International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 544
Range of exercise prices
Number
Years
p
£2.66 – £3.16
960,378
1
288.10
£3.17 – £3.67
12,227,442
3
351.00
£3.68 – £4.19
11,908,758
3
397.83
The comparative figures as at 31 December 2016 were:
Weighted
average
remaining
Outstanding
contractual
Weighted average
options
life
exercise price
Range of exercise prices
Number
Years
p
£2.66 – £3.16
2,977,769
1
282.62
£3.17 – £3.67
13,566,466
4
351.00
£3.68 – £4.19
7,708,974
3
390.25
Share-based
payment
2727
(ii) Share awards
At 31 December 2017, awards issued under the Company’s executive incentive plans over ordinary shares of
25 pence each in the Company were outstanding as follows:
Aviva long-term incentive plan 2011
Number of shares
Year of vesting
7,672,991
2018
9,601,220
2019
7,079,121
2020
Aviva annual bonus plan 2011
Number of shares
Year of vesting
3,523,971
2018
4,740,088
2019
1,857,252
2020
Aviva recruitment and retention share award plan
Number of shares
Year of vesting
410,413
2018
279,316
2019
31,575
2020
8,731
2021
5,138
2022
Aviva investors deferred share award plan
Number of shares
Year of vesting
68,468
2018
55,082
2019
37,645
2020
The vesting of awards under the LTIP is subject to the attainment of performance conditions as described in the
directors’ remuneration report.
No performance conditions are attached to the awards under the ABP, AI DSAP or some of the awards under the
RRSAP except as outlined below. There are no performance conditions attached to LTIP awards granted since 2017,
with the exception of grants made to the Group Executive.
Under the RRSAP, some shares are subject to the attainment of the same performance conditions that apply to the
LTIP grants as follows.
•
Shares which vest in 2018:
–
154,296 are subject to the same performance conditions that apply to the 2015 LTIP grant
–
35,264 subject to the performance conditions relating to the performance of the participant’s previous employer
•
Shares which vest in 2019:
–
102,602 are subject to the same performance conditions that apply to the 2016 LTIP grant
–
5,305 are subject to the performance conditions relating to the performance of the participant’s previous employer
•
Shares which vest in 2020:
–
5,305 are subject to the performance conditions relating to the performance of the participant’s previous employer
•
Shares which vest in 2021:
–
5,305 are subject to the performance conditions relating to the performance of the participant’s previous employer
These performance conditions are as outlined in the relevant year’s directors’ remuneration report. Shares which do
not vest will lapse.
2728 Chapter 30
(iii) Shares to satisfy awards and options
New issue shares are now generally used to satisfy all awards and options granted under plans that have received
shareholder approval and where local regulations permit. Further details are given in note 32.
(c) Movements in the year
A summary of the status of the option plans as at 31 December 2016 and 2017, and changes during the years ended
on those dates, is shown below.
2017
2016
Weighted
Weighted
average
average
exercise
exercise
Number of
price
Number of
price
options
p
options
p
Outstanding at 1 January
24,253,209 355.08
18,152,399 338.00
Granted during the year
5,998,098 409.00
13,679,774 351.00
Exercised during the year
(3,094,372) 327.04
(4,709,978) 286.71
Forfeited during the year
(944,431) 364.03 (591,727) 370.87
Cancelled during the year
(1,004,017) 361.90
(2,038,503) 383.14
Expired during the year
(111,909) 355.32 (238,756) 368.09
Outstanding at 31 December
25,096,578 370.81
24,253,209 355.08
Exercisable at 31 December
911,019 366.51
1,366,584 284.51
(d) Expense charged to the income statement
The total expense recognised for the year arising from equity compensation plans were as follows:
2017
2016
£m
£m
Equity-settled expense
77
38
Cash-settled expense
–
(1)
Total (note 10b)
77
37
(e) Fair value of options and awards granted after 7 November 2002
The weighted average fair values of options and awards granted during the year, estimated by using the Binomial
option pricing model and Monte Carlo Simulation model, were £1.00 and £4.94 (2016: £0.96 and £3.72) respectively.
(i) Share options
The fair value of the options was estimated on the date of grant, based on the following weighted average assumptions:
Weighted average assumption
2017
2016
Share price
506p
448p
Exercise price
409p
351p
Expected volatility
26.04%
28.29%
Expected life
3.70 years
3.79 years
Expected dividend yield
4.61%
4.65%
Risk-free interest rate
0.55%
0.15%
The expected volatility used was based on the historical volatility of the share price over a period equivalent to the
expected life of the option prior to its date of grant. The risk-free interest rate was based on the yields available on UK
government bonds as at the date of grant. The bonds chosen were those with a similar remaining term to the expected life
of the options. 3,094,372 options granted after 7 November 2002 were exercised during the year (2016: 4,709,978).
Sh
are-based
payment
2729
(ii) Share awards
The fair value of the awards was estimated on the date of grant based on the following weighted average assumptions:
Weighted average assumption
2017
2016
Share price
523p
472p
Expected volatility1
28%
25%
Expected volatility of comparator companies’ share price1
26%
24%
Correlation between Aviva and comparator competitors’ share price1
59%
53%
Expected life1
2.76 years
2.66 years
Expected dividend yield2
0.00%
4.00%
Risk-free interest rate1
0.59%
0.59%
1
For awards with market-based performance conditions only.
2
Expected dividend yield assumption was only used to fair value LTIP awards issued in France. In 2017, LTIP awards
with no market performance conditions were issued in France therefore this assumption was not used in the year.
The expected volatility used was based on the historical volatility of the share price over a period equivalent to the
expected life of the share award prior to its date of grant. The risk-free interest rate was based on the yields available on UK government bonds as at the date of grant. The bonds chosen were those with a similar remaining term to the
expected life of the share awards.
