International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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The remainder of the equity-settled share-based payment, as measured at the modification date, is recognised
in profit or loss during years 3 and 4 i.e. an expense of €33,000 in each of the two years.
10
TRANSACTIONS WITH EQUITY AND CASH
ALTERNATIVES
It is common for share-based payment transactions (particularly those with employees)
to provide either the entity or the counterparty with the choice of settling the
transaction either in shares (or other equity instruments) or in cash (or other assets). The
general principle of IFRS 2 is that a transaction with a cash alternative, or the
components of that transaction, should be accounted for:
(a) as a cash-settled transaction if, and to the extent that, the entity has incurred a
liability to settle in cash or other assets; or
(b) as an equity-settled transaction if, and to the extent that, no such liability has been
incurred. [IFRS 2.34].
More detailed guidance is provided as to how that general principle should be applied
to transactions:
• where the counterparty has choice of settlement (see 10.1 below); and
• where the entity has choice of settlement (see 10.2 below).
Some specific types of arrangement that include cash and equity alternatives, either as
a matter of choice or depending on the outcome of certain events are covered
elsewhere in this chapter, as outlined below.
A common type of arrangement seen in practice is the ‘matching’ award or deferred
bonus arrangement where an employee is offered a share award or a cash alternative to
‘match’ a share award or a cash bonus earned during an initial period. This type of
arrangement is addressed at 15.1 below.
Rather than providing either the entity or the counterparty with a choice between
settlement in equity or in cash, some transactions offer no choice but instead require
an arrangement that will generally be equity-settled to be settled in cash in certain
specific and limited circumstances (awards with contingent cash settlement). There
will also be situations where there is contingent settlement in equity of an award that
is otherwise cash-settled. These types of arrangement are considered in more detail
at 10.3 below.
Some awards offer an equity alternative and a cash alternative where the cash
alternative is not based on the price or value of the equity instruments. These
arrangements are considered at 10.4 below.
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10.1 Transactions where the counterparty has choice of settlement in
equity or in cash
Where the counterparty has the right to elect for settlement in either shares or cash,
IFRS 2 regards the transaction as a compound transaction to which split accounting
must be applied. The general principle is that the transaction must be analysed into a
liability component (the counterparty’s right to demand settlement in cash) and an
equity component (the counterparty’s right to demand settlement in shares). [IFRS 2.35].
Once split, the two components are accounted for separately. The methodology of split
accounting required by IFRS 2 is somewhat different from that required by IAS 32 for
issuers of other compound instruments (see Chapter 43 at 6).
A practical issue is that, where a transaction gives the counterparty a choice of
settlement, it will be necessary to establish a fair value for the liability component both
at grant date and at each subsequent reporting date until settlement. By contrast, in the
case of transactions that can be settled in cash only, a fair value is not generally required
at grant date for IFRS 2 accounting purposes, but a fair value is required at each
subsequent reporting date until settlement (see 9 above). However, for entities subject
to IAS 33, the grant date fair value is required in order to make the disclosures required
by that standard – see Chapter 33 at 6.4.2.
We consider in more detail at 10.1.1 to 10.1.3 below the accounting treatment required
by IFRS 2 for transactions where the counterparty has a settlement choice. In addition,
the following specific situations are discussed:
• the addition of a cash-settlement alternative after the grant date (see 10.1.4 below);
• arrangements where the counterparty is given a choice to cover more or less
remote contingencies e.g. restrictions or limits on the issue of shares in a particular
jurisdiction (see 10.1.5 below); and
• the issue of convertible bonds in return for goods or services (see 10.1.6 below).
10.1.1
Transactions in which the fair value is measured directly
Transactions with non-employees are normally measured by reference to the fair value
of goods and services supplied at service date (i.e. the date at which the goods or
services are supplied) – see 4 and 5 above.
Accordingly where an entity enters into such a transaction where the counterparty has
choice of settlement, it determines the fair value of the liability component at service
date. The equity component is the difference between the fair value (at service date) of
the goods or services received and the fair value of the liability component. [IFRS 2.35].
10.1.2
Transactions in which the fair value is measured indirectly –
including transactions with employees
All other transactions, including those with employees, are measured by reference to
the fair value of the instruments issued at ‘measurement date’, being grant date in the
case of transactions with employees and service date in the case of transactions with
non-employees [IFRS 2 Appendix A] – see 4.1 and 5.1 above.
