rendered two years’ service.
The replacement awards require one year of post-combination service. Because employees have already
rendered two years of service, the total vesting period is three years. The portion attributable to pre-
combination services equals the fair value of the award of Entity B being replaced (€1 million) multiplied by
the ratio of the pre-combination vesting period (two years) to the greater of the total vesting period (three
years) or the original vesting period of Entity B’s award (four years). Thus, €0.5 million (€1.0 million ×
2/4 years) is attributable to pre-combination service and therefore included in the consideration transferred
for the acquiree. The remaining €0.5 million is attributable to post-combination service and therefore
recognised as remuneration cost in Entity A’s post-combination financial statements, over the remaining one
year vesting period.
11.2.2
Acquiree awards that the acquirer is not ‘obliged’ to replace
IFRS 3 notes that, in some situations, acquiree awards may expire as a consequence of
a business combination. In such a situation, the acquirer might decide to replace those
awards even though it is not obliged to do so. It might also be the case that the acquirer
decides voluntarily to replace awards that would not expire and which it is not
otherwise obliged to replace.
Under IFRS 3 there is no difference in the basic approach to accounting for a
replacement award that the acquirer is obliged to make and one that it makes on a
voluntary basis (i.e. the approach is as set out at 11.2.1 above). In other words, the
accounting is based on the fair value of the replacement award at the date of acquisition,
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with an apportionment of that amount between the cost of acquisition and post-
acquisition employment expense.
However, in situations where the acquiree awards would expire as a consequence of
the business combination if they were not voluntarily replaced by the acquirer, none of
the fair value of the replacement awards is treated as part of the consideration
transferred for the business (and therefore included in the computation of goodwill), but
the full amount is instead recognised as a remuneration cost in the post-combination
financial statements. The IASB explains that this is because the new award by the
acquirer can only be for future services to be provided by the employee as the acquirer
has no obligation to the employee in respect of past services. [IFRS 3.B56, BC311B].
11.2.3
Accounting for changes in vesting assumptions after the acquisition
date
Whilst the requirements outlined at 11.2.1 above to reflect changes in assumptions
relating to the post-acquisition portion of an award through post-combination
remuneration appear consistent with the general principles of IFRS 2 and IFRS 3, the
application of the requirements to the pre-combination portion is less straightforward.
Paragraph B60 of IFRS 3 appears to require all changes to both the pre- and post-
combination portions of the award to be reflected in post-combination remuneration
expense. [IFRS 3.B60]. This could lead to significant volatility in post-combination profit
or loss as a consequence of forfeitures, or other changes in estimates, relating to awards
accounted for as part of the consideration for the business combination.
A second approach relies on a combination of paragraphs B60 and B63(d). Whilst
paragraph B60 is clear that no adjustment can be made to the purchase consideration,
paragraph B63(d) refers to IFRS 2 providing ‘guidance on subsequent measurement and
accounting for the portion of replacement share-based payment awards ... that is
attributable to employees’ future services’ (emphasis added). [IFRS 3.B60, B63(d)].
Supporters of this view therefore argue that the remeasurement requirements of
paragraph B60 apply only to the portion of the replacement award that is attributed to
future service and that the award should be split into two parts:
• a pre-combination element that is treated as if it were vested at the acquisition
date and then accounted for in the same way as other contingent consideration
settled in equity; and
• a post-combination portion that is treated as a new award and reflects only the
employees’ post-combination service.
A third approach is based on the guidance in paragraph B59 of IFRS 3 which states that
‘the acquirer attributes any excess of the market-based measure of the replacement
award over the market-based measure of the acquiree award to post-combination
service and recognises that excess as remuneration cost in the post-combination
financial statements’. [IFRS 3.B59]. As for the second approach above, the pre-
combination element is considered to be fixed and cannot be reversed. However, any
subsequent changes in assumptions that give rise to an incremental expense over the
amount recognised as pre-combination service should be recognised as part of the post-
combination remuneration expense.
Share-based
payment
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Whilst the second and third approaches above are more consistent with the general
requirement under IFRS 2 that vested awards should not be adjusted, the first approach,
based on paragraph B60, is arguably the most obvious reading of IFRS 3. In the absence
of clear guidance in the standard, we believe that an entity may make an accounting
policy choice between the three approaches but, once chosen, the policy should be
applied consistently.
The three approaches are illustrated in Example 30.49 below.
