IFRS 2 Employee equity-settled share-based payment

IFRS 2 Employee equity-settled share-based payment – Headlines

Employee services are recognised as expenses, unless they qualify for recognition as assets, with a corresponding increase in equity.

  • Employee service costs are recognised over the vesting period from the service commencement date until vesting date.
  • Employee services are measured indirectly with reference to the fair value of the equity instruments granted; this is done by applying the modified grant-date method. If, in rare circumstances, the fair value of the equity instruments granted cannot be measured reliably, then the intrinsic value method is applied.
  • Under the modified grant-date method, the grant-date fair value of the equity instruments granted is determined once at grant date, which may be after the service commencement date.
  • If a market price is not available, then the grant-date fair value of the equity instruments granted is determined using a valuation technique.
  • The grant-date fair value of the equity instruments granted takes into account the impact of any market conditions and non-vesting conditions and does not take into account service and/or non-market performance conditions. IFRS 2 Employee equity-settled share-based payment
  • The grant-date fair value is not adjusted for subsequent changes in the fair value of the equity instruments and differences between the estimated and actual outcome of market or non-vesting conditions. IFRS 2 Employee equity-settled share-based payment
  • Recognition is initially based on the number of instruments for which any required service and non-market performance conditions are expected to be met.
  • Subsequently, recognition of the share-based payment cost is trued up for changes in estimates regarding the achievement of any service and non-market performance conditions, so that ultimately the share-based payment cost is based on the number of instruments for which any service and non-market performance conditions are met.
  • Failure to meet a non-vesting condition that either the entity or the employee can choose to meet results in accelerated recognition of any unrecognised grant-date fair value of the equity instruments granted based on the amount that otherwise would have vested (cancellation accounting).
  • Grants in the form of shares may be in substance grants of share options, which will affect the valuation of the equity instruments.

Identify an employeeIFRS 2 Employee equity-settled share-based payment

Definition IFRS 2 Employee equity-settled share-based payment

Employees and others providing similar services are defined as individuals who render personal services to the entity and either:

  • are regarded as employees for legal or tax purposes; IFRS 2 Employee equity-settled share-based payment
  • work for the entity under its direction in the same way as individuals who are regarded as employees for legal or tax purposes; or
  • render services similar to those rendered by employees. IFRS 2 Employee equity-settled share-based payment

The term ‘employee’ encompasses all management personnel – i.e. those persons having authority and responsibility for planning, directing and controlling the activities of the entity, including non-executive directors. IFRS 2 Employee equity-settled share-based payment

The requirements for transactions with employees are also applied to transactions with individuals who may not be employees but who provide personal services similar to services provided by an employee. IFRS 2 Employee equity-settled share-based payment

Basic principles

Services received in an equity-settled share-based payment transaction with employees are recognised as the services are received. (IFRS 2 7)

The cost of services received is recognised as an expense, unless the services qualify for recognition as an asset, with a corresponding credit to equity. As a consequence, we generally use the term ‘share-based payment cost’ throughout this handbook. In the examples, we generally refer to ‘share-based payment expense’ because we illustrate only employee services that do not qualify for recognition as an asset, unless noted otherwise. (IFRS 2 8 – 9) IFRS 2 Employee equity-settled share-based payment

If the employee is not required to satisfy a vesting condition before becoming unconditionally entitled to the instruments granted, then the equity instruments vest immediately. Therefore, there is a presumption that the services rendered as consideration for these instruments have been received and the grant-date fair value of these instruments is recognised immediately with a corresponding credit to equity. (IFRS 2 14) IFRS 2 Employee equity-settled share-based payment

If the equity instruments do not vest until the employee completes a period of service, then the entity presumes that services are to be provided in the future. (IFRS 2 15)

The entity accounts for the services as they are received during the vesting period. IFRS 2 Employee equity-settled share-based payment

The costs are recognised on a straight-line basis over the vesting period following the modified grant-date method (see next paragraphs). For a discussion of the recognition of expenses when the vesting period is variable, see 6.4.40; and 6.4.30 (reference will follow) when the performance period is shorter than the service period.

One grant may contain several vesting periods, in which case the principles of graded vesting apply (see 6.4.20) (reference will follow). (IFRS 2 IG11 Example 1A) IFRS 2 Employee equity-settled share-based payment

Modified grant-date method, including true-up of the share-based payment cost

The value of employee services is measured indirectly with reference to the fair value of the equity instruments granted, rather than directly at the fair value of the services. This is because there is a presumption that it is not possible to value employee services reliably; this presumption is non-rebuttable.

