This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

IFRS 2 — Classification and measurement of share-based payment transactions — Comment letter analysis

Date recorded:

Agenda paper 2: Exposure Draft of proposed amendments to IFRS 2 (ED/2014/5) – Classification and Measurement of Share-based Payment Transactions – Comment letter analysis

The Committee discussed issues that had been raised in comment letters on the exposure draft published in November 2014 (“the ED”) that proposed three amendments to IFRS 2:

  1. the effects of vesting conditions on the measurement of a cash-settled share-based payment;
  2. the classification of share-based payment transactions with net settlement features; and
  3. the accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled.

The Technical Manager explained that the staff had identified eighteen issues around those three amendments and asked the Committee to discuss those issues one-by-one and then propose amendments to the IASB on the basis of these discussions.

The effects of vesting conditions on the measurement of a cash-settled share-based payment

The first six issues pertained to the first amendment.

Issue 1 concerned the proposed changes to paragraph 33 of IFRS 2. The proposed wording could imply that all vesting conditions should be taken into account when estimating fair value. However, the intention was to take only non-market vesting conditions into account. The staff therefore proposed to change the proposed wording. The Committee agreed with the recommendation.

Issue 2 concerned the proposal from respondents to clarify whether the proposed guidance in the proposed paragraphs 33-33C was limited to the measurement of share appreciation rights (SARs) only or whether it was applicable to the measurement of all cash-settled share-based payments. The staff proposed to add a footnote to paragraph 33 saying that SARs were only an example of cash-settled share-based payments. One Committee member said that he would prefer to change the body of the text instead of adding a footnote. Another Committee member agreed and suggested using the generic term ‘cash-settled share-based payments’ instead of SARs. Several Committee members agreed with these suggestions. The Chairman concluded that the body of the text should be changed to replace SARs with the generic term.

Issue 3 related to the clarification of the meaning of the notion of ‘best available estimate of the number of awards that were expected to vest’ in the proposed paragraph 33A of IFRS 2. It was unclear whether this meant the use of a ‘most likely outcome’ approach or the use of a probability-weighted average of the expected outcomes. The staff recommended including in the Basis for Conclusions (BC) that management should use judgement in determining the best available estimate. One Committee member suggested not adding anything as IAS 37 was clear as to what ‘best estimate’ meant. Several Committee members agreed with that. One observing IASB member expressed concern that adding this guidance could have unintended consequences on other fact patterns. A committee member also noted that the BC was not endorsed in the EU. One Committee member said that if guidance were to be added to the BC it should be clarified that there was no accounting policy choice about which method to use but a requirement to choose the method that delivered the best estimate. When called to vote by the Chairman, ten of the fourteen Committee members voted in favour of not adding any guidance, three members voted in favour of repeating the general principle in IFRS 2 and one member voted in favour of the staff recommendation.

Issue 4 asked whether disclosure of a contingent liability was required when vesting was not probable. The staff recommended not requiring a specific disclosure as IFRS 2 contained a general requirement to disclose information that enabled users of the financial statements to understand the effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position. One Committee member disagreed with this reasoning and preferred to specifically require the disclosure. While several Committee members agreed with him, others doubted that the general requirements were sufficient. When taking a vote, ten Committee members agreed with the staff recommendation to not add a specific requirement.

Issue 5 addressed the concern that the proposed amendment would increase the divergence between IFRS 2 and IAS 19. The staff considered the issue and recommended that no amendment of the proposed guidance would be necessary. The Committee agreed with this recommendation.

Issue 6 concerned the demand of respondents to include more examples to illustrate the effects of vesting and non-vesting conditions. The staff disagreed with this demand and recommended not adding more examples. The Committee agreed.

Classification of share-based payment transactions with net settlement features

The Technical Manager continued with the second amendment and the related issues 7 to 10.

Issue 7 addressed whether the proposed classification for the share-based payment transaction with net settlement features described in the ED should not be categorised as an exception to the requirements in IFRS 2. The staff disagreed with the view of some respondents that the proposed classification was not an exception. To avoid misunderstandings, the staff recommended explaining the reasons for the exception in the BC. One Committee member agreed with the staff’s view and said that the treatment should not be analogised to other cases. When called to vote, twelve Committee members supported the staff recommendation.

Issue 8 concerned the question as to whether the exception in the proposed paragraph 33D was applicable to other types of share-based payments with net settlement features, for example in situations with other arrangements to withhold an employee’s tax obligation (i.e., no statutory obligation). The staff recommended not extending the scope of the exception. One Committee member said that the situation where the entity sold the shares in the market to settle the obligation should be included in the exception if the entity acted as an agent of the employee. Several Committee members supported this view. One Committee member expressed concerns that in the example where the entity buys back the withheld number of shares, the bifurcation would not be eliminated but instead would only be moved to the end of the arrangement when equity was reclassified to (tax) liabilities. She said with changing share prices the dilution estimated in the beginning would be different to the dilution at the end of the arrangement. Therefore the communicated dilution throughout the arrangement would be too low. One Committee member added that in the presented example the expense would never be recognised. An observing IASB member shared these concerns. The Chairman asked if any Committee members would object to retaining the scope. None of the members objected.

The first part of Issue 9 concerned the lack of guidance on accounting for differences between the amount to be paid to the tax authorities and the expense recognised during the vesting period. The staff had developed two examples to show the accounting treatment for those differences and recommended adding these examples to IFRS 2. Furthermore they recommended adding a cross-reference to paragraph 29 in the proposed paragraph 33D. One Committee member said that this cross-reference was not sensible as paragraph 29 dealt with the repurchase of shares while paragraph 33D aimed to give guidance on the accounting for the cash paid to the tax authorities. A fellow Committee member agreed with that. The Chairman concluded that the Committee was in agreement with the staff recommendation if the cross-referencing issue would be addressed.

The second part of Issue 9 addressed the difference between the tax obligation and the portion of instruments withheld. The staff recommended treating any payment to the employee for the difference in expected tax rate and the actual tax rate as a cash-settled share-based payment. One Committee member said that under the proposed treatment (i.e. no bifurcation) the accounting would only take place in the end when the final tax rate was known and that therefore no difference could occur. The Director of Implementation Activities replied that an entity could withhold more than the statutory amount and it was important that in that case the entire arrangement would not become a cash-settled award. This would be regarded as a mere change in estimates. The Chairman asked if anyone objected to the staff recommendation. None of the Committee members objected.

Issue 10 concerned the FASB’s discussions on minimum statutory withholding requirements and if the IASB should follow those discussions and if the IASB should assess whether any further amendments to IFRS 2 were appropriate. The staff recommended not suggesting further changes to IFRS 2 on the basis of those discussions. The Committee agreed with the staff recommendation.

In addition to the above specific issues, one Committee member proposed a disclosure requirement on the cash outflow that was expected from the tax obligation. The Chairman asked whether the Committee would agree if the staff submitted a proposal for disclosure to the IASB. Nobody objected.

Accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled

The Technical Manager introduced issues 11 to 15 that arose from comments on the third amendment.

Issue 11 addressed the difference between the carrying amount of the liability at the modification date and the amount recognised in equity at the same date. The suggestion was that this difference should not be recognised immediately in profit or loss. The staff disagreed with this suggestion and proposed to include a reference to IFRS 9 and IFRIC 19 in the BC to reinforce the reasons of why the difference between the liability derecognised and the amount of equity should be recognised in profit or loss. One Committee member said that the award should be marked to fair value just before the modification and any difference to the fair value after the modification would be attributable to the new arrangement. The Director of Implementation Activities said that it should be clarified in the Standard that the guidance applicable to modifications of equity-settled share-based payments should not be applied by analogy to these scenarios. When called to vote, thirteen Committee members voted in favour of the staff recommendation.

Issue 12 related to the clarification of the accounting treatment when the replacement award had a lower fair value than the original award at the modification date. The staff believed that the guidance in the ED was clear enough and therefore recommended not adding further clarification. The Committee agreed with this recommendation.

Issue 13 concerned the clarification of the accounting treatment for other types of modifications of share-based payments. The staff noted that the ED only addressed a very particular type of modifications and recommended that other types of modifications should be addressed in the research project on share-based payment. The Committee agreed with the staff recommendation.

Issue 14 related to the respondents’ request to add an example that illustrated the accounting for a modification of a share-based payment transaction that changed the classification from cash-settled to equity-settled. The staff agreed with the request and had included an example in the agenda paper for the Committee to discuss. One Committee member said that it looked like the vesting period changed under the modification in the example. The Technical Manager confirmed that this was unintentional and agreed to amend the wording. One Committee member said that in the example the entity identified a replacement but it was not evident that a replacement had occurred. For him it was important to distinguish whether it was indeed a replacement or whether it was an unrelated new award. Another Committee member agreed and warned that unintendedly this might introduce an accounting policy choice into the Standard. A fellow Committee member suggested amending the example to simply state that there had been a replacement without reference to the identification of the replacement. The Committee members agreed with this procedure and decided to highlight to the Board that this could potentially be read as a policy choice.

Issue 15 addressed the interaction of the accounting for a modification of a share-based payment transaction that changed the classification from cash-settled to equity-settled with existing guidance elsewhere in IFRS 2. The staff recommended including additional guidance on this issue. One Committee member said that he would not see the need for guidance on whether the modification occurred inside or outside of the vesting period as this fact was irrelevant. Another Committee member agreed with that but said it should be clarified what happened if the vesting period was extended. The Committee agreed with that.

Issues 16 to 18 concerned transition. The issues asked whether retrospective application should only be allowed if the entity had the information necessary to do so and this information was available without hindsight and whether specific transition guidance should be provided for applying the proposed amendments to new awards or existing unvested awards. One Committee member suggested only allowing prospective application, i.e. only to new awards. A fellow Committee member asked whether a voluntary retrospective application would apply to all awards. The Technical Manager confirmed that. Another Committee member asked whether vested but unsettled awards would be included in a prospective application. This was confirmed by the Technical Manager. Another Committee member asked how transition worked for cash-settled share-based payments that were subject to vesting and non-vesting conditions. The Director of Implementation Activities replied that the entity should adjust the carrying amount of the liability in the statement of financial position in the period of the change on the date the amendment was first applied and recognise the effect of the change in retained earnings. All Committee members agreed with the staff recommendation.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.