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In June 2007, the Deloitte IFRS Global Office published =
an
updated version of our IAS Plus G=
uide
to IFRS 2 Share-based Payment 2007 (PDF 748k, 128 pages). The gui=
de
not only explains the detailed provisions of IFRS 2 but also deals wi=
th
its application in many practical situations. Because of the complexi=
ty
and variety of share-based payment awards in practice, it is not alwa=
ys
possible to be definitive as to what is the 'right' answer. However, =
in
this guide Deloitte shares with you our approach to finding solutions
that we believe are in accordance with the objective of the Standard.=
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Special Edition of Our IAS Plus
Newsletter
You wi=
ll
find a four-page summary of IFRS 2 in a special edition of our IAS Plus
Newsletter (PDF 49k).
Definition of Share-based Payme=
nt
A
share-based payment is a transaction in which the entity receives or
acquires goods or services either as consideration for its equity
instruments or by incurring liabilities for amounts based on the price =
of
the entity's shares or other equity instruments of the entity. The
accounting requirements for the share-based payment depend on how the
transaction will be settled, that is, by the issuance of (a) equity, (b)
cash, or (c) equity or cash.
Scope
The co=
ncept
of share-based payments is broader than employee share options. IFRS 2
encompasses the issuance of shares, or rights to shares, in return for
services and goods. Examples of items included in the scope of IFRS 2 a=
re
share appreciation rights, employee share purchase plans, employee share
ownership plans, share option plans and plans where the issuance of sha=
res
(or rights to shares) may depend on market or non-market related
conditions.
IFRS 2
applies to all entities. There is no exemption for private or smaller
entities. Furthermore, subsidiaries using their parent's or fellow
subsidiary's equity as consideration for goods or services are within t=
he
scope of the Standard.
There =
are
two exemptions to the general scope principle.
- First, the issuance of
shares in a business combination should be accounted for under IFR=
S 3
Business Combinations. However, care should be taken to distinguish
share-based payments related to the acquisition from those related=
to
employee services.
- Second, IFRS 2 does not
address share-based payments within the scope of paragraphs 8-10 of
IAS 32 Financial Instruments: Disclosure and Presentation, or
paragraphs 5-7 of IAS 39 Financial Instruments: Recognition and
Measurement. Therefore, IAS 32 and 39 should be applied for
commodity-based derivative contracts that may be settled in shares=
or
rights to shares.
IFRS 2 does not apply to share-based payment transactions
other than for the acquisition of goods and services. Share dividends, =
the
purchase of treasury shares, and the issuance of additional shares are
therefore outside its scope.
Recognition and Measurement
The is=
suance
of shares or rights to shares requires an increase in a component of
equity. IFRS 2 requires the offsetting debit entry to be expensed when =
the
payment for goods or services does not represent an asset. The expense
should be recognised as the goods or servic=
es are
consumed. For example, the issuance of shares or rights to shares to
purchase inventory would be presented as an increase in inventory and w=
ould
be expensed only once the inventory is sold or impaired.
The is=
suance
of fully vested shares, or rights to shares, is presumed to relate to p=
ast
service, requiring the full amount of the grant-date fair value to be
expensed immediately. The issuance of shares to employees with, say, a
three-year vesting period is considered to relate to services over the
vesting period. Therefore, the fair value of the share-based payment,
determined at the grant date, should be expensed over the vesting perio=
d.
As a g=
eneral
principle, the total expense related to equity-settled share-based paym=
ents
will equal the multiple of the total instruments that vest and the
grant-date fair value of those instruments. In short, there is truing u=
p to
reflect what happens during the vesting period. However, if the equity-=
settled
share-based payment has a market related performance feature, the expen=
se
would still be recognised if all other vest=
ing
features are met. The following example provides an illustration of a
typical equity-settled share-based payment.
Ill=
ustration
– Recognition of Employee Share Option Grant
Company
grants a total of 100 share options to 10 members of its executive
management team (10 options each) on 1 January 20X5. These options vest=
at
the end of a three-year period. The company has determined that each op=
tion
has a fair value at the date of grant equal to 15. The company expects =
that
all 100 options will vest and therefore records the following entry at =
30
June 20X5 - the end of its first six-month interim reporting period.
