fair value. Before the initial publication of IFRS 2, a number of respondents to the
IASB’s earlier exposure draft suggested that, for reasons of consistency and simplicity
of calculation, cash-settled transactions should be measured at intrinsic value
throughout their entire life. The IASB, while accepting these merits of the intrinsic
value approach, rejected it on the basis that, since it does not include a time value, it
is not an adequate measure of either the liability or the cost of services consumed.
[IFRS 2.BC246-251].
As noted at 5.5 above, the approach to determining the fair value of share-based
payments continues to be that specified in IFRS 2 as share-based payments fall outside
the scope of IFRS 13 which applies more generally to the measurement of fair value
under IFRSs (see Chapter 14). [IFRS 2.6A].
IFRS 2 uses the term ‘share appreciation rights’ when referring to measurement of the
liability but makes clear that this should be read as including any cash-settled share-
based payment transaction. [IFRS 2.31].
9.3.2
Application of the accounting treatment
The treatment required by IFRS 2 for cash-settled transactions is illustrated by
Example 30.37 below and by Example 30.38 at 9.3.2.C below. These examples are
based, respectively, on IG Examples 12 and 12A in the implementation guidance
accompanying IFRS 2. [IFRS 2 IG Example 12, IG Example 12A].
Example 30.37: Cash-settled transaction with service condition
An entity grants 100 cash-settled share appreciation rights (SARs) to each of its 500 employees, on condition
that the employees remain in its employment for the next three years. The SARs can be exercised on the third,
fourth and fifth anniversary of the grant date.
During year 1, 35 employees leave. The entity estimates that a further 60 will leave during years 2 and 3 (i.e.
the award will vest in 405 employees).
During year 2, 40 employees leave and the entity estimates that a further 25 will leave during year 3 (i.e. the
award will vest in 400 employees).
During year 3, 22 employees leave, so that the award vests in 403 employees. At the end of year 3, 150
employees exercise their SARs (leaving 253 employees still to exercise).
Another 140 employees exercise their SARs at the end of year 4, leaving 113 employees still to exercise, who
do so at the end of year 5.
2652 Chapter 30
The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown
below. The intrinsic values of the SARs at the date of exercise (which equal the cash paid out) at the end of
years 3, 4 and 5 are also shown below.
Year
Fair value
Intrinsic value
£
£
1 14.40
2 15.50
3 18.20
15.00
4 21.40
20.00
5 25.00
The entity will recognise the cost of this award as follows:
Liability
Cash paid Expense for
Year
Calculation of liability
Calculation of cash paid
(£)
(£)
period (£)*
1 405 employees × 100
SARs × £14.40 × 1/3
194,400
–
194,400
2 400 employees × 100
SARs × £15.50 × 2/3
413,333
–
218,933
3 253 employees × 100
150 employees × 100
SARs × £18.20
SARs × £15.00
460,460
225,000
272,127
4 113 employees × 100
140 employees × 100
SARs × £21.40
SARs × £20.00
241,820
280,000
61,360
5 –
113 employees × 100
SARs × £25.00
–
282,500 40,680
*
Liability at end of period + cash paid in period – liability at start of period
The accounting treatment for cash-settled transactions is therefore (despite some
similarities in the methodology) significantly different from that for equity-settled
transactions. An important practical issue is that, for a cash-settled transaction, the
entity must determine the fair value at each reporting date and not merely at grant date
(and at the date of any subsequent modification or settlement) as would be the case for
equity-settled transactions.
As Example 30.37 shows, it is not generally necessary, although arguably required by
IFRS 2, to determine the fair value of a cash-settled transaction at grant date, at least to
determine the expense under IFRS 2. However, for entities subject to IAS 33 – Earnings
per Share – the grant date fair value may be required in order to make the disclosures
required by that standard – see Chapter 33 at 6.4.2.
We discuss in more detail at 9.3.2.A to 9.3.2.E below the following aspects of the
accounting treatment of cash-settled transactions:
Share-based
payment
2653
• determining the vesting period (see 9.3.2.A below);
• periodic allocation of cost (see 9.3.2.B below);
• treatment of non-market vesting conditions (see 9.3.2.C below);
• treatment of market conditions and non-vesting conditions (see 9.3.2.D below);
and
• treatment of modification, cancellation and settlement (see 9.3.2.E below).
