Association of Accounting Technicians response to IASB s Exposure Draft Classification and Measurement of Share-based Payment Transactions - Proposed amendments to IFRS 2 1
Association of Accounting Technicians response to IASB s Exposure Draft Classification and Measurement of Sharebased Payment Transactions - Proposed amendments to IFRS 2 1. Introduction 1.1. The Association of Accounting Technicians (AAT) is pleased to have the opportunity to respond to IASB s Exposure Draft Classification and Measurement of Share-based Payment Transactions - Proposed amendments to IFRS 2 (condoc). 1.2. This response is being submitted on behalf of AAT s membership and from the wider public benefit perspective of achieving sound and effective accounting principles and practices. 1.3. AAT has commented with the objective of adding value or highlighting aspects of the condoc that need to be considered further. 2. Executive summary 2.1. The need for an IFRS to deal with the accounting for a share-based payment transaction was considered crucial because traditional methods of accounting for such transactions did not recognise an expense for such an arrangement since there was no associated cash flow. IFRS 2 remains a complex standard and this complexity is accentuated by the introduction of several individual amendments to the standard over recent years. A post-implementation review of IFRS 2 may be beneficial. 2.2. Our detailed comments and responses to the questions posed in IASB s Exposure Draft are contained in the Section 3 (below) of this response document. 2.3. AAT is in agreement with IASB s proposed amendments to IFRS 2 on the basis that AAT believes them to be practical and that they will reduce divergent practices in the application of IFRS 2. AAT has concerns about IASB s proposed prospective application of the amendments as contained in our response given to question 4 (3.18-3.20, below). 3. AAT response to IASB s Exposure Draft Classification and Measurement of Sharebased Payment Transactions - Proposed amendments to IFRS 2 Question 1 The IASB proposes to clarify that accounting for the effects of vesting and nonvesting conditions on the measurement of a cash-settled share-based payment should follow the approach used for measuring equity-settled share-based payments in paragraphs 19-21A of IFRS 2. 3.1. AAT notes that IFRS 2 currently does not address the impact of vesting and nonvesting conditions on the measurement of the fair value of the liability which is incurred in a cash-settled share-based payment transaction. AAT agrees with IASB s interpretation that the amendment is consistent with the requirements of paragraph 6A which requires an entity to follow the notion of fair value in the context of IFRS 2 as opposed to the definition of fair value contained in IFRS 13 Fair Value Measurement. However, paragraph 6A fails to make a distinction between equity- 2
settled and cash-settled share-based payment awards, which are different in nature and as a consequence require different approaches when it comes to re-measuring the transaction. 3.2. AAT is of the view that in order to clarify the measurement of a cash-settled sharebased payment and for preparers to follow the approach used for measuring equitysettled share-based payment transactions in paragraphs 19-21A of IFRS 2 would result in consistent application of the principles contained in the IFRS. Question 2 The IASB proposes to specify that a share-based payment transaction in which the entity settles the share-based payment arrangement net by withholding a specified portion of the equity instruments to meet the statutory tax withholding obligation should be classified as equity-settled in its entirety. This is required if the entire share-based payment transaction would otherwise have been classified as an equity-settled share-based payment transaction if it had not included the net settlement feature. 3.3. AAT appreciates that many jurisdictions have tax legislation in force requiring an entity undertaking a share-based payment transaction to withhold amounts in respect of taxation from an employee s share-based payment award and to subsequently transfer this amount to the taxation authority. 3.4. AAT understands that IASB is proposing to confirm that a share-based payment transaction, in which the entity settles the transaction net by way of withholding a specified portion of the equity instruments granted to fulfil its obligations under tax legislation, is to be classified as equity-settled in its entirety if, in the absence of such a net settlement feature, the entire share-based payment-transaction would have been classified as an equity-settled share-based payment. 3.5. AAT notes the divergent views on this particular issue and is wholly-supportive of the Interpretations Committee s concerns relating to view 1 (BC10, condoc) whereby each component of the share-based payment is accounted for in a manner which is consistent with that of settlement. 3.6. In view 1 (BC10, condoc) the portion withheld by the entity for which the entity has incurred a liability would be accounted for separately and classified as a cash-settled share-based payment transaction in accordance with the manner of settlement with the portion of the share-based payment which the entity settles by the issue of equity instruments to the employee being settled as an equity-settled share-based payment. 3.7. AAT is of the same opinion as the Interpretations Committee in that this would be over-burdensome for entities and increase the complexities already inherent within the standard (BC13, condoc). 3.8. AAT agrees with IASB s proposed approach to reducing the operational complexity which has been identified by the inclusion of guidance in the form of an exception to the IRFS requirements and that this guidance is to be limited to a situation whereby a net settlement feature is used by an entity to meet its obligations under taxation legislation (BC15, condoc). 3.9. AAT s agreement to the proposals is predicated on the belief that a share-based payment-arrangement with characteristics of those described in paragraph 33D (condoc) is, in substance, an equity-settled share-based payment-arrangement in its entirety. 3.10. AAT also believes that requiring the portion in respect of the taxation liability to be accounted for in a separate manner from that of the remaining equity portion would cause further complexity within the standard. 3