If, in rare circumstances, the fair value of the equity instruments granted cannot be measured reliably, then the intrinsic value method is applied (see 6.2.10) (reference will follow). (IFRS 2 10 – 12) IFRS 2 Employee equity-settled share-based payment

The fair value of the equity instruments granted for services received from employees in an equity-settled share-based payment is determined at grant date rather than on every date on which services are received. IFRS 2 presumes that the fair value of the services expected to be received is the same as the fair value of the equity instruments granted at grant date.

Therefore, although the services are recognised over the service period, they are measured only once, at grant date, unless the arrangement is modified (see Chapter 9.2) (reference will follow). (IFRS 2 BC96)

Share-based payments may include conditions that determine whether the employee is entitled to receive the payment. Such conditions are reflected in the accounting for equity-settled share-based payments with employees by applying the modified grant-date method.

Something else -   IFRS 2 Fair value of equity instruments granted

Under this method, there are two different approaches for dealing with conditions, which depend on their classification. For further details on the definition and classification of conditions, see Chapters 5.3 and 5.4 (reference will follow). (IFRS 2 BC180)

Under the modified grant-date method (see also below), the share-based payment cost is generally determined by multiplying a value component and a number component. (IFRS 2 19-23, IFRS 2 IG9, IFRS 2 BC216) IFRS 2 Employee equity-settled share-based payment

  • The value component reflects the fair value of the individual equity instruments granted (e.g. a share or a share option) at grant date. Starting from the fair value of the underlying equity instrument, downward adjustments are made to reflect the possibility of not meeting any market and/or non-vesting conditions. No adjustments are made for the likelihood of not meeting any service and/or non-market performance conditions.The resulting value is referred to as the ‘grant-date fair value’ of the equity instrument granted. The grant-date fair value is not adjusted subsequently for any changes in the fair value of the underlying equity instrument or any changes in the possibilities of not meeting any market and/or non-vesting conditions.
  • The number component reflects the number of equity instruments for which the service and any non-market performance conditions are expected to be satisfied. Initially, the entity estimates the number of equity instruments for which the service and any non-market performance conditions are expected to be satisfied. The number can be anything between zero and the total number of equity instruments granted. At each reporting date, the entity revises the estimate if necessary.At vesting date, the estimate is adjusted to reflect the number of equity instruments for which the service and any non-market performance conditions actually are satisfied. This mechanism of modifying the initial estimate of the number of instruments for estimated and actual satisfaction of the service and any non-market performance conditions is referred to as ‘truing up’ for forfeitures.

In general, the downward adjustment made to the value component to reflect the possibility of not meeting a market condition cannot generally be calculated by multiplying the fair value of the equity instruments by the probability of not meeting the condition.

Rather, the effect of a market condition is taken into account by incorporating the risk of not meeting such a condition into a valuation model. For a discussion of the choice of model for share-based payments with market conditions, see A2.40 (reference will follow).

In general, the probability of not meeting a non-vesting condition that is unrelated to possible future share prices does not generally need to be incorporated into a valuation model to be estimated (see also 6.6.10 and A2.40) (reference will follow). (IFRS 2 21, IFRS 2 21A) IFRS 2 Employee equity-settled share-based payment

The estimation of the number component is the best estimate of the number of equity instruments for which the service and non-market performance conditions are expected to be satisfied. In a grant to one employee that is subject to a service condition, this is effectively a yes/no decision, being the expected outcome for the entire number of instruments granted to that employee; it is not a probability-weighted number.

In larger populations, a weighted-average probability of the number of employees expected to remain is typically used for service conditions. (IFRS 2 20, IFRS IG11 Example 1, IFRS 2 IG13 Example 5) IFRS 2 Employee equity-settled share-based payment

Applying the modified grant-date method ultimately results in recognition of a share-based payment cost determined by multiplying the grant-date fair value of an individual equity instrument granted by the number of equity instruments for which the service and any non-market performance conditions ultimately are satisfied.

Therefore, if a service or non-market performance condition is not met, then no share-based payment cost is recognised on a cumulative basis and any previously recognised cost is reversed.

However, if a market or non-vesting condition is not met, then a share-based payment cost is nevertheless recognised, assuming that all other vesting conditions are met, even though the employee would neither become entitled to nor receive the share-based payment.

