The timing of the recognition of intercompany recharges was considered by the
Interpretations Committee in 2013 (see 12.2.7.A below).
The accounting requirements of IFRS 2 for group share schemes derive from IFRIC 11
(now incorporated within IFRS 2 – see 1.2 above), which was based on an exposure
draft (D17) published in 2005.
D17 proposed that any such payment made by a subsidiary should be charged directly
to equity, on the basis that it represents a return of the capital contribution recorded as
the credit to equity required by IFRS 2 (see 12.2.3 and 12.2.6 above) up to the amount of
that contribution, and a distribution thereafter.34
In our view, whilst IFRS 2 as currently drafted does not explicitly require this treatment,
this is likely to be the more appropriate analysis for most cases where the amount of the
recharge or management charge to a subsidiary is directly related to the value of the share-
based payment transaction. Indeed, the only alternative, ‘mechanically’ speaking, would
be to charge the relevant amount to profit or loss. This would result in a double charge
(once for the IFRS 2 charge, and again for the management charge or recharge) which we
consider not only less desirable for most entities, but also less appropriate in cases where
the amounts are directly related. Accordingly, in the examples at 12.4 to 12.6 below, we
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apply the treatment originally proposed in D17 to any payments made by the subsidiary
for participation in the group scheme.
Many intragroup recharge arrangements are based directly on the value of the underlying
share-based payment – typically at grant date, vesting date or exercise date. In other
cases, a more general management charge might be levied that reflects not just share-
based payments but also a number of other arrangements or services provided to the
subsidiary by the parent. Where there is a more general management charge of this kind,
we believe that it is more appropriate for the subsidiary to recognise a double charge to
profit or loss (once for the IFRS 2 charge, and again for the management charge) rather
than debiting the management charge to equity as would be the case for a direct recharge.
IFRS 2 also does not address how the parent should account for a recharge or
management charge received. In our view, to the extent that the receipt represents a
return of a capital contribution made to the subsidiary, the parent may choose whether
to credit:
• the carrying amount of its investment in the subsidiary; or
• profit or loss (with a corresponding impairment review of the investment).
Even if part of the recharge received is credited to the carrying amount of the
investment, any amount received in excess of the capital contribution previously
debited to the investment in subsidiary should be accounted for as a distribution from
the subsidiary and credited to the income statement of the parent. Where applicable,
the illustrative examples at 12.4 to 12.6 below show the entire amount as a credit to the
income statement of the parent rather than part of the recharge being treated as a credit
to the parent’s investment in its subsidiary.
The treatment of a distribution from a subsidiary in the separate financial statements of
a parent is more generally discussed in Chapter 8 at 2.4.
A further issue that arises in practice is the timing of recognition of the recharge by the
parties to the arrangement. The treatment adopted might depend to some extent on the
precise terms and whether there are contractual arrangements in place, but two
approaches generally result in practice:
• to account for the recharge when it is actually levied or paid (which is consistent
with accounting for a distribution); or
• to accrue the recharge over the life of the award or the recharge agreement even if,
as is commonly the case, the actual recharge is only made at vesting or exercise date.
An entity should choose the more appropriate treatment for its particular circumstances.
The first approach is often the more appropriate in a group context where recharge
arrangements might be rather informal and therefore not binding until such time as a
payment is made. It is also consistent with the overall recognition of the arrangement
through equity. The second approach, which is likely to be the more appropriate approach
when a liability is considered to exist in advance of the payment date, is closer in some
respects to the accounting treatment of a provision or financial liability but, unlike the
requirements of IAS 37 or IFRS 9, reflects changes in the recognised amount through
equity rather than profit or loss and builds up the recharge liability over the life of the award
rather than recognising the liability in full when a present obligation has been identified.
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Whichever accounting treatment is adopted, any adjustments to the amount to be recognised
as a recharge, whether arising from a change in the IFRS 2 expense or other changes, should
be recognised in the current period and previous periods should not be restated.
Where applicable, the examples at 12.4 to 12.6 below illustrate the first of the two
treatments outlined above and recognise the recharge only when it becomes payable at
the date of exercise.
12.2.7.A
Timing of recognition of intercompany recharges: discussion by the IFRS
Interpretations Committee
In January 2013 the Interpretations Committee discussed whether a subsidiary’s liability
to pay to its parent the settlement value of share-based payments made by the parent
to the subsidiary’s employees should be recognised by the subsidiary from the grant date
of the award or only at the date of settlement of the award.
