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IFRS 2 — Transactions in which the manner of settlement is contingent on future events

Date recorded:

The Committee received a request to clarify how to account for share-based payment transactions where settlement is contingent on either:

  • Issue A — a future event that is outside the control of both the entity and the counterparty; or
  • Issue B — a future event that is within the control of the counterparty.

The Staff has performed its analysis and outreach and came with the following recommendations:

  • Issue A — this is a common issue, however, it should not be added to the Committee’s agenda as the issue should be considered within the broader IFRS 2 project by the IASB.
  • Issue B — this is not a wide spread issue, therefore, it should not be added to the Committee’s agenda.

In the May 2013 meeting, the Committee noted significant diversity in accounting for the share-based payment transaction described in Issue A. The Committee therefore asked the staff to explore approaches to providing guidance for the classification of the share-based payment transaction in Issue A.

In the September 2013 meeting, Staff presented to the Committee various approaches for adding specific guidance to IFRS 2 Share-based Payment, for the Committee to decide and recommend to the IASB to amend to solve the divergence. The alternative approaches are:

  • Approach A — classify the entire award as cash-settled;
  • Approach B — classify the entire award as cash-settled if cash settlement is probable; or
  • Approach C — classify the award as both cash-settle and equity settled.

With Approach C there are three alternative models on measuring each component which were explained in the staff paper. These were:

  1. Model C-1: Recognise a cash-settled component based on fair value of cash settlement alternative plus an equity-settled component based on the ‘expected’ threshold;
  2. Model C-2: Bifurcate into cash-settled and equity-settled based on probability of cash settlement; or
  3. Model C-3: Bifurcate into cash-settled and equity-settled by using the compound financial instrument approach in paragraphs 35-40 of IFRS 2.

Staff found Approach A not to be useful in providing users information as it does not take into account the likelihood of the occurrence of a contingent settlement event. This approach could result in classifying the entire share-based payment transaction as cash-settled even if the contingent event occurs only in limited circumstances such as death of employees. Approach C, in particular MC-2 was found to be helpful as it would best match the principle in paragraph 34 of IFRS 2 for the classification of a share based payment transaction with a cash alternative. However, staff noted this would cause complexity in the accounting for a share based payment with a contingent cash settlement provision, as the entity would need to continuously reclassify part of the share based payment as the probability of the occurrence of cash settlement changes. Staff recommended Approach B to the Committee where a share based payment transaction with a contingent settlement provision is classified as cash settled if it is probably that the entity will settle the share based payment in cash or other assets otherwise it is classified as equity settled. Staff explored accounting changes in classification if Approach B were to be taken. The two alternative methods of accounting for the change in classification were:

  • Method 1 — Treat it as a failure to satisfy a non-market vesting condition (paragraph 19 of IFRS 2)
  • Method 2 — Treat as a modification of the terms and conditions of the share-based payment (paragraph 28(c) of IFRS 2)

For a change in the classification from cash-settled to equity-settled, in March 2013, the Committee decided to recommend to the IASB that it should add specific guidance to IFRS 2 in a narrow-scope amendment project. Even though details of the amendment have not been presented to the IASB, Staff think that the proposed amendment would provide guidance for a change in the classification of a share-based payment with a contingent settlement provision. Hence, Staff think that if the Committee agrees that the IASB should provide guidance for a share-based payment with a contingent settlement provision in line with Approach B and Method 2, Staff will bring the recommendations for the two amendments as a package to a future meeting of the IASB.

In light of the above, Staff found Approach B to be the most appropriate and think that a change in the classification of the share-based payment transaction arising from a change in an expected manner of settlement should be accounted for in the same manner as a modification of the terms and conditions of a share-based payment (Method 2). Accordingly, if the Committee agrees that IFRS 2 could be amended, Staff recommend to the Committee that it should propose a narrow-scope amendment to IFRS 2 to the IASB in line with Approach B and with the accounting for classification changes described in Method 2 above. In addition, Staff recommend that the Committee should propose the amendment together with the proposed amendment for the accounting for a change in the classification from cash-settled to equity settled, which the Committee decided to recommend to the IASB in the March 2013 meeting.

In the September 2013 meeting, a member highlighted they did not think there was significant diversity in practice on this issue. They disagreed with staff’s approach on the treatment of this as a modification and thought that the true up approach was better suited; they went on to explain this was more prominent in practice when the outcome is more probable and also it is a much simpler approach.

Another member agreed with staff proposal on the basis there is not a neat solution to this situation and neither approach is a perfect solution. Another member agreed that rather than inventing a new method, it is better to deal with the situation using the current methods available.

A member highlighted that the proposal presented by Staff is more convergent with US GAAP than any other answers, but not completely as the definition of probable under US GAAP is different to that under IFRS.

The Chairman reconvened the meeting and said the committee were in favour of a more probability based approach. There are two methods available, the first being having a catch up adjustment and therefore having a cumulative hit to the profit and loss account as if the entity had always applied this approach and therefore focused the expense in one period. The second method is a change in classification so there is no cumulative hit to the profit and loss. Instead each period would reflect the expense relating to it.

The Committee concluded through a vote to adopt the catch up approach and present this to the Board.

With regards to Issue B, as mentioned in the May 2013 meeting, there were no responses from the outreach request and therefore staff were not providing an updated technical analysis on this issue and therefore recommended the Committee should not change its previous decision of not adding this to its agenda. The Committee agreed with staff’s recommendation that it should not take this onto its agenda.

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