conditions apply before the counterparty becomes entitled to the share-based
payment. A more natural reading is to consider these words as describing all non-
compete agreements and transfer restrictions.
The classification of a non-compete provision is a matter that has been referred to the
Interpretations Committee and to the IASB (see 3.4 below).
3.3 Vesting
period
The vesting period is the period during which all the specified vesting conditions of
a share-based payment arrangement are to be satisfied. [IFRS 2 Appendix A]. This is not
the same as the exercise period or the life of the option, as illustrated by
Example 30.1 below.
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Example 30.1: Meaning of ‘vesting period’ – award with vesting conditions only
An employee is awarded options that can be exercised at any time between three and ten years from the date
of the award, provided the employee remains in service for at least three years from the date of the award.
For this award, the vesting period is three years; the exercise period is seven years; and the life of the option
is ten years. However, as discussed further at 8 below, for the purposes of calculating the fair value of the
award under IFRS 2, the life of the award is taken as the period ending with the date on which the counterparty
is most likely actually to exercise the option, which may be some time before the full ten year life expires.
It is also important to distinguish between vesting conditions and other restrictions on
the exercise of options and/or trading in shares, as illustrated by Example 30.2 below.
Example 30.2: Meaning of ‘vesting period’ – award with vesting and non-
vesting conditions
An employee is awarded options that can be exercised at any time between five and ten years from the date
of the award, provided the employee remains in service for at least three years from the date of the award. In
this case, the vesting period remains three years as in Example 30.1 above, provided that the employee’s
entitlement to the award becomes absolute at the end of three years – in other words, the employee does not
have to provide any services to the entity in years 4 and 5. The restriction on exercise of the award in the
period after vesting is a non-vesting condition, which would be reflected in the original valuation of the award
at the date of grant (see 4, 5 and 8 below).
The accounting implications of vesting conditions, non-vesting conditions and vesting
periods for equity-settled transactions are discussed in 4 to 7 below and for cash-settled
transactions in 9 below.
3.4
Vesting and non-vesting conditions: issues referred to the
Interpretations Committee and the IASB
In January 2010 the Interpretations Committee added to its agenda a request for
clarification of the following:
• the basis on which vesting conditions, especially performance conditions, can be
distinguished from non-vesting conditions, especially the distinction between a
service condition, a performance condition and a non-vesting condition; and
• the interaction of multiple conditions.
The amendments to IFRS 2 published in December 2013 as part of the IASB’s Annual
Improvements to IFRSs 2010-2012 Cycle were intended to address the first bullet point
together with related application issues that had been raised with the Interpretations
Committee (see 3.1 and 3.2 above).
In addition to considering matters subsequently addressed by the IASB in the Annual
Improvements, the Interpretations Committee tentatively decided at its meetings in July
and September 201016 that a non-compete provision should be presumed to be a
‘contingent feature’ – a term not defined in IFRS 2.17
The Interpretations Committee subsequently concluded that the classification of a non-
compete provision and the question of how to account for the interaction of multiple
vesting conditions should be referred to the IASB.18 In September 2011 the IASB agreed
that these issues should be considered as future agenda items.19
The IASB has since launched and concluded a research project into IFRS 2 (see 1.2.1
above). Both the conclusions relating to this project and the IASB’s work plan seem to
2548 Chapter 30
indicate that further discussion of these IFRS 2 matters by the IASB is unlikely – even
though the issues continue to result in some diversity in practice (see also 3.2.3 above
and 6.3.6 to 6.3.7 below).20
4
EQUITY-SETTLED TRANSACTIONS – OVERVIEW
4.1
Summary of accounting treatment
The detailed provisions of IFRS 2 are complex, but their key points can be summarised
as follows.
(a) All equity-settled transactions are measured at fair value. However, transactions
with employees are normally measured using a ‘grant date model’ (i.e. the
transaction is recorded at the fair value of the equity instrument at the date when
it is originally granted), whereas transactions with non-employees are normally
measured using a ‘service date model’ (i.e. the transaction is recorded at the fair
value of the goods or services received at the date they are received). As noted in 3
above, all transactions, however measured, are recognised using a ‘service date
model’ (see 5 below).
