Amendments to HKFRS 2 Classification and Measurement of Share-based Payment Transactions

Amendments to HKFRS 2 Classification and Measurement of Share-based Payment Transactions Newsletter Issue No. 05/2016 Background In June 2016, the International Accounting Standards Board ( IASB ) has issued amendments to International Financial Reporting Standard ( IFRS ) 2 to provide requirements on the accounting for: (a) the effects of vesting and non-vesting on the measurement of cash-settled share-based payments; (b) share-based payment transactions with a net settlement feature for withholding tax obligations; and (c) a modification to the terms and of a share-based payment that changes the classification of the transaction from cash-settled to equity settled. Subsequently in August 2016, the Hong Kong Institute of Certified Public Accountants also issued the same amendments, Amendments to Hong Kong Financial Reporting Standard ( HKFRS ) 2 Classification and Measurement of Share-based Payment Transactions, so as to maintain the convergence with IFRSs. 1 SHINEWING (HK) CPA Limited - Newsletter September 2016

What are the major content of the amendments? The following summarised the major amendments in Amendments to HKFRS 2: Effects of of vesting on the the measurement of a of a cash-settled share-based share-based payment payment The The amendments specifically clarified clarified how how market market and and non-market vesting and non-vesting should should be reflected be reflected in the in measurement the measurement of a cash-settled of a cash-settled share-based share-based payment transaction payment transaction by adding paragraphs by adding 33A-33D paragraphs of HKFRS 33A-33D 2. Those of HKFRS 2. Those should be reflected should in the be reflected measurement in the of measurement cash-settled share-based of cash-settled payments share-based in a manner payments consistent in a with manner how consistent they are with reflected how in they are measurement reflected in of the an equity-settled measurement share-based of an equity-settled payment transaction. share-based payment transaction. The amendments have clarified that: The amendments have clarified that: Vesting, other than market, should not be taken into account when Vesting estimating, the other fair than value market of the, cash-settled should share-based not be taken payment into account at the when measurement estimating the date. fair value Instead, of the cash-settled vesting, share-based other payment than at market the measurement, date. should Instead, be vesting taken into, account other by than adjusting market, the number should of awards be taken included into account in the by measurement adjusting the number of the liability of awards arising included from in the measurement transaction. of the liability arising from the transaction. An entity An entity should should recognise recognise an amount an for amount the goods for or the services goods received or services during received the vesting during period the based vesting on the period best available based on estimate the best of the available number estimate of awards of the that number are expected of awards to vest. that If subsequent are expected information to vest. If indicates subsequent that the information number of indicates awards that that are the expected number to of vest awards differs that from are expected previous estimates, o vest differs an entity from should previous revise that estimates, estimate. an entity should revise that estimate On the On vesting the vesting date, date, an entity an entity should should revise the revise estimate the estimate to equal to the equal number the of number awards of that awards ultimately that vested. ultimately vested. Market Market and non-vesting and non-vesting should be should taken be into taken account into when account estimating when estimating the fair value the of the cash-settled share-based payment granted and when remeasuring the fair value at the end of each fair value of the cash-settled share-based payment granted and when remeasuring the fair value at reporting period and at the date of settlement. the end of each reporting period and at the date of settlement. The cumulative amount ultimately recognised for goods or services received as consideration for the cash The cumulative amount ultimately recognised for goods or services received as consideration for settled share-based payment is equal to the cash that is paid. the cash settled share-based payment is equal to the cash that is paid. These amendments should be applied to share-based payment transactions that are unvested at the date These amendments should be applied to share-based payment transactions that are unvested at the date that an that an entity first applies the amendments and to share-based payment transactions with a grant date entity first applies the amendments and to share-based payment transactions with a grant date on or after the on or after the date that an entity first applies the amendments. For unvested share-based payment date that an entity first applies the amendments. For unvested share-based payment transactions granted prior transactions granted prior to the date that an entity first applies the amendments, an entity should to the date that an entity first applies the amendments, an entity should remeasure the liability at that date and remeasure the liability at that date and recognise the effect of measurement in opening retained recognise the effect of measurement in opening retained earnings (or other component of equity, as appropriate) earnings (or other component of equity, as appropriate) of the reporting period in which the of the reporting period in which the amendments are first applied. amendments are first applied. Prior Prior periods periods should should not be not restated. be restated. 2 SHINEWING (HK) CPA Limited - Newsletter September 2016

