1. E-14 Advanced Accounting and Financial Reporting
Lecture 11 & 12
7-Nov-18
E-14 Advanced Accounting and Financial Reporting
Lecture 13 & 14
IAS 19 Employee Benefits
IFRS 2 Share Based Payments
Sajid Shafiq, ACA
IAS 19 & IFRS 2 E

2. Objective and Scope Objective Scope
Distinguish between the different forms of remuneration that make up employee benefits;
Demonstrate a knowledge of the distinction between short and long-term benefits;
For each of the benefit types, understand the recognition and measurement rules;
Understand the difference between a defined contribution plan and a defined benefit plan, and hence the different accounting treatments required for each ; and
understand the implications of share-based payment transactions as a form of employee benefit.
Employee benefits are all forms of consideration, for example cash bonuses, retirement benefits and private health care, given to an employee by an entity in exchange for the employee’s services.
Types of EB addressed by IAS 19 are:
Short-term employee benefits;
Post-employment benefits;
Other long-term employee benefits; and
Termination benefits.
IAS 19 & IFRS 2

3. Types of Employee Benefits
Short Term EB
Post Employment Benefits
Those falling due wholly within 12 months after the end of the period in which the employee service is rendered e.g. salary, overtime, paid leave
Those (other than termination benefits and equity compensation benefits) payable after employment e.g. pensions, gratuity
Other Long Term EB
Termination Benefits
Those (other than post employment benefits, termination benefits and equity compensation benefits) not falling due wholly within 12 months after the end of the period in which the employee service is rendered e.g. long service bonuses,
Those payable due to termination of employment or voluntary redundancy
IAS 19 & IFRS 2

4. Short Term Employee Benefits Examples
Wages, salaries and social security contributions;
Short-term absences where the employee continues to be paid, for example paidannual vacation, paid sick leave and paid maternity/paternity leave. (To fall within the definition, the absences should be expected to occur within twelve months of the end of the period in which the employee services were provided);
Profit-sharing and bonuses payable within twelve months of the end of the period; and
Non-monetary benefits, for example private medical care and company cars.
IAS 19 & IFRS 2

5. Short Term Compensated Absences
Accumulating absences
These are benefits, such as paid annual vacation, that accrue over an employee’s period of service and can be potentially carried forward and used in future periods;
Recognized as an expense as the employee provides the services giving rise to this entitlement
For unused entitlement a liability should be created for expected utilization.
Non-accumulating absences
These are benefits that an employee is entitled to, but that are not normally capable of being carried forward to the following period if they are unused during the period, for example paid sick leave.
The cost of providing compensation for non-accumulating absences should be expensed as the absences occur.
IAS 19 & IFRS 2

6. Short Term Compensated Absences
Illustration 1 An entity has 5 employees and each is entitled to 20 days paid vacation per year, at a rate of CU50 per day. Unused vacation is carried forward to the following year. All 5 employees work for the entity throughout the year and are therefore entitled to their 20 days of vacation. An expense should be recognised in profit or loss for: 5 employees x 20 days x CU50 = CU5,000 4 of the employees use their complete entitlement for the year and the other, having used 16 days, is permitted to carry forward the remaining 4 days to the following period. A liability will be recognised at the end of the reporting period for: 1 employee x 4 days x CU50 = CU200
IAS 19 & IFRS 2

7. Short Term Profit-sharing and Bonus Plans
Recognize when:
The entity has a present legal or constructive obligation to make such payments as the result of a past event; and
A reliable estimate of the obligation can be made.
Illustration 2
An entity has a contractual agreement to pay 4% of its net profit each year as a bonus. The bonus is divided between those who are employees of the entity at the end of the reporting period. The following data is relevant:
Net profit: CU120,000
Average employees 5
Employees at start of year 6
Employees at end of year 4
An expense should be recognised in profit or loss for the year in which the profits were made and therefore the employees’ services were provided, for:
CU120,000 x 4% = CU4,800
Each of the 4 employees remaining with the entity at the end of the reporting period is entitled to CU1,200. A liability should be recognised if the bonuses remain unpaid at the end of the reporting period.
IAS 19 & IFRS 2

