• the entity’s total shareholder return (‘TSR’) relative to that of a peer group being in
the top 10% of its peer group at the end of the period (‘TSR target (market
condition)’).
Matrix 1
Service condition met?
TSR target (market IFRS 2 expense?
condition) met?
1 Yes
Yes
Yes
2 Yes
No
Yes
3 No
Yes
No
4 No
No
No
It will be seen that, to all intents and purposes, the ‘TSR target (market condition) met?’
column is redundant, as this market condition is not relevant to whether or not the
award is treated as vesting by IFRS 2. The effect of this is that the entity would recognise
an expense for outcome 2, even though no awards truly vest.
Matrix 2 summarises the possible outcomes for an award with the same conditions as in
Matrix 1, plus a requirement for earnings per share to grow by a general inflation index
plus 10% over the period (‘EPS target’).
Matrix 2
Service condition met?
TSR target (market
EPS target (non-
IFRS 2
condition) met?
market condition)
expense?
met?
1 Yes
Yes
Yes
Yes
2 Yes
No
Yes
Yes
3 Yes
Yes
No
No
4 Yes
No
No
No
5 No
Yes
Yes
No
6 No
No
Yes
No
7 No
Yes
No
No
8 No
No
No
No
Again it will be seen that, to all intents and purposes, the ‘TSR target (market condition)
met?’ column is redundant, as this market condition is not relevant to whether or not
the award is treated as vesting by IFRS 2. The effect of this is that the entity would
recognise an expense for outcome 2, even though no awards truly vest. However, no
expense would be recognised for outcome 4, which is, except for the introduction of
the EPS target, equivalent to outcome 2 in Matrix 1, for which an expense is recognised.
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This illustrates that the introduction of a non-market vesting condition closely related
to a market condition may mitigate the impact of IFRS 2.
Examples of the application of the accounting treatment for transactions involving
market conditions are given in 6.3.3 to 6.3.5 below.
6.3.3
Transactions with market conditions and known vesting periods
The accounting for such transactions is essentially the same as that for transactions
without market conditions but with a known vesting period (including ‘graded’ vesting
– see 6.2.2 above), except that adjustments are made to reflect the changing probability
of the achievement of the non-market vesting conditions only, as illustrated by
Example 30.14 below. [IFRS 2.19-21, IG13, IG Example 5].
Example 30.14: Award with market condition and fixed vesting period
At the beginning of year 1, an entity grants to 100 employees 1,000 share options each, conditional upon the
employees remaining in the entity’s employment until the end of year 3. However, the share options cannot
be exercised unless the share price has increased from €50 at the beginning of year 1 to more than €65 at the
end of year 3.
If the share price is above €65 at the end of year 3, the share options can be exercised at any time during the
next seven years, i.e. by the end of year 10. The entity applies a binomial option pricing model (see 8 below),
which takes into account the possibility that the share price will exceed €65 at the end of year 3 (and hence
the share options vest and become exercisable) and the possibility that the share price will not exceed €65 at
the end of year 3 (and hence the options will be treated as having vested under IFRS 2 but will never be
exercisable – as explained below). It estimates the fair value of the share options with this market condition
to be €24 per option.
IFRS 2 requires the entity to recognise the services received from a counterparty who satisfies all other
vesting conditions (e.g. services received from an employee who remains in service for the specified service
period), irrespective of whether that market condition is satisfied. It makes no difference whether the share
price target is achieved, since the possibility that the share price target might not be achieved has already been
taken into account when estimating the fair value of the share options at grant date. However, the options are
subject to another condition (i.e. continuous employment) and the cost recognised should be adjusted to
reflect the ongoing best estimate of employee retention.
By the end of the first year, seven employees have left and the entity expects that a total of 20 employees will
leave by the end of year 3, so that 80 employees will have satisfied all conditions other than the market
condition (i.e. continuous employment).
By the end of the second year, a further five employees have left. The entity now expects only three more
employees will leave during year 3, and therefore expects that a total of 15 employees will have left during
the three year period, so that 85 employees will have satisfied all conditions other than the market condition.
