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Share based payment: service, performance and non-vesting conditions

IFRIC, the interpretations committee of the International Accounting Standards Board (“IASB”) at its meeting on 4 March 2010, concluded that improved guidance was required for the treatment of service, performance and non-vesting conditions. They noted that the current definitions in IFRS2 lacked clarity. For example, in the definitions section:

a) “vesting conditions are defined on a broad basis to accommodate both service conditions and performance conditions;

b) service conditions and performance conditions are not separately defined, but described with a few features within the definition of vesting conditions;

c) market conditions which are a subset of performance conditions are separately defined; and

d) non-vesting conditions are neither defined nor described.”

There was also concern that there was uncertainty as to whether the duration of a service condition needed to be the same as the duration of any associated performance condition and how the award should be treated if they were different.

IFRIC was reluctant to explore these issues in any great depth for fear that it might draw them into a wholesale review of the Standard. Instead, they decided that they would try and apply US practice in this area and asked their staff to prepare guidance based on the approach followed in US GAAP (see FAS123 and ASC 718-10-55-73). Under US GAAP, the general approach is to determine a “service period” by reference to all the terms of an award and then spread the costs over that period.

Given the differences in the design of UK and US share plans, and the application of performance conditions, it will be interesting to see whether following the US approach provides the simplicity and clarity that IFRIC seeks. However, this use of the American Share Based Payment Standard to help interpret the International Standard may encourage others to look to US practice when dealing with other areas of difficulty or ambiguity in IFRS2.

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