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Dr. Share Option Expense 250
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Cr. Equity 250
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[(100 x 15) / 6 periods] =3D 250 per period
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If all=
100
shares vest, the above entry would be made at the end of each 6-month
reporting period. However, if one member of the executive management te=
am
leaves during the second half of 20X6, therefore forfeiting the entire
amount of 10 options, the following entry at 31 December 20X6 would be
made:
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Dr. Share Option Expense 150
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Cr. Equity 150
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[(90 x 15)/ 6 periods =3D 225 per period. [225 x 4]
-[250+250+250] =3D 150
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Mea=
surement
Guidance
Depend=
ing on
the type of share-based payment, fair value may be determined by the va=
lue
of the shares or rights to shares given up, or by the value of the good=
s or
services received:
- General fair value
measurement principle. In principle, transactions in which goods or
services are received as consideration for equity instruments of t=
he
entity should be measured at the fair value of the goods or servic=
es
received. Only if the fair value of the goods or services cannot be
measured reliably would the fair value of the equity instruments
granted be used.
- Measuring employee sha=
re
options.
For transactions with employees and others providing similar servi=
ces,
the entity is required to measure the fair value of the equity
instruments granted, because it is typically not possible to estim=
ate
reliably the fair value of employee services received. =
- When to measure fair v=
alue -
options.
For transactions measured at the fair value of the equity instrume=
nts
granted (such as transactions with employees), fair value should be
estimated at grant date.
- When to measure fair v=
alue -
goods and services. For transactions measured at the fair value of the goods or
services received, fair value should be estimated at the date of
receipt of those goods or services.
- Measurement guidance.<=
/span> For goods or services
measured by reference to the fair value of the equity instruments
granted, IFRS 2 specifies that, in general, vesting conditions are=
not
taken into account when estimating the fair value of the shares or
options at the relevant measurement date (as specified above).
Instead, vesting conditions are taken into account by adjusting the
number of equity instruments included in the measurement of the
transaction amount so that, ultimately, the amount recognised
for goods or services received as consideration for the equity
instruments granted is based on the number of equity instruments t=
hat
eventually vest.
- More measurement guida=
nce. IFRS 2 requires the f=
air
value of equity instruments granted to be based on market prices, =
if
available, and to take into account the terms and conditions upon
which those equity instruments were granted. In the absence of mar=
ket
prices, fair value is estimated using a valuation technique to
estimate what the price of those equity instruments would have bee=
n on
the measurement date in an arm's length transaction between
knowledgeable, willing parties. The standard does not specify which
particular model should be used.
- If fair value cannot be
reliably measured. IFRS 2 requires the share-based payment transaction to be
measured at fair value for both listed and unlisted entities. IFRS=
2
permits the use of intrinsic value (that is, fair value of the sha=
res
less exercise price) in those "rare cases" in which the =
fair
value of the equity instruments cannot be reliably measured. Howev=
er
this is not simply measured at the date of grant. An entity would =
have
to remeasure intrinsic value at each
reporting date until final settlement.
- Performance conditions=
. IFRS 2 makes a distin=
ction
between the handling of market based performance features from
non-market features. Market conditions are those related to the ma=
rket
price of an entity's equity, such as achieving a specified share p=
rice
or a specified target based on a comparison of the entity's share =
price
with an index of share prices of other entities. Market based
performance features should be included in the grant-date fair val=
ue
measurement. However, the fair value of the equity instruments sho=
uld
not be reduced to take into consideration non-market based perform=
ance
features or other vesting features.
Mod=
ifications,
Cancellations, and Settlements
The
determination of whether a change in terms and conditions has an effect=
on
the amount recognised depends on whether th=
e fair
value of the new instruments is greater than the fair value of the orig=
inal
instruments (both determined at the modification date).
Modifi=
cation
of the terms on which equity instruments were granted may have an effec=
t on
the expense that will be recorded. IFRS 2 clarifies that the guidance on
modifications also applies to instruments modified after their vesting
date. If the fair value of the new instruments is more than the fair va=
lue
of the old instruments (e.g. by reduction of the exercise price or issu=
ance
of additional instruments), the incremental amount is recognised
over the remaining vesting period in a manner similar to the original
amount. If the modification occurs after the vesting period, the
incremental amount is recognised immediatel=
y. If
the fair value of the new instruments is less than the fair value of the
old instruments, the original fair value of the equity instruments gran=
ted
should be expensed as if the modification never occurred.
