price (see 10.4 above).
The measurement date of the award is 1 January in year 1 and the vesting period is year 1. The methodology
set out in IFRS 2 for awards where the counterparty has a choice of settlement would lead to recognition over
the vesting period of a liability component of £500 and an equity component of zero (see 10.1.2 above). If in
fact the employee took shares at vesting, the £500 liability would be transferred to equity.
Example 30.63: Discretionary investment by employee of cash bonus into shares
with mandatory matching award by employer
At the beginning of year 1 an employee is told that he is to participate in a bonus scheme which will pay
£1,000 if certain performance criteria are met by the end of year 1 and he remains in service. The bonus will
be paid at the beginning of year 2. 50% will be paid in cash and the employee will be permitted, but not
required, to invest the remaining 50% in as many shares as are worth £500 at the beginning of year 2. Thus,
if the share price were £2.50, the employee could choose to receive either (a) £1,000 or (b) £500 cash and
200 shares.
If the employee elects to reinvest the bonus in shares, the shares are not fully vested unless the employee
remains in service until the end of year 3. However, if the employee elects to receive 50% of the bonus in
shares, the entity is required to award an equal number of additional shares (‘matching shares’), in this
case 200 shares, also conditional upon the employee remaining in service until the end of year 3. The award
of any matching shares will be made at the beginning of year 2.
The 50% of the bonus automatically paid in cash is outside the scope of IFRS 2 and within that of IAS 19
(see Chapter 31).
The 50% of the bonus that may be invested in shares falls within the scope of IFRS 2 as a share-based payment
transaction in which the terms of the arrangement provide the counterparty with the choice of settlement. This
is the case even though the value of the alternative award is always £500 and does not depend on the share
price (see 10.4 above).
The mandatory nature of the matching shares means that the award is a share-based payment transaction,
entered into at the beginning of year 1 (and therefore measured as at that date), in which the terms of the
arrangement provide the counterparty with a choice of settlement between:
• at the beginning of year 2: cash of £500, subject to service and performance during year 1; or
• at the end of year 3: shares with a value of £1,000 as at the beginning of year 2, subject to:
(i) performance in year 1; and
(ii) service during years 1 to 3.
The equity component as calculated in accordance with IFRS 2 will have a value in excess of zero
(see 10.1.2 above). The measurement date of the equity component is the beginning of year 1. However,
as discussed at 10.1.3.A above, IFRS 2 does not specify how to deal with a transaction where the
counterparty has the choice of equity- or cash-settlement but the liability and equity components have
2742 Chapter 30
different vesting periods. In our view it is appropriate to recognise the liability and equity components
independently over their different vesting periods, i.e. in this case:
• for the liability component (i.e. the fair value of the cash alternative), during year 1;
• for the equity component (i.e. the excess of the total fair value of the award over the fair value of the
cash alternative), during the three year period to the end of year 3.
Thus, at the end of year 1, the entity will have recorded an IFRS 2 expense together with a corresponding:
• liability for the cost of the portion of the annual award that the employee may take in cash or equity (the
liability component referred to above);
• credit to equity, for one-third of the cost of the matching award (the equity component referred to above).
If the employee decides to take shares, the entity would simply transfer the amount recorded as a liability to
equity and recognise the remaining cost of the matching shares over the following two years.
If, however, the employee elects to take cash, the position is more complicated. Clearly, the main accounting
entry is to reduce the liability, with a corresponding reduction in cash, when the liability is settled. However,
this raises the question of what is to be done with the one-third cost of the matching award already recognised
in equity and the remaining, as yet unrecognised, two-thirds cost.
An election by the employee for cash at the end of year 1 should be treated as a cancellation of the matching
award, due to the employee’s failure to fulfil a non-vesting condition (i.e. not taking the cash alternative) for
the matching award – see 3.2 and 6.4 above. Therefore the one-third cost that had already been expensed
would not be reversed and the remaining two-thirds of the matching award not yet recognised would be
recognised immediately, resulting in an expense for an award that does not actually crystallise.
The analysis above assumes that the equity award either vests or is cancelled because the employee decides
to take the cash award. An alternative outcome would be that the employee chooses the equity-settled award
but then fails to meet the three year service condition attached to that award. This would result in forfeiture
of the equity-settled award and the reversal of any expense previously recognised for the equity component.
