circumstances, in order to determine the appropriate treatment. Factors that could
suggest that IFRS 2 is the more relevant standard would, in our view, include:
• the employee can use the loan only to acquire shares;
• the employee cannot trade the shares until the loan is discharged; or
• the entity has a practice of accepting (e.g. from leavers) surrender of the shares as
full discharge for the amount outstanding on the loan and does not pursue any
shortfall between the fair value of the shares and the amount owed by the employee.
This would tend to indicate that, in substance, the loan is not truly full recourse.
15.3 Awards entitled to dividends or dividend equivalents during the
vesting period
Some awards entitle the holder to receive dividends on unvested shares (or dividend
equivalents on options) during the vesting period.
For example, in some jurisdictions, entities make awards of shares that are regarded as
fully vested for the purposes of tax legislation (typically because the employee enjoys
the full voting and dividend rights of the shares), but not for accounting purposes
(typically because the shares are subject to forfeiture if a certain minimum service
period is not achieved). In practice, the shares concerned are often held by an EBT until
the potential forfeiture period has expired.
Another variant of such an award that is sometimes seen is where an entity grants an
employee an option to acquire shares in the entity which can be exercised immediately.
However, if the employee exercises the option but leaves within a certain minimum
2746 Chapter 30
period from the grant date, he is required to sell back the share to the entity (typically
either at the original exercise price, or the lower of that price or the market value of the
share at the time of the buy-back – see also the discussions at 15.4.5 below).
Such awards do not fully vest for the purposes of IFRS 2 until the potential forfeiture or
buy-back period has expired. The cost of such awards should therefore be recognised
over this period.
This raises the question of the accounting treatment of any dividends paid to employees
during the vesting period. Conceptually, it could be argued that such dividends cannot
be dividends for financial reporting purposes since the equity instruments to which they
relate are not yet regarded as issued for financial reporting purposes (and would be
excluded from the number of shares in issue for the purposes of IAS 33). This would
lead to the conclusion that dividends paid in the vesting period should be charged to
profit or loss as an employment cost.
However, the charge to be made for the award under IFRS 2 will already take account
of the fact that the recipient is entitled to receive dividends during the vesting period. If
the recipient is not entitled to receive dividends during the vesting period a discount
would be reflected in the fair value of the award; if the recipient is entitled to dividends,
no such adjustment is made (see 8.5.4 above). Thus, it could be argued that also to charge
profit or loss with the dividends paid is a form of double counting. Moreover, whilst the
relevant shares may not have been fully issued for financial reporting purposes, the basic
IFRS 2 accounting does build up an amount in equity over the vesting period. It could
therefore be argued that – conceptually, if not legally – any dividend paid relates not to
an issued share, but rather to the equity instrument represented by the cumulative
amount that has been recorded for the award as a credit to equity, and can therefore
appropriately be shown as a deduction from equity.
However, this argument is valid only to the extent that the credit to equity represents
awards that are expected to vest. It cannot apply to dividends paid to employees whose
awards are either known not to have vested or treated as expected not to vest when
applying IFRS 2 (since there is no credit to equity for these awards). Accordingly, we
believe that the most appropriate approach is to analyse the dividends paid so that, by
the date of vesting, cumulative dividends paid on awards treated by IFRS 2 as vested
are deducted from equity and those paid on awards treated by IFRS 2 as unvested are
charged to profit or loss. The allocation for periods prior to vesting should be based on
a best estimate of the final outcome, as illustrated by Example 30.65 below.
Example 30.65: Award with rights to receive (and retain) dividends during
vesting period
An entity grants 100 free shares to each of its 500 employees. The shares are treated as fully vested for legal
and tax purposes, so that the employees are eligible to receive any dividends paid. However, the shares will
be forfeited if the employee leaves within three years of the award being made. Accordingly, for the purposes
of IFRS 2, vesting is conditional upon the employee working for the entity over the next three years. The
entity estimates that the fair value of each share (including the right to receive dividends during the IFRS 2
vesting period) is €15. Employees are entitled to retain any dividend received even if the award does not vest.
20 employees leave during the first year, and the entity’s best estimate at the end of year 1 is that 75
employees will have left before the end of the vesting period. During the second year, a further 22 employees
leave, and the entity revises its estimate of total employee departures over the vesting period from 75 to 60.
