IFRS 2 Shares to the value of a fixed amount

Variable number of equity instruments or variable exercise price or IFRS 2 Shares to the value of a fixed amount

Shares to the value of of if a variable number of equity instruments to the value of a fixed amount is granted, commonly known as ‘shares to the value of’, then such an arrangement is recorded as an equity-settled share-based payment. IFRS 2 Shares to the value of a fixed amount

A question arises about the measurement of such a grant if the date of delivery of the shares is in the future because there is a service requirement. In general, there are two acceptable approaches in respect of measurement:

  • as a fixed amount of cash that will be received in the future based on its discounted amount, similar to the net present value of a financial liability (Approach 1); or
  • as a grant of free shares that are subject only to a service requirement – i.e. referenced to the share price, without discounting – because in contrast to a financial liability there is no outflow of resources (Approach 2). IFRS 2 Shares to the value of a fixed amount

Case – Measurement of a grant of a variable number of equity instruments to the value of a fixed amount

Company C, which is listed on a stock exchange, grants shares to its CEO with a value equal to a fixed cash amount of 1,000, subject to a two-year service condition. The number of shares to be delivered depends on the share price on vesting date. C determines that the appropriate discount rate is 2%.

If C elects to apply Approach 1 to measure the grant, then the grant-date fair value to recognise over the service period is 961 (1,000 / 1.02²) – i.e. a discounted amount. The difference between 961 and 1,000 is not subsequently recognised. IFRS 2 Shares to the value of a fixed amount

Conversely, if C elects to apply Approach 2 to measure the grant, then the grant-date fair value to recognise over the service period is the total 1,000 – i.e. the undiscounted amount.

Although IFRS 2 is silent on discounting in this fact pattern, other standards require discounting to reflect the time value of money. Therefore, measurement on a discounted basis is generally more appropriate if the payment is due to be settled more than 12 months after the reporting date.

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Non-market performance condition and variable number of equity instruments

If there is a performance condition attached to a share-based payment arrangement, then often such conditions determine whether the employee receives the share-based payment in an ‘all-or-nothing’ manner. IFRS 2 Shares to the value of a fixed amount

However, sometimes performance conditions are not designed as all-or-nothing conditions, but they determine the number of equity instruments to be received or the exercise price to be paid.

If the number of equity instruments granted varies with the level of achievement of a non-market performance target, then the entity trues up the number of equity instruments to be equal to the actual number of instruments that vest (IFRS 2.IG12.Ex3). IFRS 2 Shares to the value of a fixed amount

Case – Non-market performance condition with variable number of equity instruments

On 1 January Year 1, Company B grants share options to an employee, subject to a three-year service condition. The grant-date fair value of a share option is 10.

The grant is further subject to a cumulative profit target.

  • Level 1: If profits of 10 million are achieved, then the employee receives 1,000 share options.
  • Level 2: If profits of more than 15 million are achieved, then the employee receives 2,000 share options.

B expects the employee to satisfy the service requirement. At grant date and throughout Year 1, B expects the Level 1 profit target to be met. In Year 2, B revises its estimate and expects that the Level 2 profit target will be met. Although the employee is still employed at the end of Year 3, neither profit target is met.

IFRS 2 Shares to the value of a fixed amount

Notes
1. Non-market performance. IFRS 2 Shares to the value of a fixed amount
2. 1,000 x 10. IFRS 2 Shares to the value of a fixed amount
3. 2,000 x 10. IFRS 2 Shares to the value of a fixed amount
4. 0 x 10. IFRS 2 Shares to the value of a fixed amount
5. 10,000 x 1/3. IFRS 2 Shares to the value of a fixed amount
6. 20,000 x 2/3. IFRS 2 Shares to the value of a fixed amount

Non-market performance condition and variable exercise price

If the exercise price of share options granted varies with the level of achievement of a non-market performance target, then the entity uses the grant-date fair value that applies to the most likely outcome of the non-market performance target when it trues up the actual cost to be recognised (IFRS 2.IG12.Ex4).

Case – Non-market performance condition with variable exercise price

On 1 January Year 1, Company C grants 100 share options to an employee, subject to a two-year service condition.