However, this raises a question about the treatment of the amount for the cash component that was credited
to equity when the employee chose the equity award rather than the cash award. In our view, there are two
alternative approaches:
• The employee’s decision to invest 50% of the bonus into the share award is similar to the employee
making a non-refundable deposit for the shares and so it is appropriate to leave this amount in equity
and not reverse it through profit or loss as part of the forfeiture accounting for the equity award.
• The reclassification of £500 from liability to equity is part of the consideration for the forfeited equity
instruments and relates to past service rendered in connection with the equity component of the award
and so it is appropriate to reverse this amount through profit or loss as part of the forfeiture.
In our view, either approach is acceptable but should be applied consistently.
Example 30.64: Discretionary investment by employee of cash bonus into shares
with discretionary matching award by employer
At the beginning of year 1 an employee is told that he is to participate in a bonus scheme which will pay
£1,000 if certain performance criteria are met by the end of year 1 and he remains in service. The bonus will
be paid at the beginning of year 2. 50% will be paid in cash and the employee will be permitted, but not
required, to invest the remaining 50% in as many shares as are worth £500 at the beginning of year 2. Thus,
if the share price were £2.50, the employee could choose to receive either (a) £1,000 or (b) £500 cash and
200 shares. Any shares received under this part of the arrangement are fully vested.
If the employee elects to receive shares, the entity has the discretion, but not the obligation, to award
additional shares (‘matching shares’) – in this case 200 shares – conditional upon the employee remaining in
service until the end of year 3. The award of any matching shares will be made at the beginning of
year 2.
The 50% of the bonus automatically paid in cash is outside the scope of IFRS 2 and within that of IAS 19
(see Chapter 31).
Share-based
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The 50% of the bonus that may be invested in shares falls within the scope of IFRS 2 as a share-based payment
transaction in which the terms of the arrangement provide the counterparty with the choice of settlement. This
is the case even though the value of the alternative award is always £500 and does not depend on the share
price (see 10.4 above).
In our view, it is necessary, as discussed in Example 30.61 above, to consider whether the entity’s discretion
to make an award of matching shares is real or not, this being a matter for judgement in the light of individual
facts and circumstances.
If it is determined that the entity is effectively obliged to match any share award taken by the employee, then
the award should be analysed as giving the employee the choice of settlement between:
• At the beginning of year 2: cash of £500, subject to service and performance during year 1; or
• At the beginning of year 2 shares with a value of £500 as at that date, subject to service and performance
during year 1; and, at the end of year 3: the same number of shares again subject to (i) performance
during year 1 and (ii) service during the three year period to the end of year 3.
In this case the grant date (and therefore measurement date) of all the equity awards would be taken as the
beginning of year 1. As regards the award due to vest at the beginning of year 2, this would be split into its
equity and liability components, and in this case the equity component would have a value of zero (since the
two components are essentially worth the same amount of £500). Thus the entity would accrue a liability
during year 1. The matching share award would be expensed over the three year period to the end of year 3.
Thus, at the end of year 1, the entity will have recorded an IFRS 2 expense together with a corresponding:
• liability for the cost of the portion of the annual award that the employee may take in cash or equity (the
liability component); and
• credit to equity for one-third of the cost of the matching award (the equity component).
If the employee decides to take shares at the beginning of year 2, the entity would simply transfer the amount
recorded as a liability to equity and recognise the remaining cost of the matching shares over the following
two years.
If, however, the employee elects to take cash, the position is more complicated. Clearly, the main accounting
entry is to reduce the liability, with a corresponding reduction in cash, when the liability is settled. However,
this raises the question of what is to be done with the one-third cost of the matching award already recognised
in equity and the remaining, as yet unrecognised, two-thirds cost.
As in Example 30.63 above, an election by the employee for cash at the end of year 1 should be treated as a
cancellation of the matching award, due to the employee’s failure to fulfil a non-vesting condition (i.e. not taking
the cash alternative) for the matching award – see 3.2 and 6.4 above. Therefore the one-third cost that had already
been expensed would not be reversed and the remaining two-thirds of the matching award not yet recognised
would be recognised immediately, resulting in an expense for an award that does not actually crystallise.
If it is concluded that the entity has genuine discretion to make a matching award, the analysis is somewhat different.