8. Post Employment Benefits
Are of TWO types.
Defined CONTRIBUTION Plan
are those under which
An entity pays FIXED contributions into a separate entity (a fund), AND
Has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all EB relating to employee service
Defined BENEFIT Plan
are post employment benefit plans other than those meeting the definition above
IAS 19 & IFRS 2

9. Defined Contribution Plans
DCP have terms that specify how contributions to the individual’s accounts are to be determined, rather than the amount of post employment benefits the individual is to receive e.g. 10% of Basic Salary
Under DCB,
The entity’s legal or constructive obligation is limited to the amount that it agrees to contribute
The amount of the PEB received by the employee is determined by the amount of contributions paid together with investment returns, AND
Actuarial risk (that benefit will be less than expected) and investment risk (that assets invested will be insufficient to meet the expected benefits) fall on the EMPLOYEE
IAS 19 & IFRS 2

10. Defined Contribution Plan
Accounting
Illustration 3
Where Contribution Due is MORE than payment, recognize a LIABILITY (accrued expense)
Where Contribution Due is LESS than payment, recognize an ASSET (prepayment) to the extent it will lead to a reduction in future payments or cash refund
Contribution Due itself shall be taken to INCOME STATEMENT unless another IAS/IFRS requires or allows its inclusion IN COST of an ASSET
The employing entity is required to pay a contribution equal to 5% of salaries into a plan. Once the contributions have been paid, the entity has no further payment obligations.
Total salaries of all employees under Benefit C in 2005: €900,000
Total payments into the plan in 2005: €40,000
There was no asset or liability for prepaid/outstanding contributions at 31 December 2010
Expense for the year is € 45,000
Liability at year end is € 5,000
IAS 19 & IFRS 2

11. Identify whether Defined Contribution or Defined Benefit
the plans have terms that specify how contributions into the plan are to be determined
the plans have terms that specify the amount of post-employment benefits the employees are to receive.
the entity’s obligation is to provide the benefits agreed under the plan to current and former employees.
actuarial risk and investment risk fall on the entity.
actuarial risk and investment risk fall on the employee
the entity’s obligation is determined by the amount to be contributed into the plan for the period.
IAS 19 & IFRS 2

12. Defined Benefit Plan– 1% x Final Salary x Years of Service
Step-1
Use Actuarial Techniques to estimate the amount of benefits that employee has earned for service in the current and prior periods
Step-2
Discount the benefit using Projected Unit Credit Method in order to determine Present Value of the DB obligation and the current service cost
Step-3
Determine the fair value of any plan assets (normally by actuaries)
Step-4
Determine the actuarial gains and losses and the portion to be recognized in the period applying “corridor limit” approach
Step-5
Determine any Past Service Cost and gain or loss where a plan has been curtailed or settled
Step-6
Determine the amounts to be recognized in Income Statement and Balance Sheet(SFP)
IAS 19 & IFRS 2

13. Contributions paid into the plan and Benefits paid out
Defined Benefit Plan
Contributions paid into the plan and Benefits paid out
Contributions paid into a plan increases the value of plan assets and have no impact on obligation
Benefits paid out decreases the value of asset as well as amount of obligation
Current Service Cost
Is increase in the PV of DB obligation resulting from employee service in the current period. It is the expected cost of providing the benefits that are allocated to that period.
Interest Cost
Is the increase in present value of benefit as a result of unwinding of discount. This can be obtained by taking difference of two PVs at different dates or by simply multiplying opening PV with the discount rate used to determine PV
Return on plan assets
Interest, dividends and other revenues from plan assets including realized or unrealized gains/losses
LESS any administrative costs and taxes payable on such return
Based on market expectations
Difference between expected and actual return is taken to actuarial gain/loss
IAS 19 & IFRS 2

