IFRS vs US GAAP Share-based payments

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IFRS vs US GAAP Share-based payments – Although the US GAAP and IFRS guidance in this area are similar at a conceptual level, significant differences exist at the detailed application level.

Differences within the two frameworks may result in different classifications of an award as a component of equity or as a liability. This may result in different total compensation cost and it may impact earnings volatility and balance sheet metrics. Classification under IFRS is based solely on whether awards are ultimately settled in equity or cash. However, US GAAP has guidance for certain types of awards that are equity settled but may result in liability classification (e.g., awards with vesting conditions outside of service, performance, or market conditions), as well as guidance for some awards that may be cash settled but result in equity classification (e.g., puttable awards).

In addition, companies that issue awards with graded vesting (e.g., awards that vest ratably over time, such as 25 percent per year over a four-year period) may require faster expense recognition under IFRS than under US GAAP. IFRS vs US GAAP Share-based payments

The deferred income tax accounting requirements for share-based payments under IFRS vary significantly from US GAAP. Companies can expect to experience greater period-to-period variability in their effective tax rate due to share-based payment awards under IFRS prior to the time of receiving the tax deduction. The extent of variability is linked to the movement of the issuing company’s stock price. However, companies reporting under US GAAP could have greater volatility upon receiving the tax deduction as a result of the treatment of the difference between the estimated deferred taxes recognized and the actual tax benefit received. IFRS vs US GAAP Share-based payments

Standards Reference

US GAAP1 

IFRS2

ASC 480 Distinguishing Liabilities from Equity

ASC 718 Compensation – Stock compensation

SAB Topic 143 Share-based payment

IFRS 2 Share-based payments

NoteIFRS vs US GAAP Share-based payments

The following discussion captures a number of the more significant GAAP differences under both the new revenue standards. It is important to note that the discussion is not inclusive of all GAAP differences in this area. IFRS vs US GAAP Share-based payments

Scope

While both US GAAP and IFRS apply a single standard to all share-based payment arrangements, regardless of whether the counterparty is a non employee, each framework has certain guidance specific to the measurement of non employee awards. IFRS vs US GAAP Share-based payments

Some awards categorized as non employee instruments under US GAAP will be treated as employee awards under IFRS.

IFRS vs US GAAP Share-based payments

US GAAP

IFRS

ASC 718, Compensation—Stock Compensation, applies to employee and non employee share-based transactions, with the exception of specific guidance related to the attribution of compensation cost and certain inputs used in the valuation of non employee awards.

The guidance focuses on the legal definition of an employee with certain specific exceptions.

IFRS 2 Share-based payments, includes accounting for all employee and nonemployee arrangements.

Furthermore, under IFRS, the definition of an employee is broader than the US GAAP definition.

IFRS focuses on the nature of the services provided and treats awards to employees and others providing employee-type services similarly. Awards for goods from vendors or non employee-type services are treated differently.

Measurement of awards granted by non public companies

IFRS does not permit alternatives in choosing a measurement method.

IFRS vs US GAAP Share-based payments

US GAAP

IFRS

Equity-classified

The guidance allows non public companies to measure stock-based compensation awards by using the fair value method, or the calculated-value method if it is not practicable to estimate expected stock price volatility.

IFRS does not include such alternatives for nonpublic companies and requires the use of the fair-value method in all circumstances.

Liability-classified

The guidance allows non public companies to make an accounting policy decision on how to measure stock-based compensation awards that are classified as liabilities. Such companies may use the fair value method (or calculated-value method, if applicable) or the intrinsic-value method.

Measurement of awards granted to non employees

Both the measurement date and the measurement methodology may vary for awards granted to non employees.

IFRS vs US GAAP Share-based payments

US GAAP

IFRS

Nonemployee awards are measured in the same manner as employee awards under ASC 718, at the fair value of the equity instrument on the grant date, with the exception of certain inputs used in the calculation of expected term.

Transactions with parties other than employees (or those providing employee-type services) should be measured at the date(s) on which the goods are received or the date(s) on which the services are rendered.

Nonemployee transactions are generally measured at the fair value of the goods or services received, since it is presumed that it will be possible to reliably measure the fair value of the consideration received. If an entity is not able to reliably measure the fair value of the goods or services received (i.e., if the presumption is overcome), the fair value of the award should be measured indirectly by reference to the fair value of the equity instrument granted as consideration.

