employee share
option schemes linked to a savings contract. In some jurisdictions, options are awarded
to an employee on condition that the employee works for a fixed minimum period and,
during that period, makes regular contributions to a savings account, which is then used
to exercise the option. The employee is entitled to withdraw from the savings contract
before vesting, in which case the right to the award lapses.
Entities applying IFRS 2 as originally issued almost invariably treated an employee’s
obligation to save as a vesting condition. If the employee stopped saving this was treated
as a failure to meet a vesting condition and accounted for as a forfeiture, with the
reversal of any expense so far recorded (see 6.1 and 6.2 below).
Some saw in this a scope for abuse of the general principle of IFRS 2 that, if a share-
based payment transaction is cancelled, any amount not yet expensed for it is
immediately recognised in full (see 7.4 below). The concern was that, if such a plan were
‘out of the money’, the employer, rather than cancel the plan (and thereby trigger an
acceleration of expense) would ‘encourage’ the employee to stop saving (and thereby
create a reversal of any expense already charged).
The broad effect of the January 2008 amendment to IFRS 2 (see 1.2 above) was to
remove this perceived anomaly from the standard.
However, following the publication of the January 2008 amendment, it became
apparent that the concept of the ‘non-vesting’ condition was not clear. This resulted in
differing views on the appropriate classification of certain types of condition depending
on whether or not they were considered to be measures of the entity’s performance or
activities and hence performance vesting conditions.
The Interpretations Committee took a number of the above issues onto its agenda as
part of a wider project on vesting and non-vesting conditions. Where the issues were
not addressed through the IASB’s Annual Improvements to IFRSs 2010-2012 Cycle,
there is further discussion at 3.4 below.
3.2.2
Defining a non-vesting condition
As noted at 3.1 above, IFRS 2 defines a vesting condition as a condition that determines
whether the entity receives the services that entitle the counterparty to receive
payment in equity or cash. Performance conditions are those that require the
counterparty to complete a specified period of service and specified performance
targets to be met (such as a sp
ecified increase in the entity’s profit over a specified
period of time).
The Basis for Conclusions to IFRS 2 adds that the feature that distinguishes a
performance condition from a non-vesting condition is that the former has an explicit
or implicit service requirement and the latter does not. [IFRS 2.BC171A].
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In issuing its Annual Improvements to IFRSs 2010-2012 Cycle in December 2013 the
IASB considered whether a definition of ‘non-vesting condition’ was needed. It decided
that ‘the creation of a stand-alone definition ... would not be the best alternative for
providing clarity on this issue’. [IFRS 2.BC364]. Instead, it sought to provide further
clarification in the Basis for Conclusions to IFRS 2, as follows:
‘...the Board observed that the concept of a non-vesting condition can be inferred from
paragraphs BC170-BC184 of IFRS 2, which clarify the definition of vesting conditions.
In accordance with this guidance it can be inferred that a non-vesting condition is any
condition that does not determine whether the entity receives the services that entitle
the counterparty to receive cash, other assets or equity instruments of the entity under
a share-based payment arrangement. In other words, a non-vesting condition is any
condition that is not a vesting condition.’ [IFRS 2.BC364].
Although it is stated that the Basis for Conclusions does not form part of IFRS 2, the
IASB nonetheless appears to rely on users of the standard referring to the Basis for
Conclusions in order to ‘infer’ the definition of a non-vesting condition.
A performance metric may be a non-vesting condition rather than a vesting condition
in certain circumstances. For a condition to be a performance vesting condition, it is not
sufficient for the condition to be specific to the performance of the entity. There must
also be an explicit or implied service condition that extends to the end of the
performance period. For example, a condition that requires the entity’s profit before
tax or its share price to reach a minimum level, but without any requirement for the
employee to remain in employment throughout the performance period, is not a
performance condition but a non-vesting condition.
Specific examples of non-vesting conditions given by IFRS 2 include:
• a requirement to make monthly savings during the vesting period;
• a requirement for a commodity index to reach a minimum level;
• restrictions on the transfer of vested equity instruments; or
• an agreement not to work for a competitor after the award has vested – a ‘non-
compete’ agreement (see 3.2.3 below). [IFRS 2.BC171B, IG24].
The IASB has also clarified in the Basis for Conclusions to IFRS 2 that a condition
related to a share market index target (rather than to the specific performance of the
entity’s own shares) is a non-vesting condition because a share market index reflects
not only the performance of an entity but also that of other entities outside the group.
Even where an entity’s share price makes up a substantial part of the share market index,
the IASB confirmed that this would still be a non-vesting condition because it reflects
the performance of other, non-group, entities. [IFRS 2.BC353-BC358].
