Changes to IFRS 2 Share-based Payment – Classification and measurement of share-based payment transactions

On 20 June 2016, the International Accounting Standards Board (IASB) issued narrow scope amendments to IFRS 2 Share-based Payment to clarify the accounting for:

  • The impact of vesting and non-vesting conditions when measuring cash-settled share-based payments
  • Share-based payment transactions with a net settlement feature for withholding tax obligations, and
  • Share-based payments where the classification of the transaction changes from cash-settled to equity-settled.

The changes apply to annual periods beginning on or after 1 January 2018 and can be early adopted. There are specific transitional provisions for each of these amendments (refer to discussion below).

Impact of vesting and non-vesting conditions when measuring cash-settled share-based payments

The liability shall be measured, initially and at the end of each reporting period until settled, at the fair value of the share appreciation rights, by applying an option pricing model, taking into account the terms and conditions on which the share appreciation rights were granted, and the extent to which the employees have rendered service to date.

AASB 2, paragraph 33

Although AASB 2, paragraph 33 requires cash-settled share-based payment transactions to be measured at fair value using an option pricing model, it does not give guidance on if, and how, vesting and non-vesting conditions should be taken into account when measuring fair value of the cash-settled liability.

These changes clarify that market and non-market vesting conditions and non-vesting conditions should be taken into account when determining fair value of the cash-settled share-based liability in the same way as they would be for equity-settled share-based payment transactions.

Conditions

Example

How accounted for in cash-settled liability?

Vesting – non-market

Target sales/profit

No impact on fair value.

Adjust number of awards expected to vest.

Vesting – market

Target share price

Adjust fair value at each reporting date until settlement

Non-vesting

Future commodity price

Adjust fair value at each reporting date until settlement

This means that for all types of conditions, the cumulative amount recognised for goods and services as consideration for cash-settled share-based payment transactions will equal the cash paid.

Cumulative expense = cash paid

Transition

These amendments only apply to share-based payment transactions:

  • Unvested at the date that the entity first applies the amendments, and
  • Those granted on or after the date that the entity first applies the amendments.

The entity first applies these amendments on 1 January 2018 for entities with 31 December 2018 year ends, and 1 July 2018 for entities with 30 June 2019 year ends.

Transition – granted before date amendment first applies

For unvested share-based payment transactions granted before the date that the entity first applies these amendments, the cash-settled liability must be remeasured on the date the amendments are first applied (e.g. 1 January or 1 July 2018), and the effects of remeasurement recognised in opening retained earnings on that date.

Net settlement feature for withholding tax obligations

Tax laws in some countries require an entity to withhold an amount to settle an employee’s tax obligation for a share-based payment transaction, and to pay that amount over to the tax authorities on the employee’s behalf, usually in cash.

To fulfil these obligations, share-based payment transactions may allow/require entities to withhold a number of equity instruments, equal to the monetary value of the employee’s tax obligation, from the total number of equity instruments that otherwise would have been issued. The obligation to settle in cash would usually result in such transactions being classified as cash-settled. The changes in paragraphs 33E to 33H clarify that such transactions with the net settlement feature will be accounted for as follows:

  • Classify the transaction as equity-settled in its entirety if, without the net settlement feature, it would have been so classified, and
  • Debit payments made by the entity for withholding tax as a deduction from equity.

However, paragraph 33H clarifies that this treatment will not apply where:

  • There is no obligation on the entity under tax law to withhold amounts to cover the employee’s tax obligations from the share-based payment arrangement, or
  • The entity withholds equity instruments in excess of the employee’s tax obligation under the share-based payment arrangement. In such cases the excess equity instruments withheld are accounted for as a cash-settled share-based payment if this amount is paid in cash.

Transition – granted on or after date amendment first applies

These amendments only apply to unvested (or vested but unexercised) share-based payment transactions that are granted on or after the date that the entity first applies the amendments, i.e. 1 January 2018 for entities with 31 December 2018 year ends and 1 July 2018 for entities with 30 June 2019 year ends.

Transition – granted before date amendment first applies

For unvested (or vested but unexercised) share-based payment transactions that were previously accounted for as ‘cash-settled’ because of the net settlement feature, but are now classified as ‘equity-settled’, the carrying amount of the cash-settled liability must be reclassified as equity on the date these amendments are first applied.

Changing classification from cash-settled to equity-settled

Guidance paragraphs B44A to B44C have been added to clarify the accounting if the terms of a share-based payment are modified such that a cash-settled transaction becomes an equity-settled transaction. The steps to follow on modification date are:

Measure equity-settled transaction @ FV of equity instruments granted (A)

  >  

Derecognise cash-settled liability (B)

  >  

(A) Less (B) is recognised immediately profit or loss

Transition

These amendments only apply to modifications that occur on or after the date that the entity first applies the amendments, i.e. 1 January 2018 for entities with 31 December 2018 year ends and 1 July 2018 for entities with 30 June 2019 year ends.