The Board received an update from the project manager on a meeting with the advisory group on share-based payment.

Measurement of expected volatility

Regarding how to take expected volatility into account when valuing an equity instrument of newly listed or unlisted companies, the advisory group suggested taking and adjusting a volatility factor by reference to other companies with similar characteristics. A minimum value approach as taken by SFAS 123 was dismissed as inappropriate, especially for start-up companies such as high tech companies). The Board accepted the view without taking a formal vote.

Grant date value adjustments

The Board reaffirmed its prior decision that grant date valuation reflect the possibility of forfeiture. The alternative of subsequently truing-up the grant date value to capture the 'correct' figures was rejected on the following grounds:

• The introduction of a true-up adjustment to earnings would, in effect, shift the focus from grant date to vesting date.
• Truing-up would lead to a fair value adjustment on an entity's own equity instruments which would not be in line with the Framework.
• The change in fair value is caused by factors other than movements in the share price of the equity instrument.

Repricing

If a repricing on the contract is negotiated, the Board discussed whether the difference between the fair values of the old option and the new option should be expensed when the contract is renewed or should be spread over the remaining vesting period. A slight majority of the Board favoured the first approach.

Lapsed options

Regarding lapsed options, the Board unanimously decided to leave the amount in equity, consistent with the accounting treatment for warrants that lapse unexercised. Two Board members noted that their local GAAP would require taking the amount to income if the option was not exercised.

Share appreciation rights settled in cash

If share appreciation rights are settled in cash rather than equity, the Board unanimously decided that

• A liability should be accrued over the vesting period.
• The liability should be measured at fair value (comprising both intrinsic and time value).
• The change in fair value between grant date and settlement date should be reported either on the face of the income statement or in the notes.

Share plans with cash alternatives

The key accounting issues for share plans that offer cash alternatives are whether and when a liability or eqjuity interest arises, measurement of those liabilities and equity interest, and accounting for their settlement.

There was general agreement that an equity interest arises when delivery of shares becomes more likely than a cash payment. At that time, the plan may result in a compound financial instrument that would have to be split into its equity and debt components. Although IAS 32 says that the equity component of a compound instrument is measured residually, in this case the equity component cannot be measured by subtracting the value of the debt instrument from the plan's entire value since that entire value is unknown. The liability component would have to be remeasured to fair value with changes in fair value going into the income statement.

Transfers of equity instruments by shareholders directly to the beneficiary

The Board decided unanimously that transfers of equity instruments by shareholders directly to a beneficiary should be accounted for as share-based payment unless the purpose of such transfers was clearly not for remuneration.