which are currently worthless. This could well lead to (in fact, sometimes groundless)
accusations of rewarding management for failure.
5.2
Transactions with employees
These will comprise the great majority of transactions accounted for under IFRS 2, and
include all remuneration in the form of shares, share options and any other form of
reward settled in equity instruments of the entity or a member of its group.
5.2.1
Who is an ‘employee’?
Given the difference between the accounting treatment of equity-settled transactions
with employees and with non-employees, it is obviously important for IFRS 2 to define
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what is meant by employees. In fact IFRS 2 strictly refers to ‘employees and others
providing similar services’ [IFRS 2.11] who are defined as individuals who render personal
services to the entity and either:
(a) the individuals are regarded as employees for legal or tax purposes;
(b) the individuals work for the entity under its direction in the same way as
individuals who are regarded as employees for legal or tax purposes; or
(c) the services rendered are similar to those rendered by employees.
The term encompasses all management personnel, i.e. those persons having authority
and responsibility for planning, directing and controlling the activities of the entity,
including non-executive directors. [IFRS 2 Appendix A].
The implication of (a) and (b) above is that it is not open to an entity to argue that an
individual who is not an employee as a matter of law is therefore automatically a non-
employee for the purposes of IFRS 2.
The implication of (b) and (c) above is that, where a third party provides services
pursuant to a share-based payment transaction that could be provided by an employee
(e.g. where an external IT consultant works alongside an in-house IT team), that third
party is treated as an employee rather than a non-employee for the purposes of IFRS 2.
Conversely, however, where an entity engages a consultant to undertake work for which
there is not an existing in-house function, the implication is that such an individual is not
regarded as an employee. In other words, in our view, the reference in (c) to ‘services ...
similar to those rendered by employees’ is to services rendered by employees that the
entity actually has, rather than to employees that the entity might have if it were to recruit
them. Otherwise, the distinction in IFRS 2 between employees and non-employees would
have no effect, since it would always be open to an entity to argue that it could employ
someone to undertake any task instead of engaging a contractor.
Exceptionally there might be cases where the same individual is engaged in both
capacities. For example, a director of the entity might also be a partner in a firm of
lawyers and be engaged in that latter capacity to advise the entity on a particular issue.
It might be more appropriate to regard payment for the legal services as made to a non-
employee rather than to an employee.
Related questions of interpretation arise where an award is made to an employee of an
associate or a joint venture (see 12.9 below).
The effect of a change of status from employee to non-employee (or vice versa) is
addressed at 5.4.1 below.
5.2.2
Basis of measurement
As noted above, IFRS 2 requires equity-settled transactions with employees to be
measured by reference to the fair value of the equity instruments granted at ‘grant date’
(see 5.3 below). [IFRS 2.11]. IFRS 2 asserts that this approach is necessary because shares,
share options and other equity instruments are typically only part of a larger
remuneration package, such that it would not be practicable to determine the value of
the work performed in consideration for the cash element of the total package, the
benefit-in-kind element, the share option element and so on. [IFRS 2.12].
Share-based
payment
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In essence, this is really an anti-avoidance provision. The underlying concern is that, if
an entity were able to value options by reference to the services provided for them, it
might assert that the value of those services was zero, on the argument that its personnel
are already so handsomely rewarded by the non-equity elements of their remuneration
package (such as cash and health benefits), that no additional services are (or indeed
could be) obtained by granting options.
5.3 Grant
date
As noted above, IFRS 2 requires equity-settled transactions with employees to be
accounted for at fair value at grant date, defined as ‘the date at which the entity and
another party (including an employee) agree to a share-based payment arrangement,
being when the entity and the counterparty have a shared understanding of the terms
and conditions of the arrangement [...]’. [IFRS 2 Appendix A].
The determination of grant date is critical to the measurement of equity-settled share-
based transactions with employees, since grant date is the date at which such
transactions must be measured (see 5.2.2 above).
In practice, it is not always clear when a mutual understanding of the award (and,
therefore, grant date) has occurred. Issues of interpretation can arise as to:
• how precise the shared understanding of the terms of the award must be; and
• exactly what level of communication between the reporting entity and the
counterparty is sufficient to ensure that there is the appropriate degree of
agreement and ‘shared understanding’.
