for valuable consideration such as cash and those warrants lapse unexercised, the entity
recognises no gain under IFRS. [IFRS 2.BC218-221].
6.2
Vesting conditions other than market conditions
6.2.1
Awards with service conditions
Most share-based payment transactions with employees are subject to explicit or
implied service conditions. Examples 30.7 and 30.8 below illustrate the application of
the allocation principles discussed in 6.1 above to awards subject only to service
conditions. [IFRS 2.IG11].
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Example 30.7: Award with no change in the estimate of number of awards
vesting
An entity grants 100 share options to each of its 500 employees. Vesting is conditional upon the employees
working for the entity over the next three years. The entity estimates that the fair value of each share option
is €15. The entity’s best estimate at each reporting date is that 100 (i.e. 20%) of the original 500 employees
will leave during the three year period and therefore forfeit their rights to the share options.
If everything turns out exactly as expected, the entity will recognise the following amounts during the vesting
period for services received as consideration for the share options.
Cumulative
Expense for
Year Calculation of cumulative expense
expense (€)
period‡ (€)
1 50,000 options × 80%* × €15 × 1/3†
200,000 200,000
2 50,000 options × 80% × €15 × 2/3
400,000 200,000
3 50,000 options × 80% × €15 × 3/3
600,000 200,000
*
The entity expects 100 of its 500 employees to leave and therefore only 80% of the options to vest.
†
The vesting period is 3 years, and 1 year of it has expired.
‡
In each case the expense for the period is the difference between the calculated cumulative expense at
the beginning and end of the period.
Example 30.8: Award with re-estimation of number of awards vesting due to
staff turnover
As in Example 30.7 above, an entity grants 100 share options to each of its 500 employees. Vesting is
conditional upon the employee working for the entity over the next three years. The entity estimates that the
fair value of each share option is €15.
In this case, however, 20 employees leave during the first year, and the entity’s best estimate at the end of
year 1 is that a total of 75 (15%) of the original 500 employees will have left before the end of the vesting
period. During the second year, a further 22 employees leave, and the entity revises its estimate of total
employee departures over the vesting period from 15% to 12% (i.e. 60 of the original 500 employees). During
the third year, a further 15 employees leave. Hence, a total of 57 employees (20 + 22 + 15) forfeit their rights
to the share options during the three year period, and a total of 44,300 share options (443 employees × 100
options per employee) finally vest.
The entity will recognise the following amounts during the vesting period for services received as
consideration for the share options.
Cumulative
Expense for
Year Calculation of cumulative expense
expense (€)
period (€)
1 50,000 options × 85% × €15 × 1/3
212,500 212,500
2 50,000 options × 88% × €15 × 2/3
440,000 227,500
3 44,300 options × €15 × 3/3
664,500 224,500
Note that in Example 30.8 above, the number of employees that leave during year 1 and
year 2 is not directly relevant to the calculation of cumulative expense in those years,
but would naturally be a factor taken into account by the entity in estimating the likely
number of awards finally vesting.
6.2.2
Equity instruments vesting in instalments (‘graded’ vesting)
An entity may make share-based payments that vest in instalments (sometimes referred
to as ‘graded’ vesting). For example, an entity might grant an employee 600 options, 100
of which vest if the employee remains in service for one year, a further 200 after two
Share-based
payment
2573
years and the final 300 after three years. In today’s more mobile labour markets, such
awards are often favoured over awards which vest only on an ‘all or nothing’ basis after
an extended period.
IFRS 2 requires such an award to be treated as three separate awards, of 100, 200 and
300 options, on the grounds that the different vesting periods will mean that the three
tranches of the award have different fair values. [IFRS 2.IG11]. This may well have the
effect that compared to the expense for an award with a single ‘cliff’ vesting, the expense
for an award vesting in instalments will be for a different amount in total and require
accelerated recognition of the expense in earlier periods, as illustrated in Example 30.9
below.
Example 30.9: Award vesting in instalments (‘graded’ vesting)
An entity is considering the implementation of a scheme that awards 600 free shares to each of its employees,
with no conditions other than continuous service. Two alternatives are being considered:
• All 600 shares vest in full only at the end of three years.
• 100 shares vest after one year, 200 shares after two years and 300 shares after three years. Any shares
received at the end of years 1 and 2 would have vested unconditionally.
