Go To List of Issues on the Agenda of the Interpretations Committee

Issue Description:

The IFRIC received a request in May 2009 to clarify the definition of vesting conditions and non-vesting conditions in IFRS 2 Share-based Payment. In particular, the questions the IFRIC was asked to clarify are:

• Does there need to be a direct link between a performance target and the individual employee's service for a condition to be a performance condition?
• When determining whether a target qualifies as a performance condition, does it matter whether the specified service period is shorter or longer than the period over which the performance target should be met?

Discussion at the January 2010 IFRIC Meeting

Several IFRIC members noted that they do not agree with the staff's analysis on the questions, acknowledgoing that this is evidence of the divergence that exists in practice and the need for guidance on the appropriate accounting treatment.

One member questioned what the most expedient and appropriate way would be to address the issue: as an annual improvement or as an IFRIC Interpretation. The staff identified three alternatives for addressing the issue:

• As an IFRIC Interpretation. A final Interpretation can most likely be issued within the next 12 months.
• As an Annual Improvements Project. The most likely outcome of this alternative will be the issuing of an exposure draft in August 2010, with a final Standard being issued in April 2011.
• A separate amendment to IFRS 2. This alternative will require permission from the Board for the IFRIC to carry out the amendment, with the likely timing similar to that of an IFRIC Interpretation.

One member then questioned why this matter should been taken on, while other IFRS 2 matters were rejected as IFRIC projects. Another IFRIC member responded that although he had a similar question, the reasoning is that this matter is arising from a recent amendment to IFRS 2 and that the IFRIC has to the opportunity to limit the divergence in practice before it becomes embedded.

It was suggested that if this matter is treated as a separate amendment to IFRS 2, the scope of the project should not be limited to this matter, but should also address other matters relating to IFRS 2. Some IFRIC members remarked that this route will not result in the matter being resolved quickly and that a comprehensive review of IFRS 2 should be left to the IASB.

The IFRIC agreed to add the matter to its agenda as an IFRIC Interpretation project.

Discussion at the March 2010 IFRIC Meeting

At the January 2010 meeting, the IFRIC had tentatively agreed to add a project to its agenda to clarify the distinction between a service condition, a performance condition, and a non-vesting condition. The staff an analysis and preliminary staff views. A number of IFRIC members were uncomfortable with the proposed list of issues identified by the staff for further research and analysis. Those members were also of the opinion that to analyse and amend/improve the issues identified by the staff will result in a complete rewrite of IFRS 2, which is a task that has to be performed by the Board.

One IFRIC member noted that the real issue troubling preparers at the moment is the interaction between multiple conditions, especially 'and', vs 'or' conditions, and that the IFRIC should only focus on this issue and leave the comprehensive review of IFRS 2 for the Board. Another IFRIC member observed that although US GAAP guidance on share-based payments is written in a different manner to IFRS 2, the principles are broadly the same, and the same issues are not encountered under US GAAP, as everybody is clear about what the requirements are for service and performance conditions.

The IFRIC instructed the staff to explore the guidance under US GAAP regarding the interaction of multiple conditions and determine whether it can be accommodated in IFRS 2 without contradicting any IFRS requirements.

Discussion at the July 2010 IFRIC Meeting

The Committee continued the deliberations on the distinction between vesting and non-vesting conditions and the Chairman reminded the Committee that the objective of the discussion will be to determine the next steps in the process and will not be based on decisions taken at previous meetings.

Definition of performance condition

The staff presented an analysis on the attributes of a performance condition, being:

• the incentive exists only if the employee is able to influence whether the target will be met; and
• the performance target is in the interest of the entity.

These attributes are broadly consistent with the definitions in US GAAP.

In considering the impact of these attributes on the current practices under IFRS 2, the staff applied the attributes to a number of illustrative examples, including save-as-you-earn (SAYE) schemes, IPOs and change in control provisions.