Share-based
payment
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The fair value should take into account the terms and conditions on which the rights to
cash or equity instruments were issued. [IFRS 2.36]. IFRS 2 does not elaborate further on
this, but we assume that the IASB intends a reporting entity to apply:
• as regards the equity component of the transaction, the provisions of IFRS 2
relating to the impact of terms and conditions on the valuation of equity-settled
transactions (see 4 to 6 above); and
• as regards the liability component of the transaction, the provisions of IFRS 2
relating to the impact of terms and conditions on the valuation of cash-settled
transactions (see 9.3 above).
The entity should first measure the fair value of the liability component and then that
of the equity component. The fair value of the equity component must be reduced to
take into account the fact that the counterparty must forfeit the right to receive cash in
order to receive shares. The sum of the two components is the fair value of the whole
compound instrument. [IFRS 2.37]. IG Example 13 in IFRS 2 (the substance of which is
reproduced as Example 30.41 below) suggests that this may be done by establishing the
fair value of the equity alternative and subtracting from it the fair value of the liability
component. This approach may be appropriate in a straightforward situation involving
ordinary shares and cash, as illustrated in the Example in the implementation guidance,
but will not necessarily be appropriate in more complex situations that include, for
example, the likelihood of options being exercised.
I
n many share-based payment transactions with a choice of settlement, the value to the
counterparty of the share and cash alternatives is equal. The counterparty will have the
choice between (say) 1,000 shares or the cash value of 1,000 shares. This will mean that
the fair value of the liability component is equal to that of the transaction as a whole, so
that the fair value of the equity component is zero. In other words, the transaction is
accounted for as if it were a cash-settled transaction.
However, in some jurisdictions it is not uncommon, particularly in transactions with
employees, for the equity-settlement alternative to have more value (as in
Example 30.41 below). For example, an employee might be able to choose at vesting
between the cash value of 1,000 shares immediately or 2,000 shares (often subject to
further conditions such as a minimum holding period, or a further service period). In
such cases the equity component will have an independent value. [IFRS 2.37]. Such
schemes are discussed in more detail in Examples 30.63 and 30.64 at 15.1 below.
10.1.3 Accounting
treatment
10.1.3.A
During vesting period
Having established a fair value for the liability and equity components as set out in 10.1.1
and 10.1.2 above, the entity accounts for the liability component according to the rules
for cash-settled transactions (see 9 above) and for the equity component according to
the rules for equity-settled transactions (see 4 to 8 above). [IFRS 2.38].
Example 30.41 below illustrates the accounting treatment for a transaction with an
employee (as summarised in 10.1.2 above) where the equity component has a fair value
independent of the liability component.
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Example 30.41: Award with employee choice of settlement with different fair
values for cash-settlement and equity-settlement
An entity grants to an employee an award with the right to choose settlement in either:
• 1,000 phantom shares, i.e. a right to a cash payment equal to the value of 1,000 shares, or
• 1,200 shares.
Vesting is conditional upon the completion of three years’ service. If the employee chooses the share
alternative, the shares must be held for three years after vesting date.
At grant date, the entity estimates that the fair value of the share alternative, after taking into account the
effects of the post-vesting transfer restrictions, is €48 per share. The fair value of the cash alternative is
estimated as:
€
Grant date
50
Year 1
52
Year 2
55
Year 3
60
The grant date fair value of the equity alternative is €57,600 (1,200 shares × €48). The grant date fair value
of the cash alternative is €50,000 (1,000 phantom shares × €50). Therefore the fair value of the equity
component excluding the right to receive cash is €7,600 (€57,600 – €50,000). The entity recognises a cost
based on the following amounts.
Equity component
Liability component
Calculation of Cumulative Expense for
Calculation of Cumulative Expense for
Year cumulative expense expense (€)
year (€)
cumulative expense
expense (€)
year (€)
1 €7,600 × 1/3
2,533
2,533
1,000 phantoms ×
17,333 17,333
€52 × 1/3
2 €7,600 × 2/3
5,066
2,533
1,000 phantoms ×
36,667 19,334
€55 × 2/3
3 €7,600
7,600
2,534
1,000
phantoms
×
60,000 23,333
€60
This generates the following accounting entries.