By the end of year 3, a further seven employees have left. Hence, 19 employees have left during the three year
period, and 81 employees remain. However, the share price is only €60, so that the options cannot be
exercised. Nevertheless, as all conditions other than the market condition have been satisfied, a cumulative
cost is recorded as if the options had fully vested in 81 employees.
The entity will recognise the following amounts during the vesting period for services received as
consideration for the options (which in economic reality do not vest).
Cumulative
Expense for
Year Calculation of cumulative expense
expense (€)
period (€)
1 80 employees × 1,000 options × €24 × 1/3
640,000
640,000
2 85 employees × 1,000 options × €24 × 2/3
1,360,000
720,000
3 81 employees × 1,000 options × €24
1,944,000
584,000
Share-based
payment
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6.3.4
Transactions with variable vesting periods due to market conditions
Where a transaction has a variable vesting period due to a market condition, a best
estimate of the most likely vesting period will have been used in determining the fair
value of the transaction at the date of grant. IFRS 2 requires the expense for that
transaction to be recognised over an estimated expected vesting period consistent
with the assumptions used in the valuation, without any subsequent revision.
[IFRS 2.15(b), IG14].
This may mean, for example, that, if the actual vesting period for an employee share
&nb
sp; option award turns out to be longer than that anticipated for the purposes of the initial
valuation, a cost is nevertheless recorded in respect of all employees who reach the end
of the anticipated vesting period, even if they do not reach the end of the actual vesting
period, as shown by Example 30.15 below, which is based on IG Example 6 in the
implementation guidance in IFRS 2. [IFRS 2 IG Example 6].
Example 30.15: Award with market condition and variable vesting period
At the beginning of year 1, an entity grants 10,000 share options with a ten year life to each of ten senior
executives. The share options will vest and become exercisable immediately if and when the entity’s share price
increases from £50 to £70, provided that the executive remains in service until the share price target is achieved.
The entity applies a binomial option pricing model, which takes into account the possibility that the share
price target will be achieved during the ten year life of the options, and the possibility that the target will not
be achieved. The entity estimates that the fair value of the share options at grant date is £25 per option. From
the option pricing model, the entity determines that the most likely vesting period is five years. The entity
also estimates that two executives will have left by the end of year 5, and therefore expects that 80,000 share
options (10,000 share options × 8 executives) will vest at the end of year 5.
Throughout years 1 to 4, the entity continues to estimate that a total of two executives will leave by the
end of year 5. However, in total three executives leave, one in each of years 3, 4 and 5. The share price
target is achieved at the end of year 6. Another executive leaves during year 6, before the share price
target is achieved.
Paragraph 15 of IFRS 2 requires the entity to recognise the services received over the expected vesting period,
as estimated at grant date, and also requires the entity not to revise that estimate. Therefore, the entity
recognises the services received from the executives over years 1-5. Hence, the transaction amount is
ultimately based on 70,000 share options (10,000 share options × 7 executives who remain in service at the
end of year 5). Although another executive left during year 6, no adjustment is made, because the executive
had already completed the expected vesting period of 5 years.
The entity will recognise the following amounts during the initial expected five year vesting period for
services received as consideration for the options.
Cumulative
Expense for
Year Calculation of cumulative expense
expense (£)
period (£)
1 8 employees × 10,000 options × £25 × 1/5
400,000
400,000
2 8 employees × 10,000 options × £25 × 2/5
800,000
400,000
3 8 employees × 10,000 options × £25 × 3/5
1,200,000
400,000
4 8 employees × 10,000 options × £25 × 4/5
1,600,000
400,000
5 7 employees × 10,000 options × £25
1,750,000
150,000
IFRS 2 does not specifically address the converse situation, namely where the award
actually vests before the end of the anticipated vesting period. In our view, where this
occurs, any expense not yet recognised at the point of vesting should be immediately
accelerated. We consider that this treatment is most consistent with the overall
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requirement of IFRS 2 to recognise an expense for share-based payment transactions
‘as the services are received’. [IFRS 2.7]. It is difficult to regard any services being received
for an award after it has vested.
Moreover, the prohibition in IFRS 2 on adjusting the vesting period as originally
determined refers to ‘the estimate of the expected vesting period’. In our view, the
acceleration of vesting that we propose is not the revision of an estimated period, but
the substitution of a known vesting period for an estimate.