As a consequence, the determination of the grant date is often difficult in practice. We
discuss the following issues in more detail in the sections below:
• basic determination of grant date (see 5.3.1 below);
• the communication of awards to employees and the rendering of services in
advance of grant date (see 5.3.2 below);
• awards where the exercise price depends on a formula or on a future share price
(see 5.3.3 below);
• awards where the exercise price is paid in shares (net settlement of award)
(see 5.3.4 below);
• an award of equity instruments to a fixed monetary value (see 5.3.5 below);
• awards over a fixed pool of shares (including ‘last man standing’ arrangements)
(see 5.3.6 below);
• awards with multiple service and performance periods (see 5.3.7 below);
• awards subject to modification or discretionary re-assessment by the entity after
the original grant date (see 5.3.8 below);
• mandatory or discretionary awards to ‘good leavers’ (see 5.3.9 below); and
• shares issued by special purpose acquisition companies (see 5.3.10 below).
The grant date for ‘matching’ awards (i.e. arrangements where an additional award
of shares is granted to match an initial cash bonus or award of shares) is discussed
at 15.1 below.
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5.3.1
Determination of grant date
IFRS 2 and the accompanying implementation guidance emphasise that a grant occurs
only when all the conditions are understood and agreed by the parties to the
arrangement and any required approval process has been complete
d. Thus, for
example, if an entity makes an award ‘in principle’ to an employee of options whose
terms are subject to review or approval by a remuneration committee or the
shareholders, ‘grant date’ is the later date when the necessary formalities have been
completed. [IFRS 2 Appendix A, IG1-3].
The implementation guidance to IFRS 2 emphasises that the word ‘agree’ is ‘used in its
usual sense, which means that there must be both an offer and an acceptance of that
offer’. Therefore, there cannot be a grant unless an offer by one party has been accepted
by the other party. The guidance notes that agreement will be explicit in some cases
(e.g. if an agreement has to be signed), but in others it might be implicit, such as when
an employee starts to deliver services for the award. [IFRS 2.IG2].
The counterparty’s agreement to an offer might be particularly difficult to determine
when it is implicit rather than explicit. For example, if an award required both the
rendering of service and a subscription payment (other than a minimal one) by the
employee, it is likely that the employee’s agreement, and hence the grant date of the
award, would coincide with the payment date – provided this occurs shortly after the
offer date. If, however, the employee had the choice at the offer date of deferring
payment until a much later date and could therefore decide whether the entity’s
subsequent performance justified his payment, then it is more likely that grant date
would be the date on which the services commenced. Determination of when the
counterparty has agreed to an offer will often be an area of judgement that depends on
the precise facts and circumstances of a particular situation.
The implementation guidance to IFRS 2 further notes that employees may begin
rendering services in consideration for an award before it has been formally ratified.
For example, a new employee might join the entity on 1 January and be granted options
relating to performance for a period beginning on that date, but subject to formal
approval by the remuneration committee at its next quarterly meeting on 15 March. In
that case, the entity would typically begin expensing the award from 1 January based on
a best estimate of its fair value, but would subsequently adjust that estimate so that the
ultimate cost of the award was its actual fair value at 15 March. [IFRS 2.IG4]. This reference
to formal approval could be construed as indicating that, in fact, IFRS 2 requires not
merely that there is a mutual understanding of the award (which might well have been
in existence since 1 January), but also that the entity has completed all processes
necessary to make the award a legally binding agreement.
In practice, many situations are much less clear-cut than the examples given in the
implementation guidance. For example, if a remuneration committee has discretion over
some aspects of an award and whether it vests, does that mean that there is not a shared
understanding until the vesting date? Similarly, does the counterparty need to have full
quantification of every aspect of an award (performance targets, exercise price, etc.) or
would an understanding of the formula for calculating performance or price be sufficient?
Some of these practical interpretation issues are considered further in the sections below.
Share-based
payment
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5.3.2
Communication of awards to employees and services in advance of
grant date
As discussed at 5.3.1 above, the implementation guidance to IFRS 2 indicates that, in
order for a grant to have been made, there must not merely be a mutual understanding
of the terms – including the conditions attached to the award as discussed further in the
sections that follow – but there must also be a legally enforceable arrangement. Thus,
if an award requires board or shareholder approval for it to be legally binding on the
reporting entity, for the purposes of IFRS 2 it has not been granted until such approval
has been given, even if the terms of the award are fully understood at an earlier date.
