International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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capital enhancements created in the trust by the sale of equity instruments at a severely
discounted amount.
When the reporting entity finances the arrangement, the finance is generally interest-
free or at a lower than market interest rate. The debt is serviced with the dividends
received and, at the end of the repayment period, any outstanding balance can be
treated in various ways; refinanced or waived by the reporting entity, or settled by the
return of a number of shares equal to the outstanding value.
In summary, the BEE party generally injects only a notional amount of capital into the
trust, which obtains financing to acquire the shares in the reporting entity and uses the
dividend cash flows to service the debt it has raised. In such generic schemes, the BEE
party faces a typical option return profile: the maximum amount of capital at risk is
notional and the potential upside increase in value of the shares of the reporting entity
accrues to the BEE party through the party’s beneficial rights in the trust.
15.5.2
Measurement and timing of the accounting cost
If the analysis under 15.5.1 above is that the trust should be consolidated, the transfer of
equity instruments to that entity is essentially the same as a transfer of own equity to an
employee benefit trust, as discussed at 12.3 above. Such a transfer, considered alone, is
an intra-entity transaction and therefore does not give rise to a charge under IFRS 2.
The equity instruments held by the trust are therefore treated as treasury shares, and
no non-controlling interests are recognised.
It is only when the trust itself makes an award to a third party that a charge arises, which
will be measured at the time at which the grant to the third party occurs. In a rising stock
market this will lead to a higher charge than would have occurred had there been a
grant, as defined in IFRS 2, on the date that the equity instruments were originally
transferred to the trust. Generally, the value of the award is based on an option pricing
model and the BEE party is treated as the holder of an option.
Where the trust is not consolidated, the presumption will be that the transfer of equity
instruments to the trust crystallises an IFRS 2 charge at the date of transfer. However, it
is important to consider the terms of the transaction in their totality. For example, if the
entity has the right to buy back the equity instruments at some future date, the benefit
transferred may in fact be an economic interest in the equity instruments for a limited
period. This may, depending on the method used to determine the buy-back price,
influence the measurement of any IFRS 2 charge (which would normally be based on
the presumption that the benefits of a vested share had been passed in perpetuity).
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Some have sought to argue that BEE credentials result in the recognition of an intangible
asset rather than an expense. In order to be recognised as an asset, an entity must have
control over the resource as a result of a past event. Paragraphs 13 and 16 of IAS 38 –
Intangible Assets – indicate that control over an intangible asset may be evidenced in
two ways:
• as legal rights that are enforceable by law; or
• as exchange transactions for the same or similar non-contractual customer
relationships.
In BEE transactions, a contract is usually entered into with a BEE partner. The contract
between the entity and the BEE partner may include a contractual lock-in period or a clause
that only allows the transfer of such equity instruments to another BEE partner, usually with
the lock-in provision also transferred to the buyer. However, the contract does not provide
the entity with legal rights that give it the power to obtain the future economic benefits
arising from the BEE transaction, nor the ability to restrict the access of others to those
benefits. Therefore BEE credentials do not qualify for recognition of intangible assets and
the difference between the fair value of the award and the consideration received should
be expensed. This is consistent with guidance issued by SAICA.38
An issue to be considered in determining the timing of the IFRS 2 expense is that many
BEE transactions require the BEE party to be ‘locked into’ the transaction for a pre-
determined period. During this period the BEE party or trust is generally prohibited
from selling or transferring the equity instruments. As no specific performance is
generally required during this period, it is not considered part of the vesting period
(see 3.3 and 6.1 above). Rather, the post-vesting restrictions would be taken into account
in calculating the fair value of the equity instruments (see 8.4.1 above). This is illustrated
in the following example (based in part on Example 5 in the SAICA guidance).
Example 30.66: Receipt of BEE credentials with no service or performance
condition
Entity A grants shares with a fair value of $1,000,000 to a BEE consortium for no consideration. As a result
of the BEE ownership entity A obtains BEE credentials. The BEE consortium are entitled to the shares
immediately and not required to perform any services to entity A nor are any performance conditions required
to be met. However in order to secure the BEE credentials, the consortium may not sell their shares for a
period of 7 years from grant date.
In this transaction shares have been issued at a discount to fair value in return for BEE credentials and would
fall into the scope of IFRS 2. As there is neither a service nor a performance condition, the fair value of the
shares given should be expensed at grant date. The restriction on the transfer of the shares would be treated
as a post-vesting restriction and taken into account when estimating the fair value of the equity instruments
granted. If the shares in this example were listed, the listed price would not necessarily be the fair value as
the fair value would need to be adjusted for the restriction of transfer.
