different depending on the nature of the award. Where an award is subject to a market
condition, as here, or to a non-vesting condition, an expense might well have to be
recognised in any event, if all the non-market vesting conditions (e.g. service) were
satisfied – see 6.3 and 6.4 below.
However, suppose that the award had been based on a non-market performance
condition, such as an EPS target, which was met, but only due to a gain of an unusual,
non-recurring nature, such as the revaluation of PP&E for tax purposes, giving rise to a
deferred tax credit. The remuneration committee concludes that this should be ignored,
with the effect that the award does not vest. If this is regarded as the exercise of a pre-
existing right to ensure that the award vests only if ‘normal’ EPS reaches a given level,
then there has been no modification. On this analysis, the award has not vested, and any
expense previously recognised would be reversed. If, however, the committee’s
intervention is regarded as a modification, it would have no impact on the accounting
treatment in this particular case, as the effect would not be beneficial to the employee
and so the modification would be ignored under the general requirements of IFRS 2
relating to modifications (see 7.3.2 below).
5.3.8.C
Discretion to make further awards
Some schemes may give the entity the power to increase an award in circumstances
where the recipient is considered to have delivered exceptional performance, or some
such similar wording. In our view, unless the criteria for judging such exceptional
performance are so clear as to be, in effect, performance conditions under IFRS 2, the
presumption should be that any award made pursuant to such a clause is granted, and
therefore measured, when it is made. We note at 15.1 below that there may be
circumstances where an award described as ‘discretionary’ may not truly be so, since
the entity has created an expectation amounting to an obligation to make the award.
However, we believe that it would be somewhat contradictory to argue that such
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expectations had been created in the case of an award stated to be for (undefined)
exceptional performance only.
5.3.9
‘Good leaver’ arrangements
In some jurisdictions it is common for awards to contain a so-called ‘good leaver’ clause.
A ‘good leaver’ clause is one which makes provision for an employee who leaves
employment before the end of the full vesting period of the award to receive some or
all of the award on leaving (see 5.3.9.A below).
In other cases, the original terms of an award will either make no reference to ‘good
leavers’ or will not be sufficiently specific to allow the accounting treatment on cessation
of employment to be an automatic outcome of the original terms of the scheme. In such
cases, and in situations where awards are made to leavers on a fully discretionary basis,
the approach required by IFRS 2 differs from that required where the original terms are
clear about ‘good leaver’ classification and entitlement (see 5.3.9.B below).
In some jurisdictions awards are structured in a way which allows the majority of
participants, rather than just a few specified categories of ‘good leaver’, to retain all or
part of an award if they leave employment during the vesting period (see 5.3.9.C below).
We refer throughout this section on ‘good leavers’ to an employee leaving employment,
but similar considerations apply when an individual automatically becomes entitled to
an award before the end of the original vesting period due to other reasons specified in
the terms of the agreement, e.g. attaining a certain age or achieving a specified length of
service, even if the individual remains in employment after the relevant date. In these
situations, the date of full entitlement is the date on which any services – and therefore
expense recognition – cease for IFRS 2 purposes.
Arrangements for a good leaver to receive all, or part, of an award on leaving
employment should be distinguished from a situation where an employee leaves with
no award and where forfeiture accounting is likely to apply (see 7.4.1.A below).
5.3.9.A
Provision for ‘good leavers’ made in original terms of award
In some cases the types of person who are ‘good leavers’ may be explicitly defined in
the original terms of the arrangement (common examples being persons who die or
reach normal retirement age before the end of the full vesting period, or who work for
a business unit that is sold or closed during the vesting period). In other cases, the entity
may have the discretion to determine on a case-by-case basis whether a person should
be treated as a ‘good leaver’.
In addition, some schemes may specify the entitlement of a ‘good leaver’ on leaving (e.g.
that the leaver receive a portion of the award pro-rata to the extent that the
performance conditions have been met), whereas others leave the determination of the
award to the entity at the time that the employee leaves.
Whichever situation applies, any expense relating to an award to a good leaver must be
fully recognised by the leaving date because, at that point, the good leaver ceases to
provide any services to the entity and any remaining conditions attached to the award
will be treated as non-vesting rather than vesting conditions (see 3.2 above).