Example 30.49: Accounting for post-acquisition changes in estimates relating to
replacement awards
Entity A grants an award of 1,000 shares to each of two employees. The award will vest after three years
provided the employees remain in service. At the end of year 2, Entity A is acquired by Entity B which
replaces the award with one over its own shares but otherwise on the same terms. The fair value of each share
at the date of acquisition is €1. At this date, Entity B estimates that one of the two employees will leave
employment before the end of the remaining one year service period.
At the date of acquisition, Entity B recognises €667 (1 employee × 1,000 shares × €1 × 2/3) as part of the
consideration for the business combination and expects to recognise a further €333 as an expense through
post-acquisition profit or loss (1 × 1,000 × €1 × 1/3).
However, if the estimates made as at the date of the acquisition prove to be inaccurate and either both
employees leave employment during year 3, or both remain in employment until the vesting date, there are
three alternative approaches to the accounting as explained above:
• Approach 1 – all changes in estimates are reflected in post-acquisition profit or loss (drawing on
paragraph B60 of IFRS 3);
• Approach 2 – changes to the estimates that affect the amount recognised as part of the purchase
consideration are not adjusted for and changes affecting the post-acquisition assumptions are adjusted
through post-acquisition profit or loss (drawing on paragraph B63(d) of IFRS 3); or
• Approach 3 – the amount attributable to pre-combination service, and treated
as part of the business
combination, is fixed and cannot be reversed. However, any changes in assumptions that give rise to an
additional cumulative expense are reflected through post-acquisition profit or loss (drawing on
paragraph B59 of IFRS 3).
Using the fact pattern above, and assuming that both employees leave employment in the post-acquisition period,
the three alternative approaches would give rise to the following entries in accounting for the forfeitures:
• Approach 1 – a credit of €667 to post-acquisition profit or loss to reflect the reversal of the amount
charged to the business combination. In addition to this, any additional expense that had been recognised
in the post-acquisition period would be reversed.
• Approaches 2 and 3 – the reversal through post-acquisition profit or loss of any additional expense that
had been recognised in the post-acquisition period.
If, instead, both employees remained in employment in the post-acquisition period and both awards vested,
the three alternative approaches would give rise to the following entries:
• Approach 1 – an expense of €1,333 through post-acquisition profit or loss to reflect the remaining €333
fair value of the award to the employee who was expected to remain in service plus €1,000 for the award
to the employee who was not expected to remain in service.
• Approach 2 – an expense of €666 (2 × €333) through post-acquisition profit or loss for the remaining
1/3 of the acquisition date fair value of the two awards. There is no adjustment to the business
combination or to post-acquisition profit or loss for the €667 pre-acquisition element of the award that,
as at the acquisition date, was not expected to vest.
• Approach 3 – an expense of €1,333 through post-acquisition profit or loss to reflect the remaining €333
fair value of the award to the employee who was expected to remain in service plus €1,000 for the award
to the employee who was not expected to remain in service.
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11.3 Acquiree award not replaced by acquirer
It may occasionally happen that the acquirer does not replace awards of the acquiree at
the time of the acquisition. This might be the case where, for example, the acquired
subsidiary is only partly-owned and is itself listed.
IFRS 3 distinguishes between vested and unvested share-based payment transactions of
the acquiree that are outstanding at the date of the business combination but which the
acquirer chooses not to replace.
If vested, the outstanding acquiree share-based payment transactions are treated by the
acquirer as part of the non-controlling interest in the acquiree and measured at their
IFRS 2 fair value at the date of acquisition.
If unvested, the outstanding share-based payment transactions are fair valued in
accordance with IFRS 2 as if the acquisition date were the grant date. The fair value
should be allocated to the non-controlling interest in the acquiree on the basis of the
ratio of the portion of the vesting period completed to the greater of:
• the total vesting period; and
• the original vesting period of the share-based payment transactions.
The balance is treated as a post-combination remuneration expense in accordance with
the general principles of IFRS 2. [IFRS 3.B62A-B62B]. Forfeitures in the post-combination
period will need to be assessed in accordance with the approaches set out at 11.2.3 above.
11.4 Financial
statements
of the acquired entity
The replacement of an award based on the acquiree’s equity with one based on the
acquirer’s equity is, from the perspective of the acquired entity, a cancellation and
replacement, to be accounted for in accordance with the general principles of IFRS 2
for such transactions (see 7.4 above). However, in addition to considerations about
whether this is accounted for as a separate cancellation and new grant or as a
modification of the original terms, the acquiree needs to take into account its new status
as a subsidiary of the acquirer.
