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IFRS 2 — Modification of a share-based payment transaction from cash-settled to equity-settled

Date recorded:

The Committee discussed how to measure and account for a share-based payment in situations in which a cash-settled award is cancelled and is replaced by a new equity-settled award and the replacement award has a higher fair value than the original award.

The staff, in analysing this issue, noted that there is no specific guidance in IFRS 2 for a modification of terms of a cash-settled share-based payment transaction, including a modification that changes its classification to equity-settled and there is significant diversity in practice for the share-based payment transaction analysed.

The staff presented multiple approaches to resolving this diversity and lack of guidance, including applying by analogy the modification guidance in IFRS 2 and treating the original award as having been cancelled and replaced by a new award (with the new equity-settled award measured at the replacement date fair value of the equity-settled award). The latter view would also require assessment of how to account for the difference between the carrying amount of the liability and the elapsed portion of the replacement date fair value of the new equity award as of the replacement date (e.g., recognise it over the remaining vesting period (consistent with paragraph B43 of IFRS 2) or recognise it immediately in profit or loss (consistent with paragraph 43(c) of IFRS 2)).

The staff believing it appropriate to treat the original award as having been cancelled and replaced by a new award, with the difference between the carrying amount of the liability and the elapsed portion of the replacement date fair value of the new equity award as of the replacement date recognised immediately in profit or loss. Reasons for this support followed from views that the consideration paid for the settlement of a liability should be measured at fair value of the settlement date (consistent with a general principle for the accounting for the settlement of a liability in paragraph 6 of IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments), acknowledging that recognising the difference between the carrying amount of the liability and the fair value of the consideration paid is consistent with the accounting requirements for a cash-settled share-based payment award and noting that this approach is already taken in paragraph 43(c) of IFRS 2, even though it provides specific guidance to a situation in which the entity has a choice of the manner of settlement and the entity elects the settlement alternative with the higher fair value as at the settlement date.

Following this analysis, the staff proposed that guidance should be added to IFRS 2 in line with its analysis. As the amendment would not meet the criteria of the annual improvement project, the staff believed the amendment should be performed in a narrow-scope amendment project of the IASB.

Without significant debate, the Committee supported the staff analysis and recommendation. The staff intend to bring the staff draft of the amendments to a future meeting in line with the principles agreed by the Committee. The staff also noted that it is considering the inclusion of implementation guidance on this topic, which will be discussed in a future staff paper.

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