14. Defined Benefit Plan Step 1 and 2 illustrated
IAS 19 & IFRS 2

15. Defined Benefit Plan Step 3 FV of plan assets
Fair value is based on market value of plan assets
When no market price is available, FV is estimated by e.g. discounting future CFs using discount rate that reflects both
Risk associated with the plan assets, AND
Maturity or expected disposal date of the assets
IAS 19 & IFRS 2

16. Step 4 Actuarial Gains and losses
Defined Benefit Plan
Step 4 Actuarial Gains and losses
These arise as a result of experience adjustments in actuarial assumptions regarding obligation and assets
Actuarial assumptions are
Demographic assumptions (future characteristics of current and future employees and their dependents eligible for benefit e.g. death rates, employee turnover, disability etc.)
Financial assumptions (e.g. discount rate, salary increment, expected return on plan assets etc.)
These are part of both the DB liability (unrecognized portion) and DB income/expense (recognized portion)
IAS 19 & IFRS 2

17. Defined Benefit Plan Step 4 Actuarial Gains and losses
Obligation
B/f Actuarial value………...xxx
Current service cost……....xxx
Interest cost…..…………....xxx
Benefits paid……………...(xxx)
Past service cost….……….xxx
Less:
C/f Actuarial value…….…..xxx
Actuarial gain/loss………...xxx
Asset
B/f Fair Value………………xxx
Expected return …..……….xxx
Contributions paid………....xxx
Benefits paid ……….…….(xxx)
C/f Fair Value…….…….…..xxx
Actuarial gain/loss ………..xxx
IAS 19 & IFRS 2

18. Defined Benefit Plan Step 4 Actuarial Gains and losses
The corridor approach is used to determine the MINIMUM portion of net cumulative unrecognized actuarial gains and losses at the end of PREVIOUS reporting period that should be recognized during the current period.
The approach requires excess of unrecognized gains/losses over 10% of { higher of PV of obligation or FV of plan assets} to be recognized over remaining working lives of employees
An entity may adopt any systematic method resulting in faster recognition of actuarial gains and losses than the minimum requirement provided,
The same basis is applied to both gains and losses, AND
It is applied consistently from period to period
IAS 19 & IFRS 2

19. Defined Benefit Plan Step 4 Actuarial Gains and losses
Illustration 4 The fair value of the scheme assets at the end of 2010 was CU23,000 and the present value of the scheme liabilities at that date was CU15,000. Unrecognized actuarial loss and remaining working lives of employees at end of last year were CU 3,000 and 14 years, respectively. The corridor is CU2,300 (being 10% of CU23,000, the higher figure). Unrecognised actuarial loss is greater than the corridor it will be released to profit or loss from the following year(i.e. 2011). The minimum amount recognised in profit or loss for year 2011 is CU50 ((CU3,000 less CU2,300)/14)
IAS 19 & IFRS 2

20. Defined Benefit Plan Step 5(a) Past service cost
Past service cost is the increase in the present value of the defined benefit obligation for employee service in prior periods, resulting in the current period from the introduction of, or changes to, post-employment benefits.
Past service cost may be either positive (where benefits are introduced or improved) or negative (where existing benefits are reduced).
Vested employee benefits are employee benefits that are not conditional on future employment.
PSC should be recognized immediately for employees whose benefits have been vested
PSC of employees whose benefits have not been vested, should be recognized over the vesting period.
IAS 19 & IFRS 2

21. Defined Benefit Plan Step 5(a) Past service cost
Illustration __ An entity operates a pension plan that provides a pension of 2% of final salary for each year of service. The benefits become vested after five years of service. On 1 January 2011, the entity improves the pension to 2.5% of final salary, for each year of service starting from 1 January At the date of the improvement, the present value of the additional benefits for service from 1 January 2006 to 1 January 2011, is as follows: $000 Employees with more than five years’ service at Employees with less than five years’ service at (average period until vesting: three years) The entity recognises $150,000 immediately, because those benefits are already vested. The entity recognises $120,000 on a straight-line basis over three years from 1 January 20X5.
IAS 19 & IFRS 2

