IFRS2: Amendments to the classification and measurement | KPMG | SE

IFRS 2: Amendments to the classification and measurement of share-based payment transactions

IFRS2: Amendments to the classification and measurement

Their purpose is to clarify issues which were not unambiguously defined in the existing standard and, in so doing, to reduce complexity in relation to measurement and classification.

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In its resolution dated 20 June 2016, the IASB finally unveiled its amendments to IFRS 2, which became European law on 27 February 2018. Prospective application of all of them is compulsory for annual reporting periods beginning on or after 1 January 2018.

The amendments to IFRS 2 have a significant influence on the way companies measure and account for share-based payment transactions. Their purpose is to clarify issues which were not unambiguously defined in the existing standard and, in so doing, to reduce complexity in relation to measurement and classification.

The amendments break down into three distinct areas:

  1. Classification of share-based payments that have a net settlement feature within the framework of an equity-settled plan

    For plans that involve net settlement and, hence, the withholding of tax obligations on the part of the employee concerned, it was in the past unclear how the split between the cash outflow (direct tax payment to the revenue authorities) and the issue of equity instruments (compensation of the employee) would affect the classification of payments. These plans are seen as separate from the withholding of tax obligations and therefore continue to be classified as equity-settled payments.

  2. Accounting for modifications that change the classification of payments from cash-settled to equity-settled

    These amendments enhance IFRS 2 by adding accounting rules for modifications that change the classification of share-based payment transactions from cash-settled to equity-settled. Essentially, on the date of such a modification, equity is to be increased while simultaneously derecognising provisions set aside for the cash settlement planned hitherto. Any difference in the amount is recognised in profit or loss. Discrepancies can occur either due to differences in the timing of measurement as a cash-settled share-based payment and remeasurement as an equity-settled share-based payment (carrying amount versus value at the time of modification), or due to adjustments to other vesting/non-vesting conditions which may have changed.

  3. The effects of vesting/non-vesting conditions on cash-settled share-based payments

    These amendments define how the various vesting/non-vesting conditions are factored into measurement of cash-settled share-based payment transactions. Measurement now follows the approach adopted for equity-settled share-based payment transactions – a change which is examined in greater detail below.

Harmonised measurement approach

These amendments to IRFS 2 eliminate companies' option of including all vesting/non-vesting conditions in measurement at fair value in what is known as the full fair value approach. The mixed approach (also referred to as the "modified grant date method"), according to which service conditions and non-market performance conditions are recognised in the quantity structure while market and non-vesting conditions are reflected in measurement at fair value (see the chart below), must now be regarded as compulsory. One significant difference between the two measurement methods is that, using the mixed approach, the share-based payment is recognised only if it is likely that the service and non-market performance conditions will be met at the end of the vesting period. Classification as "likely" is based on the more-likely-than-not condition. This being the case, distinguishing between value and quantity structures can lead to differences in the carrying amounts of share-based payment transactions.

The reason for such discrepancies is the different treatment of components in the quantity structure used for the mixed approach, according to which the vesting/non-vesting conditions are fully recognised if, in the view of the company, it is more than 50% likely that they will be met at the end of the vesting period. Conversely, the full fair value approach would also take account of values and components which are not recognised in the mixed approach, and vice versa.

Bottom line

The IFRS 2 amendments must be applied prospectively, which may lead to the need for corresponding adjustments as of 1 January 2018. Companies which have to drop the full fair value approach they have used to measure cash-settled share-based payment transactions in the past, and which must instead adopt the now-compulsory mixed approach, will need to take action and comply with the new accounting rules. Depending on the factors of influence described above, the consequences of this change in the measurement approach may have a pronounced impact on existing carrying amounts and should be anticipated in good time.

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