3.11. The importance of having regard to the substance of the arrangement is also a critical aspect in AAT s opinion as the proposed amendment will, additionally, avoid different treatments for varying cases where the entity may deduct a number of vested instruments or where the entity may issue instruments via a broker who then subsequently sells them and settles the tax obligations on behalf of the beneficiary from the proceeds of the sale. Question 3 The IASB proposes to specify the accounting for modifications to the terms and conditions of a cash-settled share-based payment transaction that results in a change in its classification from cash-settled to equity-settled. The IASB proposes that these transactions should be accounted for in the following manner: (a) the share-based payment transaction is measured by reference to the modification-date fair value of the equity instruments granted as a result of the modification; (b) the liability recognised in respect of the original cash-settled share-based payment is derecognised upon the modification, and the equity-settled sharebased payment is recognised to the extent that the services have been rendered up to the modification date; and (c) the difference between the carrying amount of the liability as at the modification date and the amount recognised in equity at the same date is recorded in profit or loss immediately. 3.12. AAT appreciates that in some situations, an entity may modify the terms of a sharebased payment arrangement which will then change the transaction from that of a cash-settled arrangement to an equity-settled arrangement. Currently IFRS 2 does not specifically address such situations and the absence of such guidance is creating divergent practices. 3.13. The manner of settling a share-based payment arrangement is critical due to the fact that a cash-settled arrangement is significantly different than that of an equity-settled arrangement. In a cash-settled arrangement, the entity is required to recognise the goods or services acquired and a corresponding liability to pay for those goods or services with changes in the fair value of the liability being recognised in profit or loss. In an equity-settled share-based payment transaction, the entity recognises the goods or services acquired with a corresponding increase in equity. 3.14. AAT agrees with IASB s observation in paragraph BC19 (condoc) that when an entity replaces a cash-settled award with an equity-settled award this is akin to settling the original award as opposed to a modification. 3.15. AAT agrees that the replacement award should be measured at the replacement date as this method is consistent with the grant-date approach for an equity-settled sharebased payment arrangement. 3.16. In terms of accounting for any difference that might arise between the carrying amount of the liability as at the modification date and the amount recognised in equity at the same date, AAT agrees that this difference should be recorded in profit or loss. By adopting such an approach the accounting treatment will be consistent with the treatment applied in extinguishing a liability. 3.17. In summary, AAT is supportive of these amendments as the amendments proposed by IASB will reduce divergent practices. Question 4 The IASB proposes prospective application of these amendments, but also proposes to permit the entity to apply the amendments retrospectively if it has 4
the information needed to do so and this information is available without the use of hindsight. 3.18. AAT recommends that IASB considers the requirements in IAS 8 1 which requires retrospective application of new pronouncements, unless it is impracticable to do so. AAT considers that requiring retrospective application of the amendments to IFRS 2 would be consistent with IAS 8. 3.19. AAT considers that entities should have the information readily available to apply the amendments retrospectively and that this would not necessarily be overly burdensome for entities to undertake. 3.20. Where it is considered impracticable to retrospectively apply the amendments, AAT believes that it would be more appropriate to apply the amendments to IFRS 2 at the beginning of the earliest period for which retrospective application of the amendments is possible. Question 5 Do you have any other comments on the proposals? 3.21. AAT does not have any other comments to make in respect of the proposals contained within the condoc. 4. Conclusion 4.1. AAT supports the proposed amendments to IFRS 2, with the exception of Question 4 (3.18-3.20, condoc) where AAT believes retrospective application should be considered in order to ensure consistency with IAS 8. 5. About AAT 5.1. AAT is a professional accountancy body with over 49,800 full and fellow members and 83,700 student and affiliate members worldwide. Of the full and fellow members, there are over 4,100 Members in Practice who provide accountancy and taxation services to individuals, not-for-profit organisations and the full range of business types (figures correct as at 31 December 2014). 5.2. AAT is a registered charity whose objectives are to advance public education and promote the study of the practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound administration of the law. 6. Further information If you have any questions or would like to discuss any of the points in more detail then please contact AAT at: email: aleem.islan@aat.org.uk and aat@palmerco.co.uk telephone: 020 7397 3088 FAO Aleem Islan Association of Accounting Technicians 140 Aldersgate Street London EC1A 4HY 1 IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors 5