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In our view, an award which vests before the end of the original vesting period due to
the operation of a ‘good leaver’ clause is measured at the original grant date only where,
under the rules of the scheme as understood by both parties at the original grant date,
the award is made:
• to a person clearly identified as a ‘good leaver’; and
• in an amount clearly quantified or quantifiable.
Where, as outlined above, the rules of the scheme make clear the categories of ‘good
leaver’ and their entitlement, the entity should assess at grant date how many good leavers
there are likely to be and to what extent the service period for these particular individuals
is expected to be shorter than the full vesting period. The grant date fair value of the
estimated awards to good leavers should be separately determined, where significant, and
the expense relating to good leavers recognised over the expected reduced vesting period
between grant date and leaving employment. In this situation the entity would re-estimate
the number of good leavers and adjust the cumulative expense at each reporting date.
This would be a change of estimate rather than a modification of the award as it would all
be in accordance with the original terms and would require no discretionary decisions on
the part of the entity. We would not generally expect an entity to have significant numbers
of good leavers under such an arrangement.
It is important to draw a clear distinction between the IFRS 2 accounting on a straight-
line basis over a reduced vesting period in the above case and that on a graded vesting
basis in a situation of broader entitlement as outlined at 5.3.9.C below.
5.3.9.B
Discretionary awards to ‘good leavers’
original grant date of the award. However, where – as is more usually the case – the entity
determines only at the time that the employee leaves either that the employee is a ‘good
leaver’ or the amount of the award, grant date or modification date (see further below)
should be taken as the later of the date on which such determination is made or the date
on which the award is notified to the employee. This is because the employee had no clear
understanding at the original grant date of an automatic entitlement to equity instruments
other than through full vesting of the award at the end of the full service period.
In our view, an entity should assess the appropriate accounting treatment based on the
particular facts and circumstances and the extent to which the discretionary award is
linked to the original award. The discretionary award at the time of leaving is considered
to be either a modification of an original award in the employee’s favour (for example,
where vesting conditions are waived to allow an individual to keep an award) or the
forfeiture of the original award and the granting of a completely new award on a
discretionary basis (see 7.3 and 7.5 below).
In some cases, a good leaver will be allowed, on a discretionary basis, to keep existing awards
that remain subject to performance conditions established at the original grant date. In this
situation, any conditions that were previously treated as vesting conditions will become non-
vesting conditions following the removal of the service requirement (see 3.1 and 3.2 above).
This will be the case whether the discretionary arrangement is accounted for as the forfeiture
of the old award plus a new grant or as a modification of the original award.
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The non-vesting conditions will need to be reflected in the measurement of the fair
value of the award as at the date of modification or new grant (although the non-
vesting conditions alone will not result in any incremental fair value). Any fair value
that is unrecognised as at the date of the good leaver ceasing employment will need
to be expensed immediately as there is no further service period over which to
recognise the expense.
There is further discussion of modifications at 7.3 below and of replacement and ex
gratia awards granted on termination of employment at 7.5 below.
5.3.9.C
Automatic full or pro rata entitlement on leaving employment
In some jurisdictions entities establish schemes where a significant number of the
participants will potentially leave employment before the end of the full vesting period
and will be allowed to keep a pro rata share of the award. This gives rise to a much
broader category of employee than the small number of good leavers that one would
generally expect under a scheme where ‘good leaver’ refers only to employees who die,
retire or work for a business unit that is sold or closed (see 5.3.9.A above).
The substance of an arrangement where significant numbers of employees are expected
to leave with a pro rata entitlement is that the entire award to all participants vests on a
graded basis over the vesting period as a whole. So, for example, an arrangement that
gives employees 360 shares at the end of three years but, whether under the rules of the
scheme or by precedent, allows the majority of leavers to take a pro rata share – based
on the number of months that have elapsed – at their date of departure, should be
treated as vesting at the rate of 10 shares per month for all employees. Such an
arrangement should be accounted for using the graded vesting approach illustrated
at 6.2.2 below.
