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IFRS 2 — Price difference between the institutional offer price and the retail offer price for shares in an initial public offering

Date recorded:

In November 2013, the Committee published a tentative agenda decision not to add to its agenda a request to clarify how an entity should account for a price difference between the institutional offer price and the retail offer price for shares issued in an IPO.

In May 2014, the Committee discussed the comments received on the tentative agenda decision, and decided that the agenda decision should contain more explanations about the reasons why the guidance in IFRS 2 'Share-based Payment' is not applicable to the transaction analysed, including discussion of factors that distinguish the transaction analysed from other transactions the Committee has analysed to which paragraph 13A of IFRS 2 does apply.

The purpose of this paper was to provide the Committee with a draft of the wording for the final agenda decision, and ask the Committee whether it agreed with the revised wording proposed.

The Project Manager introduced the paper and asked the Committee members whether they had any comments on the paper and whether they agreed with the revised wording proposed for the agenda decision.

The Committee members who spoke noted that they agreed with the conclusion that IFRS 2 was not applicable to the transaction the Committee had been asked to consider.

One Committee member noted that, although he had no issues with the conclusion, he was concerned that it could result in diversity in practice.  He raised the issue of Black Economic Empowerment (“BEE”) transactions in South Africa, which are currently accounted for within IFRS 2 as a result of IFRIC 8 (now incorporated in IFRS 2).  He questioned how such transactions differed from the transaction the Committee had been asked to consider, and cautioned that the agenda decision could result in increased diversity in practice as it could be interpreted as saying that transactions the Committee had initially intended should be accounted for within IFRS 2 would potentially no longer fall within the scope of IFRS 2.  He suggested that instead of rejecting the issue for the reasons set out in the revised agenda decision, the Committee could simply reject it because it was a very narrow country focused issue, and that this would be a way of not calling into question accounting applied elsewhere.  He noted that paragraph 13A of IFRS 2 proposed GAAP for a specific issue in a specific country, and that a more holistic approach was needed in determining transactions that fall within the scope of IFRS 2; and added that the paragraph was a recipe for inconsistency in practice.

Another Committee member agreed that paragraph 13A of IFRS had been causing issues in practice, and that it was very difficult when looking at different fact patterns, to determine whether or not the transaction was within the scope of IFRS 2.  He suggested that including this issue in the IFRS 2 narrow scope amendment project would be helpful. 

In response to the previous comments with respect to BEE transactions, another Committee member noted that the key difference between the transaction the Committee was considering and BEE transactions was that in BEE transactions, although it was difficult to point to exactly what it was, the conclusion was that the issuer of the shares was receiving something, and just couldn’t identify what it was.  He further noted that the difference from BEE transactions was that in the transaction under consideration the issuer was not receiving anything else, and the difference in fair value arose due to the existence of two markets in which shares were being issued.

The Committee member who had raised the issue, noted that BEE credentials were not received from the shareholders, but from the South African government, and that accordingly, there was a disconnect.

Several Committee members had comments on the drafting of the revised agenda decision. Some members commented on the wording of the first sentence of the antepenultimate paragraph, which made reference to the issue of shares for less than fair value.  The members noted that there were two different fair values depending on the market in which the shares were issued, and that it would be helpful to clarify that it was not less than fair value but a different fair value given.  Several other members questioned the need for the reference to treasury shares, and suggested that this should be removed to avoid confusion.

In bringing the discussion to a close, the Chairman asked the Committee members whether they agreed with going ahead with the revised agenda decision as written, subject to the removal of the paragraph making reference to treasury shares, and other edits to be picked up in drafting.

Thirteen Committee members agreed with this proposal.

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