• Exposure Draft issued 2 February 2006
  IASB Press Release (PDF 52k)
• 2 June 2006 comment deadline
• Discussed at September 2006 Board Meeting
• Exposure Draft issued 25 January 2007. Comment deadline 27 April 2007.
• Discussed at July 2006 IASB Meeting
• Discussed at October 2006 IASB Meeting
• Discussed at January 2007 IASB Meeting
• Discussed at May 2007 IASB Meeting
• Discussed at July 2007 IASB Meeting
• Discussed at November 2007 IASB Meeting
• Final amendment to IFRS 2 published 17 January 2008, effective 1 January 2009.

February 2006: Proposed Amendments for Vesting Conditions and Cancellations

On 2 February 2006, the IASB issued an Exposure Draft that proposes to amend two aspects of IFRS 2 Share-based Payment – what are 'vesting conditions' and what is a 'cancellation':

The proposed amendments would apply for annual periods beginning on or after 1 January 2007, with earlier application encouraged. Click for IASB Press Release (PDF 52k).

Comment deadline is 2 June 2006.

Discussion at the July 2006 IASB Meeting

Vesting conditions

The Board agreed that vesting conditions include performance conditions and service conditions only. As to whether a definition of vesting condition (and, by extension, 'performance condition' and 'service condition') was required, different opinions were expressed.

The Board agreed to develop further guidance, to be incorporated as an addition to the Implementation Guidance for IFRS 2, on the various conditions that may determine whether a counterparty obtains the equity instruments granted. This might take the form of a simple organisation chart or table.

Cancellations

More time was spent discussing the topic of cancellations and whether it should make a difference whether the cancellation comes about through the actions of the counterparty or the entity.

The Board agreed that cancellations are cancellations, which ever party brings them about and that no amendment to IFRS 2 should be made with respect to this principle.

However, the Board agreed to investigate further whether some of the schemes that were seen as causing the problem, such as Save As You Earn schemes, were truly share-based payment schemes. Board members noted that such schemes often required contributions and/or salary deductions from plan participants; these contributions were held in a segregated account by the plan sponsor until such time as the depositor purchased the shares using the amounts in the SAYE account. As such, the arrangement operates in a manner similar to a savings account with interest. It was not entirely obvious that there was a share-based element. The staff will investigate this further and revert to the Board.

Discussion at the October 2006 IASB Meeting

Vesting conditions and cancellations

(a) Definition of 'vesting condition'

The Board discussed how best to respond to constituent requests that the definitions of 'vesting conditions' and 'performance conditions' should be clarified. The Board discussed a staff proposal (see paragraph 6(a) in Observer Note 19). However, the Board seemed to agree that the definition as drafted was trying to do too much and should be broken down to state that

• Vesting conditions are those conditions that entitle the counterparty to receive cash, other assets or equity instruments of the entity under the terms of a share-based payment arrangement. Vesting conditions can be service conditions and [non-service] conditions (see below)
• Service conditions require the other party to complete a specified period of service.
• [One possibility] All other conditions are non-service conditions.
• [Another possibility] All other conditions are performance conditions (as currently defined).

The staff will think about this idea, although it did have a lot of general support around the table.

(b) Definition of 'performance condition'

Board members expressed concern that the current definition was circular, and preferred to be explicit that 'performance conditions' was the residual category (i.e. 'non-service' conditions). This was not a definition as such but an explanation of the two broad categories of conditions in a share-based payment arrangement. It was noted that the 'non-service' conditions were also distinguished from service conditions because they were always entity-specific conditions.

(c) Treatment of cancellations

The Board agreed not to provide a definition of 'cancellation' in IFRS 2. What constitutes a cancellation would be determined by the terms and conditions of the share-based payment agreement. The Board reaffirmed its previous decision that it does not matter which party to a share-based payment arrangement cancels the arrangement, either would be treated as a cancellation. However, the Board agreed with the staff that, with respect to Save As You Earn schemes, the effect of the cancellation would be the repayment of the savings component and the reversal of the compensation element. The staff suggested that the savings component was the far larger component, which should mitigate the effect of the reversal. The Board agreed and will include an example in the Implementation Guidance (along the lines of the example in paragraph 87 of Observer Note 19).

(d) Resolution of existing differences with FAS 123(R)

The Board agreed not to attempt to resolve existing differences with FAS 123(R) as this was beyond the scope of this amendment and do not arise because of the Board's conclusions in this project.

(e) Effective date

The Board agreed that the amendments to IFRS 2 would be effective for financial years beginning on or after 1 January 2008.

(f) Re-exposure

The Board agreed that the proposals did not need re-exposure as there had been no fundamental change in the proposed amendments from those exposed.

The Board concluded its redeliberations and directed the staff to proceed to drafting a pre-ballot draft of the amendments. No Board members indicated an intention to dissent from the Standard.

Discussion at the January 2007 IASB Meeting

Exposure Draft: Vesting Conditions and Cancellations

The Board discussed two sweep issues arising from the Exposure Draft.

Accounting treatment for the liability component

The staff proposed to include in IFRS 2 a new paragraph 28(ba) to clarify the accounting treatment for the liability component and provided the following revised wording:

however, if the grant arrangement included a liability component, the entity shall remeasure the fair value of the liability at the date of cancellation or settlement. and Any payment made to settle the liability component shall be accounted for as an extinguishment reduction in of the liability.

Definition of vesting conditions

Two issues were discussed in respect of this.