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2747
During the third year, a further 15 employees leave. Hence, a total of 57 employees (20 + 22 + 15) forfeit
their rights to the shares during the three year period, and a total of 44,300 shares (443 employees × 100 shares
per employee) finally vest.
The entity pays dividends of €1 per share in year 1, €1.20 per share in year 2, and €1.50 in year 3.
Under IFRS 2, the entity will recognise the following amounts during the vesting period for services received
as consideration for the shares.
Cumulative
Expense for
Year Calculation of cumulative expense
expense (€)
period (€)
1 100 shares × 425 employees × €15 × 1/3
212,500 212,500
2 100 shares × 440 employees × €15 × 2/3
440,000 227,500
3 100 shares × 443 × €15 × 3/3
664,500 224,500
On the assumption that all employees who leave during a period do so on the last day of that period (and thus
receive dividends paid in that period), in our view the dividends paid on the shares should be accounted for
as follows:
€
€
Year 1
Profit or loss (employee costs)1
7,500
Equity1
42,500
Cash2 50,000
Year 2
Profit or loss (employee costs)3
3,300
Equity3 54,300
Cash4 57,600
Year 3
Profit or loss (employee costs)5
1,590
Equity5 67,110
Cash6 68,700
1
20 employees have left and a further 55 are anticipated to leave. Dividends paid to those employees
(100 shares × 75 employees × €1 = €7
,500) are therefore recognised as an expense. Dividends paid to
other employees are recognised as a reduction in equity.
2
100 shares × 500 employees × €1.
3
22 further employees have left and a further 18 are anticipated to leave. The cumulative expense for
dividends paid to leavers and anticipated leavers should therefore be €10,800 (100 shares × 20
employees × €1 = €2,000 for leavers in year 1 + 100 shares × 40 employees × [€1 + €1.20] for leavers
and anticipated leavers in year 2 = €8,800). €7,500 was charged in year 1, so the charge for year 2 should
be €10,800 – €7,500 = €3,300. This could also have been calculated as charge for leavers and expected
leavers in current year €4,800 (100 shares × 40 [22 + 18] employees × €1.20) less reversal of expense in
year 1 for reduction in anticipated final number of leavers €1,500 (100 shares × 15 [75 – 60] employees
× €1.00). Dividends paid to other employees are recognised as a reduction in equity.
4
100 shares × 480 employees in employment at start of year × €1.20.
5
15 further employees have left. The cumulative expense for dividends paid to leavers should therefore
be €12,390 (€2,000 for leavers in year 1 (see 3 above) + 100 shares × 22 employees × [€1 + €1.20] =
€4,840 for leavers in year 2 + 100 shares × 15 employees × [€1 + €1.20 + €1.50] = €5,550 for leavers in
year 3). A cumulative expense of €10,800 (see 3 above) was recognised by the end of year 2, so the
charge for year 3 should be €12,390 – €10,800 = €1,590. This could also have been calculated as charge
for leavers in current year €2,250 (100 shares × 15 employees × €1.50) less reversal of expense in years
1 and 2 for reduction in final number of leavers as against estimate at end of year 2 €660 (100 shares ×
3 [60 – 57] employees × [€1.00 + €1.20]). Dividends paid to other employees are recognised as a
reduction in equity.
6
100 shares × 458 employees in employment at start of year × €1.50.
2748 Chapter 30
15.4 Awards vesting or exercisable on an exit event or change of
control (flotation, trade sale etc.)
Entities frequently issue awards connected to a significant event such as a flotation,
trade sale or other change of control of the business. It may be that an award that would
otherwise be equity-settled automatically becomes cash-settled if such an event
crystallises and the entity has no choice as to the method of settlement (as discussed
at 10.3 above).
However, it may also be the case that an award vests only on such an event, which raises
various issues of interpretation, as discussed below.
The sections below should be read together with the more general discussions
elsewhere in this chapter (as referred to in the narrative below) on topics such as grant
date, vesting period, vesting and non-vesting conditions and classification as equity-
settled or cash-settled. References to flotation should be read as also including other
exit events.
15.4.1 Grant
date
Sometimes such awards are structured so that they will vest on flotation or so that they
will vest on flotation subject to further approval at that time. For awards in the first
category, grant date as defined in IFRS 2 will be the date on which the award is first
communicated to employees (subject to the normal requirements of IFRS 2 relating to
a shared understanding, offer and acceptance, as discussed at 5.3 above). For awards in
the second category, grant date will be at or around the date of flotation, when the
required further approval is given.
