after 1 January 2018), IFRS 2 provided no explicit guidance on such modifications. As a
result of the lack of guidance and resultant diversity in accounting practice, the IASB
amended IFRS 2 to clarify the accounting treatment of modifications that change the
classification of an award from cash-settled to equity-settled (see 9.4.2 below).
There remains no explicit guidance for modifications that change an award from being
equity-settled to being cash-settled. As part of the discussions relating to the amended
guidance for modifications from cash-settled to equity-settled, the IASB considered, but
rejected, suggestions that additional examples be added to the implementation guidance
to illustrate other types of modification, including equity-settled to cash-settled (see
further discussion at 9.4.1 below).
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In order to develop the suggested accounting approaches discussed at 9.4.1 below we
have used the provisions of IFRS 2 in respect of:
• the modification of equity-settled awards during the vesting period (see 7.3 above);
• the addition of a cash-settlement alternative to an equity-settled award after grant
date, as illustrated by IG Example 9 in the implementation guidance to IFRS 2
(see 10.1.4 below); and
• the settlement of equity-settled awards in cash (see 7.4 above).
As noted at 10.2.3 below, the accounting in this section also applies where an entity with
a choice of settlement in equity or cash switches between settlement methods.
9.4.1
Equity-settled award modified to cash-settled award
This section focuses on accounting for a change of settlement method rather than on
the accounting treatment of other modifications to an equity-settled award that might
be made at the same time as the change of settlement method (see 7.3 above).
Drawing on the principles within the guidance referred to at 9.4 above, we suggest that
entities generally select one of the two approaches discussed below to account for the
modification of an award from equity-settled to cash-settled during the vesting period.
The first approach is based more closely on the IFRS 2 treatment for the modification
of an equity-settled award (see 7.3 above) and the second on that for the repurchase or
settlement in cash of an equity instrument (see 7.4 above).
Both approaches take into account IG Example 9 in the implementation guidance to
IFRS 2 (see 10.1.4 below) which shows the recognition of an expense when the cash-
settlement alternative is remeasured in the period following modification, in addition to
an expense for the full grant date fair value of the equity-settled arrangement. Although
this Example reflects a choice of settlement by the counterparty, rather than the
elimination of a method of settlement (as is the case in a modification from equity-
settlement to cash-settlement), we believe that an analogy may be drawn between the
two situations because the addition of a cash alternative for the counterparty effectively
results in the award being treated as cash-settled from the date of modification.
The two approaches are discussed in more detail below and illustrated in Example 30.39.
In our view, either approach is acceptable in the absence of clear guidance in IFRS 2 but
the choice of approach should be applied consistently to all such modifications.
Both approaches require the recognition, as a minimum, of an IFRS 2 expense which
comprises the following elements:
• the grant date fair value of the original equity-settled award (see 7.3 above); plus
• any incremental fair value arising from the modification of that award (see 7.1
above); plus
• any remeasurement of the liability between its fair value at the modification date
and the amount finally settled (see 10.1.4 below).
Over the vesting period as a whole, both approaches result in the same total IFRS 2
expense and the same liability/cash settlement amount. Under both approaches, the net
overall difference between the expense and the cash settlement amount is an
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adjustment to equity. However, the timing of recognition of any incremental fair value
arising on modification will differ under the two approaches, as explained below.
Approach 1
• At the date of modification a liability is recognised based on the fair value of the cash-
settled award as at that date and the extent to which the vesting period has expired.
• The entire corresponding debit is taken to equity. Any incremental fair value of the
cash-settled award over that of the equity-settled award as at the modification date will
be expensed over the period from the date of modification to the date of settlement of
the cash-settled award (i.e. no expense is recognised at the date of modification).
• The total fair value of the cash-settled award is remeasured through profit or loss
on an ongoing basis between the date of modification and the date of settlement.
As Approach 1 is based on the accounting treatment for a modification of an equity-
settled award, no incremental fair value is recognised as an expense at the modification
date. This means that, in cases where the fair value of the modified award is higher at
the date of modification than that of the original award, the reduction in equity at the
date of modification will be higher than the proportionate fair value at that date of the
original equity-settled award. This situation reverses over the remainder of the vesting
period when an expense (and corresponding credit to equity) will be recognised for the
incremental fair value of the modified award.
