means that the number of shares delivered to the counterparty will be the total ‘gross’
number of shares awarded less as many shares as have, at the date of exercise, a fair
value equal to the exercise price.
In our view, this situation is analogous to that in 5.3.3 above in that, whilst the absolute
‘net’ number of shares awarded will not be known until the date of exercise, the basis on
which that ‘net’ number will be determined is established in advance. Accordingly, in our
view, grant date is the date on which the terms and conditions (including the ability to
surrender shares to a fair value equal to the exercise price) are determined and agreed by
the entity and the counterparty, subject to the matters discussed at 5.3.2 above.
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Such a scheme could be analysed as a share-settled share appreciation right (whereby
the employee receives shares to the value of the excess of the value of the shares given
over the exercise price), which is treated as an equity-settled award under IFRS 2.
Awards settled in shares net of a cash amount to meet an employee’s tax obligation are
considered further at 14.3 below.
5.3.5
Award of equity instruments to a fixed monetary value
Some entities may grant employees awards of shares to a fixed value. For example, an
entity might award as many shares as are worth €100,000, with the number of shares
being calculated by reference to the share price as at the vesting date. The number of
shares ultimately received will not be known until the vesting date. This begs the
question of whether such an award can be regarded as having been granted until that
date, on the argument that it is only then that the number of shares to be delivered – a
key term of the award – is known, and therefore there cannot be a ‘shared
understanding’ of the terms of the award until that later date.
In our view, however, this situation is analogous to those in 5.3.3 and 5.3.4 above.
Although the absolute number of shares awarded will not be known until the vesting date,
the basis on which that number will be determined is established in advance in a manner
sufficiently clear and objective to allow an ongoing estimate by the entity and by the
counterparty of the number of awards expected to vest. Accordingly, in our view, grant
date is the date on which the terms and conditions are determined sufficiently clearly and
agreed by the entity and the counterparty, subject to the matters discussed at 5.3.2 above.
The measurement of such awards raises further issues of interpretation, which we
discuss at 8.10 below.
5.3.6
Awards over a fixed pool of shares (including ‘last man standing’
arrangements)
An award over a fixed pool of shares is sometimes granted to a small group of, typically
senior, employees. Such awards might involve an initial allocation of shares to each
individual but also provide for the redistribution of each employee’s shares to the other
participants should any individual leave employment before the end of the vesting
period. This is often referred to as a ‘last man standing’ arrangement.
The accounting requirements of IFRS 2 for such an arrangement are unclear. In the
absence of specific guidance, several interpretations are possible and we believe that an
entity may make an accounting policy choice, provided that choice is applied
consistently to all such arrangements.
The first approach is based on the view that the unit of account is all potential shares to
be earned by the individual employee and that, from the outset, each employee has a
full understanding of the terms and conditions of both the initial award and the
reallocation arrangements. This means that there is a grant on day one with each
individual’s award being valued on the basis of:
• that employee’s initial allocation of shares; plus
• an additional award with a non-vesting condition relating to the potential
reallocation of other participants’ shares.
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Under this approach, the departure of an employee will be accounted for as a forfeiture
and any cost reversed as the service condition will not have been met (see 6.1.2 below),
but the redistribution of that individual’s shares to the other employees will have no
accounting impact. This approach is likely to result in a total expense that is higher than
the number of shares awarded multiplied by the grant date price per share.
The second approach, which we believe is consistent with US GAAP, also considers the
individual employee’s award to be the unit of account. Under this approach, there is an initial
grant to all the employees and it is only these awards for which the fair value is measured at
the date of the initial grant. Any subsequent reallocations of shares should be accounted for
as a forfeiture of the original award and a completely new grant to the remaining employees,
measured at the new grant date. This approach accounts only for the specific number of
shares that have been allocated to the individual employee as at the end of each reporting
period. No account is taken in this approach of shares that might be allocated to the individual
employee in the future due to another employee’s forfeiture, even though the reallocation
formula is known to the individual employees at the initial grant date.
A third view, which takes a pragmatic approach in the light of the issues arising from the
two approaches outlined above, is to account for the award on the basis of the total pool
of shares granted rather than treating the individual employee as the unit of account. In
our view this approach is likely to be materially acceptable for many arrangements where
the pool of shares relates to the same small number of participants from the outset. Under
this approach, the fair value of the total pool of shares is measured at the grant date (day
one) with the non-vesting condition effectively ignored for valuation purposes.
