IFRS 2 Share-based Payment. Patrick Mommens Annika Örbom 8 November 2005

Transcription

1 IFRS 2 Share-based Payment Patrick Mommens Annika Örbom 8 November 2005

2 IFRS 2 What is a Share-based Payment? Share-based Payment Transaction where the entity receives goods or services as consideration - Equity instruments of the entity (including share options) - Incurring liabilities to the supplier for amounts based on the price of the entity s shares Examples - Share options - Share purchase discount plans - Share appreciation rights - Share swaps - Matching shares 2

3 Main Content of IFRS 2 Scope of the standard? Recognition of expense in profit or loss? Date of initial measurement? Measurement basis? Three types of sharebased payment transactions? Employees, suppliers etc. delivering services or goods Yes allocated over vesting period if any Principle of service date but grant date for employees Fair value - market price or valuation technique Equity-settled Cash-settled Choice between equityand cash-settlement 3

4 Overview of Recognition and Measurement Equity-settled with employees Fair value measured indirectly at grant date No changes in fair value after grant Equity-settled with non-employees Fair value measured directly (or indirectly) at service date No changes in fair value after receipt Cash-settled Fair value measured at each reporting date Changes in fair value recognised in profit or loss till settlement YES Allocate over vesting period and true up for Q Are there non-market based vesting conditions? NO Expense immediately 4

5 IFRS 2 Share-based Payment Key terms: grant date Grant date = The date at which the entity and another party (including an employee) agree to a share-based payment arrangement, being when the entity and the counterparty have a shared understanding of the terms and conditions of the arrangement. At grant date the entity confers on the counterparty the right to cash, other assets, or equity instruments of the entity, provided the specified vesting conditions, if any, are met. If that agreement is subject to an approval process (for example, by shareholders), grant date is the date when that approval is obtained. 5

6 IFRS 2 Share-based Payment Key terms: fair value Fair value = The amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm's length transaction. 6

7 IFRS 2 Share-based Payment Use of option pricing models When an observable market price for share options does not exist, an option pricing model should be used (it is not specified which model should be used) taking into account 6 input factors (next slide) 7

8 IFRS 2 Share-based Payment Relationship parameters value option An increase to the Share price Exercise price option Results in a fair value estimate that is: Higher Lower Expected dividend yield share Expected volatility share Expected life of option Risk-free interest rate Lower Higher Higher Higher 8

9 IFRS 2 Share-based Payment Key terms: Vesting period Vesting period = The period during which all the specified vesting conditions of a share-based payment arrangement are to be satisfied. Vesting conditions = The conditions that must be satisfied for the counterparty to become an entitled to receive cash, other assets or equity instruments of the entity, under a sharebased payment arrangement. Vesting conditions include service conditions, which require the other party to complete a specified period of service, and performance conditions, which require specified performance targets to be met (such as a specified increase in the entity's profit over a specified period of time). 9

10 IFRS 2 Share-based Payment Vesting Conditions Vesting conditions: if specified period of service is required before vesting, the entity shall presume that the services will be rendered during the vesting period. Performance condition > determine expected vesting period (EVP) based on the most likely outcome of the performance condition and revise if necessary If performance condition is a market condition : I. EVP needs to be consistent with assumptions to determine FV of options granted II. No subsequent revision of EVP III. To ignore non-satisfaction when all other vesting conditions are satisfied 10

11 IFRS 2 Share-based Payment Vesting Conditions (Cont d) Not to be reflected in the fair value of the equity instrument (unless it is a market condition) but by adjusting the number of equity instruments included in the measurement so that, ultimately, the expense recognized is based on the number of instruments that eventually vest. => on a cumulative basis, no expense is recognized if the equity instruments do not vest because of failure to satisfy a non-market vesting condition. 11

12 IFRS 2 Share-based Payment Disclosures Principle: Disclose information that enables users of the financial statements to understand the nature and extent of SbP arrangements that existed during the period => Minimum disclosure requirements: A description of each type of SbP arrangement that existed at any time during the period, including the general terms and conditions of each arrangement aggregation is allowed for similar type of arrangements unless conflict with principle 12

13 IFRS 2 Share-based Payment Disclosures Nature and extent minimum disclosure requirements (cont ): The number and weighted average exercise prices of share options for each of the following groups of options: - Outstanding at the beginning of the period; - Granted,forfeited,exercised,expired during the period - Outstanding at the end of the period - Exercisable at the end of the period Share price at the date of exercise For share options outstanding at the end of the period, the (meaningful) range of exercise prices and weighted average remaining contractual life. 13

14 IFRS 2 Share-based Payment Disclosures Principle: Disclose information that enables users of the financial statements to understand how the fair value of the goods or services received, or the fair value of the equity instruments granted during the period was determined. 14

15 IFRS 2 Share-based Payment Disclosures With regard to indirect measurement of equity settled SbP transactions the minimum fair value disclosure requirements are: For share options granted during the period: The weighted average fair value of the options at measurement date and information on how that fair value was measured; including: The option pricing model used and the inputs to the model (weighted average share price, exercise price, expected volatility, option life, expected dividends, the risk-free interest rate and any other inputs) How expected volatility was determined (link with historical volatility) Any other features (e.g. market condition) 15

