Currently, there is ambiguity over how a company should account for certain types of share-based payment arrangements. The IASB has responded by publishing amendments to IFRS 2 Share-based Payment.
The amendments cover three accounting areas:
The new requirements could affect the classification and/or measurement of these arrangements – and potentially the timing and amount of expense recognised for new and outstanding awards.
“The amendments resolve some long-standing ambiguities in share-based payment accounting and go a long way toward improving consistency.”
Kim Heng, KPMG’s global IFRS employee benefits leader
There is currently no guidance in IFRS 2 on how to measure the fair value of the liability incurred in a cash-settled share-based payment. As a result, diversity in practice exists between measuring the liability using the same approach as for equity-settled awards and using full fair value.
The amendments clarify that a cash-settled share-based payment is measured using the same approach as for equity-settled share-based payments – i.e. the modified grant date method. Therefore, in measuring the liability:
The new requirements do not change the cumulative amount of expense that is ultimately recognised, because the total consideration for a cash-settled share-based payment is still equal to the cash paid on settlement.
In some countries, the company may be obligated to collect or withhold tax related to a share-based payment, even though the tax obligation is often a liability of the employee and not the company.
Some share-based payment arrangements permit or require the company to withhold a portion of the shares that would otherwise be issued to the employee, and to pay the tax authorities on the employee’s behalf.
Currently, it is unclear whether the portion of the share-based payment that is withheld in these instances should be accounted for as equity-settled or cash-settled.
The amendments introduce an exception stating that, for classification purposes, a share-based payment transaction with employees is accounted for as equity-settled if:
The exception does not apply to equity instruments that the company withholds in excess of the employee’s tax obligation associated with the share-based payment.
There is no specific guidance in IFRS 2 that addresses the accounting when a share-based payment is modified from cash-settled to equity-settled. The amendments clarify that companies are to apply the following approach.
The amendments are effective for annual periods commencing on or after 1 January 2018.
Companies should consider whether the new requirements will result in a change to their accounting for share-based payment transactions.
As a practical simplification, the amendments can be applied prospectively so that prior periods do not have to be restated. Retrospective, or early, application is permitted if companies have the required information.
For more information on the amendments, read the IASB press release or speak to your usual KPMG contact.
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