The International Accounting Standards Board (IASB) has published an Exposure Draft (ED) containing proposed amendments to IFRS 2 Share Based Payment.It is intended to address:
(a) the accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled;
(b) the classification of share-based payment transactions with net settlement features; and
(c) the effects of vesting conditions on the measurement of cash-settled share-based payments.
Interview with William Franklin, a partner and chartered accountant at share scheme design and implementation specialists Pett, Franklin & Co. LLP
Q In what circumstances will the proposed amendments be relevant?
A The IASB is seeking to clarify some issues in a difficult area of share based payment accounting. IFRS 2 introduced two different accounting regimes for different kinds of equity-based incentives. Most of the attention when the Standard was introduced was on equity-settled share-based payments but at the same time, a quite different regime was introduced for cash-settled share-based payments.
Sometimes it is easy to tell the difference between the two, but not always. If a quoted company grants options to its employees which are satisfied by issuing shares then that is an equity-settled share-based payment. If a company pays a cash bonus to employees calculated by reference to the growth in the share price (phantom option) that is a cash-settled share-based payment (cash based incentives).
There can be circumstances where it is difficult to distinguish them and there can be confusion because you can have equity-settled share-based payments which are settled in cash and you can have cash-settled share-based payments which are settled in equity. There can be awards which have the characteristics of both. Sometime an award can swap categories during its life.
Given the diversity of share based incentives it is not surprising that there has been a string of issues on this subject raised by accountants with the IASB. The IASB has been reluctant to engage again on share based payment accounting, but has now after a very long period of internal deliberation issued this Exposure Draft which deals with three of the concerns raised.
(a) The IASB in the ED is addressing situations where an award is a cash-settled share-based payment and then changes into an equity-based share-based payment. Previously the Standard was largely silent on this subject. The ED sets out how this should be dealt with.
(b) One situation where an award could have the characteristics of both equity-settled and cash-settled payments arises where part of the award is used to fund the tax liability that arises. In such a case the tax liability is at least arguably a cash-settled share-based payment but one which is intrinsically linked to an equity-based share-based payment for the employee’s award.
Most companies have adopted a pragmatic solution, taking the view that although part of the award (the element to cover the tax) might be a cash-settled share-based payment, they will treat the whole award as an equity-settled payment. Otherwise the accounting could become very complicated. What the IASB is proposing in the ED is to belatedly endorse this approach.
(c)The third amendment is concerned with the calculation of the accounting value for the cash-settled share-based payments liability accrued in the accounts, before the award is paid. The original standard was somewhat unclear as to how one should deal with various performance conditions in the calculations. They are now setting out how the calculations should be approached.
Q If the proposed amendments are implemented, what practical impact will they have for companies?
A The IASB is largely catching up with what is happening in practice already and is simply endorsing the treatments most companies have been following. There could be a minority of companies who have followed different treatments who might have some problems. There might be some objections from those who will be concerned that the IASB is now being prescriptive in an area where it had previously been (by default) permissive.
This raises a bigger issue arising from this ED. The three amendments have been on the IASB agenda for many years and the process for reaching this point has been very longwinded. There are many other practical concerns with the application of IFRS2 which have gone unaddressed by the IASB where companies and advisers have had to make up their own minds. In issuing an ED on these three points the IASB has gone for the relatively easy targets. But in doing so they are becoming more prescriptive and are taking away some discretion. It is understandable that advisers and companies seek certainty in an unfamiliar area, but is this reduction in discretion a good thing? A better use of IASB resources might be a fundamental review of IFRS2 in its entirety rather than making individual prescriptive changes.
Q What is the likely timing for implementation and are there any steps that companies or their advisers should be taking now in preparation for it?
A The IASB has asked for comments by 25 March 2015. I am not expecting much dissent as the proposals are broadly in line with current practice. However, given how slowly the IASB has dealt with these issues over the last few years it will be interesting to see how long it takes to actually incorporate the changes in the Standard.