Share-based Payments:

IFRS 2

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General Recognition Principles of IFRS 2

Recognize goods or services received at fair value when the goods are obtained or as services are received When the goods or services do not qualify for recognition as assets, an expense is recognized For equity-settled share-based payment transactions a corresponding increase in equity is recognized; and For cash-settled share-based payment transactions a corresponding liability is incurred

IFRS 2 contains specific requirements for: Equity-settled (shares, share options, warrants) Cash-settled (share appreciation rights) Compound instrument containing both equity and cash-settled components (bifurcate)
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Overview of Accounting Requirements of IFRS 2

Equity-settled share-based payment transactions Measure goods/services and corresponding increase in equity at FV of goods/services received unless FV cannot be estimated reliably, then use FV of equity instruments (usually the case for employee awards) Use grant-date FV with no remeasurement in subsequent periods for employee awards, but estimate and true-up for forfeitures Cash-settled share-based payment transactions Measure goods/services and the liability incurred at FV of the liability Start with grant-date FV, but liability is remeasured at FV through P&L until settlement (estimate and true-up for forfeitures) Option of either equity-settled or cash-settled at holders election Account for as a cash-settled transaction (a compound financial instrument if settlement values differ) if entity has incurred a liability to settle in cash

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Recognition Example Cash-settled Transaction

Vesting conditions: Three year continued employment (service condition) Assumptions: 100 stock appreciation rights granted on January 1, 20X1 Best estimate is that all employees remain in service over the vesting period Grant date fair value of each right is $3.00
Subsequent estimates of: End year x1 End year x2 End year x3 Settlement date Fair value $4.00 $4.25 $4.50 $4.00 Intrinsic value $1.50 $3.00 $4.25 $4.00

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IFRS and U.S. GAAP Differences: Share-Based Payments: Classification

IFRS 2 Classification Liability-classified if cash settled (including at employees option) Puttable shares always liabilityclassified unless contingently puttable FAS 123R Classification Liability-classified if: Grantor can be compelled to deliver cash or other assets No equity holder relationship established (e.g., other conditions, fixed monetary amount awards) Puttable shares equity-classified if (a) employee has made a substantial investment and bears risks and rewards of ownership for a reasonable period and (b) redemption price is at FV

Compound instrument if employee has choice of settlement: - liability component measured first - balance is equity component

Generally liability classified unless Case Study 1: Choice of settlement award it is a tandem
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IFRS and U.S. GAAP Differences: Share-Based Payments: Grant date and Scope
IFRS 2 Grant date Date the entity and employee agree to a share-based payment arrangement and have a shared understanding of the terms and conditions of the arrangement FAS 123R Grant date Date the employer and employee have a mutual understanding of the terms and conditions of the award and the employee begins to benefit from or be adversely affected by changes in the employers share price Scope Applies to share-based payment arrangements with employees and is applied by analogy to share-based payment arrangements with non-employees

Scope Applies to all share-based payment arrangements

We would expect a high degree of correlation between the calculation of the award and the share price for a transaction to be classified a share-based payment

A transaction that is based, at least in part, on the price of an entitys shares would be considered a share-based payment. This threshold does not require a high degree of correlation between the calculation of the award and the share price, unlike IFRSs

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IFRIC 11 Group and Treasury Share Transactions

IFRIC 11 addresses the following: Classification of group SBP transactions in financial statements of entity that receives the services Transfer of employees between group entities Transactions involving an entitys own equity instruments Applies to awards granted to employee and nonemployees Confirms that the accounting for the acquisition of shares is separate from the classification of the SBP
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IFRIC 8 Scope of IFRS

IFRIC 8 applies to transactions where the entity cannot identify specifically the goods or services received in return for a share-based payment Unidentifiable goods or services received should be measured as difference between fair value of the share-based payment and fair value of identifiable consideration received

Potential application to schemes put in place by entities to comply with government policies e.g., Black Economic Employment (BEE) schemes in South Africa
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IFRS and U.S. GAAP Differences: Share-Based Payments: Attribution

IFRS 2 Service inception prior to grant date (shareholder approval) Recognize cost based on estimated FV Revise FV through grant date FAS 123R Service inception date can never occur before shareholder approval received (unless perfunctory). Service inception date can precede grant date

Graded vesting Each tranche is considered separate award Results in front-loading recognition (FIN 28)

Graded vesting Accounting policy decision (if vests based on service) to use either (a) straight-line method or (b) FIN 28 approach

Case Study 2: Income taxes and share-based payment transactions

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IFRS and U.S. GAAP Differences: Share-Based Payments: Attribution (Contd)

IFRS 2 Changes in requisite service period Recognize with cumulative effect in current period
FAS 123R Changes in requisite service period If no change in total compensation cost, unrecognized compensation cost recognized prospectively from date of change based on revised estimate of requisite service period If change in total compensation cost, recognize cumulative effect in current period

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IFRS and U.S. GAAP Differences: Share-Based Payments: Modifications

IFRS 2 Improbable Probable modifications Modification of terms applied to original and incremental grant date FV Floor = FV at original grant date

FAS 123R Improbable Probable modifications (Type III) Treat original award as though would not have vested No floor
For modifications from cashsettled to equity: Compare the fair value of the instrument immediately before modification to the fair value of the modified award and recognize any incremental compensation cost

No guidance provided when modification changes classification from cashsettled to equity

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IFRS and U.S. GAAP Differences: Share-Based Payments: Deferred Taxes

IFRS 2 Deferred tax assets measured based on amount for which deduction is expected (intrinsic value of awards in U.S.) Remeasure deferred tax asset based on share price (intrinsic value) at each reporting date If intrinsic value at settlement is less than grant-date fair value, cumulative tax benefit recognized is based on intrinsic value FAS 123R Deferred tax assets measured based on fair value of awards

Do not remeasure deferred tax asset. Assess for recoverability using more-likely-than not framework in FAS 109 If intrinsic value at settlement is less than grant-date fair value, deficiency can be offset against prior excess amounts within APIC

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