Subsequent forfeitures and reallocations would have no effect on the accounting.
There is a distinction between the ‘last man standing’ arrangement described above and a
situation where an entity designates a fixed pool of shares to be used for awards to
employees but where the allocation of leavers’ shares is discretionary rather than pre-
determined. In this situation, the valuation of the initial award would not take account of
any potential future reallocations. If an employee left employment during the vesting period,
that individual’s award would be accounted for as a forfeiture and any reallocation of that
individual’s shares would be accounted for as a new grant with the fair value determined at
the new grant date (i.e. a similar accounting treatment to that in approach two above).
A further type of award relating to a fixed pool of shares is one where an entity makes an
award over a fixed number or percentage of its shares to a particular section of its
workforce, the final allocation of the pool being made to those employed at the vesting
date. In such an arrangement, some employees will typically join and leave the scheme
during the original vesting period which will lead to changes in each employee’s allocation
of s
hares. Although employees are aware of the existence, and some of the terms, of the
arrangement at the outset, the fact that there is no objective formula (see 5.3.3 to 5.3.5
above) for determining the number of shares that each individual will ultimately receive
means that there is no grant under IFRS 2 until the date of final allocation. However,
because the employees render service under the arrangement in advance of the grant date
– either from day one or from a later joining date – the entity should estimate the fair
value of the award to each individual from the date services commence and expense this
over the full service period of the award with a final truing up of the expense to the fair
value of the award at the eventual grant date (see 5.3.2 above).
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This has the effect that, where an entity decides to set aside a bonus pool of a fixed
amount of cash, say £1 million, with the allocation to individual employees to be made
at a later date, there is a known fixed cost of £1 million. However, where an entity
decides to set aside a bonus pool of a fixed number of shares, with the allocation to
individual employees to be made at a later date, the final cost is not determined until
the eventual grant date.
5.3.7
Awards with multiple service and performance periods
Entities frequently make awards that cover more than one reporting period, but with
different performance conditions for each period, rather than a single cumulative target
for the whole vesting period. In such cases, the grant date may depend on the precision
with which the terms of the award are communicated to employees, as illustrated by
Example 30.4 below.
Example 30.4: Awards with multiple service and performance periods
Scenario 1
At the beginning of year 1, an entity enters into a share-based payment arrangement with an employee. The
employee is informed that the maximum potential award is 40,000 shares, 10,000 of which will vest at the
end of year 1, and 10,000 more at the end of each of years 2 to 4. Vesting of each of the four tranches of
10,000 shares is conditional on:
(a) the employee having been in continuous service until the end of each relevant year; and
(b) revenue targets for each of those four years, as communicated to the employee at the beginning of year 1,
having been attained.
In this case, the terms of the award are clearly understood by both parties at the beginning of year 1, and this
is therefore the grant date under IFRS 2 (subject to issues such as any requirement for later formal approval
– see 5.3 to 5.3.2 above). The cost of the award would be recognised using a ‘graded’ vesting approach –
see 6.2.2 below.
Scenario 2
At the beginning of year 1, an entity enters into a share-based payment arrangement with an employee. The
employee is informed that the maximum potential award is 40,000 shares, 10,000 of which will vest at the
end of year 1, and 10,000 more at the end of each of years 2 to 4. Vesting of each of the four tranches of
10,000 shares is conditional on:
(a) the employee having been in continuous service until the end of each relevant year; and
(b) revenue targets for each of those four years, to be communicated to the employee at the beginning of
each relevant year in respect of that year only, having been attained.
In this case, in our view, at the beginning of year 1 there is a clear shared understanding only of the terms of
the first tranche of 10,000 shares that will potentially vest at the end of year 1. There is no clear understanding
of the terms of the tranches potentially vesting at the end of years 2 to 4 because their vesting depends on
revenue targets for those years which have not yet been set.
Accordingly, each of the four tranches of 10,000 shares has a separate grant date (and, therefore, a separate
measurement date) – i.e. the beginning of each of years 1, 2, 3 and 4, and a vesting period of one year from
the relevant grant date.