The fair value of a share delivered in one year’s time is €3; in two years’ time €2.80; and in three years’ time €2.50.
For an employee that remains with the entity for the full three year period, the first alternative would be
accounted for as follows:
Cumulative
Expense for
Year Calculation of cumulative expense
expense (€)
period (€)
1 600 shares × €2.50 × 1/3
500
500
2 600 shares × €2.50 × 2/3
1,000
500
3 600 shares × €2.50 × 3/3
1,500
500
For the second alternative, the analysis is that the employee has simultaneously received an award of
100 shares vesting over one year, an award of 200 shares vesting over two years and an award of 300 shares
vesting over 3 years. This would be accounted for as follows:
Cumulative
Expense for
Year Calculation of cumulative expense
expense (€)
period (€)
1 [100 shares × €3.00] + [200 shares × €2.80 × 1/2] +
[300 shares × €2.50 × 1/3]
830
830
2 [100 shares × €3.00] + [200 shares × €2.80 × 2/2] +
[300 shares × €2.50 × 2/3]
1,360
530
3 [100 shares × €3.00] + [200 shares × €2.80 × 2/2] +
[300 shares × €2.50 × 3/3]
1,610
250
At first sight, such an approach seems to be taking account of vesting conditions other than market conditions
in determining the fair value of an award, contrary to the basic principle of paragraph 19 of IFRS 2 (see 6.1.1
above). However, it is not the vesting c
onditions that are being taken into account per se, but the fact that the
varying vesting periods will give rise to different lives for the award (which are required to be taken into
account – see 7.2 and 8 below).
Provided all conditions are clearly understood at the outset, the accounting treatment
illustrated in Example 30.9 would apply even if the vesting of shares in each year also
depended on a performance condition unique to that year (e.g. that profit in that year must
reach a given minimum level), as opposed to a cumulative performance condition (e.g.
that profit must have grown by a minimum amount by the end of year 1, 2 or 3). This is
2574 Chapter 30
because all tranches of the arrangement have the same service commencement date and
so for the awards that have a performance condition relating to year 2 or year 3 there is a
service condition covering a longer period than the performance condition. In other
words, an award that vests at the end of year 3 conditional on profitability in year 3 is also
conditional on the employee providing service for three years from the date of grant in
order to be eligible to receive the award. This is discussed further at 5.3.7 above.
The accounting treatment illustrated in Example 30.9 is the only treatment for graded
vesting permitted under IFRS 2 whether an arrangement just has a service condition or
whether it has both service and performance conditions. This contrasts with US GAAP21
which permits, for awards with graded vesting where vesting depends solely on a service
condition, a policy choice between the approach illustrated above and a straight-line
recognition method.
6.2.3
Transactions with variable vesting periods due to non-market
performance vesting conditions
An award may be made with a vesting period of variable length. For example, an award
might be contingent upon achievement of a particular performance target (such as
achieving a given level of cumulative earnings) within a given period, but vesting
immediately once the target has been reached. Alternatively, an award might be
contingent on levels of earnings growth over a period, but with vesting occurring more
quickly if growth is achieved more quickly. Also some plans provide for ‘re-testing’,
whereby an original target is set for achievement within a given vesting period, but if
that target is not met, a new target and/or a different vesting period are substituted.
In such cases, the entity needs to estimate the length of the vesting period at grant
date, based on the most likely outcome of the performance condition. Subsequently,
it is necessary continuously to re-estimate not only the number of awards that will
finally vest, but also the date of vesting, as shown by Example 30.10. [IFRS 2.15(b), IG12].
This contrasts with the treatment of awards with market conditions and variable
vesting periods, where the initial estimate of the vesting period may not be revised
(see 6.3.4 below).
Example 30.10: Award with non-market vesting condition and variable vesting
period
At the beginning of year 1, the entity grants 100 shares each to 500 employees, conditional upon the
employees remaining in the entity’s employment during the vesting period. The shares will vest:
• at the end of year 1 if the entity’s earnings increase by more than 18%;
• at the end of year 2 if the entity’s earnings increase by more than an average of 13% per year over the
two year period; or
• at the end of year 3 if the entity’s earnings increase by more than an average of 10% per year over the
three year period.
The award is estimated to have a fair value of $30 per share at grant date. It is expected that no dividends will
be paid during the whole three year period.