22. Defined Benefit Plan Step 5(b) Curtailments and settlements
A curtailment in a defined benefit plan occurs when there is a significant reduction in the number of employees who are members of the plan or where employees’ future services will not substantially increase the benefits payable under the plan. Where such changes arise, the effect of the curtailment should be reported when it occurs. A settlement occurs when an entity enters into a transaction that removes all future obligations under part of the defined benefit plan. An example of a settlement is where a lump sum is provided to the members of the plan but no further benefits will be received under it. Where a settlement is made, it should be accounted for as it takes place. An entity should remeasure the defined benefit obligation immediately before the effect of a curtailment or settlement is calculated. The gain or loss arising on a settlement or curtailment should be calculated by assessing the impact on the present value of the defined benefit obligations, the impact on plan assets and the effect on any deferred amounts in relation to the plan.
IAS 19 & IFRS 2

23. Defined Benefit Plan Step 6 Recognition in IS and BS(SFP)
Balance Sheet (SFP)
The Defined Benefit LIABILITY recognized in the BALANCE SHEET is the net total of
PV of the defined benefit obligation
PLUS, any actuarial gains (or LESS any actuarial losses) not recognized in the income statement
LESS any past service cost not yet recognized in the income statement
LESS the fair value of any plan assets at BS date.
Income Statement
Net total of the following is recognized as expense or income
Current Service Cost
Interest cost
(Expected return on plan assets)
Actuarial (gains)/losses recognized
Past service cost recognized
Effect of any curtailment or settlement
IAS 19 & IFRS 2

24. Defined Benefit Plan Asset Ceiling
DB plan assets (surpluses) are measured at the lower of:
the amount calculated above, or
the total of:
any cumulative unrecognised net actuarial losses and past service costs
the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan
Illustration ___
Normal Calculation
Asset Ceiling
The following information relates to a defined benefit plan: $000 -Fair value of plan assets PV of pension liability PV of future refunds and reductions in future contributions Unrecog actuarial losses 80
-Unrecog past service cost 50
$000
PV of pension liability 800
Fair value of plan assets (950)
(150)
Unrecog actuarial losses (80)
Unrecog past service cost (50)
Surplus (plan asset) (280)
$000
Unrecog actuarial losses 80 Unrecog past service cost 50 PV of future refunds and reductions in future contributions 70
200
Therefore the amount of the asset recognised is restricted to $200,000.
IAS 19 & IFRS 2

25. Defined Benefit- Practical Example
Balances
Contributions paid to the fund (in cash) in 2005: €180,000
Benefits paid to the employees in 2005: €300,000
Current service cost in 2005: €260,000
Present value of obligation
31 December 2004: €2,000,000
31 December 2005: €2,282,000
Fair value of plan assets
31 December 2004: €2,100,000
31 December 2005: €2,184,000
Other Information
Net cumulative un recognized actuarial gains at 31 December 2004: €360,000
The average remaining working life of employees at 31 December 2004 is 10 years.
Expected discount rate on 1 January 2005: 10%,Actual discount rate for 2005: 14.32%
Expected return on plan assets on 1 January 2005: 12%,Actual return on assets: 9.71%
Accounting policy notes
The group has always taken the minimum amount of actuarial gains and losses to the income statement each period.
Required
IS and BS (SFP)figures
IAS 19 & IFRS 2

26. Other Long Term Employee Benefits
Examples include
Sabbatical leave
Jubilee (e.g. a bonus payable for 15 years of service)
Long service bonus
Lon term disability benefits
Profit sharing, bonuses or deferred compensation payable 12 months or more after the end of the period in which the employee renders the related service
Although such long-term benefits have many of the attributes of a defined benefit pension plan, they are not subject to the same level of uncertainty. As a consequence, the accounting treatment adopted is a simplified version of that for a defined benefit plan. For example, actuarial gains and losses are recognised immediately, so as are any past service costs.
IAS 19 & IFRS 2