If the acquirer is responsible for settling the award in its own equity with the acquiree’s
employees, the acquiree will continue to account for the award on an equity-settled
basis. If, however, the acquiree is responsible for settling the award with shares of the
acquirer, then the acquiree would have to switch from an equity-settled basis of
accounting to a cash-settled basis of accounting (see 2.2.2.A and 9.4.1 above).
[IFRS 2.43B, B52(b), B55].
Even if the acquiree continues to account for the award on an equity-settled basis, the
share-based payment expense recorded in the consolidated financial statements (based
on fair value at the date of the business combination) will generally not be the same as
that in the financial statements of the acquired entity (based on fair value at the date of
original grant plus any incremental value granted at the date of acquisition, if
modification accounting is applied). The exact timing of the recognition of the expense
in the financial statements of the acquired entity after the date of cancellation and
replacement will depend on its interpretation of the requirements of IFRS 2 for the
cancellation and replacement of options (see Example 30.29 at 7.4.4.B above).
Share-based
payment
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12
GROUP SHARE SCHEMES
In this section we consider various aspects of share-based payment arrangements
operated within a group and involving several legal entities. The focus of the section is
on the accounting by the various parties involved and includes several comprehensive
illustrative examples. The main areas covered are as follows:
• typical features of a group share scheme (see 12.1 below);
• a summary of the accounting treatment of group share schemes (see 12.2 below);
• employee benefit trusts (‘EBTs’) and similar vehicles (see 12.3 below);
• an example of a group share scheme (based on an equity-settled award satisfied by
a market purchase of shares) illustrating the accounting by the different entities
involved (see 12.4 below);
• an example of a group share scheme (based on an equity-settled award satisfied by
a fresh issue of shares) illustrating the accounting by the different entities involved
(see 12.5 below);
• an example of a group cash-settled transaction where the award is settled by an
entity other than the one receiving goods or services (see 12.6 below);
• the accounting treatment when an employee transfers between group entities
(see 12.7 below); and
• group reorganisations (see 12.8 below).
Whilst associates and joint arrangements accounted for as joint ventures do not meet
the definition of group entities, there will sometimes be share-based payment
arrangements that involve the investor or venturer and the employees of its associate
or joint venture. These arrangements are discussed at 12.9 below.
12.1 Typical features of a group share scheme
In this section we use the term ‘share scheme’ to encompass any transaction falling
within the scope of IFRS 2, whether accounted for as equity-settled or cash-settled.
It is common practice for a group to operate a single share scheme covering sev
eral
subsidiaries. Depending on the commercial needs of the entity, the scheme might cover
all group entities, all group entities in a particular country or all employees of a particular
grade throughout a number of subsidiaries.
The precise terms and structures of group share schemes are so varied that it is rare to
find two completely identical arrangements. From an accounting perspective, however,
group share schemes can generally be reduced to a basic prototype, as described below,
which will serve as the basis of the discussion.
A group scheme typically involves transactions by several legal entities:
• the parent, over whose shares awards are granted;
• the subsidiary employing an employee who has been granted an award (‘the
employing subsidiary’); and
• the trust that administers the scheme. Such trusts are known by various names in
different jurisdictions, but, for the sake of convenience, in this section we will use
the term ‘EBT’ (‘employee benefit trust’) to cover all such vehicles by whatever
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name they are actually known. The accounting treatment of transactions with
EBTs is discussed at 12.3 below.
In practice, it might not always be a simple assessment to determine which entity is
receiving an employee’s services and which entity is responsible for settling the award.
For example, the scheme may be directed by a group employee services entity or an
individual might be a director of the parent as well as providing services to other
operating entities within the group.
Where an employee services company is involved it will be necessary to evaluate the
precise group arrangements in order to decide whether that entity is, in substance, the
employer or whether the entity or entities to which it makes a recharge for an individual’s
services should be treated as the employer(s). It will also often be the case that the services
company is simply administering the arrangements on behalf of the parent entity.
Where an individual provides services to more than one group entity, an assessment
will need to be made as to which entity or entities are receiving the individual’s services
in return for the award. This will depend on the precise facts and circumstances of a
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 536