In this type of situation, the entity would also need to consider whether, in the absence of a grant date, the
employee was nonetheless rendering services in advance of the grant date. However, if targets are
unquantified and do not depend on a formula, for example, then it is likely to be difficult to estimate an
expense in advance of the grant date (see 5.3.2 above).
A variation on the above two scenarios which is seen quite frequently in practice is an
award where the target is quantified for the first year and the targets for subsequent
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years depend on a formula-based increase in the year 1 target. The formula is set at the
same time as the year 1 target. Whether the accounting treatment for scenario 1 above
or scenario 2 above is the more appropriate in such a situation is, in our view, a matter
of judgement depending on the precise terms of the arrangement (see 5.3.3 above).
5.3.8
Awards subject to modification by entity after original grant date
As noted at 5.3.1 above, some employee share awards are drafted in terms that give the
entity discretion to modify the detailed terms of the scheme after grant date. Some have
questioned whether this effectively means that the date originally determined as the
‘grant date’ is not in fact the grant date as defined in IFRS 2, on the grounds that the
entity’s right to modify means that the terms are not in fact understood by both parties
in advance.
In our view, this is very often not an appropriate analysis. If it were, it could also mean
that, in some jurisdictions, nearly all share-based awards to employees would be
required to be measured at vesting date, which clearly was not the IASB’s intention.
However, the assessment of whether or not an intervention by the entity after grant
date constitutes a modification is often difficult. Some situations commonly
encountered in practice are considered in the sections below. See also the discussion
at 3.1.1 above relating to the clawback of awards.
5.3.8.A
Significant equity restructuring or transactions
Many schemes contain provisions designed to ensure that the value of awards is
maintained following a major capital restructuring (such as a share split or share
consolidation – see 7.8 below) or a major transaction with shareholders as a whole (such
as the insertion of a new holding company over an existing group (see 12.8 below), a major
share buyback or the payment of a special dividend). These provisions will either specify
the adjustments to be made in a particular situation or, alternatively, may allow the entity
to make such discretionary adjustments as it sees fit in order to maintain the value of
awards. In some cases the exercise of such discretionary powers may be relatively
mechanistic (e.g. the adjustment of the number of shares subject to options following a
share split). In other cases, more subjectivity will be involved (e.g. in determining whether
a particular dividend is a ‘special’ dividend for the purposes of the scheme).
In our view, where the scheme rules specify the adjustments to be made or where there
is a legal requirement to make adjustments in order to remedy any dilution that would
otherwise arise, the implementation of such adjustments woul
d not result in the
recognition of any incremental IFRS 2 fair value. This assumes that the adjustment
would simply operate on an automatic basis to put the holders of awards back to the
position that they would have been in had there not been a restructuring and hence
there would be no difference in the fair value of the awards before and after the
restructuring (or other specified event).
However, where there is no such explicit requirement in the scheme rules or under
relevant legislation, we believe that there should be a presumption that the exercise of the
entity’s discretionary right to modify is a ‘modification’ as defined in IFRS 2. In such a
situation, the fair values before and after the modification may differ and any incremental
fair value should be expensed over the remaining vesting period (see 7.3 below).
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5.3.8.B
Interpretation of general terms
More problematic might be the exercise of any discretion by the entity or its
remuneration committee to interpret the more general terms of a scheme in deciding
whether performance targets have been met and therefore whether, and to what extent,
an award should vest. Suppose, for example, that an entity makes an award to its
executives with a market performance condition based on total shareholder return
(TSR) with a maximum payout if the entity is in the top quartile of a peer group of 100
entities (i.e. it is ranked between 1 and 25 in the peer group).
It might be that the entity is ranked 26 until shortly before the end of the performance
period, at which point the entity ranked 25 suddenly announces that it is in financial
difficulties and ceases trading shortly afterwards. This then means that the reporting
entity moves up from 26 to 25 in the rankings. However, the entity might take the view
that, in the circumstances, it could not be considered as having truly been ranked 25 in
the peer group, so that a maximum payout is not justified.
In this case, the entity’s intervention might be considered to be a modification.
However, as the effect would be to reduce the fair value of the award, it would have no
impact on the accounting treatment (see 7.3.2 below).
If such an intervention were not regarded as a modification, then the results might be
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