Equity
Liability
€
€
€
€
€
€
Years 1-2
250
(250)
–
250
(250)
–
Modification date (beginning of
–
65 (65)
–
65 (65)
year 3)
Years
3-4
300
(185) (115)
300
(185) (115)
Totals
550
(370) (180)
550
(370) (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 €65 (€130 × 2/4 –
see 9.3.2 above). The full amount of this liability is recognised as a reduction in equity under both approaches
as the fair value of the modified award is lower than that of the original award. No gain is recognised for the
reduction in fair value consistent with the general principle in IFRS 2 that the cost recognised for an equity-
settled award must be at least the grant date fair value of the award.
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 (€180 – €65). During this period 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 remeasurement of the liability of €50 (€180 – €130) between modification date and
settlement date. The balance of €185 is credited to equity.
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 post-modification remeasurement of the liability of €50. This adjustment of €50 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).
Whilst the overall liability in Scenario C is the same as that in Scenario A above, the total expense and overall
net credit to equity are higher even though the cash-settled award had a lower fair value at the modification
date than that in Scenario A. This might appear illogical but is consistent with the approach in IG Example 9
and the requirement to recognise, as a minimum, the grant date fair value of the original equity-settled award
together with any post-modification change in the fair value of the liability.
D
Modified award with greater fair value than original award but settled for less than modification
date fair value
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 €125 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
–
85 (85)
10
75 (85)
(beginning of year 3)
Years
3-4
225
(185) (40)
215
(175) (40)
Totals
475
(350) (125)
475
(350) (125)
2662 Chapter 30
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
€40 in the fair value of the liability (€125 – €85). During this period, under Approach 1 it also recognises
employee costs totalling €225, 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 less a reduction of
€45 (€170 – €125) in the fair value of the liability since modification 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 €475, 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 less the post-modification
remeasurement of the liability of €45. This remeasurement adjustment of €45 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).
E
Modified award with same fair value as original award but where modification date fair value is
higher than original grant date fair value
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 of the award at
that date on both an equity-settled
basis and a cash-settled basis is €800. The liability is actually settled for
€700 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
– 400 (400)
– 400 (400)
(beginning of year 3)
Years 3-4
300
–
(300)
300
–
(300)
Totals 550
150
(700)
550
150
(700)
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 €400 (€800 × 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.
Share-based
payment
2663
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 a net increase of
€300 in the fair value of the liability (€700 – €400). During this period it also recognises employee costs
totalling €300, being the remaining modification date fair value of the cash-settled award (€800 × 2/4) plus
the post-modification remeasurement of the liability of €(100) (€800 – €700).
In total the entity recognises an expense of €550. This expense reflects three components: firstly, half of the
grant date fair value of the original equity-settled award and, secondly, half of the modification date fair value
of the cash-settled award. As the award had increased in value between grant date and modification date, the
requirement of paragraph 27 of IFRS 2 to recognise, as a minimum, the original grant date fair value of the
equity-settled award (€250 for the portion of the vesting period prior to modification) has been met. The third
component of the overall expense, in accordance with the requirements for cash-settled share-based
payments, is the €(100) remeasurement of the liability between modification and settlement. In our view, this
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).
Some take the view that the approach in IG Example 9 would lead to a total expense of €400 in the example
above, rather than €550 (being the original grant date fair value of €500 plus the remeasurement of the liability
of €(100) in the period following the modification). The difference of €150 would be debited to equity in the
two years following modification. In other words, in recognising an expense for the cash-settled award during
the vesting period after the modification date, no account is taken of the fact that the fair value of the
arrangement increased between the original grant date and the modification date.
IG Example 9 illustrates a situation where there is a decrease in the fair value between original grant date and
modification date. As a result, that Example expenses the grant date fair value of the original equity-settled
award (plus the remeasurement of the liability) in order to meet the minimum expense requirements of
paragraph 27 of IFRS 2. In a situation such as that outlined in Scenario E above, it does not seem appropriate,
in our view, to limit the post-modification expense for the cash-settled award to an amount based on the
original grant date fair value of the equity-settled award (€150) rather than applying cash-settled accounting
to the element of the award for which services are delivered in years 3 and 4 and recognising a corresponding
expense of €300.
