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IFRS The concept of payment based on the equity instruments

IFRS The concept of payment based on the equity instruments

IFRS The concept of payment based on the equity instruments :A share-based payment is a transaction in which the entity receives goods or services either as consideration for its equity instruments or by incurring liabilities for amounts based on the price of the entity’s shares or other equity instruments of the entity. The accounting requirements for the share-based payment depend on how the transaction will be settled, that is, by the issuance of

  1. equity
  2. cash
  3. equity or cash.

The concept of share-based payments is broader than employee share options. IFRS 2 encompasses the issuance of shares, or rights to shares, in return for services and goods. Examples of items included in the scope of IFRS 2 are share appreciation rights, employee share purchase plans, employee share ownership plans, share option plans and plans where the issuance of shares (or rights to shares) may depend on market or non-market related conditions.

IFRS 2 applies to all entities. There is no exemption for private or smaller entities. Furthermore, subsidiaries using their parent’s or fellow subsidiary’s equity as consideration for goods or services are within the scope of the Standard.

IFRS The concept of payment based on the equity instruments

IFRS The concept of payment based on the equity instruments : Until the issue of IFRS 2, there has been no International Financial Reporting Standard (IFRS) covering the recognition and measurement of these transactions. Concerns have been raised about this gap in international standards. For example, the International Organization of Securities Commissions (IOSCO), in its 2000 report on international standards, stated that
IASC (the IASB’s predecessor body) should consider the accounting treatment of share-based payment.

Few countries have standards on the topic. This is a concern in many countries, because the use of share-based payment has increased in recent years and continues to spread. Various standard-setting bodies have been working on this issue. At the time the IASB added a project on share-based payment to its agenda in July 2001, some standard-setters had recently published proposals. Forexample, the German Accounting Standards Committee published a draft accounting standard Accounting for Share Option Plans and Similar Compensation Arrangements in June 2001. The UK Accounting Standards Board led the development of the Discussion Paper Accounting for Share-based Payment, published in July 2000 by IASC, the ASB and other bodies represented in the G4+1.2 The Danish Institute of State Authorised Public Accountants issued a Discussion Paper The Accounting Treatment of Share-based Payment in April 2000. More recently, in December 2002, the Accounting Standards Board of Japan published a Summary Issues Paper on share-based payment. In March 2003, the US Financial Accounting Standards Board (FASB) added to its agenda a project to review US accounting requirements on share-based payment. Also, the Canadian Accounting Standards Board (AcSB) recently completed its project on share-based payment. The AcSB standard requires recognition of all share-based payment transactions, including transactions in which share options are granted to employees (discussed further in paragraphs BC281 and BC282).

IFRS The concept of payment based on the equity instruments

IFRS The concept of payment based on the equity instruments : Users of financial statements and other commentators are calling for improvements in the accounting treatment of share-based payment. For example, the proposal in the IASC/G4+1 Discussion Paper and ED 2 Share-based Payment, that share-based payment transactions should be recognised in the financial statements, resulting in an expense when the goods or services are
consumed, received strong support from investors and other users of financial statements. Recent economic events have emphasised the importance of high quality financial statements that provide neutral, transparent and comparable information to help users make economic decisions. In particular, the omissionof expenses arising from share-based payment transactions with employees has been highlighted by investors, other users of financial statements and other commentators as causing economic distortions and corporate governance concerns.

As noted above, the Board began a project to develop an IFRS on share-based payment in July 2001. In September 2001, the Board invited additional comment on the IASC/G4+1 Discussion Paper, with a comment deadline of 15 December 2001. The Board received over 270 letters. During the development of ED 2, the Board was also assisted by an Advisory Group, consisting of individuals from various countries and with a range of backgrounds, including persons from the investment, corporate, audit, academic, compensation consultancy, valuation and regulatory communities. The Board received further assistance from other experts at a panel discussion held in New York in July 2002. In November 2002, the Board published an Exposure Draft, ED 2 Share-based Payment, with a comment deadline of 7 March 2003. The Board received over 240 letters. The Board also worked with the FASB after that body added to its agenda a project to review US accounting requirements on share-based payment. This included participating in meetings of the FASB’s Option Valuation Group and meeting the FASB to discuss convergence issues.

IFRS The concept of payment based on the equity instruments

IFRS The concept of payment based on the equity instruments : 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.

IFRS The concept of payment based on the equity instruments

IFRS The concept of payment based on the equity instruments : 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.

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.

IFRS The concept of payment based on the equity instruments

IFRS The concept of payment based on the equity instruments : 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.

IFRS 2 applies to share-based payment transactions in which the entity receivesor acquires goods or services. However, in some situations it might be difficult to demonstrate that the entity has received goods or services. This raises the question of whether IFRS 2 applies to such transactions. In addition, if the entity has made a share-based payment and the identifiable consideration received(if any) appears to be less than the fair value of the share-based payment, does this situation indicate that goods or services have been received, even though those goods or services are not specifically identified, and therefore that IFRS 2 applies?

IFRS The concept of payment based on the equity instruments

IFRS The concept of payment based on the equity instruments : However, such a transfer is not a share-based payment transaction if the transfer of equity instruments to an employee or other party is clearly for a purpose other than payment for goods or services supplied to the entity. This would be the case, for example, if the transfer is to settle a shareholder’s personal obligation to an employee that is unrelated to employment by the entity, or if the shareholder and employee are related and the transfer is a personal gift because of that relationship.

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