Thus, whilst conditions that are not related to the performance of the entity are always,
by their nature, non-vesting conditions, conditions that relate to the performance of the
entity may or may not be non-vesting conditions depending on whether there is also a
requirement for the counterparty to render service.
As noted at 3.1 above, the definition of a performance vesting condition was clarified and
expanded in the IASB’s Annual Improvements. The amended definition includes wording
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intended to clarify the extent to which the period of achieving the performance target(s)
needs to coincide with the service period and states that this performance period:
(a) shall not extend beyond the end of the service period; and
(b) may start before the service period on the condition that the commencement date
of the performance target is not substantially before the commencement of the
service period.
During the process of finalising the amended definition, the IASB moved away from
a requirement for the duration of the performance condition to fall wholly within the
period of the related service requirement. In response to comments on the draft
version of the Annual Improvements, the Board decided to make a late adjustment
to clarify that the start of the performance period may be before the start of the
service period, provided that the commencement date of the performance target is
not substantially before the commencement of the service period. As stated in the
definition above, however, the performance period may not extend beyond the end
of the service period.
It is interesting to note that, in the US, the EITF also considered the question of non-
coterminous service and performance conditions but, unlike the IASB, reached the
conclusion that a performance target that affects the vesting of a share-based payment
and that could be achieved after the requisite service period is a performance condition
and does not need to be reflected in the fair value of the award at grant date.14 This was
on the premise that the original definition of a performance condition in ASC 718
requires only a specified period of service. Before finalising the amendments to IFRS 2,
the IASB specifically reconfirmed its own decision against the background of the US
decision.15 This is therefore an area of difference between IFRS and US GAAP.
The late adjustment by the IASB goes some way towards removing an issue that is
extremely common in practice, particularly with awards made to employees under
a single scheme but at various times. The IASB gives the example of an earnings per
share target as one of the areas in which respondents to the draft definitions
observed that there could be a problem in practice, noting that the measure of
earnings per share growth set as a performance target could often be that between
the most recently published financial statements at grant date and those before the
vesting date. [IFRS 2.BC341]. However, notwithstanding the amended definition, there
clearly remains an element of judgement in the interpretation of ‘substantially’ as
used in the definition.
There is further discussion of the accounting treatment of non-vesting conditions
at 6.4 below.
3.2.3 Non-compete
agreements
In some jurisdictions it is relatively common to have a non-compete clause in share-
based payment arrangements so that if the counterparty starts to work for a competitor
within a specified timescale, i.e. he breaches the non-compete provision, he is required
to return the shares (or an equivalent amount of cash) to the entity. Generally, a non-
compete provision is relevant once an individual has ceased employment with the entity
and so no future service is expected to be provided to the entity. However, the non-
2546 Chapter 30
compete provision is often found in share-based payment awards entered into while
the individual is sti
ll an employee of the entity and when there is no current intention
for employment to cease. There are two divergent views on how such non-compete
arrangements should be accounted for under IFRS 2.
The Basis for Conclusions to IFRS 2 states that ‘a share-based payment vests when the
counterparty’s entitlement to it is no longer conditional on future service or
performance conditions. Therefore, conditions such as non-compete provisions and
transfer restrictions, which apply after the counterparty has become entitled to the
share-based payment, are not vesting conditions.’ [IFRS 2.BC171B].
One view is that, under the current definitions in the standard, this means that all non-
compete agreements should be treated as non-vesting conditions with the condition
reflected in the grant date fair value. Another reading of paragraph BC171B is that in
some situations such arrangements meet the definition of a vesting condition and this
allows any IFRS 2 expense to be reversed should the condition not be met. This view is
explained further below. The lack of clarity in the standard as currently drafted means
that there is diversity in practice.
Those who take the view that a non-compete arrangement is not always a non-
vesting condition read paragraph BC171B as distinguishing between non-compete
clauses which apply after the counterparty has become entitled to an award (a non-
vesting condition) and those that, by implication, apply before the counterparty has
become entitled to an award (a vesting condition). Broadly, therefore, if an employee
has been given shares at the start of a non-compete period he is entitled to them (a
non-vesting condition), but if the shares are retained by the entity or held in escrow,
the employee is not entitled to the shares until the end of the non-compete period (a
vesting condition).
This view may be difficult to reconcile with IFRS 2 as currently drafted because:
• it requires the reference to ‘entitlement’ to an award to be read as including a
contingent obligation to forfeit the share, which is not in accordance with the
general approach of IFRS 2; and
• it requires the words ‘which apply after the counterparty has become entitled to
the share-based payment’ to be read with an implied emphasis on the word ‘after’,
so as to distinguish it from an implied (unstated) alternative scenario in which the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 507