16 IFRS 2 Share-based Payment Disclosures With regard to indirect measurement of equity settled SbP transactions the minimum fair value disclosure requirements are (cont ): For other equity instruments granted during the period: The number and weighted average fair value of those equity instruments at the measurement date Information on how the fair value was determined: If not measured based on an observable market: how: Incorporation of expected dividends into the measurement? Any other features incorporated into the measurement? 16

17 IFRS 2 Share-based Payment Disclosures Fair value disclosure requirements with regard to indirect measurement of equity settled SbP transactions the minimum disclosure requirements are (cont ): For share-based payment arrangements that were modified during the period: An explanation of the modifications The incremental fair value granted Information on how the incremental fair value granted was measured (see above disclosure requirements) Fair value disclosure requirements with regard to direct measurement of equity settled SbP transactions: the entity shall disclose how the fair value was determined - at market price? 17

18 IFRS 2 Share-based Payment Disclosures Principle: Disclose information that enables users of the financial statements to understand the effect of SbP transactions on the entity s profit or loss for the period and on its financial position Minimum disclosure requirements: Total expense recognised for the period arising from transactions in which the goods/services received did not qualify for recognition as assets including the portion arising from equity-settled share based payment transactions 18

19 IFRS 2 Share-based Payment Disclosures Minimum disclosure requirements effect of SbP transactions on profit or loss for the period and on financial position (cont ): For liabilities arising from SbP transactions: The total carrying amount at the end of the period The total intrinsic value at the end of the period of liabilities for which the counterparty s right to cash or other assets had vested by the end of the period Any additional information to satisfy the principles 19

20 IFRS 2 Share-based Payment Effective date Primarily partial retrospective application: Equity-settled SbP transactions: the standard applies retrospectively for grants issued after November and not yet vested at January 1, 2005 (or the transition date to IFRS, if later) Cash-settled SbP transactions: for those existing at January 1, 2005 the standard shall be applied retrospectively up to November Full retrospective application for nature and extent disclosure requirements 20

21 IFRS 2 Share-based Payment 2005 Adoption Effect recognized in opening equity 1/ Vesting period Grant 7/ / / Effect recognised in 2004 result Vesting Exercise Effect recognised in 2005 result 21

22 IFRS 2 Share-based Payment Recent developments/questions Early adoption? July 2004 IASB Update: Many of the enquiries received by the IASB staff following the publication of IFRS 2 are not so straightforward. Constituents should take these questions up with their independent accountants. IFRIC November 2004 amendment SIC-12 Consolidation-Special Purpose Entities : removal of scope exclusion for equity compensation plans. IFRIC is looking at some questions: May 2005: D16 Scope of IFRS 2 and D17 Group and Treasury Share Transactions August 2005: Employee share loan plans insufficient evidence of emerging diversity in practice 22

23 IFRS 2 Share-based Payment D17 Group and Treasury Share Transactions If parent (holding) grants rights to its equity instruments direct to a subsidiary entity s employees the transaction shall be accounted for as equity-settled. Books subsidiary Employee services received (P&L) Equity (capital contribution from parent) Books parent Investment in subsidiary (capital contribution) Equity (equity instruments granted) If subsidiary grants rights to equity instruments of its parent (holding) to its employees the transaction shall be accounted for as cash-settled. 23

24 IFRS 2 Share-based Payment Interactions with other IFRS Interaction with IFRS 3 Business Combinations Interaction with IAS 32 Financial Instruments: Disclosure and Presentation : treasury shares? Interaction with IAS 33 Earnings per Share 24

25 IFRS 2 Share-based Payment Illustrative example IFRS 2 Example 1: A grant of 10 share options, vesting after 3 years of service to 10 employees (so 100 options in total) Option is at the money at grant date (intrinsic value = 0) Fair value option at grant date = 12 Entity expects that 2 people will leave at the middle of the vesting period (i.e. after 1,5 year) Eventually, 50% of the options do not vest due to unusual high turnover of employees : 5 people leave at the middle of the third year 25

26 IFRS 2 Share-based Payment IFRS 2 example 1 Year Cumulative expense Annual expense Y1 (80 x 12) x 1/3 = Y2 (80 x 12) x 2/3 = Y3 (50 x 12) x 3/3 = 600 ( 40)

27 IFRS 2 Share-based Payment Illustrative example IFRS 2 Example 2: A company has an option plan under which the number of options ultimately awarded depends on the cumulative increase in pretax income over a 3 year period as follows: Increase in pretax income over the 3 year period from grant date Options earned More than 45% Between 30% and 45% Between 15% and 30% % or less 0 27

28 IFRS 2 Share-based Payment IFRS 2 example 2 Example 2 (cont ) : The fair value of the option at grant date = 5 The intrinsic value of the option at grant date = 0 The options vest 100% at the end of the 3 years On the date of grant the company s best estimate of its increase in pretax income over the 3 year period is 16%. However, at the end of year 2 it becomes apparent that the increase will only be around 8%. => The company estimates that in total options will be earned and vested (no service forfeitures are anticipated meaning that all 10 employees subject to the award are expected to remain employed (which eventually turns out to be the case). 28

29 IFRS 2 Share-based Payment IFRS 2 example 2 Year Cumulative expense Annual expense Y1 (1.000 x 5) x 1/3 = Y2 (0 x 5) x 2/3 = 0 (1.667) Y3 (0 x 5) x 3/3 =

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