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First Impressions: Amendments to IFRS 2 – Group Cash-settled Share-based Payment Transactions International Financial Reporting Standards September 2009

Foreword

The International Accounting Standards Board (IASB) published Group Cash-settled Share-based Payment Transactions – Amendments to IFRS 2 (the amendments) on 18 June 2009. Previously there was no specific guidance on the attribution of cash-settled share-based payments to the entity receiving goods or services when that entity had no obligation to settle the transaction. The requirement for attribution of share-based payments referred only to equity-settled share-based payments. Therefore, there was diversity in practice for cash-settled share-based payment transactions. The amendments align the attribution principle for cash-settled share-based payments to the principle that was established for equity-settled share-based payment transactions. In addition, cash payments based on the equity instruments of any group entity now meet the definition of a share-based payment transaction. Previously, the definition referred only to equity instruments of the entity.

For example, prior to the amendments, if a parent made a cash payment to the employees of its subsidiary based on the value of the parent’s shares, then the subsidiary may not have been required to account for the transaction as a share-based payment. If the subsidiary had made the payment, then the subsidiary may not have been required to account for the transaction as a share-based payment because the payment was made based on the parent’s shares. Instead, the subsidiary may have treated it as an employee benefit under IAS 19 Employee Benefits.

The attribution principle under IFRS 2 Share-based Payment differs from the approach taken for employee benefits such as salaries, bonuses and profit-sharing plans accounted for under IAS 19. Under IAS 19, an entity that has no obligation to fund payment of the employees does not recognise an expense. However, under IFRS 2 as amended an entity that receives services in a group share-based payment transaction without having an obligation to settle the transaction recognises a cost for the share-based payment and a corresponding increase to capital.

Developing accounting standards for separate financial statements is difficult when there is no clear concept of whether the separate financial statements represent the entity on a stand-alone basis or include amounts attributable to the entity from the perspective of the group financial statements. With these amendments the IASB has confirmed that the entity that receives goods or services in a share-based payment transaction accounts for those goods or services. There are still questions about what IFRSs require regarding attribution of non-share-based payments made by other group entities in the separate financial statements of the entity receiving the benefits of the goods or services. The amendments do not give any clear indication of the IASB’s views on this issue.

Mary Tokar Kim Bromfield KPMG International Standards Group KPMG in South Africa

© 2009 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

About this publication

This publication has been produced jointly by the KPMG International Standards Group (part of KPMG IFRG Limited) and the Department of Professional Practice of KPMG in South Africa.

We would like to acknowledge the principal authors of this publication. They are Ingo Rahe, Emmanuel Lahouste, Joanna Osborne and Mary Tokar of the KPMG International Standards Group, and Kim Bromfield, Heather de Jongh and Pieter van der Zwan of the Department of Professional Practice of KPMG in South Africa.

Content Our First Impressions publications are prepared upon the release of a new International Financial Reporting Standard (IFRS), interpretation or other significant amendment to the requirements of IFRSs. They include a discussion of the key elements of the new requirements and highlight areas that may result in a change of practice. Examples are provided to assist in assessing the impact of implementation.

This edition of First Impressions considers the requirements of Group Cash-settled Share-based Payment Transactions – Amendments to IFRS 2 (the amendments).

The text of this publication is referenced to IFRS 2 Share-based Payment, and to selected other current IFRSs in issue at 1 September 2009. References in the left-hand margin identify the relevant paragraphs of the IFRSs.

In many cases further interpretation will be needed in order for an entity to apply IFRSs to its own facts, circumstances and individual transactions. Further, some of the information contained in this publication is based on initial observations developed by the KPMG International Standards Group, and these observations may change as practice develops.

We will update and supplement the interpretative guidance and examples in this publication by adding additional interpretative guidance to Insights into IFRS, our practical guide to IFRSs.

Other ways KPMG member firms’ professionals can help We have a range of publications that can assist you further, including Insights into IFRS and illustrative financial statements for interim and annual reporting under IFRSs. Technical information is available at www.kpmgifrg.com.

For access to an extensive range of accounting, auditing and financial reporting guidance and literature, visit KPMG’s Accounting Research Online. This Web-based subscription service can be a valuable tool for anyone who wants to stay informed in today’s dynamic environment. For a free 15-day trial, go to www.aro.kpmg and register today.


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Contents

1. Overview of new accounting requirements 4

2. Key implementation issues 5

3. Scope 6

4. Classification 13

5. Recognition and measurement 16

6. Effective date and transition 19

Appendix I: Overview of simplified scenarios – scope and classification 22

Appendix II: Illustrative examples 23


4 First Impressions: Amendments to IFRS 2 Group Cash-settled Share-based Payment Transactions September 2009

1. Overview of new accounting requirements

¬ The amendments expand IFRS 2 to bring group cash-settled share-based payment transactions into the scope of the standard.

¬ The amendments introduce the notions of a:

– receiving entity, i.e., the entity that receives goods or services in a share-based payment

arrangement; and

– settling entity, i.e., the entity that has the obligation to settle the share-based payment

transaction.

¬ A group share-based payment transaction is a share-based payment transaction in which the receiving entity, the settling entity and the entity whose equity instruments are granted or whose equity instruments are the underlying measure for a cash payment (reference entity) are in the same group from the perspective of the ultimate parent.

¬ A share-based payment that is settled by a shareholder outside the group also is in the scope of IFRS 2, as long as the reference entity is in the same group as the receiving entity.

¬ A receiving entity without any obligation to settle the transaction accounts for a share-based

payment transaction as equity-settled.

¬ A settling entity accounts for a share-based payment transaction:

– as equity-settled if it is obliged to settle in its own equity instruments; and – as cash-settled otherwise.

¬ Recharge arrangements do not affect classification.

¬ Existing recognition and measurement requirements for equity-settled and cash-settled share-based payment transactions apply.

¬ The amendments apply retrospectively for annual periods beginning on or after 1 J anuary 2010, subject to the transitional requirements in IFRS 2.