Firstly, one Board member noted that the proposed definition is potentially confusing. The main reason for this is considered to be that the term 'service' could mean the quantity (service condition) and/or quality of services (performance condition) as well as the state of being in employment (in service) and that in paragraph 21 of IFRS 2 the term is used in all three different senses without ambiguity.

Accordingly the staff proposed the following amendment of the definition in Appendix A of IFRS 2 and the following additional paragraph BC 171A of the Basis of Conclusion:

Definition of vesting conditions

The conditions that determine whether the entity receives the services that entitle the counterparty to receive cash, other assets or equity instruments of the entity under a share-based payment arrangement. Therefore, service conditions include service conditions, which require the other party to complete a specified period of service, are vesting conditions. All other vesting conditions are performance conditions which require specified performance targets to be met (such as a specified increase in the entity's profit over a specified period of time). Performance conditions may be market conditions or other conditions.

Paragraph BC 171A

The term services refers to the quantity (service condition) or quality (performance condition) of the service received by the entity.

In principle the Board agreed to the revised definition but noted that the wording needs to be changed. Proposals for re-wording will be given to the staff offline.

Secondly, one constituent noted that further clarification is needed in respect of the treatment of conditions that are not dependent on service, for instance, when the employee receives the share on a successful initial public offering, even if the employee leaves service before the IPO occurs. The Board decided to explain in the Implementation Guidance to IFRS 2 when such a condition is a vesting condition and when it is not.

Discussion at the May 2007 IASB Meeting

The Board discussed several proposed amendments to the second pre-ballot draft of the ED. (The pre-ballot draft was omitted from the observer notes.)

In general the Board decided not to address any divergence issues in relation to SFAS 123 (revised) within the scope of this project since such issues should be addressed within the liability and equity project.

Without detailed discussion the Board agreed to the following changes to the second pre-ballot draft of the ED:

• Change paragraph 26 to clarify that a cancellation cannot occur before the grant date.
• In Implementation Guidance [a new IG (IG24) is being prepared] to confirm that the required treatment of a true cancellation by the counterparty or the entity only applies if the cancellation occurs after the grant date, that is, that the entity would revise earlier estimates to reflect the grant date value of zero in case of 'cancellations' before the grant date.
• Add a sentence to the Basis for Conclusions to clarify that 'a share-based payment may vest even if some non-vesting conditions have not been met'.
• Not to include a flowchart illustrating vesting conditions in paragraph IG 4A [new] (the flowchart was included in the Observer Note).

Discussion at the July 2007 IASB Meeting

The purpose of this discussion was to examine concerns raised by one Board member in response to the ballot draft of the ED. This Board member disagreed with the way in which it appears that the grant date is commonly interpreted under IFRS 2.

The definition of grant date is not addressed by the proposed amendment to IFRS 2. However, there is an interaction between the determination of the grant date and the proposed cancellation requirements. At its May meeting, the Board decided that a cancellation cannot occur before the grant date. Since the grant dates in IFRS 2 and SFAS 123 (revised) could be different, the same event could be treated as a reversal of expense by one standard (because grant date has not yet occurred) and an acceleration of expense by the other standard (because grant date has occurred).

The Board acknowledged that the existing definition of grant date (in particular the term 'shared understanding') might be ambiguous.

The Board did not make any technical decisions regarding the grant date definition, but it discussed the following alternatives on how to proceed with the ED:

• Put out the ED as balloted and address the grant date issue in a separate project.
• Hold back the ED and address the grant date issue as part of this project. It was noted that this would require re-exposure.

The Board decided to vote on the way forward at the September 2007 meeting and directed the staff to prepare a paper discussing the grant date issue in more detail.

Discussion at the November 2007 IASB Meeting

Staff informed the Board that the redeliberation of the ED is close to its end but that constituents raised concerns about certain aspects within IFRS 2, in particular in relation to the grant date, where it was noted by that there are significant differences to US GAAP. Therefore, the staff asked the Board how it wishes to continue with this project. The following alternatives were presented:

• The Board proceeds with the proposed Amendment with no further work on the other issues;
• The Board proceeds with the Amendment and adds a separate new project to its agenda to consider other critical issues, including the determination of the grant date; or
• The Board does not finalise the amendment and, instead, adds a new project to its agenda to consider a range of critical issues, including the determination of the grant date and the issues addressed in the proposed Amendment.

The Board had a short discussion on the merits of a more comprehensive project on IFRS 2 with a focus of convergence with US GAAP. The Board also expressed concern that dropping the ED as proposed would not help as it fixes certain problems but does not worsen other perceived issues. The Board agreed to proceed with the proposed amendment as soon as possible to allow for early adoption at year end, but also allocate resources to investigate on ways to improve IFRS 2 and share-based payment accounting as a whole. That should preferably be done together with the FASB. The result should be a proposal to add a new project to the IASB's agenda at the next agenda meeting.

January 2008: IASB amends IFRS 2 for vesting conditions and cancellations

On 17 January 2008, the IASB published final amendments to IFRS 2 Share-based Payment to clarify the terms 'vesting conditions' and 'cancellations' as follows:

• Vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. Under IFRS 2, features of a share-based payment that are not vesting conditions should be included in the grant date fair value of the share-based payment. The fair value also includes market-related vesting conditions.
• All cancellations, whether by the entity or by other parties, should receive the same accounting treatment. Under IFRS 2, a cancellation of equity instruments is accounted for as an acceleration of the vesting period. Therefore any amount unrecognised that would otherwise have been charged is recognised immediately. Any payments made with the cancellation (up to the fair value of the equity instruments) is accounted for as the repurchase of an equity interest. Any payment in excess of the fair value of the equity instruments granted is recognised as an expense.