9.4.2
Cash-settled award modified to equity-settled award
IFRS 2 (as amended for accounting periods beginning on or after 1 January 2018)
provides guidance in situations where the terms and conditions of a cash-settled award
are modified so that it becomes equity-settled.
Subject to transitional provisions (see 16.2 below), the amendment applies only to
modifications that occur on or after the date that an entity first applies the amendment.
Prior to this amendment, IFRS 2 did not contain specific guidance for modifications
from cash-settlement to equity-settlement and there was diversity in the accounting
treatment seen in practice (see International GAAP 2018 for a detailed discussion). In
our view, an entity with an existing accounting policy could continue to apply that
policy to modifications made prior to the date of adopting the amendment, but other
entities should apply the requirements of the amended standard.
2664 Chapter 30
Following amendment, Appendix B to IFRS 2 states that if a cash-settled transaction is
modified so that it becomes equity-settled, the transaction will be accounted for as such
from the date of the modification and specifically:
• the equity-settled share-based payment transaction is measured by reference to
the modification date fair value of the equity instruments granted at that date;
• the equity-settled share-based payment transaction is recognised in equity on the
modification date to the extent to which goods or services have been received;
• the liability for the cash-settled share-based payment transaction as at the
modification date is derecognised on that date; and
• any difference between the carrying amount of the liability derecognised and the
amount recognised in equity on the modification date is recognised immediately
in profit or loss. [IFRS 2.B44A].
If the vesting period is extended or shortened as a result of the modification, the
modified vesting period is reflected in applying the requirements above. The
amendment also clarifies that these requirements apply even if the modification takes
place after the vesting period. [IFRS 2.B44B].
The amended standard further clarifies that the above requirements apply if a cash-
settled share-based payment is cancelled or settled (other than by forfeiture when
vesting conditions are not satisfied) and equity instruments are designated as a
replacement for the cancelled or settled share-based payment. In order to qualify as a
replacement, the equity instruments must be designated as such on the grant date.
[IFRS 2.B44C].
The IASB notes in the Basis for Conclusions that the immediate recognition in profit or
loss of any difference between the derecognised liability and the amount recognised in
equity is consistent with how cash-settled share-based payments are measured in
accordance wi
th paragraph 30 of IFRS 2. It also observes that the approach is consistent
with the requirements for the extinguishment of a financial liability (fully or partially by
the issue of equity instruments) in IFRS 9 and in IFRIC 19 – Extinguishing Financial
Liabilities with Equity Instruments. [IFRS 2.BC237H].
IG Example 12C has been added to the implementation guidance in IFRS 2 and forms
the basis of Example 30.40 below. [IFRS 2 IG Example 12C].
Example 30.40: Modification of cash-settled award to equity-settled award
At the beginning of year 1 an entity grants 100 cash-settled share appreciation rights (SARs) to each of
100 employees on condition that they remain in the entity’s service for four years.
At the end of year 1 each SAR has an estimated fair value of €10 and at the end of year 2 €12.
At the end of year 2 the entity cancels the SARs and, in their place, grants 100 share options to each employee
on condition that each remains in service for the next two years, i.e. the original service period is unchanged.
At the date of grant, the fair value of each share option is €13.20. All of the employees are expected to meet
the service condition.
In years 1 and 2 the entity recognises a cash-settled share-based payment expense of €25,000 and
€35,000 respectively, based on the fair value of the SARs at each reporting date and the extent to which
the vesting period has been completed. At the modification date, the requirements of paragraph B44A
are applied as follows:
Share-based
payment
2665
€ €
Modification date (end of year 2)
Equity
66,000
Liability
60,000
Profit or loss
6,000
The entity compares the fair value of the equity award, measured as at the date of modification, of
€66,000 (€132,000 × 2/4) with the fair value of the liability for the cash-settled award of €60,000 (€120,000 × 2/4)
at the same date. The difference of €6,000 is recognised immediately in profit or loss.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 531