2. Key implementation issues

At first glance the new concept of group share-based payment transactions introduced by the amendments looks like a big change. In practice, the most significant impact is likely to be on the financial statements of subsidiaries or sub-groups that receive services when another group entity or shareholder has the obligation to settle the cash-settled share-based payment. Previously, it may have been the practice for the receiving entity not to account for the transaction at all; however, under the amendments all share-based payment transactions need to be accounted for by the receiving entity. For the entity that has the obligation to settle a cash share-based payment, there is likely to be less of a change as the extent of the change is likely to be limited to the timing of recognition.

However, the amendments do not impact only subsidiaries and sub-groups, but also the consolidated financial statements of the ultimate parent. Under the amendments, a cash-settled share-based payment granted and settled by a shareholder outside the group is accounted for by the group if the reference entity is within the group.

Prior to the amendments the emphasis in accounting for group share-based payments was on identifying the grantor. Under the amendments the emphasis is on identifying the entity with the obligation to settle the transaction. If the entity identified as the grantor is not the entity with the obligation to settle the transaction, then the amendment may affect accounting for both equity-settled and cash-settled share-based payment transactions.

Classification of a share-based payment transaction is made independently for each reporting entity. As a consequence, for example, one transaction could be classified as equity-settled in the separate financial statements of the subsidiary and as cash-settled in the consolidated financial statements of the parent. If market conditions and / or non-vesting conditions are attached to the transaction, then the amounts recognised can differ significantly in the respective entities, since accounting for the transaction as equity-settled prohibits a true-up for market and non-vesting conditions.

The effect of retrospective application on equity-settled share-based payments that have vested prior to the beginning of the comparative period and cash-settled share-based payments that have been settled prior to the beginning of the comparative period is expected to be limited to adjustments of line items within shareholders’ equity.



3. Scope

Groups and shareholders employ a wide variety of different methods to deliver share-based payments to suppliers of goods and services. In our experience, the structure of the share-based payment, for example which group entity settles the payment and the form of settlement, is infl uenced by local laws and regulations.

IFRS 2.IN2A, 2, The main purpose of the amendments is to clarify the scope of IFRS 2 and the accounting for group 3A cash-settled share-based payment transactions in the separate or individual fi nancial statements

of the group entities involved in the transaction. However, since the scope requirements in IFRS 2.2 and .3A are not limited to separate and individual fi nancial statements, our fi rst impression is that the requirements also apply to any consolidated fi nancial statements of any sub-groups within a group.

IFRS 2.IN2A The guidance contained in IFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2 – Group and Treasury Share Transactions has been incorporated into the amendments to IFRS 2. Accordingly, the interpretations have been withdrawn.

Insight 3.1 When considering the consolidated fi nancial statements of the group from the perspective of

the ultimate parent, we believe that this amendment has limited effect. Our fi rst impression is that the only change at this level is to include in the standard’s scope transactions in which a shareholder that is not part of the group settles a share-based payment arrangement in cash to suppliers of goods or services to the group. This is discussed later in this section.

IFRS 2.3, 3A The amendments introduce a comprehensive concept for group share-based payment transactions by replacing IFRS 2.3 and amending the defi nitions of share-based payment arrangements and share-based payment transactions. The new concept:

¬ identifi es the different roles of the entities involved in a share-based payment transaction; ¬ covers not only transactions settled by a shareholder but also those settled by another group

entity; ¬ covers not only transactions in which the entity’s own equity instruments are granted, but also

those of another group entity. The standard applies to cash payments that are based on the equity instruments of any group entity;

¬ covers both equity-settled and cash-settled share-based payment transactions; and ¬ defi nes a group as the ultimate parent of the reporting entity and its subsidiaries.

To describe the roles in a group share-based payment transaction, the amendments introduce the notions of:

¬ “receiving entity”, i.e., the entity that receives goods or services in a share-based payment transaction; and

¬ “settling entity”, i.e., the entity that has the obligation to settle the share-based payment transaction.

A transaction meets the defi nition of a share-based payment transaction from the perspective of the receiving entity if the receiving entity is in the same group as the entity whose equity instruments are granted or on whose equity instruments a cash payment is based (“reference entity”). Therefore, the amendments address not only group share-based payment transactions, but also share-based payment transactions that are settled by a shareholder that is outside the group.




Application to group share-based payment transactions A share-based payment in which the settling entity, the receiving entity and the reference entity

have the same ultimate parent meets the defi nition of a share-based payment arrangement. This is regardless of whether the share-based payment is settled in equity instruments or in cash (or other assets). The transaction is accounted for as a share-based payment transaction by the receiving entity and the settling entity. If the reference entity is neither a receiving nor a settling entity, i.e., its equity instruments are just a medium or benchmark used to facilitate the transaction, then the transaction is not a share-based payment transaction from its perspective as it is not a party to the share-based payment arrangement.

In the following we have analysed four simplifi ed scenarios applying the principles as illustrated above. For a more comprehensive overview of simplifi ed standard scenarios please refer to Appendix I. That appendix illustrates whether a share-based payment transaction is in the scope of IFRS 2 and how it is classifi ed for eight scenarios.

IFRS One of the main objectives of the amendments was to address share-based payment transactions2.BC268B in which the receiving entity has no obligation to settle the transaction with the counterparty to the

share-based payment transaction.

Example 1: Parent P grants a cash payment to the employees of its subsidiary S. The cash payment is based on the price of the equity instruments of S. P has the obligation to settle the transaction with the employees.

P

S employees

Cash based on S’s shares

services

Is this transaction a share-based payment Before the After thetransaction under IFRS 2 from the amendments amendmentsperspective of: P’s consolidated fi nancial statements P’s separate fi nancial statements S’s separate or individual fi nancial statements

Insight 3.2 In the table above, we use and to emphasise the change in the scope of IFRS 2 based on

the defi nitions in the standard. The extent of any change in accounting for an entity involved in such transactions will depend on how they were accounted for previously. Prior to the amendments:

¬ From the perspective of P’s consolidated fi nancial statements, the transaction was within the scope of IFRS 2, since the cash payment is based on the equity instruments of P’s group (IFRS 2.2(b)). This issue is discussed in our publication Insights into IFRS, 6th Edition 2009/10, 4.5.20.70.