Approach 2
• As for Approach 1, at the date of modification a liability is recognised based on the
fair value of the cash-settled award as at that date and the extent to which the
vesting period has expired.
• Unlike Approach 1, the corresponding debit is taken to equity only to the extent of
the fair value of the original equity-settled award as at the date of modification.
Any incremental fair value of the cash-settled award over the equity-settled award
as at the modification date is expensed immediately on modification to the extent
that the vesting period has expired. The remainder of any incremental value is
expensed over the period from the date of modification to the date of settlement.
• As for Approach 1, the total fair value of the cash-settled award is remeasured
through profit or loss on an ongoing basis between the date of modification and
the date of settlement.
Approach 2 is based on the accounting treatment for the repurchase of an equity
instrument where a reduction in equity up to the fair value of the equity instrument is
recognised as at the date of repurchase with any incremental fair value of the repurchase
arrangement being treated as an expense. Whilst Approach 2 avoids the potential
problem of an immediate reduction in equity in excess of the fair value of the equity-
settled award, its settlement approach could be seen as diverging from the basic IFRS 2
treatment for the modification of an equity-settled award where none of the
incremental fair value arising on a modification is expensed at the date of modification.
As noted at th
e start of this section, the two approaches outlined above are based on the
specific principles referred to at 9.4 above. In the absence of clear guidance in the
standard, other interpretations of the appropriate expense and equity adjustment are
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also possible, although these will sometimes result in a higher expense through profit or
loss than the two approaches above. For example, in relation to the cash-settled award,
the approaches outlined above expense only the difference between the final
settlement amount and the full fair value of the liability at the modification date, with
the remainder adjusted through equity. An alternative view follows the accounting
treatment for cash-settled awards which would lead to the recognition of an expense
for the entire remeasurement of the liability from the amount recognised for a part-
vested award at modification date to the amount finally settled.
As noted at 9.4 above, the IASB decided that existing implementation guidance in
IFRS 2 could be applied by analogy to other types of modification. As an example of
this, it states that IG Example 9 illustrates a grant of shares to which a cash settlement
alternative is subsequently added. [IFRS 2.BC237K]. The approach in IG Example 9 has
been considered within our two suggested accounting approaches and is also discussed
further in the context of Example 30.39 below.
Example 30.39: Modification of equity-settled award to cash-settled award
A
Modified award with same fair value as original award
At the beginning of year 1 an entity granted an equity-settled award, with a fair value at that date of €500,
and vesting if the employee is still in service at the end of year 4. At the beginning of year 3, the award is
modified so as to become cash-settled, but its terms are otherwise unchanged. The fair value at that date of
both alternatives is €150. The liability is actually settled for €180 at the end of year 4.
Approach 1
Approach 2
Expense
Equity
Liability
Expense
Equity
Liability
€
€
€
€
€
€
Years 1-2
250
(250)
–
250
(250)
–
Modification date (beginning of
– 75
(75)
– 75
(75)
year 3)
Years 3-4
280
(175)
(105)
280
(175)
(105)
Totals 530
(350)
(180)
530
(350)
(180)
During years 1 and 2 the entity recognises a cumulative expense of €250, being the proportion of the grant
date fair value of the equity-settled award of €500 attributable to 2/4 of the vesting period.
At modification date (beginning of year 3), it is necessary to recognise a liability of €75 (€150 × 2/4 – see 9.3.2
above). The full amount of this liability is recognised as a reduction in equity under both approaches as there is
no difference between the fair value of the original and modified awards as at the modification date.
As the award is continuing, there is no acceleration at the modification date of the as yet unrecognised amount
of the grant date fair value of the original award (€250, being €500 × 2/4), as would occur in an immediate
settlement (see 7.4 above).