15.5.3
Classification of awards as equity- or cash-settled
Certain schemes, particularly where the reporting entity is not listed, give the BEE party the
right to put the shares back to the entity (or another group entity) after a certain date. This
is often done to create liquidity for the BEE parties, should they decide to exit the scheme.
Such a feature would require the scheme to be classified as cash-settled (see 9.1 above).
Share-based
payment
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Similarly, where the BEE transaction is facilitated through a trust, the trust may have
granted awards to beneficiaries in the form of units in the trust. The trustees may have
the power to reacquire units from beneficiaries in certain circumstances (e.g. where the
beneficiaries are employees, when they leave the employment of the entity). Where the
trust does not have sufficient cash with which to make such payments, the reporting
entity may be obliged, legally or constructively, to fund them.
Such arrangements may – in their totality – create a cash-settled scheme from the
perspective of the reporting entity. In analysing a particular scheme, it should be
remembered that, under IFRS 2, cash-settled schemes arise not only from legal
liabilities, but also from constructive or commer
cial liabilities (e.g. to prevent a former
employee having rights against what is essentially an employee trust) – see 10.2 above.
Finally, a transaction may be structured in such a way that the trust holds equity
instruments of the reporting entity for an indefinite period. Dividends received by the
trust may be used to fund certain expenses in a particular community in which the
reporting entity operates (e.g. tuition fees for children of the reporting entity’s
employees or the costs of certain community projects). The scheme may even make
provision for the shares to be sold after a certain period with the eventual proceeds
being distributed amongst members of the community.
In such a case it is necessary to consider the nature of the distribution requirement
and whether or not the reporting entity (through the trust) has a legal or constructive
obligation under the scheme to make cash payments based on the price or value of
the shares held by the trust. Where there is such an obligation, the arrangement would
be classified as a cash-settled scheme. If however the trust merely acts as a conduit
through which:
• dividend receipts by the trust are paid out to beneficiaries with the shares never
leaving the trust; or
• proceeds from the sale of shares are distributed to beneficiaries,
the precise terms of the arrangement should be assessed to determine whether or not
the arrangement meets the definition of a cash-settled share-based payment (see 15.4.6
above for a discussion of similar considerations in the context of ‘drag along’ and ‘tag
along’ rights).
Any dividend payments by the Group for the period that the trust is consolidated should
be treated as an equity distribution or as an expense, as appropriate, in accordance with
the principles discussed at 15.3 above.
16
FIRST-TIME ADOPTION AND TRANSITIONAL
PROVISIONS
16.1 First-time adoption provisions
The requirements of IFRS 1 – First-time Adoption of International Financial Reporting
Standards – in relation to share-based payment arrangements are discussed in
Chapter 5 at 5.3. However, one provision may remain relevant for entities that have
already adopted IFRS and would no longer generally be considered ‘first-time adopters’.
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IFRS 1 does not require an entity to account for equity-settled transactions:
• granted on or before 7 November 2002; or
• granted after 7 November 2002 but vested before the later of the date of transition
to IFRS and 1 January 2005.
However, where such an award is modified, cancelled or settled, the rules regarding
modification, cancellation and settlement (see 7 above) apply in full unless the
modification occurred before the date of transition to IFRS. [IFRS 1.D2]. The intention of
this provision is to prevent an entity from avoiding the recognition of a cost for a new
award by structuring it as a modification to an earlier award not in the scope of IFRS 2.
There is slight ambiguity on this point in the wording of IFRS 1, paragraph D2 of which
refers only to the modification of such awards. However, paragraph D2 also requires an
entity to apply ‘paragraphs 26-29’ of IFRS 2 to ‘modified’ awards. Paragraphs 26-29 deal
not only with modification but also with cancellation and settlement, and indeed
paragraphs 28 and 29 are not relevant to modification at all. This makes it clear, in our
view, that the IASB intended IFRS 1 to be applied not only to the modification but also
to the cancellation and settlement of such awards.
16.2 Transitional provisions for June 2016 amendments
As noted at 1.2 above, in June 2016 the IASB amended IFRS 2 in three areas:
• treatment of vesting and non-vesting conditions in the measurement of a cash-
settled share-based payment (see 9.3.2 above);
• classification of share-based payment transactions with a net settlement feature
for withholding tax obligations (see 14.3.1 above); and
• modification of a share-based payment from cash-settled to equity-settled
(see 9.4.2 above).