¬ From the perspective of P’s separate fi nancial statements, it was not clear whether the defi nition of a cash-settled share-based payment transaction in IFRS 2.2(b) was met because the cash payment is not based on the entity’s own equity instruments. Since P had to refl ect the obligation to settle the cash payment, P would have accounted for an obligation, for example, under IFRS 2 by analogy or under IAS 39 Financial Instruments: Recognition and Measurement.



¬ From the perspective of S’s separate fi nancial statements, the transaction was not addressed specifi cally by the standard. This is because the requirement to treat grants made by group entities (or shareholders) as share-based payment transactions referred only to equity-settled transactions (IFRS 2.3). However, in our view application of the standard by analogy may have been appropriate. This issue is discussed in our publication Insights into IFRS, 6th Edition 2009/10, 4.5.870.20. If IFRS 2 had been applied, then there would be no change for S if equity-settled classifi cation previously had been used.

The amendments also cover transactions in which the receiving entity has the obligation to settle with a cash payment that is based on the equity instruments of another group entity rather than on its own equity instruments.

Example 2: Subsidiary S grants a cash payment to its employees. The cash payment is based on the price of the equity instruments of its parent P. S has the obligation to settle the transaction.

P

S employees

Cash based on P’s shares

services

Is this transaction a share-based payment Before the After thetransaction under IFRS 2 from the amendments amendmentsperspective of:

P’s consolidated fi nancial statements P’s separate or individual fi nancial statements S’s separate or individual fi nancial statements

Insight 3.3Prior to the amendments, from the perspective of S’s separate or individual fi nancial statements, the defi nition of a cash-settled share-based payment transaction in IFRS 2.2(b) was not met because the cash payment is not based on the entity’s own equity instruments. However, S may have accounted for the transaction as an employee benefi t in the scope of IAS 19 Employee Benefi ts.

The amendments further clarify the accounting for transactions in which three different group entities are involved:

Example 3: E, a subsidiary of parent P, grants a cash payment to the employees of subsidiary S. The cash payment is based on the price of the equity instruments of P. E has the obligation to settle the transaction.

P

S employees


servicesE


P’s consolidated fi nancial statements P’s separate fi nancial statements E’s separate or individual fi nancial statements S’s separate or individual fi nancial statements



Insight 3.4 Prior to the amendments:

¬ From the perspective of E’s separate fi nancial statements, the defi nition of a cash-settled share-based payment transaction in IFRS 2.2(b) was not met because the cash payment is not based on the entity’s own equity instruments. However, E refl ected the obligation to settle the cash payment. See Insight 3.2 above for a discussion of P’s separate fi nancial statements.

¬ From the perspective of S’s separate fi nancial statements, the transaction was not covered by the standard. See Insight 3.2 above for a discussion on S’s separate fi nancial statements.

Example 4: Ultimate parent UP grants a cash payment to the employees of subsidiary S, which is held via an intermediate parent P. The cash payment is based on the price of the equity instruments of P. UP has the obligation to settle the transaction.

P

S employees


services

UP


UP’s consolidated fi nancial statements UP’s separate fi nancial statements P’s consolidated fi nancial statements P’s separate fi nancial statements S’s separate or individual fi nancial statements

Insight 3.5 Prior to the amendments, in our view an intermediate entity such as P had an accounting policy

choice as to whether or not to account for the transaction as a share-based payment transaction in its separate fi nancial statements. This matter is discussed in our publication Insights into IFRS, 6th Edition 2009/10, 4.5.880.10.

The amendments are silent regarding whether the intermediate entity accounts for a share-based payment transaction in its separate fi nancial statements. Our fi rst impression is that the accounting policy choice remains available. P is only the reference entity and is not a direct party to the share-based payment transaction and therefore it appears that attribution is not required. However it seems diffi cult to preclude attribution as UP has only an indirect interest in S and can realise the benefi ts of the contribution only via P.

Application to share-based payment transactions when the reference entity is outside the group

In contrast to examples 1 to 4 above, when the reference entity is not in the same group as the receiving and the settling entity, then the transaction is not a share-based payment transaction from the perspective of the receiving entity.



Example 5: A joint venture (JV) grants a cash payment to its employees. The cash payment is based on the price of the equity instruments of one of its investors (I). JV has the obligation to settle the transaction.

I

JV employees

Cash based on I’s shares

services


JV’s separate or individual fi nancial statements

Prior to the amendments this transaction was not in the scope of IFRS 2 from the perspective of the JV. Under the amendments it remains outside the scope since the cash payment is based on the equity instruments of I, which is not in the same group as JV. Since JV has an obligation to pay cash to its employees for services, the transaction would be accounted for under IAS 19.

Application to share-based payment transactions that are settled by a shareholder outside the groupA receiving entity also is required to recognise a share-based payment when a transaction that is based on a reference entity within the same group as the receiving entity is settled by a shareholder outside the group.

Insight 3.6Prior to the amendments, a receiving entity was required to recognise a share-based payment transaction when a shareholder outside the group transferred equity instruments of the receiving entity (or another group entity) to a supplier of goods or services to the entity. Our fi rst impression is that the amendments expand the scope of IFRS 2 to include cash-settled transactions settled by a shareholder outside the group if the payments are based on the entity’s equity instruments (or those of another group entity).

Our fi rst impression is that transfers of equity instruments of a shareholder outside the group or cash payments based on the value of the equity instruments of a shareholder outside the group do not result in a share-based payment transaction that is required to be accounted for under IFRS 2 for the entity.

Example 6: An investor (I) grants a cash payment to the employees of its joint venture (JV). The cash payment is based on the price of the equity instruments of JV. I has the obligation to settle the transaction.

I

JV employees

Cash based on JV’s shares

services

Is this transaction a share-based payment Before the After thetransaction under IFRS 2 from the amendments amendmentsperspective of: JV’s separate or individual fi nancial statements



Prior to the amendments this transaction was not in the scope of IFRS 2 from the perspective of JV, since the shareholder grants a cash payment rather than an equity instrument. After the amendments this transaction is in the scope of IFRS 2 from the perspective of JV, since cash-settled share-based payment transactions settled by shareholders now are included in the defi nitions. However, our fi rst impression is that this is the case only when the reference entity is in the same group as the receiving entity as the following example highlights.

