IFRS 2 — Timing of recognition of intercompany recharges

Date recorded:

The Committee received a request for clarification relating to the accounting for intragroup recharges made in respect of share-based transactions.

The submission outlined a specific fact pattern in which the parent company of an international group grants share-based awards to the employees of its subsidiaries. The obligation to settle these awards is the parent’s. The awards are based on the employee’s service to the subsidiary. The subsidiary and the parent both recognise the share-based transaction in accordance with IFRS 2 Share-based Payment — typically over the vesting period of the awards. The parent has also entered into recharge agreements with its subsidiaries that require the subsidiaries to pay the parent the value of the share-based awards upon settlement of the awards by the parent. The specific question posed by the submitter is when the liability for the intragroup recharge transaction should be recognised in the financial statements of the subsidiary; that being, at the date of grant of the award or at the date of exercise of the award?

In analysing this issue, the submitter identified four methods of recognising the intragroup recharge:

  • View A (the linked transaction approach): The recharge is linked with the share-based arrangement because the amount recharged is based on the parent’s share-based payment arrangement with the employees of the subsidiary. The recharge is recognised as the employee’s service is rendered throughout the vesting period, in accordance with paragraph 7 of IFRS 2.
  • View B (the liabilities approach): The liability to the parent should be recognised by the subsidiary in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. If this view is adopted, there may not be a present obligation until all vesting conditions have been satisfied and it is probable that employees will exercise the option. This may not occur until the payment is made to the parent.
  • View C (the distribution of equity approach): Because the example in B53 of IFRS 2 credits the share-based transaction to equity, the recharge is viewed as analogous to a distribution. Distributions are only recognised when there is a present obligation and, in this case, the obligation is conditional on whether the employees exercises their option. The recharge would not be recognised by the subsidiary until the award is exercised.
  • View D (the executory contract approach): The recharge agreement should be treated as an executory contract and should not be recognised until one party has performed—either the parent by issuing the shares or the subsidiary by paying the recharge.

The staff outlined pros and cons of each of the approaches without recommending any particular approach. The staff also summarised outreach regarding the prevalence and diversity in practice on this issue, which revealed wide disparity regarding the accounting for the recharge (although many respondents to outreach feedback revealed that the issue was not widespread in their jurisdiction).

Based on its initial assessment of the issue, the staff recommended that the Committee should take this issue onto its agenda.

Committee discussions revealed divergent views on whether to take on this issue. Some Committee members saw this as an emerging issue which the Committee should take onto its agenda. Some even expressed strong views as to which view was appropriate – with a few expressing support for the linked transaction approach.

However, other Committee members expressed strong reservations with taking this issue onto the Committee’s agenda. Reasons for not taking this issue onto the agenda were primarily related to the possible consequences this issue may have on other common control transactions for which there is a perceived lack of sufficient guidance. Committee members also cited specific concerns including how to handle agreements where cost recorded is determined by the recharge agreement (noting in the submission, the cost recorded is not determined by the recharge agreement). Committee members also noted that the staff’s analysis was limited to addressing the recognition of the recharge liability without addressing presentation or measurement issues.

After a lengthy debate, the Committee tentatively decided not to take this issue to its agenda.

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