IFRS 2 How to easily determine the grant date

IFRS 2 How to easily determine the grant date – The determination of grant date is important because this is the date on which the fair value of equity instruments granted is measured. Usually, grant date is also the date on which recognition of the employee cost begins. However, this is not always the case (see 6.4.10) (reference will follow). (IFRS 2 11)

‘Grant date’ is the date at which the entity and the employee agree to a share-based payment arrangement, and requires that the entity and the employee have a shared understanding of the terms and conditions of the arrangement. (IFRS 2 Definitions) IFRS 2 How to easily determine the grant date

In order for the employer and the employee to ‘agree’ to a share-based payment transaction, there needs to be both an offer and an acceptance of that offer. (IFRS 2 IG2)

Approval and communication by the employer

If the agreement is subject to an approval process, then the grant date cannot be before the date on which that approval is obtained. If a grant is made subject to approval – e.g. by a board of directors – then the grant date is normally when that approval is obtained. (IFRS 2A IG1) IFRS 2 How to easily determine the grant date

The arrangement also needs to be communicated to the employees to achieve grant date. IFRS 2 How to easily determine the grant date

In a broad-based unilateral grant of a share-based payment, there is often a period of time between board approval and communication of the terms of the award to individual employees. In some entities, the terms and conditions of the awards are communicated to each employee by their direct supervisor. Because of the varying schedules of employees and employers, it is possible that different employees may be informed of their awards on different dates.

In some circumstances, the number and geographic dispersion of employees results in communication spanning several days or weeks. As a result, awards approved at a single board meeting may be subject to several different grant dates. However, using a single grant date for the purpose of valuing share-based payment transactions with the same terms that are granted at approximately the same date may not result in a material difference from the aggregate fair value that would otherwise be determined on the grant date of each individual award.

Grant date and communication of a plan to the employees

Each year on the first day of the year, multinational Company X issues share options to all employees who were employed by X for the three months before the end of the previous year. The number of options that each employee receives is based on their employee class and is a set amount each year. The exercise price of the share options is always 10% less than the market price on the day on which the share plan is approved by the board, which is on the first day of the year. X’s human resources policy requires remuneration information to be communicated to employees by their immediate supervisors; once the share plan has been approved by the board, the immediate supervisor of each employee is responsible for communicating the grant to the employee. On the day after the share plan is approved, X places information about the share plan on the employee website.

In general the grant date is the board approval date because the award is unilateral, communication to employees is purely administrative and soon after the board meeting X issues an entity-wide communication about the grant of the award, including the specific terms and conditions.

Meaning of ‘shared understanding’

A shared understanding may not require the finalisation of all terms and conditions. For example, an offer may not specify the actual exercise price, but instead may state the formula that determines how the actual exercise price will be established. If the outcome is based on objective factors and different knowledgeable parties, independently of each other, would be able to make consistent calculations, then there is a shared understanding without having specified the actual grant terms.

If, for example, the exercise price is based on the market price at a specified later date but the outcome of all other factors is already known, then there is a shared understanding at the date of the agreement of the way in which the exercise price will be determined. IFRS 2 How to easily determine the grant date

Grant date and determination of exercise price dependent on formula

On 1 January Year 1, Company B grants share options to its employees, subject to a one-year service condition. The share options can be exercised at any date in the three years following vesting. The exercise price is determined using a formula, which is based on the share price, as follows: the fixed exercise price equals the grant-date share price of 10 plus a variable exercise price of 20% of the difference between the share price at the date of exercise and 10. In this example, we believe that there is a shared understanding at the date of the agreement of the way in which the exercise price will be determined. This is because even though the actual exercise price is known only at a later date, it is based on a formula that has only objective inputs.