(b) Where an award is made subject to future fulfilment of conditions, a ‘market condition’
(i.e. one related to the market price (or value) of the entity’s equity instruments) or a
‘non-vesting condition’ (i.e. one that is neither a service condition nor a performance
condition) is taken into account in determining the fair value of the award. However,
the effect of conditions other than market and non-vesting conditions is ignored in
determining the fair value of the award (see 3 above and 6 below).
(c) Where an award is made subject to future fulfilment of vesting conditions, its cost
is recognised over the period during which the service condition is fulfilled (see 3
above and 6 below). The corresponding credit entry is recorded within equity
(see 4.2 below).
(d) Until an equity instrument has vested (i.e. the entitlement to it is no longer
conditional on future service) any amounts recorded are in effect contingent and
will be adjusted if more or fewer awards vest than were originally anticipated to
do so. However, an equity instrument awarded subject to a market condition or a
non-vesting condition is considered to vest irrespective of whether or not that
market or non-vesting condition is fulfilled, provided that all other vesting
conditions are satisfied (see 6 below).
(e) No adjustments are made, either before or after vesting, to reflect the fact that an
award has no value to the employee or other counterparty e.g. in the case of a
share option, because the option exercise price is above the current market price
of the share (see 6.1.1 and 6.1.3 below).
(f) If an equity instrument is cancelled, whether by the entity or the counterparty
(see (g) below) before vesting, any amount remaining to be expensed is charged in
full at that point (see 7.4 below). If an equity instrument is modified before vesting
(e.g. in the case of a share op
tion, by changing the performance conditions or the
exercise price), the financial statements must continue to show a cost for at least
the fair value of the original instrument, as measured at the original grant date,
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2549
together with any excess of the fair value of the modified instrument over that of
the original instrument, as measured at the date of modification (see 7.3 below).
(g) Where an award lapses during the vesting period due to a failure by the
counterparty to satisfy a non-vesting condition within the counterparty’s control,
or a failure by the entity to satisfy a non-vesting condition within the entity’s
control, the lapse of the award is accounted for as if it were a cancellation (see (f)
above and 6.4.3 below).
(h) In determining the cost of an equity-settled transaction under IFRS 2, whether the
entity satisfies its obligations under the transaction with a fresh issue of shares or
by purchasing own shares in the financial markets is completely irrelevant to the
charge in profit or loss, although there is clearly a difference in the cash flows.
Where own shares are purchased, they are accounted for as treasury shares under
IAS 32 (see 2.2.4.H above and Chapter 43 at 9). [IFRS 2.BC330-333].
The requirements summarised in (d) to (g) above can have the effect that IFRS 2 requires
a cost to be recorded for an award that ultimately has no value to the counterparty,
because the award either does not vest or vests but is not exercised. These rather
counter-intuitive requirements of IFRS 2 are in part ‘anti-abuse’ provisions to prevent
entities from applying a ‘selective’ grant date model, whereby awards that increase in
value after grant date remain measured at grant date while awards that decrease in value
are remeasured. This is discussed further in the detailed analysis at 5 to 7 below.
4.2 The
credit
entry
As noted at (c) in the summary in 4.1 above, the basic accounting entry for an equity-
settled share-based payment transaction is: debit profit or loss for the period (often
classified as employee costs), credit equity (classified as a transaction with owners in
their capacity as owners rather than as part of other comprehensive income).
IFRS 2 does not prescribe the component of equity to which the credit should be taken.
The IASB presumably adopted this non-prescriptive approach so as to ensure there was
no conflict between, on the one hand, the basic requirement of IFRS 2 that there should
be a credit in equity and, on the other, the legal requirements of various jurisdictions as
to exactly how that credit should be allocated within equity. Depending on the
requirements of the particular jurisdiction, it might be appropriate to take the credit to
retained earnings or to a separate component of equity or entities may be able to make
a policy choice.
Occasionally there will be a credit to profit or loss (see for instance Example 30.11
at 6.2.4 below) and a corresponding reduction in equity.
In some arrangements the share-based payment transaction will be settled in equity
instruments of a subsidiary of the reporting entity. This is most commonly the case
where the subsidiary is partly-owned with traded shares held by external shareholders.
In the consolidated financial statements, the question arises as to whether the credit
entry for such transactions should be presented as a non-controlling interest (NCI) or as
part of the equity attributable to the shareholders of the parent. This is discussed further
in Chapter 7 at 5.5.