Some Committee members noted that although they agree with the reasoning and conclusions of the illustrative examples, they did not agree with the attributes.  A Committee member thought that any share-based payment scheme would be in the interest of the entity, otherwise the entity would not have entered into it.  This member was of the opinion that performance conditions should rather relate to the operations/actions of the entity and its achievement should be influenced by the entity rather than the employee.

A few Committee members did not feel that the proposed changes to the definitions would be an improvement on the existing guidance and that more problems are being created by continuing with the proposed direction of the project.

A Committee member noted that the same confusion and diversity in practice did not exist in the US and the US GAAP prepares are not experiencing the same difficulties in distinguishing performance conditions from market conditions.

The Chairman responded that taking on the definitions in US GAAP would be outside the mandate of the Committee and reluctantly acknowledged that in order to develop guidance that will provide clarification of principles to be applied, any steps to be taken should be within the mandate of the Committee as the Board is not likely to get to the matter before the end of 2011.

Several Committee members noted that the definition of a performance condition by reference to the operation or activities of the entity (as described in the questions to the Committee in the agenda paper) is closer to their understanding of a performance condition. They suggested eliminating any reference to the attributes identified by the staff.

Other Committee members responded that if the attributes are eliminated, the proposed definition works for IPOs and change in control provisions, but not for SAYE schemes. As the majority of Committee members agreed that the current practice of treating the saving requirement in a SAYE scheme as a non-vesting condition (similar to the payment of an option exercise price) results in the most appropriate treatment if employees decide not to continue saving, as long as the service condition is still met. The Committee agreed to remove SAYE schemes from any future discussions on this matter and focus only on IPOs, change in control provisions and other illustrative examples that represent problem areas.

On this basis, the majority of Committee members voted in favour of the proposed definition of a performance condition.

The Committee continued to deliberate the illustrative examples provided by the staff, but agreed to allow staff some time to consider any changes to the examples based on the earlier decision in relation to performance conditions. There was general disagreement between the Committee members on whether a performance target with a measurement period that is longer than the required service period is a performance condition or a non-vesting condition. Some members were of the opinion that under US GAAP these performance targets are being treated as performance conditions, whereas other Committee members and the staff were of the opinion that they were non-vesting conditions. The Chairman requested the staff to do more research on the matter and report back at the next meeting.

A Committee member noted that the Committee has not yet agreed on whether to proceed with the project as an annual improvement or an interpretation. The Chairman asked the Committee to allow the staff to finalise their analysis based on today's discussions and requested the staff to consider the criteria for annual improvements and interpretations and present an analysis at the September meeting with a recommendation on how best to proceed. Another Committee member also requested that the staff papers to be presented at the September meeting should highlight the original questions asked by constituents, as the Committee seems to have lost sight of what it was asked to clarify. The staff committed to do more research on the illustrative examples and present the revised examples and analysis at the next meeting.

Discussion at the September 2010 IFRIC Meeting

Non-compete provision and performance target exceeding a required service period

The Committee discussed a staff analysis of whether a non-compete provision should be treated as a service condition. After a thorough debate, the Committee agreed with the assessment that the share-based payment transaction subject to a non-compete provision only is considered to be a transaction with parties other then employees and IFRS 2.13 should be applied to the service condition resulting from refraining from working for the entity's competitor in compliance with the non-compete provision. Consequently, a non-compete agreement should be presumed to be a 'contingent feature'.

With respect to the treatment of a performance target exceeding a required service period, the Committee noted that the practice under current IFRS 2 is that if a performance target's achievement is only determined after any required service period, then the performance target does not constitute a performance condition. This view is held by each of the four largest international accounting firms.

The staff proposed a revised definition of 'performance condition' as follows:

A condition affecting the vesting, exercise price, or other pertinent factors used in determining the fair value of an award that relates to both:

• (a) a counterparty's rendering service for a specified (either explicitly or implicitly) period of time, and
• (b) achieving a specified performance target that is defined by reference to:
  • (i) the employer's own operations (or activities); or
  • (ii)the same performance measure of another entity or group of entities,

while the counterparty is rendering the required service.

The Committee agreed that a performance target should be 'fully combined' with an explicit or implicit service requirement in order to constitute a performance condition. In addition, a performance target that does not have a fully combined explicit or implicit service requirement should be considered a non-vesting condition.