The amendments are applicable for accounting periods beginning on or after
1 January 2018 with earlier application permitted provided it is disclosed. [IFRS 2.63D].
The amendments have detailed transitional provisions. These begin by stating that prior
periods should not be restated when an entity first applies the amendments (although
an entity may elect to apply them retrospectively subject to certain conditions – see
below). [IFRS 2.59A].
If an entity does not elect to apply the amendments retrospectively it should apply them
as follows:
• the amendment relating to modifications of awards from cash-settled to equity-
settled applies only to modifications that occur on or after the date that an entity
first applies the amendments;
• the amendment relating to the treatment of vesting and non-vesting conditions in
a cash-settled award applies to share-based payment transactions that are
unvested at the date that an entity first applies the amendments and to share-based
payment transactions with a grant date on or after that date of first application. For
unvested share-based payment transactions with a grant date prior to the date of
initial application, the entity is required to remeasure the liability at the date it first
applies the amendment. The effect of the remeasurement should be recognised in
Share-based
payment
2759
opening retained earnings, or other component of equity, of the reporting period
in which the amendment is first applied;
• the amendment relating to awards with a net settlement feature for withholding
tax obligations applies to share-based payment transactions that are unvested (or
vested but unexercised) at the date the amendments are first applied and to share-
based payment transactions with a grant date on or after that date of first
application. For unvested (or vested but unexercised) share-based payment
transactions (or components thereof) that were previously classified as cash-
settled but are now classified as equity-settled in accordance with the
amendments, the carrying value of the liability should be reclassified to equity at
the date on which the amendments are first applied. [IFRS 2.59A].
Notwithstanding the requirements set out above, the amendments may be applied
retrospectively, subject to the existing transitional provisions set out in paragraphs 53
to 59 of IFRS 2, in accordance with the requirements of IAS 8, if, and only if, it is
possible to do so without hindsight. If an entity chooses retrospective application, it
must do so for all three areas covered by the June 2016 amendments. [IFRS 2.59B].
16.3 Transitional provisions for references to the 2018 Conceptual
Framework
As noted at 1.2 above, the revision of the Conceptual Framework in 2018 led to a minor
consequential amendment to IFRS 2. The revision amended the footnote to the
definition of an equity instrument in Appendix A to refer to the revised definition of a
liability. The definition of an equity instrument remains unchanged. The revision is not
expected to have a significant effect on IFRS 2 (se
e 1.4.1 above).
The amendment applies for annual periods beginning on or after 1 January 2020. Earlier
application is permitted if at the same time an entity also applies all other amendments
made by Amendments to References to the Conceptual Framework in IFRS Standards.
The amendment is to be applied to IFRS 2 retrospectively in accordance with IAS 8,
subject to the transitional provisions set out in paragraphs 53 to 59 of IFRS 2. [IFRS 2.63E].
If an entity determines that retrospective application would be impracticable or would
involve undue cost or effort, the entity should apply the amendment to IFRS 2 by
reference to paragraphs 23 to 28, 50 to 53 and 54F of IAS 8. [IFRS 2.63E].
References
1
Amendment to International Financial Reporting
3
Classification and Measurement of Share-based
Standards: IFRS
2 Share-based Payment –
Payment Transactions, Amendments to IFRS 2,
Vesting Conditions and Cancellations, IASB,
IASB, June 2016 (‘June 2016 amendments’).
January 2008 (‘January 2008 amendment’).
4
Amendments to References to the Conceptual
2
Group Cash-settled Share-based Payment
Framework in IFRS Standards, IASB,
Transactions, Amendments to IFRS 2, IASB,
March 2018.
June 2009 (‘June 2009 amendment’).
5
IASB Update, May 2015.
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6 IASB Update, November 2015.
23 IFRIC Update, July 2006.
7 Agenda Paper 16, IASB, November 2015.
24 IFRIC Update, March 2011.
8
IASB Update, May 2016.
25 More detailed guidance on this may be found in
9
http://www.ifrs.org/projects/work-plan/share-
a publication such as Options, Futures, and
based-payment, 9 September 2018.
Other Derivatives, John C. Hull.
10 For convenience, throughout this chapter we
26 FASB Staff Position 123(R)-4, Classification
refer to the recognition of a cost for share-based
of Options and Similar Instruments Issued as
payments. In some cases, however, a share-based
Employee Compensation That Allow for Cash
payment transaction may initially give rise to an