27. Are employee benefits: Demonstrably Committed
Termination Benefit
Are employee benefits:
payable as a result of either
An entity’s decision to terminate an employee’s employment before the normal retirement date, or
An employee’s decision to accept voluntary redundancy in exchange for those benefits
Dealt separately from other employee benefits because they arise as a result of termination and not from employee’s service.
Recognition
As they do not provide an entity with future economic benefits, they are recognized immediately
A liability and an expense are recognized when, and only when, the entity is demonstrably committed to either
Terminate the employment of employees before the normal retirement date, or
Provide termination benefits due to making and offer to encourage voluntary redundancy
Demonstrably Committed
When, and only when
It has a detailed formal plan for the termination and is without realistic possibility of withdrawal.
The detailed plan should include, as a minimum
Location, function and approximate number of employees whose services are to be terminated
Termination benefits for each job classification or function, AND
Time at which the plan will be implemented
IAS 19 & IFRS 2

28. Classification Practice
Classify these Employee Benefits
The beneficiary is promised a particular level of pension after retirement. The premiums payable by the entity are not fixed in advance.
An employer pays all employees a bonus in January based on turnover for the previous year.
An employer pays a contribution equal to 5% of wages into a post-employee benefit plan, but has no obligation beyond payment of the contributions.
An entity refunds all medical aid contributions paid by retired employees, but it doesn’t maintain a separate fund for this obligation.
An entity will pay an amount of deferred compensation 15 months after the period in which it is earned
IAS 19 & IFRS 2

29. IAS 19 Employee Benefits
7-Nov-18
IAS 19 & IFRS 2

30. EC
7-Nov-18
IAS 19 & IFRS 2

31. IFRS 2-Share Based Payments
Share Based Payment transactions
Grant Date
Measurement Comparison
Vesting Conditions
Modifications
Cash Settled Share Based Payments
Share Based Payments with cash alternatives
IAS 19 & IFRS 2

32. Share Based Payment Transactions
IFRS 2 defines share-based payment transactions as transactions in which goods or services are received or acquired for which the consideration can be in one of three different forms of settlement.
Equity-settled share-based transactions: the entity issues shares and share options (or other equity instruments), as consideration for receiving or acquiring goods or services.
 Cash-settled share-based payment transactions: the entity incurs a liability to settle the transaction in cash (or other assets) for amounts that are based on the price (or value) of the entity’s share options (or other equity instruments).
Share-based payment transactions with cash alternatives: either the entity or the counterparty has the choice of whether settlement will be in the form of shares (or other equity instruments) or cash to the value of the entity’s shares.
IAS 19 & IFRS 2

33. Equity-settled share-based transactions
Example 1
An entity grants 100 share options to each of its 500 employees as compensation for service to be rendered by the employees during the following three years of employment.
Each grant is conditional upon the employee remaining in employment for the full three years.
 Example 2
An entity grants 50 shares to each of the member of its executive board, provided that the member remains in the entity’s employment for the next five years.
If the volume of sales reported over the first three years increases by 40%, each member will receive an additional 20 shares.
Example 3
An entity grants a 1,000 share options to a senior executive, conditional upon the executive remaining employed until the end of two years.
In terms of the agreement between the entity and the executive, the share option cannot be exercised unless the share price has increased by 25% by the middle of the second year.
Example 4
A company in the manufacturing business purchases 1,000 units of raw material from a supplier.
In terms of its agreement, the company settles the transaction by issuing 2,000 of its shares to the supplier as consideration for the raw materials acquired
IAS 19 & IFRS 2

