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IFRS 2 – Modifications that affect classification of the award (new)

Date recorded:

The Committee considered a request to clarify the accounting under IFRS 2 Share-based Payment for a modification of a share-based payment that changes its classification from cash-settled to equity-settled. The classification further impacts the issue of how to measure the replacement award where: A cash-settled award is cancelled and is replaced by a new equity-settled award; and The replacement award has a higher value than the original award.

The request provides an example of a cash-settled award that is cancelled and is replaced by a new equity-settled award with a higher value and identifies two different views on how to measure the replacement award:

  • View 1: Apply by analogy the modification guidance in IFRS 2
  • View 2: Do not apply the modification guidance in IFRS 2 and instead consider that the original award has been settled and replaced by a new award.

The staff has analysed each view in depth and prefer View 1, which is to apply by analogy the modification guidance in paragraphs 27 and B42-B44 of IFRS.

The staff have considered amending the modification guidance in IFRS 2 (paragraphs 27 and B42-B44) to state that when a cancellation of an award is followed by a replacement of a new award, and the two transactions are made in contemplation of each other, then in substance, this is a modification and the modification guidance in IFRS 2 should be applied.

However, the staff believe that making this clarification is outside the scope of the 2010-2012 annual improvement process because as the current guidance in IFRS 2 does not refer explicitly to modifications that change the classification of an award from one type to another, the staff think there is no specific guidance that could be clarified or corrected through a potential annual improvement.

In conclusion, the staff does not recommend that this issue be included in the 2010-2012 annual improvements cycle. Instead, the staff recommends that a modification of a share-based payment that changes its classification from cash-settled to equity-settled should be considered in a future agenda proposal for IFRS 2.

The Committee discussed the staff's position and in general disagreed with the conclusion reached by the staff that IFRS 2 can apply by analogy using modification guidance in paragraphs 27 and B42-B44. Regardless, the Committee agreed with the staff's recommendation and decided to not take this project forward as this request requires a change to the standard and is out of scope for this Committee. Further, the Committee agreed that this request can be included in the Board's existing agenda to improve IFRS 2. A draft agenda decision would be issued explaining the rationale.