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• a failure by the entity to satisfy a non-vesting condition (see 6.4.3 above) within
the control of the entity; and
• a failure by the counterparty to satisfy a non-vesting condition (see 6.4.3 above)
within the control of the counterparty. [IFRS 2.28A, IG24].
The discussion below is not relevant to cancellations and modifications of those equity-
settled transactions that are (exceptionally) accounted for at intrinsic value (see 8.8 below).
The basic principles of the rules for modification, cancellation and settlement, which
are discussed in more detail at 7.3 and 7.4 below, can be summarised as follows.
• As a minimum, the entity must recognise the amount that would have been
recognised for the award if it remained in place on its original terms. [IFRS 2.27].
• If the value of an award to an employee is reduced (e.g. by reducing the number of
equity instruments subject to the award or, in the case of an option, by increasing
the exercise price), there is no reduction in the cost recognised in profit or loss.
[IFRS 2.27, B42, B44].
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• However, where the effect of the modification, cancellation or settlement is to
increase the value of the award to an employee (e.g. by increasing the number of
equity instruments subject to the award or, in the case of an option, by reducing
the exercise price), the incremental fair value must be recognised as a cost. The
incremental fair value is the difference between the fair value of the original award
and that of the modified award, both measured at the date of modification.
[IFRS 2.27, B43].
It might be thought that, when an award has been modified, and certainly when it has
been cancelled altogether, it no longer exists, and that it is therefore not appropriate to
recognise any cost for it. However, such a view would be consistent with a vesting date
measurement model rather than with the grant/service date measurement model of
IFRS 2. Under the IFRS 2 model, the value of an award at grant date or service date
cannot be changed by subsequent events.
Another reason given for the approach in IFRS 2 is that if entities were able not to
recognise the cost of modified or cancelled options they would in effect be able to apply
a selective form of ‘truing up’, whereby options that increased in value after grant would
remain ‘frozen’ at their grant date valuation under the general principles of IFRS 2,
whilst options that decreased in value could be modified or cancelled after grant date
and credit taken for the fall in value. [IFRS 2.BC222-237].
7.2
Valuation requirements when an award is modified, cancelled or
settled
These provisions have the important practical consequence that, when an award is
modified, cancelled or settled, the entity must obtain a fair value not only for the
modified award, but also for the original award, updated to the date of modification. If
the award had not been modified, there would have been no need to obtain a valuation
for the original award after the date of grant.
Any modification of a performance condition clearly has an impact on the ‘real’ value
of an award but it may have no direct effect on the value of the award for the purposes
of IFRS 2. As discussed at 6.2 to 6.4 above, this is because market vesting conditions and
non-vesting conditions are taken into account in valuing an award whereas non-market
vesting conditions are not. Accordingly, by implication, a change to a non-market
performance condition will not necessarily affect the expense recognised for the award
under IFRS 2.
For example, if an award is contingent upon sales of a given number of units and the
number of units required to be sold is decreased, the ‘real’ value of the award is clearly
increased. However, as the performance condition is a non-market condition, and
therefore not relevant to the original determination of the value of the award, there is
no incremental fair value required to be accounted for by IFRS 2. If the change in the
condition results in an increase in the estimated number of awards expected to vest, the
change of estimate will however give rise to an accounting charge (see 6.1 to 6.4 above).
If an award is modified by changing the service period, the situation is more complex. A
service condition does not of itself change the fair value of the award for the purposes of
IFRS 2, but a change in service period may indirectly change the life of the award, which
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is relevant to its value (see 8 below). Similar considerations apply where performance
conditions are modified in such a way as to alter the anticipated vesting date.
The valuation requirements relating to cancelled and settled awards are considered
further at 7.4 below.
7.3 Modification
When an award is modified, the entity must as a minimum recognise the cost of the
original award as if it had not been modified (i.e. at the original grant date fair value,
spread over the original vesting period, and subject to the original vesting conditions).
This applies unless the award does not vest because of failure to satisfy a vesting
condition (other than a market condition) that was specified at grant date. [IFRS 2.27, B42].
In addition, a further cost must be recognised for any modifications that increase the
fair value of the award. This additional cost is spread over the period from the date of
modification until the vesting date of the modified award, which might not be the same
as that of the original award. Where a modification is made after the original vesting
period has expired, and is subject to no further vesting conditions, any incremental fair
value should be recognised immediately. [IFRS 2.27, B42-43].