Some take the view that the situation outlined in the previous paragraph does not
require graded vesting and that a straight-line approach may be taken because the award
only vests pro rata if an employee leaves employment. Supporters of this view argue
that the requirement to leave employment in order to receive the award before the end
of the full vesting period is itself a substantive condition over and above the requirement
to provide ongoing service. If an employee remains in employment the award only vests
on completion of three years’ service and there is no earlier entitlement on a pro rata
basis. Although this treatment has some appeal, in our view it is difficult to reconcile to
the standard and is not therefore an appropriate alternative accounting treatment to the
graded approach outlined above.
In other cases, rather than just a pro rata apportionment, any good leaver will be allowed
to keep the entire award regardless of when they leave employment. If this is the case,
and in substance there is no required minimum service period attached to the award,
then the award should be treated as immediately vested in all employees and fully
expensed at the grant date.
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5.3.10
Special purpose acquisition companies (‘SPACs’)
IPOs and trade sales may be achieved through the medium of special purpose
acquisition companies (‘SPACs’). The detailed features of SPACs may vary, but common
features tend to be:
• The SPAC is established by a small number of founders, typically with expertise in
selecting attractive targets for flotation or sale. The founder shares contain a term
to the effect that, if a target is eventually identified and floated or sold, the holders
of the founder shares will receive a greater proportion of any proceeds than other
shareholders at the time of flotation.
• At a later date, other (non-founder) shareholders invest. This is frequently achieved
by an IPO of the SPAC. It is typically the case that, if a specific target is not identified
and agreed by a required majority of non-founder shareholders, within a finite
timescale, the other (non-founder) shareholders will have their funds returned.
• The SPAC seeks a target which is then approved (or not, as the case may be) by
the required majority of non-founder shareholders.
The three stages outlined above have given rise to three interpretations as to the grant
date for IFRS 2 purposes.
The first view is that there is no shared understanding until the specific target is
identified and agreed (the third stage above). Holders of this view argue that the
substance of the founder shareholders’ interest is economically equivalent to an award
of shares in any target finally approved. Therefore, until the target is finally approved,
there is no clarity as to the nature and value of the award to the founder shareholders.
The second view is that a shared understanding occurs at the point at which the non-
founder shareholders invest (i.e. the second stage above). Holders of this view argue that
a share-based payment can only occur when there has been a transfer of value from the
non-founder shareholders to the founder shareholders and this cannot occur until there
are some non-founder shareholders in place. However, once those non-founder
shareholders are in place, there is a shared understanding that – if a transaction is
subsequently approved – there will be a benefit for founder shareholders.
&nb
sp; The third view is that a shared understanding occurs on the issue of the founder shares
(i.e. the first stage above). Holders of this view argue that at that point there is a shared
understanding that there will be a benefit for founder shareholders if non-founder
shareholders are subsequently introduced and a transaction is subsequently approved.
The benefit for founder shareholders consists both in seeking further investors and in
identifying a suitable target. The founder shareholders will be actively rendering service
towards these goals from the outset.
The IFRS Interpretations Committee conducted some initial outreach research into
how SPACs are treated in practice, but the question has not been formally discussed to
date. Until such time as additional guidance is given, it seems that the diversity in
practice outlined above will remain and entities should use judgement to determine an
appropriate grant date based on the specific terms of the arrangement.
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5.4
Transactions with non-employees
In accounting for equity-settled transactions with non-employees, the entity must adopt
a rebuttable presumption that the value of the goods or services received provides the
more reliable indication of the fair value of the transaction. The fair value to be used is
that at the date on which the goods are obtained or the services rendered. [IFRS 2.13]. This
implies that, where the goods or services are received on a number of dates over a
period, the fair value at each date should be used, although in the case of a relatively
short period there may be no great fluctuation in fair value.
If ‘in rare cases’ the presumption is rebutted, the entity may use as a surrogate measure
the fair value of the equity instruments granted, but as at the date when the goods or
services are received, not the original grant date. However, where the goods or services
are received over a relatively short period where the share price does not change
significantly, an average share price can be used in calculating the fair value of equity
instruments granted. [IFRS 2.13, IG5, IG6-7].
5.4.1
Effect of change of status from employee to non-employee (or vice
versa)
IFRS 2 does not give specific guidance on how to account for an award when the
status of the counterparty changes from employee to non-employee (or vice versa)
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 511