Example 7: An investor (I) grants its own equity instruments to the employees of its joint venture (JV). I has the obligation to settle the transaction.

I

JV employees

I’s equity instruments

services

Is this transaction a share-based payment Before the After thetransaction under IFRS 2 from the amendments amendmentsperspective of

JV’s separate or individual fi nancial statements

Before and after the amendments, this transaction is not clearly in the scope of IFRS 2 from the perspective of JV, since the equity instruments granted are those of a shareholder that is not a group entity. Since the reference entity is not within the same group as the receiving entity, our fi rst impression is that the transaction is not a share-based payment transaction from the perspective of the receiving entity.

Insight 3.7Prior to the amendments an entity that granted a share-based payment was required to account for it and an entity needed to assess which entity was the grantor of a group share-based payment transaction (see IFRIC 8.6). In our view, the grantor could differ from the entity that has the obligation to settle the transaction. This issue is discussed in our publication Insights into IFRS, 6th Edition 2009/10, 4.5.940.

Under the amendments, an entity is required to account for a share-based payment transaction if it has the obligation to settle the share-based payment transaction (settling entity); the guidance in IFRIC 8.6 has not been incorporated into the amendments. Consequently, some entities may need to reassess the recognition and classifi cation of share-based payments involving group entities.


Key messages

The amendments expand the scope of IFRS 2 to bring group cash-settled share-based payment transactions into the scope of the standard.

After the amendments the definition of a share-based payment includes payments in cash or other assets based on the price (or value) of equity instruments of any group entity, and not only of the receiving entity.

The amendments introduce the notion of receiving entity, i.e., the entity that receives goods or services in a share-based payment arrangement, and settling entity, i.e., the entity that has the obligation to settle the share-based payment transaction.

A group share-based payment transaction is a share-based payment transaction in which the receiving entity, the settling entity and the entity whose equity instruments are granted or whose equity instruments are the underlying measure for a cash payment (the reference entity) are in the same group from the perspective of the ultimate parent. This applies to both equity-settled and cash-settled share-based payment transactions.

A share-based payment that is settled by a shareholder outside the group also is in the scope of IFRS 2, as long as the reference entity is in the same group as the receiving entity.




4. Classification

After an entity has determined that it has a share-based payment transaction in the scope of IFRS 2 (see section 3), the next step is to determine the classification of the transaction. The classification will be either equity-settled or cash-settled.

IFRS 2.43A The classification of the share-based payment transaction depends on the nature of the award granted and whether the entity has an obligation to settle the transaction. If the entity has no such obligation, then the transaction is accounted for as equity-settled:

Nature of the Own equity instruments Cash or other assetsObligation awardto settle?

Yes

No

Equity-settled Cash-settled

Equity-settled Equity-settled

IFRS 2.43A A share-based payment transaction is classified from the perspective of each reporting entity rather than by making a single classification determination, e.g., from the perspective of the consolidated financial statements of the ultimate parent. Therefore a single share-based payment transaction could be classified as equity-settled in the financial statements of a subsidiary that receives the services and cash-settled in the group’s consolidated financial statements, or vice versa.

Identification of the reporting entity, and whether it is the separate entity or consolidated group, is important when there is an obligation to settle the transaction in equity instruments of another group entity. This is because, from the perspective of the separate financial statements of the reporting entity, the equity instruments would be classified as “cash or other assets”, but from the perspective of the consolidated financial statements they may qualify as “own equity instruments”, depending on the level in the group at which the consolidated financial statements under consideration are prepared.

The following illustrative examples show how the principle of classification as presented in the table above is combined with the principle of considering the perspective of the entity.

Classification of group share-based payment transactions in the financial statements of the receiving entity

IFRS 2.43B(a) A receiving entity classifies a group share-based payment transaction as equity-settled if it has an obligation to settle in its own equity instruments.

Example 8: Subsidiary S grants a share-based payment to its employees. Thepayment will be settled in equity instruments of S. S as the receiving entity has an obligation to settle in its own equity instruments.

S accounts for the transaction in its financial statements as equity-settled. Parent P also accounts for the transaction as equity-settled in its consolidated financial statements, since, from P’s group perspective, it has an obligation to settle in equity instruments of the group. Neither of these accounting treatments has changed with the amendments.

P

S employees

S’s shares

services



IFRS 2.43B A receiving entity classifies a group share-based payment transaction as cash-settled if it has an obligation to settle in cash or other assets. Other assets include the equity instruments of another group entity.

Example 9: Subsidiary S grants a share-based payment to its employees. Thepayment will be settled in equity instruments of parent P.

S as the receiving entity has an obligation to settle in “cash or other assets” since the equity instruments are not S’s equity instruments. Therefore S classifies the transaction in its financial statements as cash-settled.

P

S employeesservices

P’s shares

IFRS 2.43B(b) A receiving entity classifies a group share-based payment transaction as equity-settled if it has no obligation to settle the payment.

Example 10: Parent P grants a share-based payment to the employees of subsidiaryS. The payment will be settled in equity instruments of P.

S as the receiving entity has no obligation to settle the payment. S classifies the transaction in its financial statements as equity-settled. See example 11 below for a discussion of the classification from the perspective of the settling entity (P).

P

S employees

P’s shares

services

Classification of group share-based payment transactions in the financial statements of the settling entity

IFRS 2.43C A settling entity classifies a group share-based payment transaction as equity-settled if it has the obligation to settle in its own equity instruments.

Example 11: Parent P grants a share-based payment to the employees of subsidiaryS. The payment will be settled in equity instruments of P.

P as the settling entity has the obligation to settle the payment in own equity instruments. P classifies the transaction in its separate and consolidated financial statements as equity-settled.

P

S employees

P’s shares

services

A settling entity classifies a group share-based payment transaction as cash-settled if it has the obligation to settle in cash or other assets. Other assets include the equity instruments of another group entity.



Example 12:

Parent P grants a share-based payment to the employees of subsidiaryS. The payment will be settled in equity instruments of S.

From the perspective of P’s separate financial statements, P as the settling entity has an obligation to settle in “cash or other assets” since the equity instruments are not P’s own equity instruments. Therefore P classifies the transaction as cash-settled in its separate financial statements. In contrast, from its group perspective, P has an obligation to settle in equity instruments of the group and therefore classifies the transaction as equity-settled in its consolidated financial statements.