While outreach conducted by the Interpretations Committee suggested that there is
diversity in practice (as indicated at 12.2.7 above), the Interpretations Committee
concluded in May 2013 that the topic could not be restricted to recharges relating to
share-based payments and therefore decided not to add this issue to its agenda.35
12.3 Employee benefit trusts (‘EBTs’) and similar arrangements
12.3.1 Background
For some time entities have established trusts and similar arrangements for the benefit
of employees. These 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 name they are actually known.
The commercial purposes of using such vehicles vary from employer to employer, and
from jurisdiction to jurisdiction, but may include the following:
• An EBT, in order to achieve its purpose, needs to hold shares that have either been
issued to it by the entity or been bought by the EBT on the open market. In some
jurisdictions, the direct holding of shares in an entity by the entity itself is unlawful.
• In the case of longer-term benefits the use of an EBT may ‘ring fence’ the assets
set aside for the benefit of employees in case of the insolvency of the entity.
• The use of an EBT may be necessary in order to achieve a favourable tax treatment
for the entity
or the employees, or both.
The detailed features of an EBT will again vary from entity to entity, and from
jurisdiction to jurisdiction, but typical features often include the following:
• The EBT provides a warehouse for the shares of the sponsoring entity, for example
by acquiring and holding shares that are to be sold or transferred to employees in the
future. The trustees may purchase the shares with finance provided by the
sponsoring entity (by way of cash contributions or loans), or by a third-party bank
loan, or by a combination of the two. Loans from the entity are usually interest-free.
In other cases, the EBT may subscribe directly for shares issued by the sponsoring
entity or acquire shares in the market.
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• Where the EBT borrows from a third party, the sponsoring entity will usually
guarantee the loan, i.e. it will be responsible for any shortfall if the EBT’s assets are
insufficient to meet its debt repayment obligations. The entity will also generally
make regular contributions to the EBT to enable the EBT to meet its interest
payments, i.e. to make good any shortfall between the dividend income of the EBT
(if any) and the interest payable. As part of this arrangement the trustees may waive
their right to dividends on the shares held by the EBT.
• Shares held by the EBT are distributed to employees through an employee share
scheme. There are many different arrangements – these may include:
• the purchase of shares by employees when exercising their share options
under a share option scheme;
• the purchase of shares by the trustees of an approved profit-sharing scheme
for allocation to employees under the rules of the scheme; or
• the transfer of shares to employees under some other incentive scheme.
• The trustees of an EBT may have a legal duty to act at all times in accordance with
the interests of the beneficiaries under the EBT. However, most EBTs (particularly
those established as a means of remunerating employees) are specifically designed
so as to serve the purposes of the sponsoring entity, and to ensure that there will
be minimal risk of any conflict arising between the duties of the trustees and the
interest of the entity.
12.3.2 Accounting
for
EBTs
Historically, transactions involving EBTs were accounted for according to their legal
form. In other words, any cash gifted or lent to the EBT was simply treated as,
respectively, an expense or a loan in the financial statements of the employing entity.
However, this treatment gradually came to be challenged, not least by some tax
authorities who began to question whether it was appropriate to allow a corporate tax
deduction for the ‘expense’ of putting money into an EBT which in some cases might
remain in the EBT for some considerable time (or even be lent back to the entity) before
being actually passed on to employees. Thus, the issue came onto the agenda of the
national standard setters.
The accounting solution proposed by some national standard setters, such as those in
the United States and the United Kingdom, was to require a reporting entity to account
for an EBT as an extension of the entity. The basis for this treatment was essentially
that, as noted at 12.3.1 above, EBTs are specifically designed to serve the purposes of
the sponsoring entity, and to ensure that there will be minimal risk of any conflict arising
between the duties of the trustees and the interest of the entity, suggesting that they are
under the de facto control of the entity.
Unlike the approach required by some national standard setters, IFRS does not mandate
the treatment of an EBT as an extension of the sponsoring entity in that entity’s separate
financial statements and the accounting treatment in the separate entity is therefore less
clear under IFRS (see 12.3.4 below). If an entity does not treat the EBT as an extension
of itself in its own financial statements it will need to assess for its consolidated IFRS
financial statements whether the EBT should be consolidated as a separate vehicle.