During years 3 and 4 (the period from modification to settlement date), the entity recognises an increase of
€105 in the fair value of the liability (€180 – €75). During this period it also recognises employee costs
totalling €280, being the remaining grant date fair value of €250 (€500 total less €250 expensed prior to
modification) plus the post-modification remeasurement of the liability of €30 (€180 – €150). The balance of
€175 is credited to equity.
In total the entity recognises an expense of €530, being the original grant date fair value of the equity-settled
award of €500 plus the post-modification remeasurement of the liability of €30. This adjustment of €30 is
consistent with the approach taken in IG Example 9 in the implementation guidance to IFRS 2 (see 10.1.4
and Example 30.42 below).
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In Scenario A the modification date fair value is lower than the grant date fair value. Scenario E below
considers a situation where the awards have the same fair value as at the date of modification but this fair
value is higher than the original grant date fair value of the equity-settled award.
B
Modified award with greater fair value than original award
At the beginning of year 1 an entity granted an equity-settled award, with a fair value at that date of €500,
and vesting if the employee is still in service at the end of year 4. At the beginning of year 3, the award is
modified so as to become cash-settled, with other modifications meaning that the new award has a higher fair
value than the original award. At that date, the fair value of the original award is €150, but that of the cash-
settled replacement award is €170. The liability is actually settled for €200 at the end of year 4.
Approach 1
Approach 2
Expense
Equity
Liability
Expense
Equity
Liability
€
€
€
€
€
€
Years
1-2
250 (250) –
250 (250) –
Modification date (beginning of
–
85 (85)
10
75 (85)
year 3)
Years
3-4
300
(185) (115)
290
(175) (115)
Totals
550
(350) (200)
550
(350) (200)
During years 1 and 2 the entity recognises a cumulative expense of €250, being the proportion of the grant
date fair value of the equity-settled award of €500 attributable to 2/4 of the vesting period.
At modification date (beginning of year 3), it is necessary to recognise a liability of €85 (€170 × 2/4 –
see 9.3.2 above). Under Approach 1 the difference between the fair value of the original equity-settled award
and the modified award (€20 in total) is not recognised immediately as an expense but is spread over the
remainder of the vesting period (i.e. starting from the date of modification). The liability of €85 is therefore
recognised as a reduction in equity. Under Approach 2, the difference between the fair value of the original
equity-settled award and the modified award is expensed immediately to the extent that the vesting period
has already expired (€20 × 2/4) with the remainder being expensed in the post-modification period.
As the award is continuing, there is no acceleration at the modification date of the as yet unrecognised amount
of the grant date fair value of the original award (€250, being €500 × 2/4) as would occur in an immediate
settlement (see 7.4 above).
During years 3 and 4 (the period from modification to settlement date), the entity recognises an increase of
€115 in the fair value of the liability (€200 – €85). During this period, under Approach 1 it also recognises
employee costs totalling €300, being the remaining grant date fair value of €250 (€500 total less €250
expensed prior to modification) plus the incremental modification fair value of €20 (€170 – €150) plus the
remeasurement of the liability of €30 (€200 – €170) between modification date and settlement date. The
balance of €185 is credited to equity. For Approach 2, the expense and the credit to equity during this period
are €10 less than under Approach 1 because a proportionate amount of the incremental fair value was
expensed immediately at the modification date.
In total the entity recognises an expense of €550, being the original grant date fair value of the equity-
settled award of €500 plus the incremental fair value of €20 arising on modification of the award plus the
post-modification remeasurement of the liability of €30. This remeasurement adjustment of €30 is
consistent with the approach taken in IG Example 9 in the implementation guidance to IFRS 2 (see 10.1.4
and Example 30.42 below).
C
Modified award with lower fair value than original award
At the beginning of year 1 an entity granted an equity-settled award, with a fair value at that date of €500,
and vesting if the employee is still in service at the end of year 4. At the beginning of year 3, the award is
modified so as to become cash-settled, with other modifications meaning that the new award has a lower fair
value than the original award. At that date, the fair value of the original award is €150, but that of the cash-
settled replacement award is €130. The liability is actually settled for €180 at the end of year 4.
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Approach 1
Approach 2
Expense
Equity
Liability
Expense
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 530