P

S employees

S’s shares

services

Recharge arrangementsIFRS 2.43D In the context of a group share-based payment transaction, the settling entity may require the

receiving entity to reimburse it for settling the transaction with the counterparty. Such an intra-group payment arrangement often is referred to as a “recharge arrangement”. The existence of a recharge arrangement between the settling entity and the receiving entity does not change the character of the share-based payment transaction, and therefore would not affect the classification of the share-based payment transaction as equity-settled or cash-settled.

Key messages

A share-based payment transaction is classified as equity-settled or cash-settled in each set of financial statements from the perspective of the reporting entity. Therefore the classification in the receiving entity’s and settling entity’s financial statements may differ. Similarly, the classification may differ between the separate and the consolidated financial statements of the same entity for transactions involving equity instruments of a group entity. Therefore share-based payment transactions that are classified as cash-settled at the group level may need to be classified as equity-settled at a subsidiary level (or vice versa).

A receiving entity that has no obligation to settle the transaction classifies the share-based payment transaction as equity-settled.

A settling entity classifies the share-based payment transaction depending on the nature of the award:

¬ if it has the obligation to settle in own equity instruments, then it accounts for it as equity

settled; ¬ if it has the obligation to settle in cash or other assets, including equity instruments of

another group entity, then it accounts for it as cash-settled.

The existence of recharge arrangements does not affect the classification of the transaction in the reporting entity’s financial statements.


5. Recognition and measurement

Accounting for a share-based payment transaction IFRS 2.43A The amendments do not introduce any changes of principle in the recognition and measurement

of equity-settled and cash-settled share-based payment transactions. After determining the classifi cation of the share-based payment in the fi nancial statements of the reporting entity (see section 4) the recognition and measurement of the share-based payment transaction follows the currently effective accounting requirements in IFRS 2.10 - .29 and IFRS 2.30 - .33.

IFRS 2.43A The amounts recognised in the fi nancial statements of the receiving and settling entities may differ. This is because classifi cation could be different in the fi nancial statements of the receiving and settling entities. Equity-settled share-based payments involving employees are measured once at grant date and the number of instruments is adjusted only to refl ect the number of instruments for which any service and non-market performance conditions are satisfi ed. In contrast, a cash-settled share-based payment is re-measured to equal the amount ultimately paid (see Appendix II – examples 1 and 3).

IFRS 2.B53 A receiving entity that has no obligation to settle the transaction with the counterparty to the share-based payment transaction accounts for the transaction as equity-settled and recognises an expense, unless the goods or service received qualify for recognition as an asset, and an increase in its equity as a contribution.

Insight 5.1 A settling entity recognises an increase in equity or liabilities, depending on the classifi cation of the share-based payment transaction. However, there is no guidance on how a settling entity that is different from a receiving entity accounts for the debit entry. Consider the following examples:

Parent is the settling entity When a parent P grants rights to its equity instruments to employees of a subsidiary S, P receives goods or services indirectly through S in the form of an increased investment in S, i.e., S receives services from employees that are paid for by P, thereby increasing the value of S. Therefore, in our view the equity-settled share-based payment transaction should be recognised by P as an increase in its investment in S and a corresponding increase in equity over the period in which the employees provide the services to S. This issue is discussed in our publication Insights into IFRS, 6th Edition 2009/10, 4.5.900.20.

IFRS 2.IG19 However, when a parent classifi es a share-based payment transaction as cash-settled, then our fi rst impression is that only the grant-date fair value of the share-based payment would qualify as part of the investment in S and any remeasurement of the liability is recognised in profi t or loss (see Appendix II – examples 1 and 3). This fi rst impression is based on the guidance in IFRS 2 regarding the capitalisation of cash-settled share-based payments. Remeasurements of cash-settled share-based payments are required to be recognised in profi t or loss rather than as an adjustment of the amount capitalised. For example, if the costs of services rendered by an engineer in a cash-settled share-based payment arrangement were capitalised as a cost of software development, then IFRS 2.IG19 specifi es that subsequent remeasurement of the share-based payment would not adjust the amount recognised for services received. In addition, if the remeasurement of the share-based payment is a net reduction in the liability, then such a circumstance could be an indication of impairment of the assets capitalised.


http:4.5.900.20


Ultimate Parent is the settling entity An ultimate parent UP grants a share-based payment to the employees of its subsidiary S and will settle the transaction in its own equity instruments. S is held indirectly by UP via parent P. Our fi rst impression is that regardless of whether P, as an intermediate parent, recognises the transaction as a share-based payment transaction (see Insight 3.5), the value of UP’s investment in P increases by granting the share-based payment arrangement to S’s employees, and therefore UP should recognise the cost of the share-based payment as a cost of investment in P.

Another group entity is the settling entity E grants a share-based payment to the employees of S and will settle the transaction in its own equity instruments. E is another group entity without a shareholding relationship with S (a fellow subsidiary of S). As E neither receives services nor has an investment in S, our fi rst impression is that E should recognise the cost of the share-based payment in equity as a distribution to its parent over the vesting period. This is because E could be seen to be settling the transaction on behalf of its parent.

Accounting for transfers of employees IFRS 2.B59- A group share-based payment may be granted to employees subject to the completion of a service B61 period within the group. During the vesting period employees may transfer from one group entity

to another. Under the terms of the agreement such a transfer is not considered a failure to meet a vesting condition because the employees remain in service within the group.

Prior to the amendments, IFRIC 11 addressed the accounting for transfers of employees within a group in a share-based payment transaction by each of the group entities when the parent granted its equity instruments to employees of its subsidiaries.

The amendments incorporate the principles set out in IFRIC 11 and expand them to address scenarios in which the subsidiaries classify the share-based payment transactions as cash-settled, in which case:

¬ Each subsidiary measures the services received by reference to the grant-date fair value of the equity instruments granted and for the proportion of the vesting period served with each subsidiary.

¬ Each subsidiary recognises any change in the fair value of the equity instruments during the service period of the employees with each subsidiary.

