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BASIS FOR CONCLUSIONS ON IFRS 2 TRANSITIONAL PROVISIONS

BASIS FOR CONCLUSIONS ON IFRS 2 TRANSITIONAL PROVISIONS

BASIS FOR CONCLUSIONS ON IFRS 2 TRANSITIONAL PROVISIONS

Share-based payment transactions among group entities

The Board noted a potential difficulty when an entity retrospectively applies the amendments made by Group Cash-settled Share-based Payment Transactions issued in June 2009. An entity might not have accounted for some group share-based payment transactions in accordance with IFRS 2 in its separate or individual financial statements. In a few cases, an entity that settles a group share-based payment transaction may have to apply hindsight to measure the fair value of awards now required to be accounted for as cash-settled. However, the Board noted that such transactions would have been accounted for in accordance with IFRS 2 in the group’s consolidated financial statements. For these reasons and those outlined in paragraph BC268G, if the information necessary for retrospective application is not available, the Board decided to require an entity to use amounts previously recognised in the group’s consolidated financial statements when applying the new requirements retrospectively in the entity’s separate or individual financial statements.

BASIS FOR CONCLUSIONS ON IFRS 2 TRANSITIONAL PROVISIONS

BASIS FOR CONCLUSIONS ON IFRS 2 RECOGNITION OF EQUITY-SETTLED

When it developed ED 2, the Board first considered conceptual arguments relating to the recognition of an expense arising from equity-settled share-based payment transactions, including arguments advanced by respondents to the Discussion Paper and other commentators. Some respondents who disagreed with the recognition of an expense arising from particular share-based payment transactions (ie those involving employee share options) did so for practical, rather than conceptual, reasons. The Board considered those practical issues later (see paragraphs BC294–BC310).

The Board focused its discussions on employee share options, because that is where most of the complexity and controversy lies, but the question of whether expense recognition is appropriate is broader than that—it covers all transactions involving the issue of shares, share options or other equity instruments to employees or suppliers of goods and services. For example, the Board noted that arguments made by respondents and other commentators against expense recognition are directed solely at employee share options. However, if conceptual arguments made against recognition of an expense in relation to employee share options are valid (eg that there is no cost to the entity), those arguments ought to apply equally to transactions involving other equity instruments (eg shares) and to equity instruments issued to other parties (eg suppliers of professional services).

The rationale for recognising all types of share-based payment transactions—irrespective of whether the equity instrument is a share or a share option, and irrespective of whether the equity instrument is granted to an employee or to some other party—is that the entity has engaged in a transaction that is in essence the same as any other issue of equity instruments. In other words, the entity has received resources (goods or services) as consideration for the issue of shares, share options or other equity instruments. It should therefore account for the inflow of resources (goods or services) and the increase in equity. Subsequently, either at the time of receipt of the goods or services or at some later date, the entity should also account for the expense arising from the consumption of those resources.

BASIS FOR CONCLUSIONS ON IFRS 2 TRANSITIONAL PROVISIONS

Many respondents to ED 2 agreed with this conclusion. Of those who disagreed, some disagreed in principle, some disagreed for practical reasons, and some disagreed for both reasons. The arguments against expense recognition in principle were considered by the Board when it developed ED 2, as were the arguments against expense recognition for practical reasons, as explained below and in paragraphs.

Arguments commonly made against expense recognition include:
(a) the transaction is between the shareholders and the employees, not the entity and the employees.
(b) the employees do not provide services for the options.
(c) there is no cost to the entity, because no cash or other assets are given up; the shareholders bear the cost, in the form of dilution of their ownership interests, not the entity.

(d) the recognition of an expense is inconsistent with the definition of an expense in the conceptual frameworks used by accounting standard-setters, including the IASB’s Framework for the Preparation and Presentation of Financial Statements.9
(e) the cost borne by the shareholders is recognised in the dilution of earnings per share (EPS); if the transaction is recognised in the entity’s accounts, the resulting charge to the income statement would mean that EPS is ‘hit twice’.
(f) requiring the recognition of a charge would have adverse economic consequences, because it would discourage entities from introducing or continuing employee share plans.‘The entity is not a party to the transaction’

Some argue that the effect of employee share plans is that the existing shareholders transfer some of their ownership interests to the employees and that the entity is not a party to this transaction.

The Board did not accept this argument. Entities, not shareholders, set up employee share plans and entities, not shareholders, issue share options to their employees. Even if that were not the case, eg if shareholders transferred shares or share options direct to the employees, this would not mean that the entity is not a party to the transaction. The equity instruments are issued in return for services rendered by the employees and the entity, not the shareholders, receives those services. Therefore, the Board concluded that the entity should account for the services received in return for the equity instruments issued. The Board noted that this is no different from other situations in which equity instruments are issued. For example, if an entity issues warrants for cash, the entity recognises the cash received in return for the warrants issued. Although the effect of an issue, and subsequent exercise, of warrants might be described as a transfer of ownership interests from the existing shareholders to the warrant holders, the entity nevertheless is a party to the transaction because it receives resources (cash) for the issue of warrants and further resources (cash) for the issue of shares upon exercise of the warrants. Similarly, with employee share options, the entity receives resources (employee services) for the issue of the options and further resources (cash) for the issue of shares on the exercise of options.

BASIS FOR CONCLUSIONS ON IFRS 2 TRANSITIONAL PROVISIONS

BASIS FOR CONCLUSIONS ON IFRS 2 MEASUREMENT OF EQUITY-SETTLED

To recognise equity-settled share-based payment transactions, it is necessary to decide how the transactions should be measured. The Board began by considering how to measure share-based payment transactions in principle. Later, it considered practical issues arising from the application of its preferred measurement approach. In terms of accounting principles, there are two basic questions:
(a) which measurement basis should be applied?
(b) when should that measurement basis be applied?

To answer these questions, the Board considered the accounting principles applying to equity transactions. The Framework states: Equity is the residual interest in the assets of the enterprise after deducting all of its liabilities … The amount at which equity is shown in the balance sheet is
dependent upon the measurement of assets and liabilities. Normally, the aggregate amount of equity only by coincidence corresponds with the aggregate market value of the shares of the enterprise …

The accounting equation that corresponds to this definition of equity is: assets minus liabilities equals equity

BASIS FOR CONCLUSIONS ON IFRS 2 TRANSITIONAL PROVISIONS

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