This is different from the approach for cash-settled share-based payments (see Chapter 7.2) (reference will follow).

Changing expectations for satisfaction of service or non-market vesting conditions is a change in estimate. However, the normal prospective treatment for changes in estimate is not used. Instead, the true-up for changes in estimates of the number of instruments expected to satisfy service and non-market performance conditions occurs as follows.

In the period in which the change in estimate occurs, an amount is determined that would have been recognised cumulatively by the end of that period if the revised estimate had been used from the beginning of the vesting period.

The difference between the cumulative cost taking into account the revised estimates at the reporting date and the cumulative cost recognised at the previous reporting date is recognised in the period of the change. Although this is usually an increase in cost because of recognising the cost over the vesting period, the amount can be negative – i.e. a reduction in expense. Prior periods are not adjusted. For an illustration of how to account for a revised estimation of expected forfeitures, see Example 6.2.1.  (reference will follow) (IFRS 2 IG11 Example 1A)

After vesting date, there is no adjustment to the total share-based payment cost recognised for an equity-settled share-based payment. For example, options that are exercisable during a specified period after vesting may not be exercised because the share price falls below the exercise price during that period and they become out-of-the-money.

In this case the options lapse, but the cumulative share-based payment cost previously recognised is not adjusted. (IFRS 2 23) IFRS 2 Employee equity-settled share-based payment

The following flowchart provides a simplified overview of the treatment of different types of conditions in the modified grant-date method.

different types of conditions in the modified grant date method

The manner in which IFRS 2 explains the modified grant-date method may initially be confusing. It uses the following sentence: “…, vesting conditions shall be 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 shall be based on the number of equity instruments that eventually vest”.

However, read in the context of the remainder of IFRS 2, that the sentence should be read as meaning ‘vesting conditions other than market conditions’. IFRS 2 Employee equity-settled share-based payment

The following examples illustrate the accounting for an equity-settled share-based payment with the following features: IFRS 2 Employee equity-settled share-based payment

  • only a service condition (see Example 1) IFRS 2 Employee equity-settled share-based payment
  • a service condition and a non-market performance condition (see Example 2); and IFRS 2 Employee equity-settled share-based payment
  • a service condition and a market performance condition (see Example 3). IFRS 2 Employee equity-settled share-based payment

Example 1 – Equity-settled share-based payment transaction with a service condition

On 1 January Year 1, Company B grants one share option to each of its 100 employees in a share-based payment transaction, subject to a three-year service condition. If the service condition is met, then the employees can exercise their option at any date in Year 4 at an exercise price of 50 per share.

On grant date and at the end of each year, B estimates the number of employees expected to have satisfied the service condition at 31 December Year 3 and the number of instruments expected to vest.

Estimate of instruments expected to vest

Number of employees on date of estimate

1 January Year 1

90

100

31 December Year 1

80

92

31 December Year 2

75

77

31 December Year 3

70

70

All 70 employees who meet the service condition on 31 December Year 3 exercise their options in Year 4.

The fair value of a share option at grant date is 9.

End of

Instruments for which it is expected that the service condition will be satisfied

Expected total expense

Cumulative expense until end of period

Expense in current period

Year 1

80

720 1

2402

240

Year 2

75

6753

4504

210

Year 3

70

6305

6306

180

B accounts for the transaction as follows.

DT

CR

Year 1

Expenses

240

Equity

240

To recognise share-based payment expense based on best estimate at reporting date of number of instruments for which service condition is expected to be met (80 x 9 x 1/3)

Year 2

Expenses

210

Equity

210

To recognise difference between cumulative amount taking into account revised estimate (75 x 9 x 2/3) and cumulative amount recognised in previous years (240)

Year 3

Expenses

180

Equity

180

To recognise difference between cumulative amount taking into account revised estimate (70 x 9) and cumulative amount recognised in previous years (450)

Year 4

Expenses

3,500

Equity

3,500

To recognise exercise price received (70 x 50)

Cumulative effect

Expenses

630

Cash

3,500

Equity

4,130

The total increase in equity of 4,130 comprises the exercise price paid in cash of 3,500 and the option premium of 630 paid in services provided. The increase in equity during the vesting period equals the grant-date fair value of the equity instruments granted (9) multiplied by the number of equity instruments that ultimately satisfy the service condition (70).

