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IFRS 2 — Vesting and non-vesting conditions

Date recorded:

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.

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