Changes to method of settlement

IFRS 2 contains specific requirements for modifications to the terms and conditions on which equity instruments are granted (see Chapter 5 of this guide). It also deals with circumstances where there is choice between cash settlement and equity settlement (see sections 7.1 to 7.3 above). But it contains no specific requirements relating to the variation of terms to alter the method of settlement.

7.4.1 Addition of a cash alternative

An entity may decide, during the vesting period for an equity-settled transaction, to add an employee option to choose a cash alternative. From the date of such a modification, the transaction should be accounted for as a compound instrument as outlined at section 7.2 above. This approach is illustrated in the following example which is taken from the IFRS 2 Implementation Guidance (IG Example 9).

Example 7.4.1

[IFRS 2 Implementation Guidance (IG Example 9)]

Grant of shares, with a cash alternative subsequently added BACKGROUND

At the beginning of year 1, the entity grants 10,000 shares with a fair value of CU33 per share to a senior executive, conditional upon the completion of three years’ service. By the end of year 2, the share price has dropped to CU25 per share. At that date, the entity adds a cash alternative to the grant, whereby the executive can choose whether to receive 10,000 shares or cash equal to the value of 10,000 shares on vesting date. The share price is CU22 on vesting date.

APPLICATION OF REQUIREMENTS

Paragraph 27 of the IFRS requires, irrespective of any modifications to the terms and conditions on which the equity instruments were granted, or a cancellation or settlement of that grant of equity instruments, the entity to recognise, as a minimum, the services received measured at the grant date fair value of the equity instruments granted, unless those equity instruments do not vest because of failure to satisfy a vesting condition (other than a market condition) that was specified at grant date. Therefore, the entity recognises the services received over the three-year period, based on the grant date fair value of the shares.

Furthermore, the addition of the cash alternative at the end of year 2 creates an obligation to settle in cash. In accordance with the requirements for cash-settled share-based payment transactions (paragraphs 30 to 33 of the IFRS), the entity recognises the liability to settle in cash at the modification date, based on the fair value of the shares at the modification date and the extent to which the specified services have been received. Furthermore, the entity remeasures the fair value of the liability at each reporting date and at the date of settlement, with any changes in fair value recognised in profit or loss for the period. Therefore, the entity recognises the following amounts:

Year Calculation Expense Equity Liability

CU CU CU

1 Remuneration expense for year: 10,000 shares 110,000 110,000 x CU33 x 1/3

2 Remuneration expense for year: (10,000 shares 110,000 110,000 x CU33 x 2/3) – CU110,000

Reclassify equity to liabilities: 10,000 shares x (166,667) 166,667 CU25 x 2/3

3 Remuneration expense for year: (10,000 shares 110,000 26,667* 83,333*

x CU33 x 3/3 – CU220,000)

Adjust liability to closing fair value: (CU166,667

+ CU83,333) – (CU22 x 10,000) shares (30,000) (30,000)

Total 300,000 80,000 220,000

* Allocated between liabilities and equity, to bring in the final third of the liability based on the fair value of the shares as at the date of the modification.

7.4.2 Change from cash-settled to equity-settled

The following example considers a change in the terms whereby options that were originally to be cash-settled will be equity-settled.

Example 7.4.2

Change from cash-settled to equity-settled

On 1 January 20X1, Company A issued 100 share options to certain of its employees with an exercise price of CU15 per option. The options vest if the employee remains in A’s employ after four years. The share options can only be cash-settled. A determined the fair value of the instruments to be CU5 per option at the date of grant.

As of 31 December 20X2, A determined the fair value of the cash-settled share-based payment to be CU6 and, therefore, has recorded a cumulative expense of CU300 [(CU6 x 100) x 2/4 years]

as A expects all options to vest. On 1 January 20X3, A modified the options such that they can only be settled by delivery of A’s equity instruments and, therefore, are classified as equity-settled share-based payments.

At the date of modification, 1 January 20X3, A is required to eliminate the liability of CU300.

The guidance in IFRS 2.27 to 29, which applies to modifications of equity-settled share-based payments that continue to be accounted for as equity-settled share-based payments after the modification, can be used by analogy.

IFRS 2.27 requires that, at a minimum, the grant-date fair value of the equity instruments granted is recognised as remuneration expense over the vesting period unless those instruments do not vest because of failure to satisfy a non-market condition. Any incremental fair value, as a result of the modification, is recognised over the remaining vesting period. Based on that principle, an entity recognises cumulative remuneration expense at the amount that would have been recognised as of the date of the modification had the liability award been accounted for as equity from the date of grant unless the modification date fair value of the liability award exceeds the grant date fair value of the liability award, had it been accounted for as equity.

If the modification date fair value of the liability award exceeds the grant date fair value of the liability award, had it been accounted for as equity, the higher amount becomes the basis for recognising cumulative remuneration expense of the modified award over the remaining vesting period. In that situation, the liability is reclassified as equity and unrecognised remuneration expense is recognised over the remaining vesting period.

If the grant date fair value of the liability award, had it been accounted for as equity, exceeds the modification date fair value of the liability award, the higher amount becomes the basis for recognising cumulative remuneration expense over the vesting period. In that situation, the liability is reclassified to equity. In addition, the excess of the cumulative remuneration expense that would have been recognised to date, had the liability been accounted for as equity, is immediately recognised as remuneration expense with a corresponding increase in equity.