The
cancellation or settlement of equity instruments is accounted for as an=
acceleration
of the vesting period and therefore any amount unr=
ecognised
that would otherwise have been charged should be r=
ecognised
immediately. Any payments made with the cancellation or settlement (up =
to
the fair value of the equity instruments) should be accounted for as the
repurchase of an equity interest. Any payment in excess of the fair val=
ue
of the equity instruments granted is recognised
as an expense
New eq=
uity
instruments granted may be identified as a replacement of cancelled equ=
ity
instruments. In those cases, the replacement equity instruments should =
be
accounted for as a modification. The fair value of the replacement equi=
ty
instruments is determined at grant date, while the fair value of the
cancelled instruments is determined at the date of cancellation, less a=
ny
cash payments on cancellation that is accounted for as a deduction from
equity.
Disclosure
Requir=
ed
disclosures include:
- the nature and extent =
of
share-based payment arrangements that existed during the period; <=
o:p>
- how the fair value of =
the
goods or services received, or the fair value of the equity
instruments granted, during the period was determined; and
- the effect of share-based
payment transactions on the entity's profit or loss for the period=
and
on its financial position.
Effective Date
IFRS 2=
is
effective for annual periods beginning on or after 1 January 2005. Earl=
ier
application is encouraged.
Transition
All
equity-settled share-based payments granted after 7 November 2002, that are not yet vested at the effective dat=
e of
IFRS 2 shall be accounted for using the provisions of IFRS 2. Entities =
are
allowed and encouraged, but not required, to apply this IFRS to other
grants of equity instruments if (and only if) the entity has previously
disclosed publicly the fair value of those equity instruments determine=
d in
accordance with IFRS 2.
The
comparative information presented in accordance with IAS 1 shall be
restated for all grants of equity instruments to which the requirements=
of
IFRS 2 are applied. The adjustment to reflect this change is presented =
in
the opening balance of retained earnings for the earliest period presen=
ted.
IFRS 2
amends paragraph 13 of IFRS
1 First-time Adoption of International Financial Reporting Standard=
s to
add an exemption for share-based payment transactions. Similar to entit=
ies
already applying IFRS, first-time adopters will have to apply IFRS 2 for
share-based payment transactions on or after 7 November 2002. Additiona=
lly,
a first-time adopter is not required to apply IFRS 2 to share-based
payments granted after 7 November 2002 that vested before the later of =
(a)
the date of transition to IFRS and (b) 1 January 2005. A first-time ado=
pter
may elect to apply IFRS 2 earlier only if it has publicly disclosed the
fair value of the share-based payments determined at the measurement da=
te
in accordance with IFRS 2.
Differences with FASB Statement=
123
Revised 2004
In Dec=
ember
2004, the US FASB published FASB Statement 123 (revised 2004) Share-Bas=
ed
Payment. Statement 123(R) requires that the compensation cost relating =
to
share-based payment transactions be recognised in
financial statements. Click for FASB Press Re=
lease
(PDF 17k). Deloitte (USA) has published a special issue of its Heads=
Up
newsletter summarising the key concepts of =
FASB
Statement No. 123(R). Click to download the Download the Heads=
Up
Newsletter (PDF 292k). While Statement 123(R) is largely consistent
with IFRS 2, some differences remain, as described in a Q&A document
FASB issued along with the new Statement:
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Q22. Is the Statement convergent with International
Financial Reporting Standards?
The Statement is largely convergent with International Financial
Reporting Standard (IFRS) 2, Share-based Payment. The Statement and I=
FRS
2 have the potential to differ in only a few areas. The more signific=
ant
areas are briefly described below.
- IFRS 2 requires the =
use of
the modified grant-date method for share-based payment arrangeme=
nts
with nonemployees. In contrast, Issue
96-18 requires that grants of share options and other equity
instruments to nonemployees be measu=
red at
the earlier of (1) the date at which a commitment for performanc=
e by
the counterparty to earn the equity instruments is reached or (2)
the date at which the counterparty's performance is complete.
- IFRS 2 contains more
stringent criteria for determining whether an employee share
purchase plan is compensatory or not. As a result, some employee
share purchase plans for which IFRS 2 requires recognition of
compensation cost will not be considered to give rise to
compensation cost under the Statement.
- IFRS 2 applies the s=
ame
measurement requirements to employee share options regardless of
whether the issuer is a public or a nonpublic entity. The Statem=
ent
requires that a nonpublic entity account for its options and sim=
ilar
equity instruments based on their fair value unless it is not
practicable to estimate the expected volatility of the entity's
share price. In that situation, the entity is required to measure
its equity share options and similar instruments at a value using
the historical volatility of an appropriate industry sector inde=
x.