2550 Chapter 30
5
EQUITY-SETTLED TRANSACTIONS – COST OF AWARDS
5.1
Cost of awards – overview
The general measurement rule in IFRS 2 is that an entity must measure the goods or
services received, and the corresponding increase in equity, directly, at the fair value of
the goods or services received, unless that fair value cannot be estimated reliably. If the
fair value of the goods or services received cannot be estimated reliably, the entity must
measure their value, and the corresponding increase in equity, indirectly, by reference
to the fair value of the equity instruments granted. [IFRS 2.10]. ‘Fair value’ is defined as the
amount for which an asset could be exchanged, a liability settled, or an equity
instrument granted could be exchanged, between knowledgeable, willing parties in an
arm’s length transaction. [IFRS 2 Appendix A]. IFRS 2 has its own specific rules in relation to
determining the fair value of share-based payments which differ from the more general
fair value measurement requirements in IFRS 13 – Fair Value Measurement (see 5.5
below). [IFRS 2.6A].
On their own, the general measurement principles of IFRS 2 would suggest that the
reporting entity must determine in each case whether the fair value of the equity
instruments granted or that of the goods or services received is more reliably
determinable. However, IFRS 2 goes on to clarify that:
• in the case of transactions with employees, the fair value of the equity instruments
must be used (see 5.2 below), except in those extremely rare cases where it is not
possible to measure this fair value reliably, when the intrinsic value of the equity
instruments may be used instead (see 5.5 below); but
• in the case of transactions with non-employees, there is a rebuttable presumption
that the fair value of the goods or services provided is more reliably determinable
(see 5.4 below).
Moreover, transactions with employees are measured at the date of grant (see 5.2
below), whereas those with non-employees are measured at the date when goods or
services are received (see 5.4 below).
The overall position can be summarised by the following matrix.
Counterparty Measurement
basis
Measurement date
Recognition date
Employee
Fair value of equity
Grant date
Service date
instruments awarded
Non-employee
Fair value of goods or
Service date
Service date
services received
The Basis for Conclusions addresses the issue of why the accounting treatment for
apparently identical transactions should, in effect, depend on the identity of the counterparty.
The main argument put forward to justify the approach adopted for transactions with
employees is essentially that, once an award has been agreed, the value of the services
provided pursuant to the transaction does not change significantly with the value of the
award. [IFRS 2.BC88-96]. However, some might question this proposition, on the grounds
Share-based
payment
2551
that employees are more likely to work harder when the value of their options is rising
than when it has sunk irretrievably.
As regards transactions with non-employees, the IASB offers two main arguments for
the use of measurement at service date.
The first is that, if the counterparty is not firmly committed to delivering the goods
or services, the counterparty would consider whether the fair value of the equity
instrum
ents at the delivery date is sufficient payment for the goods or services when
deciding whether to deliver the goods or services. This suggests that there is a high
correlation between the fair value of the equity instruments at the date the goods or
services are received and the fair value of those goods or services. [IFRS 2.BC126]. This
argument is clearly vulnerable to the challenge that it has no relevance where (as
would more likely be the case) the counterparty is firmly committed to delivering the
goods or services.
The second is that non-employees generally provide services over a short period
commencing some time after grant date, whereas employees generally provide services
over an extended period beginning on the grant date. This leads to a concern that
transactions with non-employees could be entered into well in advance of the due date
for delivery of goods or services. If an entity were able to measure the expense of such
a transaction at the grant date fair value, the result, assuming that the entity’s share price
rises, would be to understate the cost of goods and services delivered. [IFRS 2.BC126-127].
The true reason for the IASB’s approach may have been political as much as theoretical.
One effect of a grant date measurement model is that, applied to a grant of share options
that is eventually exercised, it ‘freezes’ the accounting cost at the (typically) lower fair
value at the date of grant. This excludes from the post-grant financial statements the
increased cost and volatility that would be associated with a model that constantly
remeasured the award to fair value until exercise date. The IASB might well have
perceived it as a marginally easier task to persuade the corporate sector of the merits of
a ‘lower cost, zero volatility’ approach as opposed to a ‘fair value at exercise date’ model
(such as is used for cash-settled awards – see 9 below).
The price to be paid in accounting terms for the grant date model is that, when an award
falls in value after grant date, it continues to be recognised at its higher grant date value.
It is therefore quite possible that, during a period of general economic downturn,
financial statements will show significant costs for options granted in previous years, but
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 508
