Share-Based Payment

Date recorded:

The Board discussed six issues relating to questions raised in ED 2. The Board was not asked to make any decisions at this meeting, as other standard setters will be addressing these issues in the near future and it will be helpful to the staff and the Board to understand their views on the issues. The Board will address these issues in the July 2003 meeting with the intention to make tentative decisions.

The Board first discussed the proposal to measure employee share-based payments based on the fair value of the equity instruments granted (Question 7 in ED 2). The staff noted that a majority of the respondents supported the conclusion in ED 2 to measure these services by reference to the fair value of the options granted, as the option's fair value is more readily determinable than the fair value of the services received. A few Board members suggested adding in the notion of a rebuttable presumption; however, there seemed to be a majority supporting the requirement in ED 2. Specifically, several Board members were concerned that allowing employee options to be valued at the excess of the fair value of the services received over the current cash salary would generally result in a value of zero, which they felt was clearly inappropriate.

Question 11 of ED 2 proposed that, in the absence of an observable market price for options granted, an option pricing model that takes into account various factors (such as exercise price of the option, life of the option, current price of underlying shares, volatility in the share price, dividends expected, and risk free interest rate over the life of the option) should be used. The Board confirmed its intention that the Black Scholes model should not be prescribed; however the standard will indicate that it is one model that would be appropriate. The Board also noted that since valuation models are being improved and updated, the final standard should not give prescriptive guidance.

ED 2 proposed that the option be valued based on its expected life, not its contractual life (Question 12). The Board reiterated its support for that model. The Board also reiterated its support for including in the grant date measurement the effects of a reload feature (Question 14). The Board noted that several valuation experts have suggested that models to value reload features have been sufficiently developed and should cause little problem in practice.

Question 15 of ED 2 asked respondents to identify other common features of employee share options for which the IFRS should specify requirements. The staff noted that items consistent with the fair value measurement should be picked up in the final IFRS (for example, the effect of black-out periods on the fair value calculation).

The final issue discussed was the general form of the final standard. Specifically, the staff asked the Board whether the final standard should be more principle-based or more prescriptive (Question 16). The Board confirmed that the final standard should not be as prescriptive as some respondents requested. While there will be some guidance on how to determine fair value, there should be room left for more appropriate valuation valuations to develop. Therefore, while the Board may not prescribe a model, it will prescribe the parameters within which the model should operate.

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