- In tax jurisdictions=
such
as the Un=
ited
States, where the time value =
of
share options generally is not deductible for tax purposes, IFRS=
2
requires that no deferred tax asset be recognized for the
compensation cost related to the time value component of the fair
value of an award. A deferred tax asset is recognized only if and
when the share options have intrinsic value that could be deduct=
ible
for tax purposes. Therefore, an entity that grants an at-the-mon=
ey
share option to an employee in exchange for services will not
recognize tax effects until that award is in-the-money. In contr=
ast,
the Statement requires recognition of a deferred tax asset based=
on
the grant-date fair value of the award. The effects of subsequent
decreases in the share price (or lack of an increase) are not
reflected in accounting for the deferred tax asset until the rel=
ated
compensation cost is recognized for tax purposes. The effects of
subsequent increases that generate excess tax benefits are
recognized when they affect taxes payable.
- The Statement requir=
es a
portfolio approach in determining excess tax benefits of equity
awards in paid-in capital available to offset write-offs of defe=
rred
tax assets, whereas IFRS 2 requires an individual instrument
approach. Thus, some write-offs of deferred tax assets that will=
be
recognized in paid-in capital under the Statement will be recogn=
ized
in determining net income under IFRS 2.
Differences between the Statement and IFRS 2 may be furt=
her
reduced in the future when the IASB and FASB consider whether to
undertake additional work to further converge their respective accoun=
ting
standards on share-based payment.
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March 2005: SEC Staff Accounting
Bulletin 107
On 29 =
March
2005, the staff of the US Securities and Exchange Commission issued Sta=
ff
Accounting Bulletin 107 dealing with valuations and other accounting is=
sues
for share-based payment arrangements by public companies under FASB
Statement 123R Share-Based Payment. For public companies, valuations un=
der
Statement 123R are similar to those under IFRS 2 Share-based Payment. S=
AB
107 provides guidance related to share-based payment transactions with =
nonemployees, the transition from nonpublic to pu=
blic
entity status, valuation methods (including assumptions such as expected
volatility and expected term), the accounting for certain redeemable
financial instruments issued under share-based payment arrangements, the
classification of compensation expense, non-GAAP financial measures,
first-time adoption of Statement 123R in an interim period, capitalisation of compensation cost related to
share-based payment arrangements, accounting for the income tax effects=
of
share-based payment arrangements on adoption of Statement 123R, the
modification of employee share options prior to adoption of Statement 1=
23R,
and disclosures in Management's Discussion and Analysis (MD&A)
subsequent to adoption of Statement 123R. One of the interpretations in=
SAB
107 is whether there are differences between Statement 123R and IFRS 2 =
that
would result in a reconciling item:
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Question: Does the staff believe there are differences in t=
he
measurement provisions for share-based payment arrangements with
employees under International Accounting Standards Board International
Financial Reporting Standard 2, Share-based Payment ('IFRS 2') and St=
atement
123R that would result in a reconciling item under Item 17 or 18 of F=
orm
20-F?
I=
nterpretive
Response: The staff believes that application of the guidance
provided by IFRS 2 regarding the measurement of employee share options
would generally result in a fair value measurement that is consistent
with the fair value objective stated in Statement 123R. Accordingly, =
the
staff believes that application of Statement 123R's measurement guida=
nce
would not generally result in a reconciling item required to be repor=
ted
under Item 17 or 18 of Form 20-F for a foreign private issuer that has
complied with the provisions of IFRS 2 for share-based payment
transactions with employees. However, the staff reminds foreign priva=
te
issuers that there are certain differences between the guidance in IF=
RS 2
and Statement 123R that may result in reconciling items. [Footnotes
omitted]
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Click =
to
download:
March 2005: Bear, Stearns Study=
on
Impact of Expensing Stock Options in the United States=
If US =
public
companies had been required to expense employee stock options in 2004, =
as
will be required under FASB Statement 123R Share-Based Payment starting=
in
third-quarter 2005:
- the reported 2004 post=
-tax
net income from continuing operations of the S&P 500 companies
would have been reduced by 5%, and
- 2004 NASDAQ 100 post-t=
ax net
income from continuing operations would have been reduced by 22%. =
Those are key findings of a study conducted by the Equity
Research group at Bear, Stearns &Co. Inc. The purpose of the study =
is
to help investors gauge the impact that expensing employee stock options
will have on the 2005 earnings of US public companies. The Bear, Stearns
analysis was based on the 2004 stock option disclosures in the most
recently filed 10Ks of companies that were S&P 500 and NASDAQ 100
constituents as of 31 December 2004. Exhibits to the study present the
results by company, by sector, and by industry. Visitors to IAS Plus are
likely to find the study of interest because the requirements of FAS 12=
3R
for public companies are very similar to those of IFRS 2. We are gratef=
ul
to Bear, Stearns for giving us permission to post the study on IAS Plus.