9.3.2.A
Determining the vesting period
The rules for determining vesting periods are the same as those applicable to equity-
settled transactions, as discussed in 6.1 to 6.4 above. Where an award vests immediately,
IFRS 2 creates a presumption that, in the absence of evidence to the contrary, the award
is in respect of services that have already been rendered, and should therefore be
expensed in full at grant date. [IFRS 2.32].
Where cash-settled awards are made subject to vesting conditions (as in many cases
they will be, particularly where payments to employees are concerned), IFRS 2 creates
a presumption that they are a payment for services to be received in the future, during
the ‘vesting period’, with the transaction being recognised during that period, as
illustrated in Example 30.37 above. [IFRS 2.32].
9.3.2.B
Periodic allocation of cost
IFRS 2 states that the required treatment for cash-settled transactions is simply to
measure the fair value of the liability at each reporting date, [IFRS 2.30], which might
suggest that the full fair value, and not just a time-apportioned part of it, should be
recognised at each reporting date – as would be the case for any liability that is a
financial instrument and measured at fair value under IFRS 9.
However, the standard goes on to clarify that the liability is to be measured at an amount
that reflects ‘the extent to which employees have rendered service to date’, and the cost
is to be recognised ‘as the employees render service’. [IFRS 2.32-33]. This, together with IG
Examples 12-12A in IFRS 2 (the substance of which is reproduced as Examples 30.37
above and 30.38 below), indicates that a spreading approach is to be adopted.
&nbs
p; 9.3.2.C Non-market
vesting conditions
IFRS 2 (as amended for accounting periods beginning on or after 1 January 2018)
clarifies how performance vesting conditions and non-vesting conditions should be
treated in the measurement of cash-settled share-based payment transactions. In this
section we consider non-market performance conditions; market performance
conditions and non-vesting conditions are discussed at 9.3.2.D below.
2654 Chapter 30
The amended standard makes clear that:
• vesting conditions (other than market conditions) should not be taken into account
in estimating the fair value of a cash-settled share-based payment. Instead, as for
equity-settled share-based payment transactions, such conditions should be taken
into account by adjusting the number of awards included in the measurement of
the liability arising from the cash-settled share-based payment transaction;
• the amount recognised for the goods or services received during the vesting period
should be based on the entity’s best estimate of the number of awards expected to
vest. This estimate should be revised, if necessary, if subsequent information
indicates that the number of awards expected to vest differs from previous
estimates. On the vesting date, the entity should revise the estimate to equal the
number of awards that ultimately vested; and
• on a cumulative basis, the amount ultimately recognised for goods or services
received as consideration for the cash-settled share-based payment will be equal
to the cash that is paid. [IFRS 2.33A-33B, 33D].
There are transitional provisions relating to application of the amended standard as set
out at 16.2 below.
As part of the amendments, IG Example 12A was added to the implementation guidance
accompanying IFRS 2 to illustrate the accounting treatment of a cash-settled award with
a non-market performance condition. [IFRS 2 IG Example 12A]. This example forms the basis
of Example 30.38 below and supplements the illustration of a service condition in
IG Example 12 (broadly reproduced as Example 30.37 above).
Example 30.38: Cash-settled transaction with service condition and non-market
performance condition
An entity grants 100 cash-settled share appreciation rights (SARs) to each of its 500 employees, on condition that
the employees remain in its employment for the next three years and the entity reaches a revenue target (£1 billion
in sales) by the end of year 3. The entity expects all employees to remain in employment for the full three years.
At the end of year 1, the entity expects that the revenue target will not be achieved by the end of year 3. During
year 2, the entity’s revenue increased significantly and it is expected that the revenue will continue to grow.
Consequently, at the end of year 2, the entity expects that the revenue target will be achieved by the end of year 3.
At the end of year 3, the revenue target is achieved and 150 employees exercise their SARs. Another 150 employees
exercise their SARs at the end of year 4 and the remaining 200 exercise their SARs at the end of year 5.
Using an option pricing model, the entity estimates the fair value of the SARs, ignoring the revenue target
performance condition and the employment service condition, at the end of each year until all of the cash-
settled share-based payments are settled. At the end of year 3, all of the SARs vest. The following table shows
the estimated fair value of the SARs at the end of each year and the intrinsic values of the SARs at the date
of exercise (which equal the cash paid out).
