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Much of the controversy and complexity surrounding the accounting for share-based payment relates to employee share options. However, the scope of IFRS 2 is broader than that. It applies to transactions in which shares or other equity instruments are granted to employees. It also applies to transactions with parties other than employees, in which goods or services are received as consideration for the issue of shares, share options or other equity instruments. The term ‘goods’ includes inventories, consumables, property, plant and equipment, intangible assets and other non-financial assets. Lastly, the IFRS applies to payments in cash (or other assets) that are ‘share-based’ because the amount of the payment is based on the price of the entity’s shares or other equity instruments, eg cash share appreciation rights.


Broad-based employee share plans, including employee share purchase plans

Some employee share plans are described as ‘broad-based’ or ‘all-employee’ plans, in which all (or virtually all) employees have the opportunity to participate, whereas other plans are more selective, covering individual or specific groups of employees (eg senior executives). Employee share purchase plans are often broad-based plans. Typically, employee share purchase plans provide employees with an opportunity to buy a specific number of shares at a discounted price, ie at an amount that is less than the fair value of the shares. The employee’s entitlement to discounted shares is usually conditional upon
specific conditions being satisfied, such as remaining in the service of the entity
for a specified period.

The issues that arise with respect to employee share purchase plans are:
(a) are these plans somehow so different from other employee share plans that a different accounting treatment is appropriate?
(b) even if the answer to the above question is ‘no’, are there circumstances, such as when the discount is very small, when it is appropriate to exempt employee share purchase plans from an accounting standard on share-based payment?

Some respondents to ED 2 argued that broad-based employee share plans should be exempt from an accounting standard on share-based payment. The reason usually given was that these plans are different from other types of employee share plans and, in particular, are not a part of remuneration for employee services. Some argued that requiring the recognition of an expense in respect of these types of plans was perceived to be contrary to government policy to encourage employee share ownership. In contrast, other respondents saw no difference between employee share purchase plans and other employee share plans, and argued that the same accounting requirements should therefore apply. However, some suggested that there should be an exemption if the discount is small.

The Board concluded that, in principle, there is no reason to treat broad-based employee share plans, including broad-based employee share purchase plans, differently from other employee share plans (the issue of ‘small’ discounts is considered later). The Board noted that the fact that these schemes are available only to employees is in itself sufficient to conclude that the benefits provided represent employee remuneration. Moreover, the term ‘remuneration’ is not limited to remuneration provided as part of an individual employee’s contract: it encompasses all benefits provided to employees. Similarly, the term services encompasses all benefits provided by the employees in return, including increased productivity, commitment or other enhancements in employee work performance as a result of the incentives provided by the share plan.


Moreover, distinguishing regular employee services from the additional benefits received from broad-based employee share plans would not change the conclusion that it is necessary to account for such plans. No matter what label is placed on the benefits provided by employees—or the benefits provided by the entity—the transaction should be recognised in the financial statements.

Furthermore, that governments in some countries have a policy of encouraging employee share ownership is not a valid reason for according these types of plans a different accounting treatment, because it is not the role of financial reporting to give favourable accounting treatment to particular transactions to encourage entities to enter into them. For example, governments might wish to encourage entities to provide pensions to their employees, to lessen the future burden on the state, but that does not mean that pension costs should be excluded from the financial statements. To do so would impair the quality of financial reporting. The purpose of financial reporting is to provide information to users of financial statements, to assist them in making economic decisions. The omission of expenses from the financial statements does not change the fact that those expenses have been incurred. The omission of expenses causes reported profits to be overstated and hence the financial statements are not
neutral, are less transparent and comparable, and are potentially misleading to users.

There remains the question whether there should be an exemption for some plans, when the discount is small. For example, FASB Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation contains an exemption for employee share purchase plans that meet specified criteria, of which one is that the discount is small.


On the one hand, it seems reasonable to exempt an employee share purchase plan if it has substantially no option features and the discount is small. In such situations, the rights given to the employees under the plan probably do not have a significant value, from the entity’s perspective.

On the other hand, even if one accepts that an exemption is appropriate, specifying its scope is problematic, eg deciding what constitutes a small discount. Some argue that a 5 per cent discount from the market price (as specified in SFAS 123) is too high, noting that a block of shares can be sold on the market at a price close to the current share price. Furthermore, it could be argued that it is unnecessary to exempt these plans from the standard. If the rights given to the employees do not have a significant value, this suggests that the amounts involved are immaterial. Because it is not necessary to include immaterial information in the financial statements, there is no need for a specific exclusion in an accounting standard.

For the reasons given in the preceding paragraph, the Board concluded that broad-based employee share plans, including broad-based employee share purchase plans, should not be exempted from the IFRS.

However, the Board noted that there might be instances when an entity engages
in a transaction with an employee in his/her capacity as a holder of equity

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