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IFRS 2 — Cash-settled share-based payment transactions that include a performance condition

Date recorded:

In April 2013, the Committee received a request to clarify the accounting for cash-settled share-based payment transactions that include a performance condition. The submitter thinks that IFRS 2 Share-based Payment does not specifically address the accounting for these transactions and this has led to diversity in practice.

The submitter thinks that IFRS 2 is not clear in specifying whether the measurement at fair value of cash-settled share-based payments that include a performance condition should be based on the notion of ‘fair value’ as defined in IFRS 13 or as defined in IFRS 2. The two methods of accounting adopted in practice are:

  • either being consistent with the measurement of equity-settled awards that include a performance condition in paragraph 19 of IFRS 2; or
  • the measurement of cash-settled awards should reflect the impact of all conditions and all possible outcomes on a weighted- average basis consistent with IFRS 13.

Staff performed outreach with the International Forum of Accounting Standard- Setters (IFASS) and securities regulators on this topic in order to establish whether the issue is widespread and whether significant diversity in practice exists. The majority of those who responded think that cash-settled share-based payment transactions that include a performance condition are not very common or widespread. However, two IOSCO members indicated that cash- settled share-based payment transactions that include a performance condition are common and relevant. The majority of those who responded think that the prevalent approach is to account for these transactions in a similar way as for equity-settled share-based payment transactions under IFRS 2. Only one member noted that there are different views on this issue.

Staff identified two methods for accounting for the effect of cash-settled share-based payment transactions that include a non-market performance condition as follows:

  • Approach A – equity settled measurement model
  • Approach B – cash settled measurement model

Staff support approach B as they think this approach is consistent with the measurement of the liability that arises from a cash settled award at fair value in accordance with paragraph 30 of IFRS 2, given that the underlying principle in a fair value valuation is to include the effects of all significant conditions that may affect its value. Staff believe that the inclusion of a scope exclusion in paragraph 6A of IFRS 2 (i.e. stating that the notion of fair value is not the same as the notion of fair value in IFRS 13) does not override the existing guidance for measuring cash-settled awards at fair value in paragraph 33. Staff think that the guidance in paragraph 33 could be reinforced by additional guidance that would indicate that, for cash-settled share-based payment transactions, an entity should take into the account the effect of vesting and non- vesting conditions when initially measuring the fair value of the liability and at the end of each reporting period until settled.

Based on their analysis, Staff propose adding paragraph 33A to IFRS 2 to clarify that the measurement of the fair value of the liability shall take into account the effect of vesting conditions and non-vesting conditions when initially measuring the fair value of the liability

and at the end of each reporting period until the liability is settled. Staff also propose amending paragraph IG 19 of IFRS 2 to clarify that the initial measurement of the fair value of the liability and the measurement of the liability at the end of each reporting period until settled shall consider the effect of all the terms and conditions on which the share appreciation rights were granted. Staff also want to add Example 12A to the Implementation Guidance in IFRS 2 to address the impact of a performance condition in the measurement of a cash- settled share-based payment transaction.

After assessing the Interpretations Committee’s agenda criteria and having done their analysis, Staff think that their proposed amendments to IFRS 2 meet the criteria for inclusion in the Annual Improvements cycle for 2012–2014. Staff propose that the amendment to IFRS 2 should be applied on a prospective basis rather than retrospectively because the proposed clarifications to the accounting for the effect of vesting and non-vesting conditions may result in changes to the timing and amount of the liability recognised at each reporting date. Staff believe that an entity should apply the amendment prospectively for annual periods beginning on or after 1 January 2016. Earlier application should be permitted.

First time adopters  have the appropriate relief through the exemptions for share-based payment transactions in Appendix D of IFRS 1 First- time Adoption of International Financial Reporting Standards.

Staff have reviewed other IFRSs for potential consequential amendments triggered by this proposed amendment. As a result of their review, Staff do not propose any consequential amendments.

The September 2013 meeting began with members expressing they can understand why Staff have concluded on Approach B but they would prefer approach A. The fair value of the liability award is the same as that of an equity instrument. Another member was concerned that the direction Staff are taking would lead to complex calculations which may be difficult to implement. This may ultimately lead to unintended consequences. Also, approach A is in line with BC 84 of the IFRS 2 as well.

In agreement with Staff another member expressed approach B was in line with the standard and agreed with staff. For approach A to be implemented, the standard would have to be amended.

A member explained that if approach B was taken then it would require further clarification within the standard.

Another member expressed that if a company was to sell this scheme then the company would account for this at fair value and therefore approach B would seem appropriate. However, the member also acknowledged that approach B would lead to measurement difficulties.

In their paper Staff found example 12 of the Implementation Guidance of IFRS 2 to be accurate and therefore recommended not to amend it. A member disagreed and explained example 12 assumes that each person will either stay or leave and therefore have only assigned probabilities of 0% or 100%. In reality this will never be the case, the probabilities are like to vary and therefore example 12 could not be applied to either of these scenarios.

Members discussed that the difference between approach A and B is the treatment of intra period expenses, the total cash paid out overall does not change. If approach A was adopted then this is a move away from the notion of fair value.

In disagreement a member explained that per paragraph 6A of IFRS 2 the definition of fair value is the same as that in IFRS 13. Paragraph 33 of IFRS 2 also explains the treatment of the liabilities in cash settled share based payments by taking into account all terms and conditions of the scheme.

A member gathered the thoughts of the Committee and summarised that from the discussions there is clear diversity in practice on the treatment of such schemes. By taking any one approach would ultimately lead to the other approach being seen as incorrect and therefore those that have adopted that “other” approach would have to justify why they had adopted that approach. Therefore issuing an agenda decision would be insufficient and this issue would be best dealt with through an annual improvement.

The Committee concluded with Approach A being the most appropriate by way of vote, which Staff would present to the Committee in the form of an Annual improvement in a future meeting.

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