The portion of the annual award that may be taken in shares should be analysed as giving the employee the
choice, at the beginning of year 2, between cash of £500 and shares worth £500 (the number of shares being
determined by reference to the share price at that date). This would be split into its equity and liability
components, and in this case the equity component would have a value of zero (since the two components
are essentially worth the same). Thus the entity would accrue a liability during year 1. If the employee elected
to receive shares, this liability would be transferred to equity.
Any matching share award would be treated as being granted on, and measured as at, the beginning of year 2.
The cost would be recognised over the two year period from the beginning of year 2 to the end of year 3.
The discussion in 8.10 above is relevant to the valuation of the matching equity award.
Example 30.63 above discusses the accounting treatment in a situation where the employee fails to meet the
service condition.
If, as is often the case in practice, the employee had to retain his original holding of
shares and complete a further period of service in order for the matching award to vest,
2744 Chapter 30
the requirement to retain the original shares would be treated as a non-vesting condition
and taken into account in the grant date fair value of the matching award (see 6.4 above).
Failure to meet this non-vesting condition, by disposing of the shares whilst remaining
in employment during the matching period, would be treated as a cancellation of the
matching award as holding the shares is a condition within the employee’s control
(see 6.4.3 above).
15.2 Loans to employees to purchase shares (limited recourse and full
recourse loans)
In some jurisdictions, share awards to employees are made by means of so-called
‘limited recourse loan’ schemes. The detailed terms of such schemes vary, but typical
features include the following:
• the entity makes an interest-free loan to the employee which is immediately used
to acquire shares to the value of the loan on behalf of the employee;
• the shares may be held by the entity, or a trust controlled by it (see 12.3 above),
until the loan is repaid;
• the employee is entitled to dividends, except that these are treated as paying off
some of the outstanding loan;
• within a given period (say, five years) the employee must either have paid off the
outstanding balance of the loan, at which point the shares are delivered to the
employee, or surrendered the shares. Surrender of the shares by the employee is
treated as discharging any outstanding amount on the loan, irrespective of the
value of the shares.
The effect of such an arrangement is equivalent to an option exercisable within
five years with an exercise price per share equal to the share price at grant date less
total dividends since grant date – a view reinforced by the Interpretations Committee.36
There is no real loan at the initial stage. The entity has no right to receive cash or
another financial asset, since the loan can be settled by the employee returning the
(fixed) amount of equity ‘purchased’ at grant date.
Indeed, the only true cash flow in the entire transaction is any amount paid at the final
stage if the employee chooses to acquire the shares at that point. The fact that the
exercise price is a factor of the share price at grant date and dividends paid between
grant date and the date of repayment of the ‘loan’ is simply an issue for the valuation of
the option.
The arrangement is valued using an option-pricing model and the fair value is based on
the employee’s implicit right to buy the shares at a future date rather than being the
share price a
t grant date (the face value of the loan).
The loan arrangement might have a defined period during which the employee must
remain in service (five years in the example above) and during which there might also
be performance conditions to be met. Where this is the case, the IFRS 2 expense will
be recognised by the entity over this period. However, where, as is frequently the case,
such an award is subject to no future service or performance condition, i.e. the ‘option’
is, in effect, immediately exercisable by the employee should he choose to settle the
‘loan’, IFRS 2 requires the cost to be recognised in full at grant date (see 6.1 above).
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2745
There are also some arrangements where the loan to the employee to acquire the shares
is a full recourse loan (i.e. it cannot be discharged simply by surrendering the shares and
there can be recourse to other assets of the employee). However, the amount repayable
on the loan is reduced not only by dividends paid on the shares, but also by the
achievement of performance targets, such as the achievement of a given level of earnings.
The appropriate analysis of such awards is more difficult, as they could be viewed in
two ways:
• either the employer has made a loan (which the employee has chosen to use to
buy a share), accounted for under IFRS 9, and has then entered into a
performance-related cash bonus arrangement with the employee, accounted for
under IAS 19; or
• the transaction is a share option where the exercise price varies according to the
satisfaction of performance conditions and the amount of dividends on the shares,
accounted for under IFRS 2.
The different analyses give rise to potentially significantly different expenses. This will
particularly be the case where one of the conditions for mitigation of the amount
repayable on the loan is linked to the price of the employer’s equity. As this is a market
condition, the effect of accounting for the arrangement under IFRS 2 may be that an
expense is recognised in circumstances where no expense would be recognised under
IAS 19.
Such awards need to be carefully analysed, in the light of their particular facts and
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 547