The amendments provide high level principles and no guidance on how to apply them in practice. The amendments do not address the attribution to the subsidiaries of the changes in fair value occurring from vesting date to settlement date.



Key messages

The recognition and measurement requirements for group share-based payments follow the general accounting requirements for equity-settled and cash-settled share-based payment transactions, which are unchanged.

A receiving entity without an obligation to settle the transaction recognises a capital contribution.

Amounts recognised for a single share-based payment transaction can differ in the respective financial statements of the settling and receiving entities.

The amendments expand IFRS 2 to include principles on how subsidiaries should account for transfers of employees within a group in a cash-settled share-based payment transaction.

If market conditions and / or non-vesting conditions are attached to the transaction, then the amounts recognised can differ significantly in the respective entities, since accounting for the transaction as equity-settled prohibits a true-up for market and non-vesting conditions.




6. Effective date and transition

IFRS 2.63 Effective date The amendments to IFRS 2 are effective for annual periods beginning on or after 1 January 2010;

early application is permitted. If an entity applies these amendments from an earlier date, then it discloses that fact.

IFRS 2.63 Transition The amendments are applied retrospectively and comparatives are adjusted in accordance with

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors subject to the transitional requirements of IFRS 2:

IFRS 2.58 ¬ For cash-settled share-based payment transactions that are not settled at the effective date of IFRS 2, the standard is applied retrospectively, except that an entity is not required to restate comparative information to the extent that the information relates to a period or date that is earlier than 7 November 2002.

IFRS 2.53 ¬ For equity-settled share-based payment transactions, the standard is applied retrospectively to the extent that the equity instruments were granted after 7 November 2002 and are not vested at the effective date of IFRS 2.

Insight 6.1 Applying the transitional requirements of the amendments could raise some issues in practice.

When another group entity has the obligation to settle a share-based payment transaction in cash then the receiving entity does not recognise any liability because it accounts for the transaction as equity-settled. Therefore IFRS 2.58 does not seem to apply. However, cash, but no equity instrument, is granted in this share-based payment transaction. Therefore IFRS 2.53 does not seem to apply directly either. Our fi rst impression is that a subsidiary that accounts for a transaction as equity-settled should apply IFRS 2.53 even if the share-based payment is settled by another entity in cash. Applying IFRS 2.53 to this fact pattern is consistent with the general principle of applying the requirements for equity-settled share-based payment transactions.

When the transitional requirements of IFRS 2 summarised previously refer to the effective date of IFRS 2, our fi rst impression is that the amendments refer to the effective date of the original IFRS 2, i.e., 1 January 2005. Accordingly, the amendments would be applied retrospectively to equity-settled transactions vested and cash-settled transactions settled after 1 January 2005.However, we expect the impact of retrospective application to be limited when vesting or settlement occurred before the beginning of the earliest comparative period. The most likely impact of retrospective application to vested / settled awards will be for cash-settled share-based payment transactions in which the parent (or another group entity) is the settling entity and previously the subsidiary had not refl ected the share-based payment in its fi nancial statements. Under the amendments the share-based payment transaction would be classifi ed as equity-settled in the subsidiary’s fi nancial statements. Therefore the subsidiary’s fi nancial statements would be adjusted to refl ect the cost and an equal increase in contributed capital. Retrospective application results only in a restatement within equity at the beginning of the earliest comparative period unless some cost still is capitalised as part of an asset (e.g., inventory).

Example: On 1 January 2004 parent P granted a share-based payment to the employees of its subsidiary S subject to a six-year vesting period ending on 31 December 2009. The transaction will be settled by P in cash based on P’s share price in 2010. P and S have reporting periods ending on 31 December.


Assume that S did not recognise the transaction in its separate fi nancial statements prior to

the amendments. Under the amendments, S would account for the transaction as equity-

settled because S is the receiving entity and has no obligation to settle the transaction. In

its 2010 fi nancial statements, S applies the amendments by (a) restating the statement of

comprehensive income for the comparative period, i.e., 2009, to refl ect compensation cost

in respect of the last year of the vesting period, and (b) considering whether any adjustment

is appropriate in respect of opening components of equity. The settlement of the transaction

in 2010 does not impact the accounting in S’s fi nancial statements since S classifi es the

transaction as equity-settled.

IFRS 2.63, When the information necessary for retrospective application is not available, the entity refl ects in BC310A its separate or individual fi nancial statements the amounts previously recognised in the

consolidated fi nancial statements of the group.

Neither the standard nor the basis for conclusions provide further guidance on situations in which information is not available. However, the basis for conclusions does acknowledge the potential problem of using hindsight if a group share-based payment transaction had not been recognised previously in the fi nancial statements of a subsidiary. Our fi rst impression is that “not available” should be understood as not measured previously and not able to be measured without hindsight.

Insight 6.2 An entity refl ects in its fi nancial statements the amounts previously recognised in the group’s

consolidated fi nancial statements if the information necessary for retrospective application is

not available.

The question arises as to how an entity applies this requirement when the group’s consolidated fi nancial statements were prepared under another GAAP and are not compliant with IFRSs. Our fi rst impression is that the entity’s fi nancial statements should refl ect the amounts recognised in the group’s consolidated fi nancial statements only if the other GAAP is established using a similar conceptual framework as IFRSs and the recognition and measurement requirements for share-based payment transactions under the other GAAP generally are similar to those under IFRS 2 because otherwise the amounts recognised would be inconsistent with the IFRSs hierarchy. In other circumstances, our initial thinking is that no amount is recognised in the fi nancial statements of the receiving entity for grants of share-based payments occurring before the effective date of the amendments.

When no group consolidated fi nancial statements were prepared and the information for

retrospective application is not available, it seems that the entity has no other choice but to

apply these amendments prospectively.

IFRS 2.63, If information is not available for the reporting dates and periods presented, then an entity applies IAS 8.24 the amendments to the earliest period possible.



Key messages

The amendments are effective for annual periods beginning on or after 1 January 2010.

The amendments are applied retrospectively subject to the (original) transitional requirements in IFRS 2. Therefore, the standard as amended would be applied to equity-settled share-based payment transactions not vested and cash-settled share-based payment transactions not settled prior to the effective date of “this IFRS”. The effective date of “this IFRS” is 1 January 2005.