In general, there will not generally be agreement on terms and conditions if the outcome is based primarily on subjective factors – e.g. if the number of shares to be awarded is a discretionary determination by a compensation committee at the end of the service period. IFRS 2 How to easily determine the grant date

Similarly, if the number of instruments issued to employees is determined based primarily on a subjective evaluation of the individual’s performance over a period, then we believe that there is not a shared understanding until the number of instruments has been determined. IFRS 2 How to easily determine the grant date

The assessment of whether the evaluation of an individual’s performance is primarily subjective may require judgement. For further details on discretion clauses that result in a shared understanding being delayed, see 6.3.60. (reference will follow) IFRS 2 How to easily determine the grant date

Acceptance by the employee

Grant date is not reached until there is acceptance of the offer. The acceptance may be explicit (e.g. by signing a contract) or implicit (e.g. by commencing to render services). (IFRS 2 IG2)

Some arrangements do not require explicit acceptance. This is the case when participation in the arrangement does not require any action by the employee other than providing the required services until vesting date. (IFRS 2 IG2) IFRS 2 How to easily determine the grant date

Other arrangements require explicit acceptance – e.g. signing a contract, paying an exercise price up front, starting to pay monthly contributions towards the exercise price, buying participation shares etc. IFRS 2 How to easily determine the grant date

For a discussion of the impact of different types of acceptance on ESPPs, see 6.5.10. (reference will follow) IFRS 2 How to easily determine the grant date

If an arrangement provides the opportunity to alter the extent of a previous acceptance, then it is necessary to conclude not only whether grant date has been reached, but also whether there are several grants with several grant dates. IFRS 2 How to easily determine the grant date

All of the facts and circumstances need to be considered and judgement may be required. Once the grant date has been reached, the opportunity to alter the extent of a previous acceptance may be considered to be a modification or cancellation (see Section 9). (reference will follow) IFRS 2 How to easily determine the grant date

Annual acceptance and monthly reductions

Company Q establishes a three-year share-based payment arrangement in which an employee is required to specify a monthly deduction percentage from their salary for buying shares at the then-current fair value (participation shares). For each participation share, the employee will receive an additional free share (matching share). Employees can state their monthly deduction in January Year 1 for the entire three-year period – i.e. January Year 1 to December Year 3. They are required to make an explicit annual statement in January of each year in which they confirm the deduction percentage or amount. New joiners to the company can participate in the plan from the beginning of the next calendar year. Employees also have the right to reduce the monthly deductions at any time. If, for example, an employee stops the deductions from May Year 1 onwards, then the employee will not lose entitlement to the matching shares previously received. Although the employee cannot subsequently increase the deduction amount during Year 1, the employee can rejoin in January Year 2 or January Year 3 by stating a new monthly deduction percentage. In this example, the statement of the deduction or investment amount is considered a required explicit acceptance. Therefore, grant date for the share-based payment of the matching shares could not be earlier than January each year because that is the date on which both parties agree to the arrangement. 1 January each year is considered a new grant date because employees may increase or decrease their contributions and new employees are permitted to join at that date. In this example there is only one grant date per year because an ability to reduce but not increase contributions is considered not create new acceptance at each monthly purchase date of participation shares. This is because the absence of a reduction is not an implicit acceptance, and an explicit acceptance has already been made. The ability to reduce or stop deductions entirely is considered a cancellation right rather than an indication of a separate grant date because it is a one-directional change. If a reduction does take place, then that would be accounted for as a cancellation, which accelerates recognition of the related cost (see Section 9). (reference will follow)

Grant date decision tree

The determination of grant date of a share-based payment that requires substantive approval can be illustrated as follows. IFRS 2 How to easily determine the grant date

Discretion clauses

Some share-based payment arrangements may provide a remuneration committee (or an equivalent body) with differing degrees of discretion to amend the terms of awards. If a share-based payment arrangement contains a ‘discretion clause’, then it is necessary to consider the impact of the discretion clause: IFRS 2 How to easily determine the grant date

• on the determination of grant date of the share-based payment (see 6.3.10-50) (reference will follow); and IFRS 2 How to easily determine the grant date
• whether modification accounting should be applied if discretion is exercised after grant date. IFRS 2 How to easily determine the grant date

If the terms of a share-based payment arrangement provide the remuneration committee with discretion to amend the terms of an award, then a determination about whether there is a shared understanding with employees should be based on an analysis of the degree of subjectivity (i.e. discretion) afforded to the remuneration committee, as well as the factors over which the remuneration committee has discretion. IFRS 2 How to easily determine the grant date

Arrangements with discretion clauses should be considered to be categorised into the following three categories depending on the degree of discretion available to the remuneration committee.

