International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 537
particular situation.
A share-based award is often granted to an employee by the parent, or a group
employee services entity, which will in turn have an option exercisable against the EBT
for the shares that it may be required to deliver to the employee. Less commonly, the
trustees of the EBT make awards to the employees and enter into reciprocal
arrangements with the parent.
If the parent takes the view that it will satisfy any awards using existing shares it will often
seek to fix the cash cost of the award by arranging for the EBT to purchase in the market,
on the day that the award is made, sufficient shares to satisfy all or part of the award. This
purchase will be funded by external borrowings, a loan from the parent, a contribution
from the employing subsidiary, or some combination. The cash received from the
employee on exercise of the option can be used by the EBT to repay any borrowings.
If the parent takes the view that it will satisfy the options with a fresh issue of shares,
these will be issued to the EBT, either:
(a) at the date on which the employee exercises his option (in which case the EBT will
subscribe for the new shares using the cash received from the employee together
with any non-refundable contribution made by the employing subsidiary – see
below). Such arrangements are generally referred to as ‘simultaneous funding’;
(b) at some earlier date (in which case the EBT will subscribe for the new shares using
external borrowings, a loan from the parent or a contribution from the employing
subsidiary, or some combination. The cash received from the employee on
exercise of the option may then be used by the EBT to repay any borrowings).
Such arrangements are generally referred to as ‘pre-funding’; or
(c) some shares will be issued before the exercise date as in (b) above, and the balance
on the exercise date as in (a) above.
As noted in (a) above, the employing subsidiary often makes a non-refundable
contribution to the EBT in connection with the scheme, so as to ensure that employing
subsidiaries bear an appropriate share of the overall cost of a group-wide share scheme.
Share-based
payment
2691
12.2 Accounting treatment of group share schemes – summary
12.2.1 Background
From a financial reporting perspective, it is generally necessary to consider the
accounting treatment in:
• the group’s consolidated financial statements;
• the parent’s separate financial statements; and
• the employing subsidiary’s financial statements.
We make the assumption throughout section 12 that the subsidiary is directly owned by
the parent company. In practice, there will often be one or more intermediate holding
companies between the ultimate parent and the subsidiary. The intermediate parent
company generally will not be the entity granting the award, receiving the goods or
services or responsible for settling the award. Therefore, under IFRS 2, we believe that
there is no requirement for the intermediate company to account for the award in its
separate or individual financial statements (although it might choose to recognise an
increase in its investment in the subsidiary and a corresponding capital contribution
from the ultimate parent in order for the transaction to be reflected throughout the
chain of companies).
The accounting entries to be made in the various financial statements will broadly vary
according to:
• whether the award is satisfied using shares purchased in the market or a fresh issue
of shares;
• whether any charge is made to the employing subsidiary for the cost of awards to
its employees;
• whether an employee benefit trust (EBT) is involved. The accounting treatment of
transactions undertaken with and by EBTs is discussed in more detail at 12.3 below;
and
• the tax consequences of the award. However, for the purposes of the discussion
and illustrative examples below, tax effects are ignored, since these will vary
significantly by jurisdiction. A more general discussion of the tax effects of share-
based payment transactions may be found at 14 below and in Chapter 29 at 10.8.
12.2.2
Scope of IFRS 2 for group share schemes
By virtue of the definition of ‘share-based payment transaction’ (see 2.2.1 and 2.2.2.A
above), a group share-based payment transaction is in the scope of IFRS 2 for:
• the consolidated financial statements of the group (the accounting for which
follows the general principles set out in 3 to 10 above);
• the separate or individual financial statements of the entity in the group that
receives goods or services (see 12.2.3 below); and
• the separate or individual financial statements of the entity in the group (if different
from that receiving the goods or services) that settles the transaction with the
counterparty. This entity will typically, but not necessarily, be the parent
(see 12.2.4 below).
2692 Chapter 30
IFRS 2 provides further guidance on the application of its general principles to:
• transactions settled in the equity of the entity, or in the equity of its parent
(see 12.2.5 below); and
• cash-settled transactions settled by a group entity other than the entity receiving
the goods or services (see 12.2.6 below).
At 2.2.2.A above we consider seven scenarios commonly found in practice and outline
the approach required by IFRS 2 in the consolidated and separate or individual financial
statements of group entities depending on whether the award is settled in cash or shares
and which entity grants the award, has the obligation to settle the award and receives
the goods or services.