€
€
Year 1
Profit or loss (employment costs)
19,866
Liability 17,333
Equity 2,533
€
€
Year 2
Profit or loss (employment costs)
21,867
Liability 19,334
Equity 2,533
Year 3
Profit or loss (employment costs)
25,867
Liability 23,333
Equity 2,534
The above Example is based on IG Example 13 in IFRS 2, in which the share price at
each reporting date is treated as the fair value of the cash alternative. As discussed more
Share-based
payment
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fully at 9 above, the fair value of a cash award is not necessarily exactly the same as the
share price as it will depend on the terms and conditions of the award (see 9.3.2 above).
Accordingly, in adapting IG Example 13 as Example 30.41 above, we have deliberately
described the numbers used in respect of the liability component as ‘fair value’ and not
as the ‘share price’. [IFRS 2 IG Example 13].
Example 30.41 also ignores the fact that transactions of this type often have different
vesting periods for the two settlement alternatives. For instance, the employee might
have been offered:
(a) the cash equivalent of 1,000 shares in three years’ time subject to performance
conditions; or
(b) subject to the performance criteria in (a) above being met over three years,
3,000 shares after a further two years’ service.
IFRS 2 offers no guidance as to how such transactions are to be accounted for.
Presumably, however, the equity component would be recognised over a five year
period and the liability component over a three year period. This is considered further
in the discussion of ‘matching’ share awards at 15.1 below.
10.1.3.B Settlement
At the date of settlement, the liability component is restated to fair value through profit
or loss. If the counterparty elects for settlement in equity, the restated liability is
transferred to equity as consideration for the equity instruments issued. If the liability is
settled in cash, the cash is obviously applied to reduce the liability. [IFRS 2.39-40]. In other
words, if the transaction in Example 30.41 above had been settled in shares the
accounting entry would have been:
€
€
Liability* 60,000
Equity† 60,000
*
There is no need to remeasure the liability in this case as it has already been stated at fair value at vesting
date, which is the same as settlement date.
†
The precise allocation of this amount within equity, and its impact on distributable reserves, will depend
on a number of factors, including jurisdictional legal requirements, which are not discussed here.
If the transaction had been settled in cash the entry would simply have been:
€
€
Liability 60,000
Cash 60,000
If the transaction is settled in cash, any amount taken to equity during the vesting period
(€7,600 in Example 30.41 above) is not adjusted. However, the entity may transfer it
from one component of equity to another (see 4.2 above). [IFRS 2.40].
10.1.4
Transactions with cash-settlement alternative for em
ployee
introduced after grant date
Such transactions are not specifically addressed in the main body of IFRS 2. However,
IG Example 9 in the implementation guidance does address this issue, in the context of
the rules for the modification of awards (discussed at 7.3 and 9.4 above). The substance
of this example is reproduced as Example 30.42 below. [IFRS 2 IG Example 9].
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Example 30.42: Award with employee cash-settlement alternative introduced
after grant
At the beginning of year 1, the entity grants 10,000 shares with a fair value of $33 per share to a senior
executive, conditional upon the completion of three years’ service. By the end of year 2, the fair value of
the award has dropped to $25 per share. At that date, the entity adds a cash alternative to the grant, whereby
the executive can choose whether to receive 10,000 shares or cash equal to the value of 10,000 shares on
vesting date. The share price is $22 on vesting. The implementation guidance to IFRS 2 proposes the
following approach.
For the first two years, the entity would recognise an expense of $110,000 per year, (representing
10,000 shares × $33 × 1/3), giving rise to the cumulative accounting entry by the end of year 2:
$
$
Profit or loss (employee costs)
220,000
Equity 220,000
The addition of a cash alternative at the end of year 2 constitutes a modification of the award, but does
not increase the fair value of the award at the date of modification, which under either settlement
alternative is $250,000 (10,000 shares × $25), excluding the effect of the non-market vesting condition
as required by IFRS 2.
The fact that the employee now has the right to be paid in cash requires the ‘split accounting’ treatment set
out in 10.1.2 above. Because of the requirement, under the rules for modification of awards (see 7.3 above),
to recognise at least the grant date fair value of the original award, a minimum fair value of $330,000 has to
be recognised over the vesting period.
At the modification date, a liability of $166,667 (representing 2/3 of the $250,000 fair value of the liability