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| IFRS 2: Treasury Share Transactions and Group Transactions |
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 Go To List of IFRIC Issues
Issue Description: The project involves the issues that arise when a subsidiary gives its employee benefits in the form of rights to purchase shares in its parent, and when an entity must purchase its own shares to satisfy IFRS 2 obligations. The project includes the following cases:
Discussion at the November 2004 IFRIC Meeting The IFRIC agreed that this issue should be taken onto its agenda, and that at this time all of the issues identified above should be considered. It was noted that the existence of minority interests would further complicate many of these issues. The IFRIC decided to consider all of these issues for interpretation, as many of the simpler issues must be concluded on as a building block to those requiring more in depth interpretation. However the IFRIC noted that in terms of final published interpretations it was possible some of these issues might be excluded and passed to the IASB education section. Discussion at the December 2004 IFRIC Meeting The IFRIC considered a number of examples of cases where an entity provides its employees with share-based payments where the shares are those of its parent rather than itself, or acquires treasury shares in order to satisfy share-based payment obligations. The first example is a single entity which voluntarily purchases its own shares on the market to satisfy share based payment obligations - it was agreed that such a transaction should be treated as an equity settled share based payment in accordance with IFRS 2. The second example is where a single entity must mandatorily purchase its own shares to satisfy a share based payment obligation. It was agreed that this is an equity settled transaction, and the question of whether a liability should be raised for the obligation to purchase own shares is a question of interpretation of IAS 32 rather than IFRS 2 and should not be addressed in this project. The third example is where a subsidiary grants share options over shares in the parent. A majority of IFRIC members agreed that this should be treated as equity settled, and that this was consistent with paragraphs BC19-BC22 of IFRS 2, and the reference to issuance of shares from other group entities in paragraph 11 of IFRS 2. It was agreed that IFRIC should expose only this view, although a minority of IFRIC members expressed the view that this conclusion results in very different accounting depending on how the intra-group expense allocation is handled, and particularly whether payments are required from the subsidiary to the parent (as noted in examples 5 and 6). The fourth example is where the subsidiary grants share options over shares in the parent and the parent levies an inter-company charge. The IFRIC agreed this should be treated as an equity settled transaction. In the fifth example the subsidiary grants share options over shares in the parent which it buys in the market. It was agreed this must be treated as cash settled because the subsidiary is giving up another asset (its shares in the parent rather than its own equity) to settle the share based payment obligation. Similarly in the sixth example where the subsidiary grants share options over shares in the parent which it buys from the parent this should be treated as a cash settled payment of the subsidiary. In example seven, where there is a group transfer of employee from one member of a group to another. Any difference between the total of amounts recognised in subsidiary's accounts and the amount determined at the group level should be treated as a consolidation adjustment. The IFRIC noted that the accounting would vary depending on the form and structure of the group scheme, which are often structured in a manner designed to be tax effective. The IFRIC noted that there were future issues to be considered in terms of inter-company transactions including those related to transfer pricing and related parties, which are wider reaching than IFRS 2 issues alone and should be addressed separately. The IFRIC considered briefly a situation where the subsidiary grants a cash-settled share appreciation right based on the parent's share price and agreed that this is outside of the scope of IFRS 2 and within the scope of IAS 19. The IFRIC agreed that the key example was example three and that this should be converted into text for an interpretation, including the journal entries. The flow of logic used in getting to this conclusion (example 1, 2 and 4-6) should be explained in the basis for conclusions. The IFRIC will consider a draft interpretation at a future meeting. Discussion at the IFRIC Meeting February 2005 The IFRIC considered a draft interpretation based on the examples that it had considered at previous meetings. The IFRIC had an extensive discussion on the appropriate accounting treatment in scenarios where a subsidiary provides parent company shares to the employees. The IFRIC concluded that while this transaction would be an equity-settled share-based payment in the group accounts, it may be a cash-settled share-based payment in the subsidiary's entity-only accounts. The IFRIC agreed that the wording in IFRS 2 stating that IFRS 2 applies to transactions where shares are received in other group entities is designed to scope in such arrangements, rather than to dictate that they must be accounted for consistently in individual entity accounts and consolidated accounts. The IFRIC made the following decisions in respect of specific situations:
The IFRIC agreed to consider a further draft interpretation at its March meeting, and that the interpretation should be worded to cover both transactions within a group, and transactions where a major shareholder grants shares – i.e. to cover both types of transactions scoped into IFRS 2 by paragraph 3 of that standard. IFRIC D17 Issued IFRIC D17 IFRS 2 Treasury Share Transactions was issued 19 May 2005. Comment deadline is 18 July 2005. Discussion at the May 2006 IFRIC Meeting The IFRIC continued its discussion of D17 - Group and Treasury Share Transactions. At IFRIC's November 2005 meeting, the staff had presented an analysis of comments on the draft interpretation. The IFRIC was not able to get to a consensus at that meeting. Some members thought the IFRIC should discontinue the project as the issues in D17 did not address a principle for how group transactions should be accounted for in the separate financial statements of the subsidiary. However, the IFRIC asked the staff to develop a paper exploring accounting under the following issues:
The issue before the IFRIC at the current meeting is how to continue on D17. (Note that the staff had outlined a rejection note that the IFRIC used in their discussion, which was not available for observers). The staff had analysed issue (a) and (b) and concluded that the principles set out in IFRS 2 were sufficiently clear to recommend that an interpretation not be issued. The IFRIC did not discuss those two issues but focused its discussion on the accounting treatment for issue (c) and )d), and specifically the accounting treatment in the subsidiary's separate financial statements. The staff's paper outlined a treatment that would be similar for issues (c) and (d), resulting in equity-settled treatment for both. The IFRIC members were divided in their views. Some disagreed with the staff analysis as they did not think that equity-settlement accounting is appropriate in the separate accounts of the subsidiary under (d). This led to debate on the issue of 'push-down' accounting (that is, if the transactions are accounted as equity-settled share-based payment in consolidation, that accounting should be 'pushed down' to the parent's and the subsidiary's separate accounts). At the end of the discussion, the IFRIC asked the staff to review the wording in IFRS 2 and to explore whether it possible to read into the current standard how accounting in the separate financial accounts the subsidiary and a parent in at group share-based payment transaction should be accounted for. The IFRIC decided to postpone the decision on whether to issue an interpretation or whether to discontinue the project until the staff had analysed the wording of IFRS 2. Discussion at the July 2006 IFRIC Meeting The IFRIC discussed the following situations, previously raised in paragraph 6(c)(i) and 6(c)(ii) of D17 Group and Treasury Share Transactions:
Situations in which the Parent grants options on its shares directly to a Subsidiary's employees or to the Subsidiary, which then delivers them to its employees The IFRIC quickly coalesced around a method (Method 3 in the Observer note) that would result in a 'reasonable allocation of the group charge' being made by the Parent to the Subsidiary. This method ensures that, regardless of the intragroup payment structures that exist, the effects of the transactions are reasonably reflected in profit or loss of the subsidiary that receives services from the employees. Several IFRIC members, while expressing support for the method, also expressed concerns about the possible consequences of this approach on separate financial statements generally. Others noted the concern, but thought that because these schemes were always 'group schemes' and the parent company was actively involved in the scheme, the reasonable allocation approach reflected the substance of the transaction. A subsidiary grants equity instruments of its parent (or another entity of the same group) to its employees The IFRIC was more troubled with extending Method 3 to the second group of transactions, because some of them thought that the approach contravened IAS 39's definitions of a derivative and the accounting prescribed for them in that Standard. Decision After an extended discussion, it was decided to draft an Interpretation to address the first Issue only. The Interpretation would comment that, in some circumstances, share-based payment schemes would be more appropriately treated as cash-settled. Next steps The staff will bring a draft Interpretation to the next meeting of the IFRIC. Discussion at the September 2006 IFRIC Meeting The IFRIC discussed staff proposals on:
Share-based payment arrangements involving equity instruments of the parent (or another entity in the same group) A parent grants rights to its equity instruments to the employees of its subsidiary and the subsidiary does not have an obligation to the employees After considerable discussion, the IFRIC concluded that in these circumstances, if the transaction was an equity-settled share-based payment transaction in the parent/ group financial statements, it would also be equity-settled in the subsidiary's financial statements. The subsidiary would recognise a contribution from an equity participant for the fair value of the amount of services attributed. The IFRIC noted that this was an application of the general principle of attribution in IFRS 2.3 transfers of an entity's equity instruments by its shareholders to parties that have supplied goods or services to the entity (including employees) are share-based payment transactions. This also applies to transfers of equity instruments of the entity's parent, or equity instruments of another entity in the same group as the entity, to parties that have supplied goods or services to the entity. A subsidiary grants rights to equity instruments of its parent (another entity in the same group) to its employees, and the subsidiary has an obligation to the employees The IFRIC reconsidered its decision taken at the July 2006 meeting not provide guidance in this area. The IFRIC considered three alternatives: (i) to require such arrangements to be treated as cash-settled share-based payment transactions in the financial statements of the subsidiary (irrespective of the treatment in the parent); (ii) to require equity-settled treatment, if the transaction was an equity-settled share-based payment arrangement in the parent/ group financial statements; or (iii) provide no guidance in the Interpretation, but add a discussion in the Basis for Conclusions noting that different treatments are possible. The IFRIC noted that, in the subsidiary's financial statements, IFRS 2 required that such arrangements be treated as cash-settled because the instruments used to settle the subsidiary's obligation to its employees were not its own equity instruments. Thus, it was not possible to apply the principle of attribution in IFRS 2.3. The transaction was a share-based payment, but it did not meet the definition of an equity-settled share-based payment transaction. Thus, it had to be accounted for as a cash-settled transaction. Transfers of employees between group entities The IFRIC agreed that the transfer of employees between group entities would not be considered as a failure to satisfy a non-market vesting condition in the financial statements of the subsidiary from which the employees transfer employment. The IFRIC also agreed that if an employee leaves the group during the vesting period (i.e. fails to satisfy a non-market vesting condition), each individual subsidiary should reverse the charge previously recognised in respect of the services from that employee during the past vesting period. Whether the Interpretation should include guidance that the Interpretation might not be applicable automatically to intragroup transactions in general. The IFRIC agreed that because of its decisions made at this meeting, the staff proposal to include guidance that the Interpretation might not be applicable automatically to intragroup transactions generally was unnecessary and should be deleted. Approval The IFRIC Chairman asked whether, on the basis of the decisions taken at this meeting, any IFRIC Members would oppose the consensus in the Interpretation (subject to drafting). No IFRIC Members indicated their opposition, and the Interpretation was approved. Next steps IFRIC members were asked to submit drafting comments to the staff, after which the staff will prepare a revised draft for the IFRIC to review in time to submit the Interpretation to the IASB for consideration at Board's October 2006 meeting. The date of issue of the Interpretation would depend on the Board's review of the document. Discussion at the October 2006 IASB Meeting At its September 2006 meeting, the IFRIC decided to present the revised draft text of a final Interpretation based on D17 IFRS 2–Group and Treasury Share Transactions to the Board as a final draft and that the Board should be asked for approval to issue the Interpretation. The revised draft text of D17 reflects the decisions taken by the IFRIC during its post-exposure deliberations, particularly the decisions taken at the September 2006 meeting. The Board unanimously approved the final draft of the final Interpretation. November 2006: IFRIC 11 Issued On 2 November 2006, the IFRIC issued Interpretation 11 IFRS 2: Group and Treasury-share Transactions.
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