It is common practice in a group share scheme to require each participating entity in
the group to pay a charge, either to the parent or to an EBT, in respect of the cost of
awards made under the scheme to employees of that entity. This is generally done either
as part of the group’s cash-management strategy, or in order to obtain tax relief under
applicable local legislation. The amount charged could in principle be at the discretion
of the group, but is often based on either the fair value of the award at grant date or the
fair value at vesting, in the case of an award of free shares, or exercise, in the case of an
award of options.
IFRS 2 does not directly address the accounting treatment of such intragroup
management charges and other recharge arrangements, which is discussed further
at 12.2.7 below. [IFRS 2.B45-46].
Worked examples illustrating how these various principles translate into accounting
entries are given at 12.4 to 12.6 below.
12.2.3
Entity receiving goods or services
The entity in a group receiving goods or services in a share-based payment transaction
determines whether the transaction should be accounted for, in its separate or
individual financial statements, as equity-settled or cash-settled. It does this by assessing
the nature of the awards granted and its own rights and obligations. [IFRS 2.43A].
The entity accounts for the transaction as equity-settled when either the awards granted
&
nbsp; are the entity’s own equity instruments, or the entity has no obligation to settle the
share-based payment transaction. Otherwise, the entity accounts for the transaction as
cash-settled. Where the transaction is accounted for as equity-settled it is remeasured
after grant date only to the extent permitted or required by IFRS 2 for equity-settled
transactions generally, as discussed at 3 to 6 above. [IFRS 2.43B].
IFRS 2 notes that a possible consequence of these requirements is that the amount
recognised by the entity may differ from the amount recognised by the consolidated
group or by another group entity settling the share-based payment transaction.
[IFRS 2.43A]. This is discussed further at 12.6 below.
The cost recognised by the entity receiving goods or services is always calculated
according to the principles set out above, regardless of any intragroup recharging
arrangement. [IFRS 2.43D, B45]. The accounting for such arrangements is discussed
at 12.2.7 below.
Share-based
payment
2693
12.2.4
Entity settling the transaction
A group entity which settles a share-based payment transaction in which another group
entity receives goods or services accounts for the transaction as an equity-settled share-
based payment transaction only if it is settled in the settling entity’s own equity
instruments. Otherwise, the transaction is accounted for as cash-settled. [IFRS 2.43C].
IFRS 2 specifies only the credit entry – the classification of the transaction as equity-
or cash-settled, and its measurement. IFRS 2 does not specify the debit entry, which is
therefore subject to the general requirement of IFRS 2 that a share-based payment
transaction should normally be treated as an expense, unless there is the basis for
another treatment under other IFRS (see 3 above).
In our view, the settling entity is not always required to treat the transaction as an expense:
• Where the settling entity is a parent (direct or indirect) of the entity receiving the
goods or services and is accounting for the transaction as equity-settled, it will
generally account for the settlement under IAS 27 – Separate Financial Statements
– as an addition to the cost of its investment in the employing subsidiary (or of that
holding company of the employing subsidiary which is the settling entity’s directly-
held subsidiary). [IFRS 2.B45]. It may then be necessary to review the carrying value
of that investment to ensure that it is not impaired.
• Where the settling entity is a parent (direct or indirect) of the entity receiving the
goods or services and is accounting for the transaction as cash-settled (whereas the
subsidiary will be accounting for the transaction as equity-settled), in our view it
has an accounting policy choice for the treatment of the remeasurement of the
cash-settled liability. Either:
• it accounts for the entire award as part of the contribution to the subsidiary
and therefore as an addition to the cost of its investment in the employing
subsidiary (or of that holding company of the employing subsidiary which is
the settling entity’s directly-held subsidiary); or
• after the initial capitalisation of the grant date fair value of the liability, it
remeasures the liability through profit or loss.
Whichever policy is chosen, it may then be necessary to review the carrying value
of the investment to ensure that it is not impaired.
• In other cases (i.e. where the settling entity is a subsidiary (direct or indirect) or
fellow subsidiary of the entity receiving the goods or services), it should treat the
settlement as a distribution, and charge it directly to equity. Whether or not such a
settlement is a legal distribution is a matter of law in the jurisdiction concerned.
We adopt the approach of full capitalisation by the parent entity in the worked examples
set out in 12.4 to 12.6 below.
12.2.5
Transactions settled in equity of the entity or its parent
12.2.5.A
Awards settled in equity of subsidiary
Where a subsidiary grants an award to its employees and settles it in its own equity, the
subsidiary accounts for the award as equity-settled.
