LACPA- IFRS 2 July 5, 2006 Roger Nasr Share-Based Payment.

Agenda Overview of IFRS 2 Case studies Scope and Definition Recognition Measurement Vesting Conditions Valuation Case studies Grant date Graded vesting Market conditions IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Overview

Scope exclusions Definition Issuance of shares in a business combination (IAS 22) Share based payments in the scope of IAS 32 & 39 Share based payments other than for goods or services Definition Transaction in which an entity receives or acquires goods or services in exchange for: Equity instruments OR Based on the price of equity instruments IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Types Equity settled Cash settled Choice between the two alternatives IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

New – IFRS 2 Share based payments Goods or services Equity instruments/ Liabilities (linked to share price) Asset Expense Equity Liability IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

New – IFRS 2 Overview of recognition Equity settled Cash settled With cash alternative Fair value grant day only Fair value each balance sheet date Equity component (measure at grant date only) Cash component (Measure at each balance sheet) No changes in fair value Changes in fair value in P&L until exercise Changes if fair value follow split IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

New – IFRS 2 Equity settled payments Employees or similar Other than employees Fair value grant date only Value goods or services at date received Expense allocated over vesting period Expense recognised as goods or services are used IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Vesting conditions Vesting conditions means that the employee does not get the right to exercise options, unless certain conditions are met Two types of vesting conditions Market based Achieve a target share price or share price relative to an index Non-market based Employment Accounting key figures (e.g. EPS, revenue targets) Personal targets IPO of the company Sale of the company IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Vesting Conditions Issuance of fully vested shares relates to past service therefore expensed immediately Issuance of shares with a vesting period relates to services over vesting period: expense over vesting period Two types of vesting conditions:` 1. Non-market based vesting condition 2. Market based vesting condition OR Fair value excludes vesting conditions Fair value includes these vesting conditions True-up Adjust number of shares or vesting date for actual results No true-up Do not adjust number of shares or vesting date for actual results IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

New – IFRS 2 Valuation models Black-Scholes method Binomial method IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

5 Example 100 options each that vest if employed in 3 years Fair value per option = $15 Total grant date value? Adjust expense for actual vested shares since there is a non-market vesting condition $750,000 (=500x100x15) $250 each year IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

$200,000 Year 1 Year 2 Year 3 Example (continued) $600,000 total expense over three years (50,000 options x 80%) x $15 If 80% are expected to vest (and does vest) IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

$212,500 $227,500 Year 2 Year 3 $224,500 Example (continued) IF At the end of year 1: expect 85% of options to vest At the end of year 2: expect 88% of options to vest At the end of year 3: 44,300 shares (or 88.6%) actually vest $212,500 Year 1 (250 x 0.85) $227,500 Year 2 (500 x 0.88 - 212.5) Year 3 $224,500 (750 x 0.886 - (212.5 + 227.5)) Total expense = $664,500 ($15 x 44,300) IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

$0 total expense reduced to zero  because no options vest Example (continued) - $400,000 Year 3 (250 x 0.8) x 2 $0 total expense reduced to zero  because no options vest All employees resign during period 3 without receiving options (or another non-market vesting condition is not met) $200,000 Year 1 (250 x 0.8) Year 2 IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Case studies

Case study 1 Accounting for a grant of options with graded vesting conditions What expense is recognised in year 2 and why? IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Case study 2 Grant date Why is the determination of grant date important? How does grant date impact the period over which any expense relating to a share-based payment is recognised? (discussion) What is the grant date for the share options? Over what period should the expense in relation to the share options be recognised? Does this have any impact on the determination of the fair value of the share options granted? IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Case study 3 Definitions of market conditions Determine whether the vesting conditions for the share-based payment transaction of Lamentana and Benson should be considered a market condition or a non-market condition IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Questions ? IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr