Source: KPMG Corporate Treasury News, Edition 42, April 2015 - On 25 November 2014, the International Accounting Standards Board (IASB) published an Exposure Draft of proposed amendments to IFRS 2 entitled “Classification and Measurement of Share-based Payment Transactions”, for which comments were due by 25 March 2015. The content of the draft is intended to remove the ambiguity concerning the different classification and measurement of share-based payment models.
Specifically, this covers the following three issues.
1. Inclusion of vesting conditions in the measurement of cash-settled share-based payment models
As IFRS 2 does not currently contain any specific guidance on how to include vesting conditions in the measurement of cash-settled share-based payment models, the IASB is proposing to treat the resulting effects in the same way as paragraphs 19 to 21A of IFRS 2, i.e. with vesting conditions being treated using the same approach as for equity settlement plans. This means that measurement must also make a distinction between the quantity structure and value structure where cash settlement is planned.
2. Classification of share-based payment models with net settlement features
Some share option plans are linked to regulatory or tax criteria. This is why, in some jurisdictions, a certain proportion of equity instruments are retained by the entity in order to satisfy the tax liability for the beneficiary. This is defined as payment with net settlement. The amendment proposed by the IASB would introduce the option of treating the entire transaction as equity-settled, providing that the share option plan would have been classified as equity-settled had it not included the net settlement feature.
3. Accounting for modifications to the settlement of share-based payment models
There is currently no defined procedure for situations where the settlement model for payment transactions changes from cash settlement to equity settlement. The proposed amendment by the IASB states that the transaction should be treated as equity-settled from the modification date, thereby resulting in a new grant date. The transaction should be measured by reference to the fair value at the modification date. In addition, the liability recognised in respect of the transaction should be derecognised at the modification date and a new equity item recognised. Any difference between the two items should be recognised in profit or loss.
The draft does not contain a proposed effective date but states that earlier application would be permitted. Retrospective adoption would only be permitted if an entity has all of the necessary information and if the information is available without the use of hindsight.
Once this draft has been implemented in a new version of the standard, the entities affected may be required to make changes to their accounting practice. For example, the new standard would preclude the use of the full fair value approach, which currently allows all vesting conditions to be included in fair value measurement when determining the fair value of a cash-settled plan. Accordingly, the entities affected would have to address the question of how the full fair value can be broken down into a quantity structure and a value structure as part of its measurement calculations in future. This is likely to lead to definition and measurement issues in practice.
Author: Dr. Christoph Lippert, Manager, firstname.lastname@example.org
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