Share-based payment transactions with a a net net settlement feature feature for for withholding tax tax obligations The The amendments explicitly explicitly stated stated that if that an entity if an is entity obliged is obliged by tax laws by or tax regulations laws or regulations to withhold to an withhold amount for an an amount employee s for tax an obligation employee s associated tax obligation with a associated share-based with payment a share-based and transfer payment that amount and transfer to the that tax authority amount on to the the employee s tax authority behalf, on that the transaction employee s should behalf, be that classified transaction in its entirety should as be an classified equity settled in its share-based entirety as payment an equity transaction settled share-based provided that payment the terms transaction of the share-based provided payment that the terms arrangement of the share-based may permit or require payment the arrangement entity to withhold may the permit number or require of equity the instruments entity to withhold equal to the the monetary number value of equity of the instruments employee s tax equal obligation to the from monetary the total value number of of the equity employee s instruments tax that obligation otherwise from would the have total been number issued of to equity the employee instruments upon that exercise otherwise (or vesting) would of share-based have been payment issued to (i.e. the the employee share based upon payment exercise arrangement (or vesting) has of a net share-based settlement payment feature ). (i.e. the share based payment arrangement has a net settlement feature ). The above exception does not apply to: The above exception does not apply to: a share-based payment arrangement with a net settlement feature for which there is no obligation a share-based payment arrangement with a net settlement feature for which there is no obligation on the on the entity under tax laws or regulations to withhold an amount for an employee s tax entity under tax laws or regulations to withhold an amount for an employee s tax obligation associated with obligation associated with that share-based payment; or that share-based payment; or any equity instrument that the entity withholds in excess of the employee s tax obligation any equity instrument that the entity withholds in excess of the employee s tax obligation associated with associated with the share-based payment (i.e. the entity withheld an amount of shares that the share-based payment (i.e. the entity withheld an amount of shares that exceeds the monetary value of exceeds the monetary value of the employee s tax obligation). Such excess shares withheld the employee s tax obligation). Such excess shares withheld should be accounted for as a cash-settled share-based should be payment accounted when for this as amount a cash-settled is paid in share-based cash (or other payment assets) to when the employee. this amount is paid in cash (or other assets) to the employee. If an If entity an entity withhold withhold shares shares to fund to the fund payment the payment to the tax to the authority tax authority in respect in of respect the employee s of the employee s tax obligation tax associated obligation with associated the share-based with the payment, share-based the payment, made the payment should be made accounted should for be as accounted a deduction for from as a equity deduction for the shares from equity withheld, for except the shares to the withheld, extent that except the payment to the exceeds extent that the fair the value payment at the exceeds net settlement the fair date value of the at equity the net instruments settlement withheld. date of the equity instruments withheld. The The amendments amendments requires requires additional additional disclosures, disclosures, such as such disclosure as disclosure about the about estimate the estimate of the amount of the amount that it expects that it to transfer expects to to the transfer tax authority to the to tax settle authority the employee s to settle tax obligation the employee s when it tax is necessary obligation to inform when users it is about necessary the future to cash inform flow users effects about associated the future with cash the share-based flow effects payment associated arrangement. with the share-based payment arrangement. These These amendments apply apply to share-based to share-based payment payment transactions transactions that are unvested that are (or unvested but (or unexercised) vested but at the unexercised) date that an entity at the first date applies that the an amendments entity first and applies to share-based the amendments payment and transactions to share-based with a grant payment date on transactions or after the date with that a grant entity date on first or applies after the date amendments. that an entity For unvested first applies (or vested the amendments. but unexercised) For share-based unvested (or payment vested transactions but unexercised) (or components share-based thereof) payment that transactions were previously (or components classified as thereof) cash-settled that share-based were previously payments classified but now are as classified cash-settled equity-settled share-based in accordance payments with but the now amendments, are classified an entity as should equity-settled reclassify the in accordance carrying value with of the share-based amendments, payment an entity liability should to equity reclassify at the the date carrying that it value first applies of the the share-based amendments. payment liability to equity at the date that it first applies the amendments. Prior Prior periods periods should should not be not restated. be restated. 3 SHINEWING (HK) CPA Limited - Newsletter September 2016

Accounting for modification of a share-based payment transaction that changes its classification from cash-settled to to equity-settled. Paragraph B44A of HKFRS 2 specifically stated that if the terms and of a cash-settled Paragraph B44A of HKFRS 2 specifically stated that if the terms and of a cash-settled share-based share-based payment transaction are modified with the result that it becomes an equity-settled payment transaction are modified with the result that it becomes an equity-settled share-based payment share-based payment transaction, the transaction is accounted for as such from the date of the transaction, the transaction is accounted for as such from the date of the modification. Specifically: modification. Specifically: The The equity-settled equity-settled share-based share-based payment payment transaction transaction is measured is measured by reference by reference to the fair to value the fair of the value equity of instruments the equity granted instruments at the granted modification the date. modification The equity-settled date. The equity-settled share based payment share based transaction payment is recognised transaction in equity is recognised on the modification in equity date on to the the modification extent to which date goods to the or services extent to have which been goods received. or The services liability have for been the cash received. settled share-based payment transaction as at the modification date is derecognised The liability on for that the date. cash settled share-based payment transaction as at the modification date is Any difference between the carrying amount of the liability derecognised and the amount of equity derecognised on that date. recognised on the modification date is recognised immediately in profit or loss. Any difference between the carrying amount of the liability derecognised and the amount of equity recognised on the modification date is recognised immediately in profit or loss. Paragraph Paragraph B44A B44A of HKFRS of HKFRS 2 also applies 2 also to applies situation to situation in which: in which: (a) the vesting period is is extended or or shorted as as a result a result of the of the modification; or or (b) modification occurs after after the the vesting period; period; or or (c) equity instruments are are granted and, and, on on that that grant grant date, date, the entity the entity identifies identifies them them as a replacement as a replacement for the cancelled for the cancelled cash-settled cash-settled share-based share-based payment. payment. These These amendments only only apply apply to modifications to modifications that occur that on occur or after on the or after date that the an date entity that first an applies entity first the amendments. applies the amendments. When will these amendments become effective? The Amendments to HKFRS 2 will become effective for financial statements with annual periods beginning on or after 1 January 2018. Earlier application is permitted. If an entity applies these amendments for an earlier period, it should disclose that fact. 4 SHINEWING (HK) CPA Limited - Newsletter September 2016

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