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be (see 1.4.1 above). Thus an option over equity with a foreign currency strike price is
an equity instrument if accounted for under IFRS 2.
The fair value of such an award should be assessed at grant date and, where the award
is treated as equity-settled, should not subsequently be revised for foreign exchange
movements (on the basis that the equity instrument is a non-monetary item translated
using the exchange rate at the date when the fair value was measured). This applies to
the separate financial statements of a parent or subsidiary entity as well as to
consolidated financial statements. Where the award is treated as cash-settled, however,
the periodic reassessment through profit or loss of the fair value of the award required
by IFRS 2 will also need to take into account any exchange difference arising from the
requirements of IAS 21 – The Effects of Changes in Foreign Exchange Rates.
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2.2.4.H
Holding own shares to satisfy or ‘hedge’ awards
Entities often seek to hedge the cost of share-based payment transactions, most
commonly by buying their own equity instruments in the market. For example, an entity
could grant an employee options over 10,000 shares and buy 10,000 of its own shares
into treasury at the date that the award is made. If the award is share-settled, the entity
will deliver the shares to the counterparty. If it is cash-settled, it can sell the shares to
raise the cash it is required to deliver to the counterparty. In either case, the cash cost
of the award is capped at the market price of the shares at the date the award is made,
less any amount paid by the employee on exercise. It could of course be argued that
such an arrangement is not a true hedge at all. If the share price goes down so that the
option is never exercised, the entity is left holding 10,000 of its own shares that cost
more than they are now worth.
Whilst these strategies may cap the cash cost of share-based payment transactions that
are eventually exercised, they will not have any effect on the charge to profit or loss
required by IFRS 2 for such transactions. This is because purchases and sales of own
shares are accounted for as movements in equity and are therefore never included in
profit or loss (see 4.1 below).
The illustrative examples of group share schemes at 12.4 and 12.5 below show the
interaction of the accounting required for a holding of own shares and the requirements
of IFRS 2.
2.2.4.I
Shares or warrants issued in connection with a loan or other financial liability
As noted at 2.2.3.E above, IFRS 2 does not apply to transactions within the scope of
IAS 32 and IFRS 9. However, if shares or warrants are granted by a borrower to a lender
as part of a loan or other financing arrangement, the measurement of those shares or
warrants might fall within the scope of IFRS 2. The determination of the relevant
standard is likely to require significant judgement based on the precise terms of
individual transactions. If the shares or warrants are considered to be granted by the
borrower in lieu of a cash fee for services provided by the lender then IFRS 2 is likely
to be the appropriate standard, but if the shares or warrants are considered instead to
be part of the overall return to the lender on the financing arrangement then IAS 32 and
IFRS 9 are more likely to apply.
2.2.4.J
Options over puttable instruments classified as equity under specific
exception in IAS 32
Some entities, such as certain types of trust, issue tradeable puttable instruments that
are classified as equity instruments rather than as a financial liability because the entity
has no other equity instruments. This classification is based on a specific exception in
IAS 32 that makes it clear that such instruments are not equity instruments for the
purposes of IFRS 2. [IAS 32.16A-16B, 96C]. However, should options over such instruments
granted to employees – and allowing them to obtain the instruments at a discount to the
market price – be treated as cash-settled awards under IFRS 2 or are they outside the
scope of IFRS 2 and within that of IAS 19?
The entity has no equity apart from the instruments classified as such under the narrow
exception in IAS 32 and, in the absence of equity, the entity cannot logically issue equity
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instruments in satisfaction of an award to employees nor can it pay cash based on the
price or value of its equity instruments. In our view, paragraph 96C of IAS 32 should be
interpreted as meaning that, for the purposes of IFRS 2, such awards are not share-
based payments and the appropriate standard is IAS 19 rather than IFRS 2.
Those who take the view that such options could be cash-settled share-based payments
seem to rely more on the general IAS 32 definition of equity than on the more specific
requirements of paragraph 96C of IAS 32 (that ‘these instruments should not be
considered as equity instruments under IFRS 2’). We believe that the more specific
guidance should take precedence over the general definition.
2.2.4.K
Special discounts to certain categories of investor on a share issue
In the context of a flotation or other equity fundraising, an entity might offer identical
shares at different prices to institutional investors and to individual (retail) investors.