By the end of the first year, the entity’s earnings have increased by 14%, and 30 employees have left. The
entity expects that earnings will continue to increase at a similar rate in year 2, and therefore expects that the
shares will vest at the end of year 2. The entity expects, on the basis of a weighted average probability, that a
further 30 employees will leave during year 2, and therefore expects that an award of 100 shares each will
vest for 440 (500 – 30 – 30) employees at the end of year 2.
Share-based
payment
2575
By the end of the second year, the entity’s earnings have increased by only 10% and therefore the shares do
not vest at the end of that year. 28 employees have left during the year. The entity expects that a further 25
employees will leave during year 3, and that the entity’s earnings will increase by at least 6%, thereby
achieving the average growth of 10% per year necessary for an award after 3 years, so that an award of
100 shares each will vest for 417 (500 – 30 – 28 – 25) employees at the end of year 3.
By the end of the third year, a further 23 employees have left and the entity’s earnings have increased by 8%,
resulting in an average increase of 10.67% per year. Therefore, 419 (500 – 30 – 28 – 23) employees receive
100 shares at the end of year 3.
The entity will recognise the following amounts during the vesting period for services received as
consideration for the shares:
Cumulative
Expense for
Year Calculation of cumulative expense
expense ($)
period ($)
1 440 employees × 100 shares × $30 × 1/2*
660,000
660,000
2 417 employees × 100 shares × $30 × 2/3*
834,000
174,000
3 419 employees × 100 shares × $30
1,257,000
423,000
*
The entity’s best estimate at the end of year 1 is that it is one year through a two year vesting period and
at the end of year 2 that it is two years through a three year vesting period.
It will be noted that in Example 30.10, which is based on IG Example 2 in the
implementation guidance to IFRS 2, it is assumed that the entity will pay no dividends
(to any shareholders) throughout the maximum possible three year vesting period. This
has the effect that the fair value of the shares to be awarded is equivalent to their market
value at the date of grant.
If dividends were expected to be paid during the vesting period, this would no longer
be the case. Employees would be better off if they received shares after two years rather
than three, since they would have a right to receive dividends from the end of year two.
In practice, an entity is unlikely to suspend dividend payments in order to simplify the
calculation of its share-based payment expense, and it is unfortunate that IG Example 2
is not more realistic. [IFRS 2 IG Example 2].
One solution might be to use the approach in IG Example 4 in the implementation
guidance to IFRS 2 (the substance of which is reproduced as Example 30.12 at 6.2.5
below). That Example deals with an award whose exercise price is either CHF12 or
CHF16, dependent upon various performance conditions. Because vesting conditions
other than market conditions must be ignored in determining the value of an award,
the approach is in effect to treat the award as the simultaneous grant of two awards,
whose value, in that case, varies by reference to the different exer
cise prices.
[IFRS 2 IG Example 4].
The same principle could be applied to an award of shares that vests at different
times according to the performance conditions, by determining different fair values
for the shares (in this case depending on whether they vest after one, two or three
years). The cumulative charge during the vesting period would be based on a best
estimate of which outcome will occur, and the final cumulative charge would be
based on the grant date fair value of the actual outcome (which will require some
acceleration of expense if the actual vesting period is shorter than the previously
estimated vesting period).
2576 Chapter 30
Such an approach appears to be taking account of non-market vesting conditions in
determining the fair value of an award, contrary to the basic principle of paragraph 19
of IFRS 2 (see 6.1.1 above). However, it is not the vesting conditions that are being taken
into account per se, but the fact that the varying vesting periods will give rise to different
lives for the award (which are required to be taken into account – see 7.2 and 8 below).
That said, the impact of the time value of the different lives on the fair value of the
award will, in many cases, be insignificant and it will therefore be a matter of judgement
as to how precisely an entity switches from one fair value to another.
Economically speaking, the entity in Example 30.10 has made a single award, the true
fair value of which must be a function of the weighted probabilities of the various
outcomes occurring. However, under the accounting model for share-settled awards in
IFRS 2, the probability of achieving non-market performance conditions is not taken
into account in valuing an award. If this is required to be ignored, the only approach
open is to proceed as in Example 30.10 above and treat the arrangement as if it consisted
of the simultaneous grant of three awards.
Some might object that this methodology is not relevant to the award in Example 30.10
above, since it is an award of shares rather than, in the case of Example 30.12 (see 6.2.5
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 513