2694 Chapter 30
The parent accounts for the award as equity-settled in its consolidated financial statements.
In its separate financial statements, the parent is not required by IFRS 2 to account for the
award. In both cases, the transaction may have implications for other aspects of the financial
statements, since its settlement results in the partial disposal of the subsidiary (see Chapter 7).
Where the parent is responsible for settling the award, it accounts for the transaction as
equity-settled in its consolidated financial statements. In its separate financial
statements, however, it accounts for the award as cash-settled, since it is settled not in
its own equity, but in the equity of the subsidiary. From the perspective of the parent’s
separate financial statements, the equity of a subsidiary is a financial asset. [IFRS 2.B50].
12.2.5.B
Awards settled in equity of the parent
Where the parent grants an award directly to the employees of a subsidiary and settles
it in its own equity, the subsidiary accounts for the award as equity-settled, with a
corresponding increase in equity as a contribution from the parent. [IFRS 2.B53].
The parent accounts for the award as equity-settled in both its consolidated and
separate financial statements. [IFRS 2.B54].
Where a subsidiary grants an award of equity in its parent to its employees and settles the
award itself, it accounts for the award as cash-settled, since it is settled not in its own
equity, but in the equity of its parent. From the perspective of the subsidiary’s separate or
individual financial statements, the equity of the parent is a financial asset. [IFRS 2.B55].
This requirement potentially represents something of a compliance burden. For the
purposes of the parent’s consolidated financial statements the fair value of the award
needs to be calculated once, at grant date. For the purposes of the subsidiary’s financial
statements, however, IFRS 2 requires the award to be accounted for as cash-settled,
with the fair value recalculated at each reporting date.
It is, however, important to note that IFRS 2 requires this accounting treatment only for a
subsidiary that ‘grants’ such an award. [IFRS 2.B52, headings to B53 & B55]. In some jurisdictions it
is normal for grants of share awards to be made by the parent, or an employee service
company or EBT, rather than by the subsidiary, although the subsidiary may well make
recommendations to the grantor of the award as to which of its employees should benefit.
In those cases, the fact that the subsidiary may communicate the award to the employee
does not necessarily mean that the subsidiary itself has granted the award. It may simply
be notifying the employee of an award granted by another group entity and which the
other group company has the obligation to settle. In that case the subsidiary should
apply the normal requirement of IFRS 2 to account for the award as equity-settled.
12.2.6
Cash-settled transactions not settled by the entity receiving goods or
IFRS 2 considers arrangements in which the parent has an obligation to make cash
payments to the employees of a subsidiary linked to the price of either:
• the subsidiary’s equity instruments; or
• the parent’s equity instruments.
Share-based
payment
2695
In both cases, the subsidiary has no obligation to settle the transaction and therefore
accounts for the transaction as equity-settled, recognising a corresponding credit in
equity as a contribution from its parent.
The subsidiary then subsequently remeasures the cost of the transaction only for any
changes resulting from non-market vesting conditions not being met in accordance with
the normal provisions of IFRS 2 discussed at 3 to 6 above. IFRS 2 points out that this
will differ from the measurement of the transaction as cash-settled in the consolidated
financial statements of the group. [IFRS 2.B56-57].
In both cases, the parent has an obligation to settle the transaction in cash. Accordingly,
the parent accounts for the transaction as cash-settled in both its consolidated and
separate financial statements. [IFRS 2.B58].
The requirement for the subsidiary to measure the transaction as equity-settled is
somewhat controversial. The essential rationale for requiring the subsidiary to record
the cost of a share-based payment transaction settled by its parent is to reflect that the
subsidiary is effectively receiving a capital contribution from its parent.
The IASB specifically considered whether it would be more appropriate to measure that
contribution by reference to the cash actually paid by the parent, but concluded that
the approach adopted in IFRS 2 better reflects the perspective of the subsidiary as a
separate reporting entity. An accounting treatment based on the cash paid by the parent
would, in the IASB’s view, reflect the perspective of the parent rather than that of the
subsidiary. [IFRS 2.BC268H-268K].
12.2.7
Intragroup recharges and management charges
As noted at 12.2.2 above, IFRS 2 does not deal specifically with the accounting
treatment of intragroup recharges and management charges that may be levied within
the group on the subsidiary that receives goods or services, the consideration for which
is equity instruments or cash provided by another group entity.