Something else -   IFRS 2 How to easily determine the grant date
Specific points
  • The grant-date fair value of the share options granted does not take into account the impact of the service condition.
  • The change in the fair value of the share options after grant date has no effect on the accounting.
  • The actual number of employees in employment during the service period is not relevant for the accounting for the share-based payment. Instead, the accounting is based on the number of instruments expected to vest based on the number of employees that are expected to meet the service condition at the end of the vesting period.

Example 2 – Equity-settled share-based payment transaction with a non-market performance condition

On1 January Year 1, Company C grants one share option to each of its 100 employees in a share-based payment transaction, subject to a three-year service condition and cumulative profits being at least 10 million at vesting date. If the service condition and non-market performance condition are met, then the employees can exercise their option at any date in Year 4 at an exercise price of 50 per share.

On grant date and at the end of each year, C estimates the number of employees expected to have satisfied the service condition at 31 December Year 3 and the number of instruments expected to vest.

Value

Instruments for which it is expected that the service requirements will be satisfied

Estimate whether profit target will be met

1 January Year 1

90

Yes

31 December Year 1

80

Yes

31 December Year 2

75

Yes

31 December Year 3

70

No

The fair value of a share option at grant date is 9. At the end of Year 3, the profit target is not met.

End of

Instruments for which it is expected that the service requirements and NMP7 target will be satisfied

Expected total expense

Cumulative expense until end of period

Expense in current period

Year 1

80

720 8

2409

240

Year 2

75

67510

45011

210

Year 3

70

63012

13

-450

C accounts for the transaction as follows.

DT

CR

Year 1

Expenses

240

Equity

240

To recognise share-based payment expense based on best estimate at reporting date of number of instruments for which service condition is expected to be met (80 x 9 x 1/3)

Year 2

Expenses

210

Equity

210

To recognise difference between cumulative amount taking into account revised estimate (75 x 9 x 2/3) and cumulative amount recognised in previous years (240)

Year 3

Expenses (credit)

450

Equity

450

To recognise true-up because non-market performance target was not met (0 – 450)

Specific point
  • If both a service and a non-market performance condition are required to be met, then failure to meet either results in a true-up to zero.

Example 3 – Equity-settled share-based payment transaction with a market condition

On 1 January Year 1, Company D grants one share option to each of its 100 employees in a share-based payment transaction, subject to a three-year service condition and the underlying share price reaching a target of 80 at vesting date. If the service condition and market condition are met, then the employees can exercise their option at any date in Year 4 at an exercise price of 50 per share.

The valuation technique used by D to determine the grant-date fair value of the share options estimates the grant-date fair value of a share option granted as 6. This is a discount of 3 compared with the fair value of a share option without such a condition (i.e. 9 as calculated in Example 1).

On grant date and at the end of each year, D estimates the number of employees expected to have satisfied the service condition at 31 December Year 3.

FXX

Instruments for which it is expected that the service requirements will be satisfied

1 January Year 1

90

31 December Year 1

80

31 December Year 2

75

31 December Year 3

70

At the end of Year 3, the share price target is not met.

End of

Instruments for which it is expected that the service condition will be satisfied

Expected total expense

Cumulative expense until end of period

Expense in current period

Year 1

80

480 14

16015

160

Year 2

75

45016

30017

140

Year 3

70

42018

42019

120

D accounts for the transaction as follows.

DT

CR

Year 1

Expenses

160

Equity

160

To recognise share-based payment expense based on best estimate at reporting date of number of instruments for which service condition is expected to be met (80 x 6 x 1/3)

Year 2

Year 2

Year 2

Expenses

140

Equity

140

To recognise difference between cumulative amount taking into account revised estimate (75 x 6 x 2/3) and cumulative amount recognised in previous years (160)

Year 3

Expenses

120

Equity

120

To recognise difference between cumulative amount taking into account revised estimate (70 x 6) and cumulative amount recognised in previous years (300)

Something else -   IFRS 3 Reverse acquisitions How to?
Specific point
  • Although the final amount recognised takes account of the number of instruments for which the service requirement is satisfied, the actual failure to meet the share price target does not have any effect on the accounting. IFRS 2 Employee equity-settled share-based payment