Whether a modification increases or decreases the fair value of an award is determined
as at the date of modification, as illustrated by Example 30.18. [IFRS 2.27, B42-44].
Example 30.18: Does a modification increase or decrease the value of an award?
At the beginning of year 1, an entity granted two executives, A and B, a number of options worth $100 each.
At the beginning of year 2, A’s options are modified such that they have a fair value of $85, their current fair
value being $80. This is treated as an increase in fair value of $5 (even though the modified award is worth
less than the original award when first granted). Therefore an additional $5 of expense would be recognised
in respect of A’s options.
At the beginning of year 3, B’s options are modified such that they have a fair value of $120, their current
fair value being $125. This is treated as a reduction in fair value of $5 (even though the modified award is
worth more than the original award when first granted). However, there is no change to the expense
recognised for B’s options as IFRS 2 requires the entity to recognise, as a minimum, the original grant date
fair value of the options (i.e. $100).
This treatment ensures that movements in the fair value of the original award are not reflected in the entity’s
profit or loss, consistent with the treatment of other equity instruments under IFRS.
IFRS 2 provides further detailed guidance on this requirement as discussed below.
7.3.1
&nbs
p; Modifications that increase the value of an award
7.3.1.A
Increase in fair value of equity instruments granted
If the modification increases the fair value of the equity instruments granted, (e.g. by
reducing the exercise price or changing the exercise period), the incremental fair value,
measured at the date of modification, must be recognised over the period from the date
of modification to the date of vesting for the modified instruments, as illustrated in
Example 30.19 below. [IFRS 2.B43(a), IG15, IG Example 7].
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Example 30.19: Award modified by repricing
At the beginning of year 1, an entity grants 100 share options to each of its 500 employees. Each grant is
conditional upon the employee remaining in service over the next three years. The entity estimates that the
fair value of each option is €15.
By the end of year 1, the entity’s share price has dropped, and the entity reprices its share options. The repriced
share options vest at the end of year 3. The entity estimates that, at the date of repricing, the fair value of each
of the original share options granted (i.e. before taking into account the repricing) is €5 and that the fair value
of each repriced share option is €8.
40 employees leave during year 1. The entity estimates that a further 70 employees will leave during years 2
and 3, so that there will be 390 employees at the end of year 3 (500 – 40 – 70).
During year 2, a further 35 employees leave, and the entity estimates that a further 30 employees will leave
during year 3, so that there will be 395 employees at the end of year 3 (500 – 40 – 35 – 30).
During year 3, 28 employees leave, and hence a total of 103 employees ceased employment during the
original three year vesting period, so that, for the remaining 397 employees, the original share options vest at
the end of year 3.
IFRS 2 requires the entity to recognise:
• the cost of the original award at grant date (€15 per option) over a three year vesting period beginning
at the start of year 1, plus
• the incremental fair value of the repriced options at repricing date (€3 per option, being the €8 fair value
of each repriced option less the €5 fair value of the original option) over a two year vesting period
beginning at the date of repricing (end of year 1).
This would be calculated as follows:
Cumulative
Expense for
Year Calculation of cumulative expense
expense (€)
period (€)
Original award (a)
Modified award (b)
(a+b)
1 390 employees × 100
options × €15 × 1/3
195,000
195,000
2 395 employees × 100
395 employees × 100
options × €15 × 2/3
options × €3 × 1/2
454,250
259,250
3 397 employees × 100
397 employees × 100
options × €15
options × €3
714,600
260,350
In effect, IFRS 2 treats the original award and the incremental value of the modified
award as if they were two separate awards.
A similar treatment to that in Example 30.19 above is adopted where the fair value of
an award subject to a market condition has its value increased by the removal or
mitigation of the market condition. [IFRS 2.B43(a), B43(c)]. Where a vesting condition
other than a market condition is changed, the treatment set out in 7.3.1.C below is
adopted. IFRS 2 does not specifically address the situation where the fair value of an
award is increased by the removal or mitigation of a non-vesting condition. It seems
appropriate, however, to account for this increase in the same way as for a
modification caused by the removal or mitigation of a market condition – i.e. as in
Example 30.19 above.