In practice, the accounting for equity-settled share-based payments that have vested or cash-settled share-based payments that have been settled before the beginning of the comparative period is unlikely to be affected by the amendments. The most likely impacts of retrospective application of the amendments for these transactions are reclassifications between retained earnings and other captions in shareholders’ equity.




Appendix I: Overview of simplified scenarios – scope and classification

Equity instruments granted Cash granted

P

S employees

P’s shares

services es es es

P

S employees

Based on P’s shares

services

P’s consolidated financial statements

P’s separate financial statements

S’s separate or individual financial statements




cs

cs

es

P

S employees

S’s shares

services

P

S employees

Based on S’s shares

services




es cs es




cs

cs

es

P

S employeesservices

P’s shares

es – cs

P

S employeesservices

Based on P’s shares







cs

–

cs

P

S employees

S’s shares

services es –

es

P

S employeesservices

Based on S’s shares







cs

–

cs

es –

Equity-settled share-based payment transaction

No share-based payment transaction

cs Cash-settled share-based payment transaction


Appendix II: Illustrative examples

The examples in this appendix illustrate the application of the principles discussed in sections 1-5. For the purposes of these examples, the following are relevant:

¬ All entities have a calendar year-end. ¬ When reference is made to fair value, this fair value has been determined in accordance with

IFRS 2 and accordingly excludes the impact of service and non-market performance conditions. ¬ The services received in the share-based payments do not qualify for capitalisation as an asset

in the financial statements of the receiving entity.



123


Example 1: Parent grants cash payments to employees of its subsidiary based on the price of the subsidiary’s shares On 1 January 2010 parent P implemented a share incentive scheme for the senior management of its subsidiary S. The intention of the scheme is to allow senior management of S to participate in the growth of S by providing them with the right to receive a cash payment based on the increase in value of S’s shares. P will make the payment if the member of senior management meets a two-year service condition and S meets a specified profit target (a non-market performance condition).

Ten cash-settled share appreciation rights (SARs) are granted to each of the five members of senior management. The grant-date fair value of a SAR is 8 currency units (CU). At the end of 2010 and 2011 respectively each SAR has a fair value of CU 7 and CU 9 respectively. At grant date all members of senior management are expected to remain in service. During 2011, one member of senior management resigns. At the end of 2011 the profit target has been achieved.

The following illustrates our first impression (see Insight 5.1) that only the grant date fair value of a group share-based payment is recognised as an increase in the investment while, for services received, any remeasurement of the liability is recognised in profit or loss. We have illustrated this below by adjusting the cost of investment in the parent’s separate financial statements for changes to the number of share-based payments that vest (or do not vest) as a result of meeting (or not meeting) service (or non-market) conditions (trueing up), measured at the grant date fair value. In contrast, the cost of investment in the parent’s separate financial statements has not been adjusted for any other remeasurements for changes in value or for not meeting market and non-vesting conditions.

P’s separate financial statements P as the settling entity has the obligation to settle in cash for amounts based on the price of equity instruments of another entity, i.e., S. P accounts for the transaction in its separate financial statements as cash-settled. For accounting prior to the amendments, see Insight 3.2.

Debit Credit

2010

Cost of investment1 (CU 8 x 5 x 10 x 1/2) Liability

200 200

Liability (CU (7 - 8) x 5 x 10 x 1/2) Expense1, 2

25 25

2011

Cost of investment1, 3 (CU 8 x 4 x 10) - CU 200 Liability

120 120

Expense1, 2 ((CU 9 x 4 x 10) - CU 200 + CU 25 - CU 120) Liability

65 65

The total amount recognised for the share-based payment is CU 360 (CU 9 x 4 x 10), being an increase in the investment in S of CU 320 and a net expense of CU 40.

1 2

3

For an explanation of the treatment of the debit entry, see Insight 5.1. For presentation of the expense in a cash-settled share-based payment transaction, see our publication Insights into IFRS, 6th Edition 2009/10, 4.5.630.30. Adjustment to true up the debit to cost of investment to reflect the failure by one member of senior management to meet the service condition.


S’s separate financial statements S as the receiving entity has no obligation to settle the payment. S accounts for the transaction in its separate financial statements as equity-settled. For accounting prior to the amendments, see Insight 3.2.

Debit Credit

2010

Expense (CU 8 x 5 x 10 x 1/2)

Equity (capital contribution from parent)

200

200

2011

Expense ((CU 8 x 4 x 10) - CU 200)


120

120

The total amount recognised for the share-based payment is CU 320 (CU 8 x 4 x 10).

P’s consolidated financial statements P group as the receiving entity has the obligation to settle in cash. P accounts for the transaction in its consolidated financial statements as cash-settled. This treatment is not different from that prior to the amendments.

Debit Credit

2010

Expense (CU 7 x 5 x 10 x 1/2)

Liability

175

175

2011

Expense ((CU 9 x 4 x 10) - CU 175)

Liability

185

185

The total amount recognised for the share-based payment is CU 360 (CU 9 x 4 x 10).



Example 2: Subsidiary grants cash payments to its employees based on the price of its parent’s shares On 1 January 2010 subsidiary S grants a share-based payment to its 100 employees. Each employee will receive a cash payment from S on 31 December 2012 based on the increase in parent P’s share price between 1 January 2010 and 31 December 2012. Such a payment is commonly known as a “share appreciation right” (SAR). The payment is conditional on the employees remaining in service until the end of 2012 as well as the platinum price reaching USD 2,000 per ounce by the end of 2012 (non-vesting condition). The grant-date fair value per SAR is CU 10. Throughout the period it was expected that 90 of the employees would remain in service until 31 December 2012. However, during 2012, 15 employees resigned. The target platinum price was not reached at 31 December 2012.

At each of the respective year ends, the fair values of the SARs were as follows:

Fair value per SAR in CU

1 January 2010 10

31 December 2010 12

31 December 2011 7

31 December 2012 0 (target platinum price is not reached)

S’s separate financial statements S as the receiving entity has incurred an obligation to settle in cash for amounts based on the price of equity instruments of another group entity, i.e., P. S accounts for the transaction as cash-settled. For the accounting prior to the amendments, see Insight 3.3.