The grant is also subject to a cumulative profits target.

  • Level 1: If profits of 10 million are achieved, then the exercise price is 100. The grant-date fair value in this case is estimated to be 20.
  • Level 2: If profits of more than 15 million are achieved, then the exercise price is reduced to 80. The grant-date fair value in this case is estimated to be 28.

B expects the employee to satisfy the service requirement. At grant date and throughout Year 1, B expects the Level 1 profit target to be met. At the end of Year 2, the employee is still employed and the Level 2 profit target is achieved.

Non market performance condition with variable exercise price

Notes
1. Non-market performance.
2. 100 x 20.
3. 100 x 28.
4. 2,000 x 1/2.
5. 2,800 x 2/2.

This last case illustrates that sometimes it is necessary to determine two or more different grant-date fair values of the equity instruments granted, none of which is remeasured subsequently, in the absence of a modification. The concept of switching from one grant-date fair value to another is not addressed in IFRS 2, but is illustrated in the standard’s implementation guidance. In our experience, this concept is key to applying the standard to share-based payments with multiple vesting conditions. IFRS 2 Shares to the value of a fixed amount

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Market condition and variable number of equity instruments

Typically, an employee is granted a share-based payment to receive a fixed number of equity instruments subject to vesting conditions. In such situations, the entity values the individual equity instruments granted to determine the grant-date fair value of the share-based payment.

Sometimes a share-based payment is granted in which the number of equity instruments that the employee receives varies based on the achievement of a market condition. In these situations, the employee has been granted a right to receive a variable number of equity instruments, and the value of this right depends on the outcome of the market condition.

If a share-based payment includes a market condition, then the grant-date fair value reflects the probability of satisfying the market condition. In the case just described, the market condition creates variability in the number of equity instruments that will be received. Therefore, the entity determines the grant-date fair value of the right to receive a variable number of equity instruments reflecting the probability of different outcomes.

In our view, the grant-date fair value of the share-based payment for each right should be valued by applying a valuation technique that considers the different possible outcomes, such as binomial or Monte Carlo (see A2.100). We believe that the value of the share-based payment per right should not be adjusted for changes in the share price or related to the market condition, because it is a share-based payment with a market condition. Changes resulting from failure to meet a service condition are trued up as required.

Case – Market condition with variable number of equity instruments: Grant to one employee

On 1 January Year 1, Company D grants a right to share options to an employee, subject to a three-year service condition.Quality

The grant is also subject to a share price target.

  • Level 1: If a share price of at least 100 is achieved, then the employee receives 1,000 share options.
  • Level 2: If a share price of more than 120 is achieved, then the employee receives 2,000 share options.
  • If the share price does not reach 100, then no options are received.

D expects the employee to satisfy the service condition. D estimates the grant-date fair value of the right to receive the variable number of equity instruments by applying an appropriate valuation technique to be 13,545.

At the end of Year 3, the employee is still employed and the Level 2 share price target is met. The actual achievement of the share price target does not affect the accounting. Because the probability of meeting a share price target to obtain the extra 1,000 share options was already factored into the grant-date fair value of 13,545, the share-based payment is not remeasured.

Market condition with variable number of equity instruments Grant to one employee

Notes IFRS 2 Shares to the value of a fixed amount
1. 13,545 x 1/3. IFRS 2 Shares to the value of a fixed amount
2. 13,545 x 2/3. IFRS 2 Shares to the value of a fixed amount
3. 13,545 x 3/3. IFRS 2 Shares to the value of a fixed amount

Case – Market condition with variable number of equity instruments: Grant to more than one employee

Assume the same facts as in the last case above, except that the grant was made to more than one employee. In this case, the same grant-date fair value of the share-based payment applies to the rights given to each employee and the grant is trued up as required if the service condition is not met.

For example, if the same grant is made to 10 employees and eight are expected to meet the service requirement, then the total share-based payment expense would be 108,360 (13,545 x 8). If only seven employees ultimately meet the service requirement, then the share-based payment expense is trued up to 94,815 (13,545 x 7).

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See also: IFRS 2 in IFRS Community

IFRS 2 Shares to the value of a fixed amount

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

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