Suppose in Example 30.15 above, the award had in fact vested at the end of year 4. We
believe that the expense for such an award should be allocated as follows:
Cumulative
Expense for
Year Calculation of cumulative expense
expense (£)
period (£)
1 8 employees × 10,000 options × £25 × 1/5
400,000
400,000
2 8 employees × 10,000 options × £25 × 2/5
800,000
400,000
3 8 employees × 10,000 options × £25 × 3/5
1,200,000
400,000
4 8 employees × 10,000 options × £25 × 4/4
2,000,000
800,000
6.3.5
Transactions with multiple outcomes depending on market
conditions
In practice, it is very common for an award subject to market conditions to give varying
levels of reward that increase depending on the extent to which a ‘base line’ market
performance target has been met. Such an award is illustrated in Example 30.16 below.
Example 30.16: Award with market conditions and multiple outcomes
At the beginning of year 1, the reporting entity grants an employee an award of shares that will vest on the
third anniversary of grant if the employee is still in employment. The number of shares depends on the share
price achieved at the end of the three-year period. The employee will receive:
• no shares if the share price is below €10.00
• 100 shares if the share price is in the range €10.00 – €14.99
• 150 shares if the share price is in the range €15.00 – €19.99
• 180 shares if the share price is €20.00 or above.
In effect the entity has made three awards, which need to be valued as follows:
(a) 100 shares if the employee remains in service for three years and the share price is in the range €10.00 – €14.99
(b) 50 (150 – 100) shares if the employee remains in service for three years and the share price is in the
range €15.00 – €19.99; and
(c) 30 (180 – 150) shares if the employee remains in service for three years and the share price is €20.00 or more.
Each award would be valued, ignoring the impact of the three-year service condition but taking account of
the share price target. This would result in each tranche of the award being subject to an increasing level of
discount to reflect the relative probability of the share price target for each tranche of the award being met.
All three awards would then be expensed over the three-year service period, and forfeited only if the awards
lapsed as a result of the employee leaving during that period.
It can be seen that the (perhaps somewhat counterintuitive) impact of this is that an
equity-settled share-based payment where the number of shares increases in line with
increases in the entity’s share price may nevertheless have a fixed grant date value
irrespective of the number of shares finally awarded.
Share-based
payment
2585
6.3.6
Transactions with independent market conditions, non-market
vesting conditions or non-vesting conditions
6.3.6.A
Independent market and non-market vesting conditions
The discussion at 6.3.2 above addressed the accountin
g treatment of awards with
multiple conditions that must all be satisfied, i.e. a market condition and a non-market
vesting condition. However, entities might also make awards with multiple conditions,
only one of which need be satisfied, i.e. the awards vest on satisfaction of either a
market condition or a non-market vesting condition. IFRS 2 provides no explicit
guidance on the treatment of such awards, which is far from clear, as illustrated by
Example 30.17 below.
Example 30.17: Award with independent market conditions and non-market
vesting conditions
An entity grants an employee 100 share options that vest after three years if the employee is still in
employment and the entity achieves either:
• cumulative total shareholder return (TSR) over three years of at least 15%, or
• cumulative profits over three years of at least £200 million.
The fair value of the award, ignoring vesting conditions, is £300,000. The fair value of the award, taking
account of the TSR condition, but not the other conditions, is £210,000.
In our view, the entity has, in effect, simultaneously issued two awards – call them ‘A’ and ‘B’ –which vest
as follows:
A
on achievement of three years’ service plus minimum TSR,
B
on achievement of three years’ service plus minimum earnings growth.
If the conditions for both awards are simultaneously satisfied, one or other effectively lapses.
It is clear that award A, if issued separately, would require the entity to recognise an expense of £210,000 if
the employee were still in service at the end of the three year period. It therefore seems clear that, if the
employee does remain in service, there should be a charge of £210,000 irrespective of whether the award
actually vests. It would be anomalous for the entity to avoid recording a charge that would have been
recognised if the entity had made award A in isolation simply by packaging it with award B.
If in fact the award vested because the earnings condition, but not the market condition, had been satisfied, it
would then be appropriate to recognise a total expense of £300,000.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 515