IFRS and US GAAP –Common Challenges and

Practical Solutions

Gautam Goswami, BDO (US)Peter Klinger, BDO (US)

Learning Objective• This session is intended to provide participants with

an understanding of issues when there is dual reporting under International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and generally accepted accounting principles in the United States (“US GAAP”)

• After this session, participants will be able to describe the significant differences between US GAAP and IFRS for share-based payment accounting

Comparison of US GAAP and IFRS Share-Based Payments

• Fundamentally, ASC 718 and IFRS 2 are largely converged.• Both standards require a fair value-based approach in

accounting for share-based payment arrangements whereby an entity either:– Incurs liabilities that are based on the price of its shares, or

that may require settlement in its shares; or– Receives goods or services in exchange for issuing share options

or other equity instruments• However, some significant differences still exist between the two

standards

Summary of Significant Differences Between IFRS and US GAAP

• Scope differences• Nonemployee transactions• Definition differences• Awards with vesting conditions

other than service, performance or market

• Performance target after requisite service period

• Accounting modifications• Attribution methods• Group transactions

• ESPP plans• Tax withholding arrangements• Income taxes• Payroll Taxes• Public companies• Non-public companies

– IPOs– Measurement of equity awards– Measurement of liability awards– Transition

Scope Differences• US GAAP

– ASC 718 applies to awards granted to employees only. It does not apply to non-employees (ASC 505)

• IFRS– IFRS 2 applies to awards granted to both employees and

non-employees. Because the definition of “employee” is broader in IFRS 2, the measurement date and expense may be different for some awards which are categorized as non-employee awards under US GAAP

Nonemployee Transactions• US GAAP

– Measured based on the fair value of the consideration received or the equity instruments issued, whichever is more reliably measurable.

• IFRS– Generally measured at the fair value of the goods

or services received.• It is presumed that it is possible to reliably measure the

fair value of the consideration received.

Definition Differences• US GAAP

– ASC 718 includes detailed definitions on terms including “grant date,” “requisite service period” and “service inception date”

• IFRS– IFRS 2 does not include the same detailed

descriptions, which may lead to different accounting treatments

Awards with Vesting Conditions Other Than Service, Performance or Market• US GAAP

– ASC 718 states that such awards are classified as liability awards

• IFRS– IFRS 2 states that awards (vesting or non-vesting)

that contains conditions other than service, performance or market are classified as equity awards

Performance Target Could Be Achieved After Requisite Service Period

• US GAAP– Treat as a performance condition that affects vesting, rather

than grant-date fair value• If requisite service rendered, compensation cost recognized

when probable that the performance target could be achieved

• IFRS– Not a performance condition; treat as non-vesting condition

reflected in grant-date fair value• Recognize over the requisite service period

Modifications of performance or service conditions that affect vesting Improbable-to-

probable Type III modifications• US GAAP

– Under ASC 718, this is treated as a forfeiture of the original award and grant of a new award (and FV of the original award at grant date is ignored)

• IFRS– IFRS 2 would require such a modification to be accounted for as

only a change in the number of options expected to vest, and provides the same results as if the modification performance condition had been in effect at the grant date

Attribution Methods• US GAAP

– ASC 718 provides that for awards with service conditions and graded-vesting features that an accounting policy choice exists (either graded-vesting or straight line)

• IFRS– IFRS 2 does not include such a choice and requires that

companies treat each vesting tranche as a separate award

Group Transactions• US GAAP

– Subsidiary awards settled in parent’s equity classified as equity award in subsidiary f/s

• IFRS– Subsidiary awards settled in parent’s equity

classified as liability in subsidiary f/s

Employee Stock Purchase Plans• US GAAP

– ASC 718 states that such ESPPs are only deemed compensatory if certain criteria are met:

• Either the terms are 1) more favorable than those available to shareholders, OR 2) if the discount provided exceeds the percentage of issuance costs avoided;

– 5% safe harbor• If the terms do not permit all eligible employees to

participate on an equitable basis, AND• Include any option features

Employee Stock Purchase Plans• IFRS

– IFRS 2 states that all ESPPs are compensatory and are within the scope of IFRS 2

• If the terms of the award are no more favorable than those made to all holders of the same class of shares, then there will be no difference between US GAAP and IFRS

Tax Withholding Arrangements• US GAAP

– ASC 718 provides an exception for the requirement to classify a net-settled tax withholding clause as a liability if the arrangement only allows such withholding at the employer’s minimum statutory withholding rate. In such cases, the award can be classified as equity.