Year
Fair value
Intrinsic value
£
£
1 14.40
2 15.50
3 18.20
15.00
4 21.40
20.00
5 25.00
25.00
Share-based
payment
2655
The entity will recognise a total expense and cash payment of £1,025,000 as follows:
Liability
Cash paid Expense for
Year
Calculation of liability
Calculation of cash paid
(£)
(£)
period (£)*
1 SARs are not expected to
vest: no expense is
recognised.
–
–
–
2 SARs are expected to
vest: 500 employees ×
100 SARs × £15.50 × 2/3
516,667
–
516,667
3 ((500 – 150) employees ×
150 employees × 100
100 SARs × £18.20 × 3/3) SARs × £15.00
– 516,667
637,000
225,000 345,333
4 ((350 – 150) employees ×
150 employees × 100
100 SARs × £21.40) –
SARs × £20.00
637,000
428,000
300,000 91,000
5 ((200 – 200) employees ×
200 employees × 100
100 SARs × £25.00) –
SARs × £25.00
428,000
–
500,000 72,000
*
Liability at end of period + cash paid in period – liability at start of period
Prior to the June 2016 amendments to the standard, the treatment of service conditions
attached to cash-settled awards was clear (as illustrated in IG Example 12) but the lack
of clarity about the treatment of performance vesting conditions and non-vesting
conditions led to diversity in practice.
For non-market performance conditions attached to a cash-settled award, it was
unclear whether an entity should:
• analogise to the treatment of service conditions in IG Example 12
(see Example 30.37 above), basing the liability until vesting date on the current best
estimate of the outcome of those conditions; or
• fully reflect the estimated outcome of the conditions other than service as part of
the fair value calculation.
Both approaches were used in practice and an entity with an existing policy to reflect the
outcome of non-market performance conditions in the fair value of cash-settled transactions
could, in our view, continue to apply this policy prior to adoption of the amendment.
9.3.2.D Market
conditions
and non-vesting conditions
Prior to the June 2016 amendments (applicable for accounting periods beginning on or
after 1 January 2018), IFRS 2 had no specific guidance about whether market
performance conditions and non-vesting conditions attached to a cash-settled
transaction should be accounted for differently from non-market performance
conditions, as is the case for an equity-settled transaction (see 6.2 to 6.4 above).
The amended standard states that market conditions and non-vesting conditions should
be taken into account when estimating the fair value of a cash-settled share-based
payment when it is initially measured and at each remeasurement date until settlement.
[IFRS 2.33C]. The requirements are now explicit but are consistent with the approach
previously considered appropriate for cash-settled transactions with market conditions
and/or non-vesting conditions. Therefore we do not expect that there will be
2656 Chapter 30
; widespread changes of accounting policy in this area on adoption of the amended
standard (in contrast to the elimination of diversity in the accounting treatment for non-
market conditions, as outlined at 9.3.2.C above).
There will be no ultimate cost for a cash-settled award where a market condition or
non-vesting condition is not satisfied as any liability would be reversed. The cumulative
amount recognised will be equal to the cash paid. [IFRS 2.33D]. This is different from the
accounting model for equity-settled transactions with market conditions or non-vesting
conditions, which can result in a cost being recognised for awards subject to a market
or non-vesting condition that is not satisfied (see 6.3 and 6.4 above).
There are transitional provisions relating to application of the amended standard as set
out at 16.2 below.
9.3.2.E
Modification, cancellation and settlement
IFRS 2 (as amended for accounting periods beginning on or after 1 January 2018)
includes guidance for modifications that change the classification of a share-based
payment transaction from cash-settled to equity-settled (see 9.4 below). Apart from this,
IFRS 2 provides no specific guidance on modification, cancellation and settlement of
cash-settled awards. However, as cash-settled awards are accounted for using a full fair
value model no such guidance is needed. It is clear that:
• where an award is modified, the liability recognised at and after the point of
modification will be based on its new fair value, with the effect of any movement
in the liability recognised immediately;
• where an award is cancelled the liability will be derecognised, with a credit
immediately recognised in profit or loss; and
• where an award is settled, the liability will be derecognised, and any gain or loss
on settlement immediately recognised in profit or loss.
9.4
Modification of award from equity-settled to cash-settled or
from cash-settled to equity-settled
An entity will sometimes modify the terms of an award in order to change the manner
of settlement. In other words, an award that at grant date was equity-settled is modified
so as to become cash-settled, or vice versa.
Prior to the June 2016 amendments (applicable for accounting periods beginning on or
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