Project Options

More challenging was how to present the results of the Committee's deliberations. Some Committee members were of the view that the Committee's decisions did not change the intent of IFRS 2 and that the Committee could proceed to a Draft Interpretation. Others were more cautious, thinking that because the Committee was proposing substantial changes to wording in IFRS 2, any change should be made via the Annual Improvements Process. Others thought that since, in any event, the IASB would need to be involved and given the sensitive nature of IFRS 2 generally, a report of the Committee's deliberations and conclusions should be presented to the IASB and that the IASB should be asked to provide specific guidance to the Committee

In the end, the Committee agreed that the staff should raise this issue with the IASB at the September 2010 meeting. It might be possible to address some issues through the Annual Improvements Process, but the larger matters—in particular those that changed the IASB's 2008 amendments to IFRS 2—created practical issues that might best be addressed by the IASB itself, perhaps as part of the post-2011 Post-Implementation Review of IFRS 2.

Any further Committee activities will be informed by the directions received from the IASB.

Discussion at the November 2010 IFRIC Meeting

The Committee has previously considered several issues related to vesting conditions within IFRS 2 and which alternative provided the best solution to address these issues (i.e., an interpretation, as part of Annual Improvements, a separate IFRS 2 amendment project, or as part of the post-implementation review of IFRS 2).

The Committee had diverse views on how to proceed and requested the views of the IASB. At the September 2010 Board meeting, the Board acknowledged that not every issue required being addressed in a similar process and therefore asked the Committee to prioritise the issues under consideration and then determine a best route forward.

The IFRS 2 issues currently being considered by the Committee include:

• Issue 1 – Correlation between an employee's responsibility and the performance target
• Issue 2 – Share market index target
• Issue 2A – Vesting conditions other than service or performance
• Issue 3 – Performance period longer than the required service period
• Issue 4 – Non-compete provision
• Issue 5 – Interaction of multiple vesting conditions
• Issue 6 – Termination of employments

The staff noted that issues 1, 2, 3, 4 and 6 were raised by submissions to the Committee whereas issues 2A and issue 5 were derived during Committee deliberations. The Committee decided to take the following action:

• Address issues 1, 2, 3 and 6 through the Annual Improvements process
• Address issues 2A, 4 and 5 through an agenda request to the IASB for a separate amendment project to IFRS 2.

The Committee noted that the consideration of the separate agenda request would have to be considered alongside the ANC's report for a complete reconsideration of IFRS 2.

As part of the process to address issues 1, 2, 3 and 6 though the Annual Improvements process, the Committee tentatively agreed to propose separating the performance and service conditions from the definition of vesting conditions within IFRS 2 as follows:

• 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. Vesting conditions are either service conditions or performance conditions. Service conditions require the counterparty to complete a specified period of service. Performance conditions require the counterparty to complete a specified period of service and specified performance targets to be met (such as a specified increase in the entity's profit over a specified period of time). A performance condition might include a market condition.
• performance conditions
• Performance The conditions that require
  • (a) the counterparty to complete a specified period of service, and
  • (b) specified performance targets to be met (such as a specified increase in the entity's profit over a specified period of time) while the counterparty is rendering the service required in (a).
• A performance target is defined by reference to the entity's own operations (or activities) or its share price. A performance target might relate either to the performance of the entity as a whole or to some part of the entity, such as a division or an individual employee. A performance condition might include a market condition.
• service conditions
• Service The conditions that require the counterparty to complete a specified period of service. If the counterparty, regardless of the reason, ceases to provide service during the vesting period, the counterparty has failed to satisfy the condition.

Discussion at the November 2010 IASB Meeting

With regards to the issue related to vesting and non-vesting conditions under IFRS 2, there are six issues that have been currently considered by the Committee. The staff noted that the Committee had taken the Board's suggestion from the September meeting and decided to address four out of six issues through the annual improvements process (1, 2, 3 and 6) and the rest through an agenda request to the IASB for a separate amendment project to IFRS 2 (issues 4 and 5). The Board agreed with that decision.