This means that the IFRS 2 cost of awards subject to final approval at flotation will
generally be significantly higher than that of awards that do not require such approval.
Moreover, as discussed further at 5.3.2 above, it may well be the case that employees
begin rendering service for such awards before grant date (e.g. from the date on which
the entity communicates its intention to make the award in principle). In that case, the
entity would need to make an initial estimate of the value of the award for the purpose
of recognising an expense from the date services have been provided, and continually
re-assess that value up until the actual IFRS 2 grant date. As with any award dependent
on a non-market vesting condition, an expense would be recognised only to the extent
that the award is considered likely to vest. The classification of a requirement to float
as a non-market vesting condition is discussed further at 15.4.3 below.
15.4.2 Vesting
period
Many awards that vest on flotation have a time limit – in other words, the award lapses
if flotation has not occurred on or before a given future date. In principle, as discussed
at 6.2.3 above, when an award has a variable vesting period due to a non-market
performance condition, the reporting entity should make a best estimate of the likely
vesting period at each reporting date and calculate the IFRS 2 charge on the basis of
that best estimate.
In practice, the likely timing of a future flotation is notoriously difficult to assess months,
let alone years, in advance. In such cases, it would generally be acceptable simply to
recognise the cost over the full potential vesting period until there is real clarity that a
Share-based
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2749
shorter period may be more appropriate. However, in making the assessment of the
likelihood of vesting, it is important to take the company’s circumstances into account.
The likelihood of an exit event in the short- to medium-term is perhaps greater for a
company owned by private equity investors seeking a return on their investment than
for a long-established family-owned company considering a flotation.
It is worth noting that once an exit event becomes likely, the IFRS 2 expense will in
some cases need to be recognised over a shorter vesting period than was originally
envisaged as the probability of the exit event occurring will form the basis at the
reporting date of the estimate of the number of awards expected to vest (see also the
discussion at 6.2.3 and 7.6 above).
This contrasts with the US GAAP approach where, in practice, an exit event that is a
change in control or an initial public offering is only recognised when it occurs. In a
situation where a change in control or an initial public offering occurs shortly after the
reporting date, it is therefore possible that the expense will need to be recognised in an
earlier period under IFRS than under US GAAP.
15.4.3
Is flotation or sale a vesting condition or a non-vesting condition?
There was debate in the past about whether a requirement for a flotation or sale to
occur in order for an award to vest was a vesting condition or a non-vesting condition.
The argument for it being a non-vesting condition was that flotation or sale may occur
irrespective of the performance of the entity. The counter-argument was essentially
that the price achieved on flotation or sale, which typically affects the ultimate value of
the award (see 15.4.4 below), reflects the performance of the entity and is therefore a
non-market performance cond
ition (provided there is an associated service condition
– see further below).
As part of its wider project on vesting and non-vesting conditions, the Interpretations
Committee reached a tentative decision in July 2010 that a condition requiring an initial
public offering (IPO) or a change of control should be deemed to be a performance
vesting condition rather than a non-vesting condition. This was subsequently reflected
in general terms through the IASB’s amendments to the definition of a performance
condition in the Annual Improvements to IFRSs 2010-2012 Cycle (see 3.1 and 3.2
above). The amendments were intended, inter alia, to make clear that a requirement for
flotation or sale (with an associated service condition) is a performance condition rather
than a non-vesting condition on the basis that the flotation or sale condition is by
reference to the entity’s own operations.
The amendments also made it clear that a performance target period cannot extend
beyond the end of the associated service period in order for the definition of a
performance vesting condition to be met (see 3.2.2 above). Therefore, the flotation or
sale condition will be treated as a non-vesting condition, rather than as a vesting
condition, if the service period is not at least as long as the duration of the flotation or
sale condition.
Even though the condition is deemed to relate to the entity’s own operations and
therefore generally classified as a performance condition, it will sometimes be
concluded that fulfilment of the condition is outside the control of both the entity and
the counterparty. The settlement of an award in equity or cash might depend on the
2750 Chapter 30
outcome of the condition i.e. there might be either cash- or equity-settlement that is
entirely contingent on the exit event. Such contingent arrangements are discussed
at 10.3 above.
15.4.4
Awards requiring achievement of a minimum price on flotation or
sale
Some awards with a condition dependent on flotation (or another similar event) vest
only if a minimum price per share is achieved. For example, an entity might grant all its
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 548