The report remains copyright Bear, Stears &=
amp;
Co. Inc., all rights reserved. Click to download Download 2004 Earnings Impact of Stock Options=
on
the S&P 500 & NASDAQ 100 Earnings (PDF 486k).
November 2005: Standard & P=
oor's
Study on Impact of Expensing Stock Options
In Nov=
ember
2005 Standard & Poor's published a report of the impact of expensing
stock options on the S&P 500 companies. FAS 123(R) requires expensi=
ng
of stock options (mandatory for most SEC registrants in 2006). IFRS 2 is nearly
identical to FAS 123(R). S&P found:
- Option expense will =
reduce
S&P 500 earnings by 4.2%. Information Technology is affected=
the
most, reducing earnings by 18%.... P/E ratios for all sectors wi=
ll
be increased, but will remain below historical averages.
- The impact of option
expensing on the Standard & Poor's 500 will be noticeable, b=
ut
in an environment of record earnings, high margins and historica=
lly
low operating price-to-earnings ratios, the index is in its best
position in decades to absorb the additional expense.
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S&P
takes issue with those companies that try to empha=
sise
earnings before deducting stock option expense and with those analysts =
who
ignore option expensing. The report emphasises
that:
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Standard
& Poor's will include and report option expense in all of its
earnings values, across all of its business lines. This includes Oper=
ating,
As Reported and Core, and applies to its analytical work in the S&=
;P
Domestic Indices, Stock Reports, as well as its forward estimates. It
includes all of its electronic products.... The investment community
benefits when it has clear and consistent information and analyses. A
consistent earnings methodology that builds on accepted accounting
standards and procedures is a vital component of investing. By suppor=
ting
this definition, Standard & Poor's is contributing to a more reli=
able
investment environment.
The
current debate as to the presentation by companies of earnings that
exclude option expense, generally being referred to as non-GAAP earni=
ngs,
speaks to the heart of corporate governance. Additionally, many equity
analysts are being encouraged to base their estimates on non-GAAP
earnings. While we do not expect a repeat of the EBBS (Earnings Before
Bad Stuff) pro-forma earnings of 2001, the ability to compare issues =
and
sectors depends on an accepted set of accounting rules observed by al=
l.
In order to make informed investment decisions, the investing communi=
ty
requires data that conform to accepted accounting procedures. Of even
more concern is the impact that such alternative presentation and
calculations could have on the reduced level of faith and trust inves=
tors
put into company reporting. The corporate governance events of the la=
st
two-years have eroded the trust of many investors, trust that will ta=
ke
years to earn back. In an era of instant access and carefully scripted
investor releases, trust is now a major issue.
|
Click =
to
download The
Impact of Option Expensing on S&P 500 Earnings (PDF 399k). Plea=
se
note that the report remains copyright Standard & Poor's, all rights
reserved, and is posted here with the kind permission of S&P.
January 2008: Amendment of IFRS=
2 to
clarify vesting conditions and cancellations
On 17
January 2008, the IASB published final amendments to IFRS 2 Share-based
Payment to clarify the terms 'vesting conditions' and 'cancellations' as
follows:
- Vesting conditions are
service conditions and performance conditions only. Other features=
of
a share-based payment are not vesting conditions. Under IFRS 2,
features of a share-based payment that are not vesting conditions
should be included in the grant date fair value of the share-based
payment. The fair value also includes market-related vesting
conditions.
- All cancellations, whe=
ther
by the entity or by other parties, should receive the same account=
ing
treatment. Under IFRS 2, a cancellation of equity instruments is
accounted for as an acceleration of the vesting period. Therefore =
any
amount unrecognised that would otherwi=
se
have been charged is recognised immedi=
ately.
Any payments made with the cancellation (up to=
the
fair value of the equity instruments) is accounted for as t=
he
repurchase of an equity interest. Any payment in excess of the fair
value of the equity instruments granted is re=
cognised
as an expense.
The Board had proposed the amendment in an exposure draft =
on 2
February 2006. The amendment is effective for annual periods beginning =
on
or after 1 January 2009, with earlier application permitted.
Click =
for Press Rel=
ease
(PDF 47k).
Deloit=
te has
published a Special
Edition of our IAS Plus Newsletter explaining the amendments to IFR=
S 2
for vesting conditions and cancellations (PDF 126k). =
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