• IFRS– IFRS 2 provides no such exception

• In Q1 2014, the IASB tentatively decided to treat as equity

Accounting for Income Taxes• US GAAP

– Under ASC 718-740, deferred tax assets are measured based on the FV of the awards

• IFRS– Under amendments to IAS 12, the accounting for

deferred taxes is based on the intrinsic value at each reporting period end rather than an estimate of the FV of the equity instrument

Accounting for Income Taxes• GAAP

– Windfalls upon settlement of an award are recorded in equity– Shortfalls upon settlement of an award are recorded as

either:• Reduction of equity (to the extent the company has

accumulated windfalls in its pool of windfall tax benefits), OR• Charge to income tax expense (if no accumulated windfall

exists)

Accounting for Income Taxes• IFRS

– IFRS 2 does not include the concept of a pool of windfall tax benefits to offset shortfalls

– Where expected tax benefit > tax effect of cumulative book comp, any excess is recorded in equity

– Where expected tax benefit < tax effect of cumulative book comp, all tax benefit is recorded in income

Accounting for Income Taxes Example

• 4,000 non-statutory options– $60 exercise price per share– Fair value of $20/share ($80,000 of total expense)

• Cliff vests in 4 years• Book expense = $5,000 per quarter

($80,000/16 quarters)• Tax rate = 40%

Example: First Quarter• Stock price drops below $60 exercise price

– No intrinsic value• ASC 718 : Cumulative DTA = $2,000,

– $5,000 x 40% = $2,000– Net P&L expense for Q1 = $3,000 ($5,000 - $2,000)

• IFRS 2: DTA = $0, since there is no intrinsic value– Net P&L expense for Q1 - $5,000 ($5,000 – 0)

Example: Second Quarter• Stock prices increases to $84

– Intrinsic value - $24 ($84 - $60 exercise price)• ASC 718 : Cumulative DTA balance = $4,000

– $10,000 x 40% = $4,000– Net P&L expense for Q2 = $3,000 ($5,000 - $2,000)

• IFRS 2: DTA balance = $4,800, based on intrinsic value– 4,000 options x $24 x 12.5% vested = $12,000 x 40% = $4,800– P&L tax benefit limited to $4,000 ($10,000 x 40%)– Excess benefit recorded in APIC = $800– Net P&L expense for Q2 = $1,000 ($5,000 expense less $4,000 tax

benefit)

Example: Third Quarter• Stock price drops to $65

– Intrinsic value = $5 ($65 - $60 exercise price)• ASC 718 (FKA FAS 123R): DTA balance = $6,000, based on

cumulative book expense:– 4,000 options x $20 FV x 18.75% vested = $15,000 x 40% = $6,000– Net P&L expense for Q2 = $3,000 ($5,000 - $2,000)

• IFRS 2: DTA balance = $1,500, based on intrinsic value– 4,000 options x $5 x 18.75% vested = $3,750 x 40% = $1,500– Need to reduce DTA by $3,300 (from $4,800 to $1,500)– First reverse $800 from APIC that was recorded in Q2– Remaining $2,500 reversal hits income tax expense– Net P&L expense for Q3 = $7,500 ($5,000 expense + $2,500 tax expense)

Accounting for payroll taxes due to share based awards made to employees:

• US GAAP– ASC 718 states that such payroll taxes should be recognized

on the date of the event triggering the measurement (generally exercise date)

• IFRS– IFRS 2 states that such payroll taxes are expensed in

income at the same time as the related share-based payment charge is recognized

Public Companies• SEC SAB 107/110 “Share-based payment”

provides additional guidance on volatility and expected term, which includes a safe harbor method (the “simplified method”) for determining expected term where an entity has no sufficient historical exercise data

• IFRS– IFRS 2 does not have specific guidance in this area

Non-Public Companies – IPO’s• In the US, the SEC has historically challenged the determination

of the value of company shares (or the strike price of stock options) issued as compensation, generally within a 12 month period prior to an Initial Public Offering (IPO)

• To the extent the SEC requires companies to reflect a higher fair market value for their shares, they will face challenges in determining the fair value of equity instruments (in particular stock options) granted during that period, generally resulting in a “cheap stock charge”

• Neither US GAAP nor IFRS have specific guidance in this area

Non-Public CompaniesMeasurement of Equity Awards

• US GAAP– ASC 718 provides accommodations to non-public

companies by providing a choice of using the fair value method or calculated value method

• In rare instances, the intrinsic value method can be used

• IFRS– IFRS 2 does not provide any alternatives for non-public

companies• All companies are required to use the fair value method

Non-Public CompaniesMeasurement of Equity Awards

• IFRS 2 does provide some relief in very rare instances when an entity cannot estimate reliably the FV of the equity instruments. In such instances:– Measure at intrinsic value and subsequently at the end of

every reporting period and at final settlement, with changes in intrinsic value recognized in income; AND

– True-up the previous estimates of options expected to vest to the actual amount that ultimately vest

Non-Public CompaniesMeasurement of Liability Awards

• US GAAP– ASC 718 provides accommodations to non-public

companies by providing a choice of using the fair value method, calculated value method or the intrinsic value method

• IFRS– IFRS 2 does not provide any alternatives for non-public

companies• All companies are required to use the fair value method

Non-Public CompaniesTransition

• US GAAP– ASC 718 provides different methods of transition,

depending on the method used for accounting for share-based payments (fair value, calculated value [or intrinsic value])

• IFRS– IFRS 2 provides no difference in transition for

public or private companies

QUESTIONS?

Thank You

Peter KlingerPartner

Compensation and BenefitsBDO USA, LLP

pklinger@bdo.com

Gautam GoswamiParner

National AssuranceBDO USA, LLP

ggoswami@bdo.com