Should the additional discount given to one class of investor be accounted for under
IFRS 2 as representing unidentified goods or services received or receivable?
The Interpretations Committee was asked to clarify the accounting treatment in this
area. The request submitted to the Committee referred to the fact that the final retail
price could differ from the institutional price because of:
• an unintentional difference arising from the book-building process; or
• an intentional difference arising from a retail discount given by the issuer of the
equity instruments as indicated in the prospectus.
For example, a discount to the institutional investor price might need to be offered to
encourage retail investors to buy shares in order to meet the requirements of a particular
stock exchange for an entity to have a minimum number of shareholders.
The Interpretations Committee considered whether the discount offered to retail
investors in the above example involves the receipt of identifiable or unidentifiable
goods or services from the retail shareholder group and, therefore, whether the discount
is a share-based payment transaction within the scope of IFRS 2.
IFRS 2 was specifically amended for situations where the identifiable consideration
received by the entity appears to be less than the fair value of the equity instruments
granted (see 2.2.2.C above). [IFRS 2.2, 13A]. The Interpretations Committee noted that the
application of this guidance requires judgement and consideration of the specific facts
and circumstances of each transaction.
In the circumstances underlying the submission to the Interpretations Committee, the
Committee observed that the entity issues shares at two different prices to two different
groups of investors for the purpose of raising funds. Any difference in price between the
two groups appears to relate to the existence of different markets – one accessible only
to retail investors and the other accessible only to institutional investors – rather than
to the receipt of additional goods or services. The only relationships involved are those
between the investors and the investee entity and the investors are acting in their
capacity as shareholders.
The Interpretations Committee therefore observed that the guidance in IFRS 2 is not
applicable because there is no share-based payment transaction.
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A distinction was drawn between the example above and a situation considered by the
Interpretations Committee in 2013 (accounting for reverse acquisitions that do not
constitute a business – see 2.2.3.C above). In the latter situation, a stock exchange listing
received by the accounting acquirer was considered to be a service received from the
accounting acquiree and to represent the difference between the fair value of the equity
instruments issued and the identifiable net assets acquired. Hence an IFRS 2 expense
would be required in order to recognise this difference. In the situation relating to retail
and institutional investors considered above, however, there is no service element and
the difference in prices for the two different types of investor is due solely to an
investor-investee relationship rather than to unidentifiable goods or services received
from the investors.
At its July 2014 meeting the Interpretations Committee decided not to add this matter
to its agenda on the basis that sufficient guidance exists without further interpretation
or the need for an amendment to a standard.13
In other situations, an entity might voluntarily offer a discount to one class of investor, e.g.
to an institution underwriting the share issue. In our view, this type of discount is likely to
require an IFRS 2 expense to be recognised unless there is evidence that separate prices,
and therefore different fair values, are required for each category of investor.
However, in some cases – such as the example above where an institution provides
underwriting services – it might be possible to conclude that any additional cost under
IFRS 2 is actually a cost of issuing the equity instruments and should therefore be
debited to equity rather than to profit or loss.
Similar considerations to those discussed in this section apply when, in advance of an
IPO, a private company issues convertible instruments at a discount to their fair value
in order both to attract key investors and to boost working capital. There is further
discussion on convertible instruments at 10.1.6 below.
3
GENERAL RECOGNITION PRINCIPLES
The recognition rules in IFRS 2 are based on a so-called ‘service date model’. In other
words, IFRS 2 requires the goods or services received or acquired in a share-based
payment transaction to be recognised when the goods are acquired or the services
rendered. [IFRS 2.7]. For awards to employees (or others providing similar services), this
contrasts with the measurement rules, which normally require a share-based payment
transaction to be measured as at the date on which the transaction was entered into, which
may be some time before or after the related services are received – see 4 to 7 below.
Where the goods or services received or acquired in exchange for a share-based
payment transaction do not qualify for recognition as assets they should be expensed.
[IFRS 2.8]. The standard notes that typically services will not qualify as assets and should
therefore be expensed immediately, whereas goods will generally be recognised initially
as assets and expensed later as they are consumed. However, some payments for
services may be capitalised (e.g. as part of the cost of PP&E, intangible assets or
inventories) and some payments for goods may be expensed immediately (e.g. where
they are for items included within development costs written off as incurred). [IFRS 2.9].