However, if services are effectively being rendered for an award from a date earlier than
the grant date as defined in IFRS 2, the cost of the award should be recognised over a
period starting with that earlier date. [IFRS 2.IG4].
In some situations the employee will have a valid expectation of an award, and the entity
will have a corresponding obligation, based on an earlier commitment by the entity.
However, it might be the case that not all of the precise terms and conditions have been
finalised. In our view, provided it is possible to estimate the fair value of the
arrangement, an estimated cost for services should be recognised in advance of grant
date in such cases as well as in those situations where formal approval does not take
place until a later date.
The implications of the paragraph IG4 requirement are illustrated in Example 30.3
below for a situation where formal approval of an award is delayed. It is important,
however, to retain a sense of proportion in considering the overall impact on the
financial statements. For example, in cases where the share price is not particularly
volatile, whether the grant date is, say, 1 January or 1 April may not make a great
difference to the valuation of the award, particularly when set beside the range of
acceptable valuations resulting from the use of estimates in the valuation model.
Example 30.3: Determination of grant date
Scenario 1
On 1 January an entity advises employees of the terms of a share award designed to reward performance over
the following three years. The award is subject to board approval, which is given two month later on 1 March.
Grant date is 1 March. However, the cost of the award would be recognised over the three year period
beginning on 1 January, since the employees would have effectively been rendering service for the award
from that date.
Scenario 2
On 1 January an entity’s board resolves to implement a share scheme designed to reward performance over
the following three years. The award is notified to employees two months later on 1 March. Grant date is
again 1 March. Prima facie, in this case, the cost of the award would be recognised over the period of two
years and ten months beginning on 1 March, since the employees could not be regarded as rendering service
in January and February for an award of which they were not aware at that time.
However, if a similar award is made each year, and according to a similar timescale, there might be an
argument that, during January and February of each year, the employees are rendering service for an award
of which there is high expectation, and that the cost should therefore, as in Scenario 1, be recognised over the
full three year period. The broader issue of the accounting treatment for awards of which there is a high
expectation is addressed in the discussion of matching share awards at 15.1 below.
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Scenario 3
On 1 January an entity advises employees of the terms of a share award designed to reward performance over
the following three years. The award is subject to board approval, which is given two months later on 1 March.
However, in giving such approval, the boa
rd makes some changes to the performance conditions as originally
communicated to employees on 1 January. The revised terms of the award are communicated to employees a
month later on 1 April. Grant date is 1 April. However, the cost of the award would be recognised over the
three year period beginning on 1 January, since the employees would have effectively been rendering service
for the award from that date.
Examples of situations where an employee might render service in advance of the
IFRS 2 grant date because the precise conditions of an award are outstanding are
considered at 5.3.3 to 5.3.7 and at 15.1 and 15.4.1 below.
5.3.3
Exercise price or performance target dependent on a formula or
future share price
Some share plans define the exercise price not in absolute terms, but as a factor of the
share price. For example, the price might be expressed as:
• a percentage of the share price at exercise date; or
• a percentage of the lower of the share price at grant date and at exercise date.
The effect of this is that, although the actual exercise price is not known until the date
of exercise, both the entity and the counterparty already have a shared understanding
of how the price will be calculated and it is possible to estimate the outcome on an
ongoing basis without the need for additional approval or inputs.
A similar approach might be applied in the setting of performance targets i.e. they are
set by reference to a formula rather than in absolute terms and so do not require further
input by the entity or its remuneration committee, for example.
In order for there to be a shared understanding and a grant date, the formula or method
of determining the outcome needs to be sufficiently clear and objective to allow both
the entity and the counterparty to make an estimate of the outcome of the award during
the vesting period. Accordingly, in our view, grant date is the date on which the terms
and conditions (including the formula for calculating the exercise price or performance
target) are determined sufficiently clearly and agreed by the entity and the counterparty,
subject to the matters discussed at 5.3.2 above.
5.3.4
Exercise price paid in shares (net settlement of award)
Some share awards allow the exercise price to be paid in shares. In practical terms, this
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 509