Discussion at the March 2011 IFRS Interpretations Committee Meeting

Review of requests received in relation to IFRS 2 by the Committee

At its September 2010 meeting, the Board discussed the Interpretations Committee's recommendations regarding vesting and non-vesting conditions relating to IFRS 2 Share-based Payment. After doing so, the Board asked the Interpretations Committee to review the other requests that it had received in relation to IFRS 2 with a view to helping the staff to develop an agenda proposal that could be considered as part of the setting of the new agenda in 2011.

The staff brought to the Committee a summary of various IFRS 2 issues that had been received since 2005. A summary of the issues and the staff recommendations are as follows:

1. Employee share loan plans (May 2005) – The staff note that there have not been any recent amendments to IFRS 2 that could change the original conclusions that the Committee reached on this issue. The staff are not aware of any further concerns on this matter or diversity in practice. Therefore, the staff do not recommend that this issue should be considered in a future agenda proposal for IFRS 2.
2. Share plans with cash alternatives at the direction of the entity (May 2006) – There have not been any recent amendments to IFRS 2 that could change the original conclusions that the Committee had reached on this issue. In addition, the staff are not aware of any further concerns on this matter or diversity in practice. The staff therefore do not recommend that this issue should be considered in a future agenda proposal for IFRS 2.
3. Grant date and vesting periods (May 2006) – There have not been any recent amendments to IFRS 2 that could change the original conclusions that the Committee had reached on this issue. In addition, the staff are not aware of any further concerns on this matter or diversity in practice. Therefore, the staff do not recommend that this issue should be considered in a future agenda proposal for IFRS 2.
4. Fair value measurements of post-vesting transfer restrictions (November 2006) – There have not been any recent amendments to IFRS 2 that could change the original conclusions that the Committee had reached on this issue. In addition, the staff are not aware of any further concerns on this matter or diversity in practice. Therefore, the staff do not recommend that this issue should be considered in a future agenda proposal for IFRS 2.
5. Incremental fair value to employees as a result of unexpected capital restructuring (November 2006) – There have not been any recent amendments to IFRS 2 that could change the original conclusions that the Committee had reached on this issue. In addition, the staff are not aware of any further concerns on this matter or diversity in practice. However, if the Committee thinks that this issue has widespread significance, then the staff think that the Committee should consider recommending the Board to consider this issue, in a future agenda proposal for IFRS 2.
6. Employee benefit trusts in the separate financial statements of the sponsor (November 2006) – This issue was classified as an IFRS 2 issued when considered by the Interpretation Committee in 2006. However, the staff view this issue as principally a consolidation/reporting entity question rather than a share-based payment question. The staff are not aware of any further concerns on this matter or diversity in practice. The staff do not recommend that this issue should be considered in a future agenda proposal for IFRS 2.
7. Transactions in which the manner of settlement is contingent on future events (January 2010) – There have not been any recent amendments to IFRS 2 that could change the original conclusions that the Committee had reached on this issue. Since January 2010 the staff have learnt that the Board does not expect to conduct a post-implementation review of IFRS 2. Consequently, the staff think that the Committee should recommend the Board to consider this issue in a future agenda proposal for IFRS 2.
8. Vesting and non-vesting conditions (September 2010) – The classification of a non-compete provision and the accounting for the interaction of multiple vesting conditions should be referred to the Board for consideration in a future agenda proposal for IFRS 2.

One Committee member mentioned that the issue of incremental fair value to employees as a result of unexpected capital restructuring is something that is becoming more and more common. The Committee Chairman responded that plan agreements which do not contain provisions for capital restructurings are a matter for the company's legal counsel moreso than an accounting issue.

Certain Committee members were somewhat confused on the Board's process for addressing issues associated with IFRS 2. The staff clarified that the Board is not currently planning a post-implementation review of IFRS 2 but has a separate consultation process ongoing on the post-implementation review process. However, these issues may be raised as a separate project to amend IFRS 2 rather than through the post implementation review process.