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This assessment will be based on the control criteria set out in IFRS 10, as discussed in
more detail in Chapter 6. However, in summary, the entity will need to decide whether:
• it has power over the EBT;
• it has exposure, or rights, to variable returns from its involvement with the EBT; and
• it has the ability to use its power over the EBT to affect the amount of the
sponsoring entity’s returns.
Paragraphs BC70 to BC74 of the Basis for Conclusions to IFRS 2 are clearly written on
the assumption that the trust referred to in paragraph BC70 is being included in the
financial statements of the reporting entity. This suggests that the IASB regards the
consolidation of such vehicles as normal practice. [IFRS 2.BC70-74].
In addition to a decision as to whether it is appropriate to consolidate an EBT, reporting
entities also need to make an assessment as to the level within a group at which the EBT
should be consolidated i.e. whether the EBT is controlled by a sponsoring entity at a
sub-group level or whether just by the ultimate parent entity. In many cases, an EBT
holding shares in the ultimate parent entity will be considered to be under the control
of that entity but there will be exceptions in some group scenarios. The discussion
below generally assumes that the reporting entity is the sponsoring entity of the EBT
and consolidates an EBT holding the reporting entity’s own shares.
Consolidation of an EBT will have the following broad consequences for the
consolidated financial statements of the reporting entity:
• Until such time as the entity’s own shares held by the EBT vest unconditionally
in employees:
• any consideration paid for the shares should be deducted in arriving at
shareholders’ equity in accordance with IAS 32 (see Chapter 43 at 9); and
• the shares should be treated as if they were treasury shares when calculating
earnings per share under IAS 33 (see Chapter 33 at 3.2).
• Other assets and liabilities (including borrowings) of the EBT should be recognised as
assets and liabilities in the consolidated financial statements of the sponsoring entity.
• No gain or loss should be recognised in profit or loss on the purchase, sale, issue or
cancellation of the entity’s own shares, as required by IAS 32. Although not explicitly
required by IFRS, we suggest that entities show consideration paid or received for
the purchase or sale of the entity’s own shares in an EBT separately from other
purchases and sales of the entity’s own shares in the reconciliation of movements in
shareholders’ equity. This may be particularly relevant for entities in jurisdictions
that distinguish between ‘true’ treasury shares (i.e. those legally held by the issuing
entity) and those accounted for as such under IFRS (such as those held by an EBT).
• Any dividend income arising on own shares should be excluded in arriving at profit
before tax and deducted from the aggregate of dividends paid and proposed. In our
view, the deduction should be disclosed if material.
• Finance cost
s and any administration expenses should be charged as they accrue
and not as funding payments are made to the EBT.
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The discussion above, and in the remainder of Section 12, focuses on arrangements
where the EBT holds unallocated shares of the reporting entity and/or shares that
have been allocated to employees in connection with share awards but where the
awards have not yet vested. There will also be situations in practice in which an EBT
reaches the stage where, or is designed so that, it only holds shares to which
employees have full entitlement (i.e. the shares are fully vested). In this situation the
shares are beneficially owned and controlled by the individual employees but might
remain in trust for tax or other reasons in the period following vesting. Where an EBT
does not hold any unvested shares and there are no other assets or liabilities in the
EBT over which the entity continues to exercise control, there will be nothing left in
the EBT to be consolidated.
12.3.3
Illustrative Examples – awards satisfied by shares purchased by, or
issued to, an EBT
The following Examples assume that the EBT is consolidated in accordance with
IFRS 10 and show the interaction of the requirements of IFRS 10 with those of IFRS 2.
Example 30.50 illustrates the treatment where an award is satisfied using shares
previously purchased in the market. Example 30.51 illustrates the treatment where
freshly issued shares are used.
Example 30.50: Interaction of IFRS 10, IAS 32 and IFRS 2 (market purchase)
On 1 January in year 1, the EBT of ABC plc made a market purchase of 100,000 shares of ABC plc at £2.50
per share. These were the only ABC shares held by the EBT at that date.
On 1 May in the same year, ABC granted executives options over between 300,000 and 500,000 shares
at £2.70 per share, which will vest at the end of year 1, the number vesting depending on various
performance criteria. It is determined that the cost to be recognised in respect of this award under IFRS 2
is £0.15 per share.
Four months later, on 1 September, the EBT made a further market purchase of 300,000 shares at £2.65 per share.
At the end of year 1, options vested over 350,000 shares and were exercised immediately.
The accounting entries for the above transaction required by IFRS 10, IAS 32 and IFRS 2 in the consolidated
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 538