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7.3.1.B
Increase in number of equity instruments granted
If the modification increases the number of equity instruments granted, the fair value of
the additional instruments, measured at the date of modification, must be recognised
over the period from the date of modification to the date of vesting for the modified
instruments. If there is no further vesting period for the modified instruments, the
incremental cost should be recognised immediately. [IFRS 2.B43(b)].
7.3.1.C
Removal or mitigation of non-market vesting conditions
Where a vesting condition, other than a market condition, is modified in a manner that
is beneficial to the employee, the modified vesting condition should be taken into
account when applying the general requirements of IFRS 2 as discussed in 6.1 to 6.4
above – in other words, the entity would continuously estimate the number of awards
likely to vest and/or the vesting period. [IFRS 2.B43(c)]. This is consistent with the general
principle of IFRS 2 that vesting conditions, other than market conditions, are not taken
into account in the valuation of awards, but are reflected by recognising a cost for those
instruments that ultimately vest on achievement of those conditions. See also the
discussion at 7.2 above.
IFRS 2 does not provide an example that addresses this point specifically, but we assume
that the intended approach is as in Example 30.20 below. In this Example, the entity
modifies an award in a way that is beneficial to the employee even though the modification
does not result in any incremental fair value. The effect of the modification is therefore
recognised by basing the expense on the original grant date fair value of the awards and an
assessment of the extent to which the modified vesting conditions will be met.
Example 30.20: Modification of non-market performance condition in employee’s
favour
At the beginning of year 1, the entity grants 1,000 share options to each member of its sales team, with
exercise conditional upon the employee remaining in the entity’s employment for three years, and the team
selling more than 50,000 units of a particular product over the three year period. The fair value of the share
options is £15 per option at the date of grant.
At the end of year 1, the entity estimates that a total of 48,000 units will be sold, and accordingly records no
cost for the award in year 1.
During year 2, there is so severe a downturn in trading conditions that the entity believes that the sales target
is too demanding to have any motivational effect, and reduces the target to 30,000 units, which it believes is
achievable. It also expects 14 members of the sales team to remain in employment throughout the three year
performance period. It therefore records an expense in year 2 of £140,000 (£15 × 14 employees × 1,000
options × 2/3). This cost is based on the originally assessed value of the award (i.e. £15) since the performance
condition was never factored into the original valuation, such that any change in performance condition
likewise has no effect on the valuation and does not result in any incremental fair value.
By the end of year 3, the entity has sold 35,000 units, and the share options vest as the modified performance
condition has been met. Twelve members of the sales team have remained in service for th
e three year period.
The entity would therefore recognise a total cost of £180,000 (12 employees × 1,000 options × £15), giving
an additional cost in year 3 of £40,000 (total charge £180,000, less £140,000 charged in year 2).
The difference between the accounting consequences for different methods of enhancing
an award could cause confusion in some cases. For example, it may sometimes not be
clear whether an award has been modified by increasing the number of equity instruments
or by lowering the performance targets, as illustrated in Example 30.21.
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Example 30.21: Increase in number of equity instruments or modification of
vesting conditions?
An entity grants a performance-related award which provides for different numbers of options to vest after
3 years, depending on different performance targets as follows:
Profit growth
Number of options
5%-10% 100
10%-15% 200
over 15%
300
During the vesting period, the entity concludes that the criteria are too demanding and modifies them as follows:
Profit growth
Number of options
5%-10% 200
over 10%
300
This raises the issue of whether the entity has changed:
(a) the performance conditions for the vesting of 200 or 300 options; or
(b) the number of equity instruments awarded for achieving growth of 5%-10% or growth of over 10%.
In our view, the reality is that the change is to the performance conditions for the vesting of 200 or 300
options, and should therefore be dealt with as in 7.3.1.C, rather than 7.3.1.B, above. Suppose, however, that
the conditions had been modified as follows:
Profit growth
Number of options
5%-10% 200
10%-15% 300
over 15%
400
In that case, there has clearly been an increase in the number of equity instruments subject to an award for a
growth increase of over 15%, which would have to be accounted for as such (i.e. under 7.3.1.B, rather than
7.3.1.C, above). In such a case, it seems more appropriate also to deal with the changes to the lower bands as
changes to the number of shares awarded rather than as changes to the performance conditions.