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The corresponding credit entry is, in the case of an equity-settled transaction, an
increase in equity and, in the case of a cash-settled transaction, a liability (or decrease
in cash or other assets). [IFRS 2.7].
The primary focus of the discussion in the remainder of this chapter is the application
of these rules to transactions with employees. The accounting treatment of transactions
with non-employees is addressed further at 5.1 and 5.4 below.
3.1 Vesting
conditions
Under IFRS 2, the point at which a cost is recognised for goods or services depends on
the concept of ‘vesting’. The following definitions in Appendix A to IFRS 2 are relevant.
A share-based payment to a counterparty is said to vest when it becomes an entitlement
of the counterparty. Under IFRS 2, a share-based payment arrangement vests when the
counterparty’s entitlement is no longer conditional on the satisfaction of any vesting
conditions. [IFRS 2 Appendix A].
A vesting condition is a condition that determines whether the entity receives the
services that entitle the counterparty to receive cash, other assets or equity instruments
of the entity, under a share-based payment arrangement. A vesting condition is either a
service condition or a performance condition. [IFRS 2 Appendix A].
A service condition is a vesting condition that requires the counterparty to complete a
specified period of service during which services are provided to the entity. If the
counterparty, regardless of the reason, ceases to provide service during the vesting
period, it has failed to satisfy the condition. A service condition does not require a
performance target to be met. [IFRS 2 Appendix A]. For example, if an employee is granted
a share option with a service condition of remaining in employment with an entity for
three years, the award vests three years after the date of grant if the employee is still
employed by the entity at that date.
A performance condition is a vesting condition that requires:
(a) the counterparty to complete a specified period of service (i.e. a service condition);
the service requirement can be explicit or implicit; and
(b) specified performance target(s) to be met while the counterparty is rendering the
service required in (a).
The period of achieving the performance target(s):
(a) shall not extend beyond the end of the service period; and
(b) may start before the service period on the condition that the commencement date
of the performance target is not substantially before the commencement of the
service period.
A performance target is defined by reference to:
(a) the entity’s own operations (or activities) or the operations or activities of another
entity in the same group (i.e. a non-market condition); or
(b) the price (or value) of the entity’s equity instruments or the equity instruments of
another entity in the same group (including shares and share options) (i.e. a
market condition).
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payment
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A performance target might relate either to the performance of the entity as a whole or
to some part of the entity (or part of the group), such as
a division or individual
employee. [IFRS 2 Appendix A].
The definition of a market condition is included at 6.3 below.
In order for a condition to be a vesting condition – rather than a ‘non-vesting’ condition
(see 3.2 below) – there must be a service requirement and any additional performance
target must relate to the entity or to some part of the entity or group. Thus a condition
that an award vests if, in three years’ time, earnings per share has increased by 10% and
the employee is still in employment, is a performance condition. If, however, the award
becomes unconditional in three years’ time if earnings per share has increased by 10%,
irrespective of whether the employee is still in employment, that condition is not a
performance condition but a non-vesting condition because there is no associated
service requirement.
The different types of performance condition and the related accounting requirements
are discussed more fully at 6 below. The distinction between vesting and non-vesting
conditions is discussed at 3.2 below.
The accounting treatment in a situation where the counterparty fails to meet a service
condition – a situation now explicitly covered by the definition of a service condition
above – is considered in more detail at 7.4.1.A below.
In addition to the general discussion throughout section 3, specific considerations
relating to awards that vest on a flotation or change of control (or similar exit event) are
addressed at 15.4 below.
The definitions of ‘vesting condition’, ‘service condition’ and ‘performance condition’
reproduced above reflect the amendments in the IASB’s Annual Improvements to
IFRSs 2010-2012 Cycle aimed at clarifying the distinction between different types of
condition attached to a share-based payment (see 1.2 above).
3.1.1
‘Malus’ clauses and clawback conditions
Whether as a result of an entity’s own decision or in response to regulatory
requirements, an increasing number of share-based payment awards include conditions
that mean that the awards will only vest if there is no breach of any ‘malus’ clause on
the part of the employee and/or the entity. Often these or other provisions are put in
place to allow an entity to claw back vested awards from employees should any