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IFRS 2 Share-based Payment – Vesting and non-vesting conditions

Date recorded:

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.

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