Debit Credit

2010

Expense (CU 12 x 100 x 0.9 x 1/3)

Liability

360

360

2011

Expense ((CU 7 x 100 x 0.9 x 2/3) - CU 360)

Liability

60

60

2012

Liability

Expense ((CU 0 x 100 x 0.85) - CU 360 - CU 60)

420

420

The total amount recognised for the share-based payment is 0.


27 First Impressions: Amendments to IFRS 2 Group Cash-settled Share-based Payment Transactions

September 2009

P’s consolidated financial statements P group as the receiving entity has the obligation to settle in cash. P accounts for the transaction as cash-settled in its consolidated financial statements. This treatment is not different from that prior to the amendments.

Debit Credit

2010

Expense (CU 12 x 100 x 0.9 x 1/3)

Liability

360

360

2011

Expense ((CU 7 x 100 x 0.9 x 2/3) - CU 360)

Liability

60

60

2012

Liability

Expense ((CU 0 x 100 x 0.85) - CU 360 - CU 60)

420

420


P’s separate financial statements P does not account for the transaction since it is neither a settling nor a receiving entity.



1)4,25)6


Example 3: Ultimate parent grants cash payments to the employees of the subsidiary based on price of equity instruments of the subsidiary On 1 January 2010 ultimate parent UP grants the right to receive a cash payment based on the value of subsidiary S’s equity instruments to the employees of S. S is held by UP indirectly via parent P. UP has the obligation to settle the transaction in cash. The right is granted on the condition that the employees remain in service until the end of 2011 (service condition) and S’s share price increasing by at least 10 by end of 2011 (market condition). One right is granted to each of the 100 employees. The grant-date fair value of each right is CU 11. The fair value of each right at the end of 2010 is CU 10. At grant date 90 employees are expected to remain in service until the end of 2011. During 2011, 20 employees resign. At the end of 2011 the market condition is not met and the fair value of each right is zero.

The following illustrates our first impression (see Insight 5.1) that only the grant date fair value of a group share-based payment is recognised as an increase in the investment while, for services received, any remeasurement of the liability is recognised in profit or loss. We have illustrated this below by adjusting the cost of investment in the parent’s separate financial statements for changes to the number of share-based payments that vest (or do not vest) as a result of meeting (or not meeting) service (or non-market) conditions (trueing up), measured at the grant date fair value. In contrast, the cost of investment in the parent’s separate financial statements has not been adjusted for any other remeasurements for changes in value or for not meeting market and non-vesting conditions.

UP’s separate financial statements UP as the settling entity has the obligation to settle the transaction in cash. The amount of the payment will be based on the value of another group entity’s share price. UP accounts for the transaction in its separate financial statements as cash-settled. For the accounting prior to the amendments, see Insight 3.2.

Debit Credit

2010

Cost of investment4 (CU 11 x 100 x 0.9 x 1/2)

Liability

495

495

Liability (CU (10 - 11) x 100 x 0.9 x 1/2)

Expense4, 5 45

45

2011

Cost of investment4, 6 (CU 11 x 100 x 0.8) - CU 495)

Liability

385

385

Liability

Expense4, 5 ((CU 0 x 100 x 0.8) - CU 495 + CU 45 - CU 385)

835

835

The amount recognised for the share-based payment is an increase in the investment of CU 880 and a negative expense from remeasurement of CU (880).

4 5

6

For an explanation of the treatment of the debit entry, see Insight 5.1. For presentation of the expense in a cash-settled share-based payment transaction, see our publication Insights into IFRS, 6th Edition 2009/10, 4.5.630.30. Adjustment to true up the debit to cost of investment to reflect the failure by 10 further employees to meet the service condition.


The net effect is to capitalise the cost of a share-based payment while failure to satisfy the market condition results in a gain in profit or loss from remeasuring the liability to zero. Our first impression is that this remeasurement should be considered as a possible indication of impairment (see Insight 5.1).

S’s separate financial statements S as the receiving entity has no obligation to settle the transaction. However, S does receive services in an arrangement that is settled by another entity in the group for an amount that is based on the value of S’s equity instruments. S accounts for the share-based payment transaction in its separate financial statements as equity-settled. As a consequence, unlike accounting for a cash-settled share-based payment transaction, the grant-date fair value is recognised over the vesting period without true-up for market conditions. For the accounting prior to the amendments, see Insight 3.2.

Debit Credit

2010

Expense (CU 11 x 100 x 0.9 x 1/2)


495

495

2011

Expense ((CU 11 x 100 x 0.8) - CU 495)


385

385

The total amount recognised for the share-based payment is 880 (CU 11 x 80).

UP’s consolidated financial statements UP group as the receiving entity has the obligation to settle the transaction in cash for an amount based on the price of the equity instruments of another group entity (S). UP accounts for the transaction in its consolidated financial statements as cash-settled. This accounting is not different from that prior to the amendments.

Debit Credit

2010

Expense (CU 10 x 100 x 0.9 x 1/2)

Liability

450

450

2011

Liability

Expense

450

450


P’s separate financial statements P is neither the settling nor receiving entity. See Insight 3.5.



P’s consolidated financial statements P group is receiving goods or services with no obligation to settle the obligation. P accounts for the transaction in its consolidated financial statements as equity-settled. For the accounting prior to the amendments, see Insight 3.5.

Debit Credit

2010

Expense (CU 11 x 100 x 0.9 x 1/2)


495

495

2011

Expense ((CU 11 x 100 x 0.8) - CU 495)


385

385

The total amount recognised for the share-based payment is CU 880 (CU 11 x 80).


–

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Cover design: Mytton Williams

Publication name: First Impressions: Amendments to IFRS 2 - Group Cash-settled Share-based Payment Transactions

Publication no: 910002

Publication date: September 2009

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First Impressions: Amendmentsto IFRS 2 – Group Cash-settled Share-based Payment TransactionsForewordAbout this publicationContents1. Overview of new accounting requirements2. Key implementation issues3. Scope4. Classification5. Recognition and measurement6. Effective date and transitionAppendix I: Overview of simplified scenarios – scope and classificationAppendix II: Illustrative examples

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