When the presumption is not overcome, an entity is also required to account for any unidentifiable goods or services received or to be received. This would be the case if the fair value of the equity instruments granted exceeds the fair value of the identifiable goods or services received and to be received.

Classification of instruments as liabilities or equity

Although ASC 718 and IFRS 2 contain a similar principle for classification of stock based compensation awards, certain awards will be classified differently under the two standards. In some instances, awards will be classified as equity under US GAAP and a liability under IFRS, while in other instances awards will be classified as a liability under US GAAP and equity under IFRS.

IFRS vs US GAAP-based payments

US GAAP

IFRS

ASC 718 contains guidance on determining whether to classify an award as equity or a liability. ASC 718 also references the guidance in ASC 480, Distinguishing Liabilities from Equity, when assessing classification of an award.

In certain situations, puttable shares may be classified as equity awards, as long as the recipient bears the risks and rewards normally associated with equity share ownership for a reasonable period of time (defined as 6 months).

Liability classification is required when an award is based on a fixed monetary amount settled in a variable number of shares.

Under IFRS, equity/liability classification for share-based awards is determined wholly on whether the awards are ultimately settled in equity or cash.

Puttable shares are always classified as liabilities, even if the put cannot be exercised for an extended period of time.

Share-settled awards are classified as equity awards even if there is variability in the number of shares due to a fixed monetary value to be achieved.

Awards with other than service performance, or market conditions

Certain awards classified as liabilities under US GAAP may be classified as equity under IFRS.

IFRS vs US GAAP Share-ayments

US GAAP

IFRS

If an award contains conditions other than service, performance, or market conditions (referred to as “other” conditions), it is classified as a liability award.

If an award of equity instruments contains conditions other than service or performance (which can include market) vesting conditions, it can still be classified as an equity-settled award.

Such conditions may be non vesting conditions. Non vesting conditions are taken into account when determining the grant date fair value of the award.

Awards with performance targets met after the service period

Under IFRS, this is a non vesting condition that is reflected in the measurement of the grant date fair value.

IFRS vs US GAAsed payments

US GAAP

IFRS

A performance target that may be met after the requisite service period is complete is a performance vesting condition. The fair value of the award should not incorporate the probability of a performance condition vesting, but rather should be recognized only if the performance condition is probable of being achieved.

A performance target that may be met after the requisite service period is a non vesting condition and is reflected in the measurement of the grant date fair value of an award.

Service-inception date, grant date, and requisite service

Because of the differences in the definitions, there may be differences in the grant date and the period over which compensation cost is recognized.

IFRS vs US based payments

US GAAP

IFRS

The guidance provides specific definitions of service-inception date, grant date, and requisite service, which, when applied, will determine the beginning and end of the period over which compensation cost will be recognized. Additionally, the grant date definition includes a requirement that the employee begins to be affected by the risks and rewards of equity ownership at that date.

IFRS does not include the same detailed definitions. The difference in the grant date definition is that IFRS does not require the employee to begin to be affected by the risks and rewards of equity ownership to have a grant date.

Furthermore, the IFRS definition of the start of the service period does not have the same explicit requirements as the US GAAP definition of service inception date, which could result in earlier recognition of compensation cost under IFRS when the grant date is delayed.

Attribution—awards with graded-vesting features

The alternatives included under US GAAP provide for differences in both the measurement and attribution of compensation costs when compared with the requirements under IFRS for awards with graded vesting (i.e., tranches).

IF GAAP Share-based payments

US GAAP

IFRS

Companies are permitted to make an accounting policy election regarding the attribution method for awards with service-only conditions and graded vesting features. The valuation method that the company uses (single award or multiple tranches of individual awards) is not required to align with the choice in attribution method used (straight-line or accelerated tranche by tranche). For awards with graded vesting and performance or market conditions, the accelerated graded-vesting attribution approach is required.

Companies are not permitted to choose how the valuation or attribution method is applied to awards with graded-vesting features. Companies should treat each installment of the award as a separate grant. This means that each installment would be separately measured and attributed to expense over the related vesting period, which would accelerate the expense recognition.

Attribution—awards to non employees

Compensation cost for non employee awards is recognized over the service period for IFRS, whereas for US GAAP it is recognized in the same period and manner as if cash had been paid in exchange for the goods or services, which may or may not be the same pattern.