Depending on the precise regulatory requirements of a particular jurisdiction, it might
be possible to meet some of the IFRS 2 disclosure requirements by means of a cross-
reference between the financial statements and other parts of an annual report
published together with the financial statements, such as a management commentary or
statutory remuneration report (as in the case of Aviva plc above). However, even where
such an approach is permissible, care needs to be taken to ensure that any such cross-
reference is clear and specific and that all of the relevant IFRS 2 requirements have
been addressed as these requirements vary depending on when an award was granted.
For example, detailed fair value information for an equity-settled award is generally
required only in the year of grant (and as comparative information in the following
period(s)), whereas the conditions attached to an award are required to be disclosed in
every period in which that award is outstanding.
14
TAXES RELATED TO SHARE-BASED PAYMENT
TRANSACTIONS
14.1 Income tax deductions for the entity
In many jurisdictions entities are entitled to receive income tax deductions for share-
based payment transactions. In many, if not most, cases the tax deduction is given for a
cost different to that recorded under IFRS 2. For example, some jurisdictions give a tax
deduction for the fair or intrinsic value of the award at the date of exercise; others may
give a tax deduction for amounts charged to a subsidiary by its parent, or by a trust
controlled by the parent, in respect of the cost of group awards to the employees of that
subsidiary. In either case, both the amount and timing of the expense for tax purposes
will be different from the amount and timing of the expense required by IFRS 2.
The particular issues raised by share-based payment transactions are addressed in
IAS 12 and discussed further in Chapter 29 at 10.8.
2730 Chapter 30
14.2 Employment taxes of the employer
It is frequently the case that an employing entity is required to pay employment taxes
or social security contributions on share options and other share-based payment
transactions with employees, just as if the employees had received cash remuneration.
This raises the question of how such taxes should be accounted for.
14.2.1 Applicable
standard
The choice of accounting method does not affect the total expense ultimately recognised
(which must always be the tax actually paid), but rather its allocation to different
accounting periods. IFRS is unclear as to which standard should be applied in accounting
for such employment taxes. Some consider that such taxes are most appropriately
accounted for under IAS 37 (see 14.2.1.A below), others favour IFRS 2 (see 14.2.1.B below)
or IAS 19 (see 14.2.1.C below). A reporting entity may therefore choose what it considers
an appropriate policy for employment taxes in its particular circumstances.
Such taxes do not fall within the scope of IFRS 9 since, like income taxes, they are not
contractual liabilities (see Chapter 41 at 2.2.1).
14.2.1.A IAS
37
Some consider that, for the reasons set out in 14.2.1.B and 14.2.1.C below, employment
taxes of the employer do not fall within the scope of IFRS 2 or of IAS 19. Accordingly,
since the amount ultimately payable is uncertain, the most appropriate standard to apply
is IAS 37.
Where IAS 37 is applied, the entity will recognise a provision for the employment tax in
accordance with IFRIC 21 – Levies – which requires identification of the activity that
triggers the payment, as identified by the legislation (see Chapter 27 at 3.1 and 6.8).
However, there is some room for discussion as to what constitutes the activity that
triggers the payment. Is it:
• the granting of the award;
• the consumption of services received from employees;
• the event (typically exercise) that gives rise to a real tax liability; or
• the vesting of the award?
Entities applying IAS 37 need therefore to consider the appropriate treatment of
employment taxes in the light of IFRIC 21.
14.2.1.B IFRS
2
Some argue that, since the employment taxes are a payment of an amount of cash
typically directly linked to the share price, they should be accounted for as a cash-
settled share-based payment transaction under IFRS 2. This would require the taxes to
be measured at each reporting date at fair value, multiplied by the expired vesting period
of the award to which they relate (see 9.3.1 above).
A difficulty with this analysis is that IFRS 2 defines a cash-settled share-based payment
transaction as one in which the entity incurs a liability to the ‘supplier of ... goods or
services’. The liability for such employment taxes is clearly due to the tax authorities,
not to the supplier of goods and services (i.e. the employee). Some who support the
Share-based
payment
2731
application of IFRS 2 accept that IFRS 2 is not directly applicable but argue that it is
nevertheless the most appropriate standard to apply under the ‘GAAP hierarchy’ in
IAS 8 (see Chapter 3 at 4.3). The objective of IFRS 2 (see 2.1 above) states that the
standard is intended to apply to ‘expenses associated with transactions in which share
options are granted to employees’. However, the standard contains no explicit
provisions relevant to this objective.
14.2.1.C IAS
19
Some argue that such payments are more appropriately accounted for under IAS 19 (see
Chapter 31). Again the difficulty is that IAS 19 defines employee benefits as ‘all forms of
consideration
given by an entity in exchange for service rendered by employees or for
the termination of employment’ [IAS 19.8] which would appear to rule out payments to
the tax authority, but for the fact that IAS 19 refers to social security contributions as a
component part of short-term employee benefits. [IAS 19.9(a)]. However, many share-
based payment transactions would, if they were within the scope of IAS 19, be classified
as long-term benefits. That brings the added complication that IAS 19 would require the
employment taxes due on long-term benefits to be accounted for, like the benefits
themselves, using the projected unit credit method, which seems an unduly complex
approach in the circumstances.
In some situations the entity may require employees to discharge any liability for
employment taxes. The accounting issues raised by such arrangements are discussed
at 14.2.2 and 14.3 below.
14.2.2
Recovery of employer’s taxes from employees
As discussed at 14.2 above, in some jurisdictions employers are required to pay
employment taxes on share-based payment transactions. This detracts from one of
the key attractions for an employer of a share-based payment transaction, namely that
it entails no cash cost. This is particularly the case where the tax payable is based on