Category 1 – No delay to grant date, no modification

Arrangements may contain clauses that are largely objective, such that these may give little, if any, discretion to either the employee or the remuneration committee. In our view, such clauses that are largely objective do not result in a delay in grant date. IFRS 2 How to easily determine the grant date

As discussed at 9.2.20 (reference will follow), the subsequent use of the clause is considered not to result in modification accounting if the changes are for predetermined adjustments. Commonly, adjustments made under a discretion clause are ‘predetermined’ if the following conditions are met: IFRS 2 How to easily determine the grant date

• the arrangement clearly states the objective, method or outcome of the clause; IFRS 2 How to easily determine the grant date
• both parties have a shared understanding of the clause at grant date; and IFRS 2 How to easily determine the grant date
• the clause is invoked following a specified event. IFRS 2 How to easily determine the grant date

Examples of predetermined adjustments are changes in the exercise price of options to reflect changes in capital structures – e.g. share splits or the recalculation of performance requirements. In limited circumstances, a constructive obligation may exist if an entity, by its past practice or sufficiently specific communication to its employees, has created a valid expectation in the employees that it will exercise the discretion clause. IFRS 2 How to easily determine the grant date

Category 1 discretion clause

Company B grants share options to its employees. The agreement contains an anti-dilution clause requiring B to restore the fair value of the employees’ award following a change in the capital structure. B has discretion over the mechanism of restoring the fair value – e.g. by issuing additional share options or by lowering the exercise price. Both B and its employees have a shared understanding of the terms of the anti-dilution provision at grant date. The anti-dilution provision in this example should be considered to be treated as a Category 1 discretion clause because the changes to the award are predetermined. In this case, both the event requiring the clause to be invoked and the objective of the clause are clearly defined in the agreement – i.e. B is required to invoke the clause to restore the fair value of the employees’ award following a change in the capital structure. However, if the fair value of the award increases rather than stays the same before and after changes in the capital structure, then B would treat this as a modification and recognise additional compensation cost (see 9.2.20). (reference will follow)

Category 2 – No delay to grant date, modification IFRS 2 How to easily determine the grant date

If the discretion clause does not result in a delay to grant date, then it is necessary to consider whether invocation of the clause would result in modification accounting. In our view, modification accounting should be applied if a discretion clause is invoked and results in changes other than predetermined adjustments. IFRS 2 How to easily determine the grant date

Category 2 discretion clause

Company C grants share options to its employees. The agreement contains a discretionary anti-dilution clause that gives C discretion over whether to make an equitable adjustment to the employees’ award following a change in capital structure. The anti-dilution clause in this example should be considered to be treated as a Category 2 discretion clause, because the changes to the award are not predetermined. In this example, C has discretion over whether to invoke the clause.

When an entity exercises its discretion and modifies awards in conjunction with an equity restructuring, in our experience this often results in significant incremental compensation. This incremental compensation is measured as the difference between the fair value of the pre-modified award – considering how the equity restructuring would have affected the fair value of the award had it not been modified – and the fair value of the post-modified award. For further discussion of modification accounting, see Section 9. (reference will follow)

Category 3 – Delayed grant date

If the discretion clause provides the remuneration committee with significant subjectivity, such that there is no shared understanding of the terms and conditions before finalisation of the award, then grant date is not achieved until the period for exercising the discretion has passed. In our view, clauses that would be invoked only ‘with cause’ or in exceptional circumstances would not generally delay grant date. IFRS 2 How to easily determine the grant date

For example, a clause that is intended to be invoked with cause may be in relation to a specific employee action or an event that was not anticipated when the original performance condition was set – e.g. adjusting a revenue performance condition on the disposal of a significant business unit.

An example of a discretion clause with a significant degree of subjectivity is a discretion clause that allows the remuneration committee to review at the vesting date the total compensation of employees (including share-based compensation) to determine whether total compensation is appropriate. The clauses may be included in share-based payment arrangements to provide the remuneration committee with the discretion to reduce or eliminate an award.

If an entity has the discretion to reduce or eliminate an award, then we believe that this would delay grant date. However, this does not result in delaying recognition of the share-based payment (see 6.4.10). (reference will follow) IFRS 2 How to easily determine the grant date

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IFRS 2 How to easily determine the grant date