IFRS vs US GAAP Share-based payments

US GAAP

IFRS

Under US GAAP, compensation cost for non employee awards is recognized as if cash had been paid.

Under IFRS, compensation cost is recognized over the service period for all awards.

Certain aspects of modification accounting

Differences between the two standards for improbable to probable modifications may result in differences in the compensation costs that are recognized.

IFRS vs US GAAP Share-based payments

US GAAP

IFRS

An improbable to probable “Type III” modification can result in recognition of compensation cost that is more or less than the fair value of the award on the original grant date. When a modification makes it probable that a vesting condition will be achieved, and the company does not expect the original vesting conditions to be achieved, a new measurement date is established. The grant-date fair value of the award would not be a floor for the amount of compensation cost recognized.

Under IFRS, if the vesting conditions of an award are modified in a manner that is beneficial to the employee, this would be accounted for as a change in only the number of awards that are expected to vest (from zero to a new amount), and the award’s full original grant-date fair value would be recognized for the awards over the remainder of the service period. That result is the same as if the modified vesting condition had been in effect on the grant date.

Accounting for forfeitures

Attribution of compensation costs may differ for entities that elect a policy under US GAAP to account for forfeitures when they occur. IFRS vs US GAAP Share-based payments IFRS vs US GAAP Share-based payments

US GAAP

IFRS

Companies make an entity-wide accounting policy election (independent elections for employee and non employee awards) to account for award forfeitures as they occur or by estimating expected forfeitures as compensation cost is recognized.

IFRS does not allow a similar policy election; forfeitures must be estimated.

Derived service period

For an award containing a market condition that is fully vested and deep out of the money at grant date, expense recognition may occur earlier under IFRS. IFRS vs US GAAP Share-based payments

US GAAP

IFRS

US GAAP contains the concept of a derived service period. Where an award is fully vested and deep out of the money at the grant date but allows employees only a limited amount of time to exercise their awards in the event of termination, US GAAP presumes that employees must provide some period of service to earn value from the award.

Because there is no explicit service period stated in the award, a derived service period must be determined by reference to a valuation technique.

The expense for the award would be recognized over the derived service period and reversed if the employee does not complete the requisite service period.

IFRS does not define a derived service period for fully vested, deep-out-of-the-money awards. Therefore, the related expense for such an award would be recognized in full at the grant date because the award is fully vested at that date.

Tax withholding arrangements—impact to classification

There could be a difference in award classification if the limit for tax withholding is exceeded. IFRS vs US GAAP Share-based payments

IFRS vs US GAAP Share-based payments

US GAAP

IFRS

An award containing a net settled tax withholding clause could be equity classified as long as the arrangement limits tax withholding to the maximum individual statutory tax rate in a given jurisdiction. If tax withholding is permitted at some higher rate, then the entire award (not solely the excess) would be classified as a liability.

IFRS has an exception similar to US GAAP. However, there will still be a difference if the withholding limit is exceeded, as only the excess number of equity instruments that can be withheld would be separated and accounted for as a cash-settled share-based payment under IFRS.

Accounting for income tax effects

Companies reporting under IFRS generally will have greater volatility in their deferred tax accounts over the life of the awards due to the related adjustments for stock price movements in each reporting period. IFRS vs US GAAP Share-based payments

Companies reporting under US GAAP could have greater volatility upon exercise arising from the variation between the estimated deferred taxes recognized and the actual tax deductions received.

IFRS vs US GAAP Share-based payments

US GAAP

IFRS

The US GAAP model for accounting for income taxes requires companies to record deferred taxes as compensation cost is recognized, as long as that particular type of instrument ordinarily would result in a future tax deduction.

The measurement of the deferred tax asset is based on the amount of compensation cost recognized for book purposes. Changes in the stock price do not impact the deferred tax asset or result in any adjustments prior to settlement or expiration.

Upon settlement or expiration, excess tax benefits and tax deficiencies (the difference between the recorded deferred tax asset and the tax benefit of the actual tax deduction) are recognized within income tax expense.

The measurement of the deferred tax asset in each period is based on an estimate of the future tax deduction, if any, for the award measured at the end of each reporting period (based on the current stock price if the tax deduction is based on the future stock price).

When the expected tax benefits from equity awards exceed the recorded cumulative recognized expense multiplied by the tax rate, the tax benefit up to the amount of the tax effect of the cumulative book compensation expense is recorded in the income statement; the excess is recorded in equity.