Non-vesting conditions

Like market conditions, non-vesting conditions are reflected in measuring the grant-date fair value of the share-based payment and there is no true-up in the measurement of the share-based payment for differences between the expected and the actual outcome of non-vesting conditions. Therefore, if all service and non-market performance conditions are met, then the entity will recognise the share-based payment cost even if the employee does not receive the share-based payment due to a failure to meet a non-vesting condition. (IFRS 2 21A, IFRS 2 IG24)

The failure to meet a non-vesting condition may have other effects on the recognition of the share-based payment, depending on whether any party (i.e. the entity or the employee) can choose not to meet a non-vesting condition in the vesting period. IFRS 2 Employee equity-settled share-based payment

If either the entity or the employee can choose whether to meet a non-vesting condition and one chooses not to do so during the vesting period, then such a failure to meet the condition is treated as a cancellation. Under cancellation accounting, the amount of the cost that would otherwise have been recognised over the remainder of the vesting period is recognised immediately, generally in profit or loss. For a discussion of non-vesting conditions that one party can choose to meet, see 6.6.10. (reference will follow) (IFRS 2 28(a), IFRS 2 28A)

Example 4 – Not meeting a non-vesting condition that the counterparty can choose to meet

On 1 January Year 1, Company E grants 10 share options to each of its 100 employees, subject to a four-year service condition and the employees making monthly contributions towards the exercise price of 20. The grant-date fair value of the options is 10, taking into account the probability of employees not meeting the non-vesting condition (i.e. the saving requirement).

E expects all employees to remain employed. Although all 100 employees remain employed, one employee stops making monthly contributions in Year 3 – i.e. that employee chooses not to meet the non-vesting condition.

End of

Instruments for which it is expected that the service condition will be satisfied

Expected total expense

Cumulative expense until end of period

Expense in current period

Year 1

1,000

10,000 20

2,50021

2,500

Year 2

1,000

10,000 22

5,00023

2,500

Year 3

1,000

10,000 24

7,52525

2,525

Year 4

1,000

10,000 26

10,00027

2,475

In Example 4, the requirement to make contributions is a non-vesting condition that either the entity or the counterparty can choose to meet; more specifically, it is a non-vesting condition that the employee can choose to meet. Another example of such a non-vesting condition is the condition to buy shares and hold them for a specified period (see 3.5.30). (reference will follow)

However, if neither the entity nor the employee can choose whether to meet a non-vesting condition, then there is no change to the recognition if the non-vesting condition is not satisfied during the vesting period. The entity continues to recognise the cost over the vesting period. (IFRS 2 21A, IFRS 2 IG24) IFRS 2 Employee equity-settled share-based payment

Intrinsic value method

In rare circumstances, if the grant-date fair value of the equity instruments cannot be measured reliably, then an intrinsic value method is applied. The intrinsic value is remeasured at each reporting date and changes are recognised in profit or loss (to the extent that the cost is not eligible for capitalisation) until the instrument is settled (e.g. until an option is exercised). Example 10 in the implementation guidance to IFRS 2 provides an illustration of the intrinsic value method. (IFRS 2 24-25, IFRS 2 IG16) IFRS 2 Employee equity-settled share-based payment

However, uncertainty about the future market price is not a reason for not being able to measure the fair value reliably (this section might have been included to enable the international acceptance of the standard).

For example, in an ESPP in which employees pay a monthly contribution of 100 to buy shares at the end of the year at a discount of 20 percent of the then-current market price, there is uncertainty at grant date about what the future market price of those shares will be and accordingly how many shares the employees will be entitled to buy.

However, this is not sufficient reason to conclude that the grant-date fair value cannot be measured reliably. For a discussion of the rare circumstances in which the application of the intrinsic value method may be required, see 6.6.10. (reference will follow) IFRS 2 Employee equity-settled share-based payment

Read on in: IFRS 2 How to easily determine the grant date (reference will follow) IFRS 2 Employee equity-settled share-based payment

IFRS 2 Employee equity-settled share-based payment

IFRS 2 Employee equity-settled share-based payment IFRS 2 Employee equity-settled share-based payment IFRS 2 Employee equity-settled share-based payment IFRS 2 Employee equity-settled share-based payment IFRS 2 Employee equity-settled share-based payment IFRS 2 Employee equity-settled share-based payment IFRS 2 Employee equity-settled share-based payment IFRS 2 Employee equity-settled share-based payment IFRS 2 Employee equity-settled share-based payment IFRS 2 Employee equity-settled share-based payment

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

Something else -   IFRS 2 Determination of the vesting period

Leave a comment