When the expected tax benefit is less than the tax effect of the cumulative amount of recognized expense, the entire tax benefit is recorded in the income statement.

Recognition of social charges (e.g., payroll taxes)

The timing of recognition of social charges generally will be earlier under IFRS than US GAAP. IFRS vs US GAAP Share-based payments

IFRS vs US GAAP Share-based payments

US GAAP

IFRS

A liability for employee payroll taxes on employee stock-based compensation should be recognized on the date of the event triggering the measurement and payment of the tax (generally the exercise date for a non qualified option or the vesting date for a restricted stock award).

Social charges, such as payroll taxes levied on the employer in connection with stock-based compensation plans, are expensed in the income statement when the related share-based compensation expense is recognized.

The guidance in IFRS for cash-settled share-based payments would be followed in recognizing an expense for such charges.

Valuation—Guidance on expected volatility and expected term IFRS vs US GAAP Share-based payments

Companies that report under US GAAP may place greater reliance on implied short-term volatility to estimate volatility. Companies that report under IFRS do not have the option of using the “simplified method” of calculating expected term provided by SAB Topic 14 and ASC 718. As a result, there could be differences in estimated fair values. IFRS vs US GAAP Share-based payments

IFRS vs US GAAP Share-based payments

US GAAP

IFRS

SAB Topic 14 includes guidance on expected volatility and expected term, which includes (1) guidelines for reliance on implied volatility and (2) the “simplified method” for calculating the expected term for qualifying awards.

Non public entities may use a practical expedient for determining the expected term similar to the simplified method.

IFRS does not include comparable guidance.

Employee stock purchase plans

Employee stock purchase plans generally will be deemed compensatory more often under IFRS than under US GAAP. IFRS vs US GAAP Share-based payments

IFRS vs US GAAP Share-based payments

US GAAP

IFRS

Employee stock purchase plans are compensatory if terms of the plan:

  • Either (1) are more favorable than those available to all shareholders, or (2) include a discount from the market price that exceeds the percentage of stock issuance costs avoided (discount of 5 percent or less is a safe harbor);
  • Do not allow all eligible employees to participate on an equitable basis; or
  • Include any option features (e.g., look-backs).

In practice, most Employee stock purchase plans are compensatory; however, plans that do not meet any of the above criteria are non-compensatory.

Employee stock purchase plans are always compensatory and treated like any other equity-settled share-based payment arrangement.

IFRS does not allow any safe-harbor discount for Employee stock purchase plans.

Group share-based payment transactions

Under US GAAP, push-down accounting of the expense recognized at the parent level generally would apply. Under IFRS, the reporting entity’s obligation will determine the appropriate accounting. IFRS vs US GAAP Share-based payments

IFRS vs US GAAP Share-based payments

US GAAP

IFRS

Generally, push-down accounting of the expense recognized at the parent level in the consolidated financial statements would apply to the separate financial statements of the subsidiary.

For liability-classified awards settled by the parent company, the mark to market expense impact of these awards should be pushed down to the subsidiary’s books each period, generally as a capital contribution from the parent. However, liability accounting at the subsidiary may be appropriate, depending on the facts and circumstances

For the separate financial statements of the subsidiary, equity or liability classification is determined based on the nature of the obligation each entity has in settling the awards, even if the award is settled in parent equity.

The accounting for a group cash-settled share-based payment transaction in the separate financial statements of the entity receiving the related goods or services when that entity has no obligation to settle the transaction would be as an equity-settled share-based payment. The group entity settling the transaction would account for the share-based payment as cash-settled.

The accounting for a group equity-settled share-based payment transaction is dependent on which entity has the obligation to settle the award.

For the entity that settles the obligation, a requirement to deliver anything other than its own equity instruments (equity instruments of a subsidiary would be “own equity” but equity instruments of a parent would not) would result in cash-settled (liability) treatment.

Therefore, a subsidiary that is obligated to issue its parent’s equity would treat the arrangement as a liability, even though in the consolidated financial statements the arrangement would be accounted for as an equity-settled share-based payment. Conversely, if the parent is obligated to issue the shares directly to employees of the subsidiary, then the arrangement should be accounted for as equity-settled in both the consolidated financial statements and the separate standalone financial statements of the subsidiary.

See also: The IFRS Foundation

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