34. IAS 19 & IFRS 2

35. Is the transaction with employees or others providing similar services?
Measure at the fair value of the equity instruments granted at grant date over vesting period
Yes No
Measure at the f air value of the equity instruments granted at grant date on receipt of goods-services. No
Can the fair value of the goods and services received be measured reliably?
Yes
Measure at the fair value of the goods and services received at the date they are received
IAS 19 & IFRS 2

36. Grant Date
Definition It is important to understand the meaning of grant date in IFRS 2 because this is the date on which equity settled share based payment transactions with employees and other providing similar services are measured. The definition of grant date requires three incidences to have occurred Agreement The entity and the employee (or other party providing a similar service) has agreed to a share based payment arrangement. An agreement is in place when both parties have a shred understanding of the terms and conditions of the arrangement Confer of right The entity has conferred on the employee (or other party providing similar service) the right to cash (or other assets), or equity instruments of the entity. Whether this is conditional upon meeting certain vesting requirements does not impact the determination of the grant date. Approval If the agreement is subject to an approval process, the grant date is the date on which that approval is obtained.
IAS 19 & IFRS 2

37. Measurement Comparison
Employees versus non-employees
The date at which the entity measures the equity instruments granted is called the measurement date.
The date is different for
share based payment transactions with employees (and others providing similar service), and
transactions with non employees.
Furthermore the measurement is also determined in a different way for employees than for non-employees.
IFRS 2 requires that transactions should be measured by reference to the fair value of the goods and services received, unless that fair value cannot be estimated reliably.
IAS 19 & IFRS 2

38. Measurement Comparison
IFRS 2 distinguishes between ‘employees and others providing similar service’ and ‘non-employees’ when it prescribes when and how equity settled share based payment transactions should be measured.
Employee when?
The measurement date for transactions with employees (and other providing similar service) is the grant date.
Employees: how?
Typically it is not possible to estimate reliably the fair value of service rendered by employee. So equity settled share based payment transactions with employees (and other providing similar service) are measured with reference to the fair value of the equity instrument granted rather than the service received.
In rare cases, the fair value of the equity instrument can also not be estimated reliably, in these rare cases only, the entity have to measure the equity instruments at their intrinsic value.(e.g. in case of non traded options)
IAS 19 & IFRS 2

39. Measurement Comparison
Non-employee when?
The measurement date for transactions with non-employees is always the date the entity obtains the goods or the counterparty (e.g. the supplier) renders the service.
 Non-employee: how?
With non employee it is presumed that the fair value of the acquired goods and services can be measured reliably. the goods and services received as well as the corresponding increase in equity is measured directly at the fair value of the goods and services received.
However if that fair value cannot be estimated reliably the transaction is measured by reference to the fair value of the equity instruments granted i.e. the same as with transactions with employees.
IAS 19 & IFRS 2

40. Vesting Conditions Recognition principle
IFRS 2 requires that services received as consideration in a share based payment arrangement to be recognized as the services are received.
Past services
If the shares (or other equity instruments) granted in terms of the share based payment arrangement vest immediately, the entity must presume, in the absence of evidence to the contrary that the services rendered have been received (i.e. past services).
Consequently the full amount for the services rendered is recognized on grant date.
Future services
If the shares (or the equity instruments) do not vest immediately but vesting is postponed until the counterparty completes a specified period of service the entity must presume that the services to be rendered as consideration for those shares will be received in the future. That is during the vesting period.
As certain requirements are to be met before the counterparty has the right to take ownership it is logical not to recognize the full expense immediately (that is at grant date), but rather as the services are rendered during the period.
IAS 19 & IFRS 2

41. Vesting Conditions
A share based payment arrangement can include various different types of vesting conditions.
IFRS 2 divides these conditions in two main groups.
Non market
Market
The accounting for the two groups is different.
IAS 19 & IFRS 2

42. Non Market and Market Conditions- Examples
Non market conditions
Market vesting conditions
 Share options granted to employees will vest, if the employee remains in the entity’s employ for three years.
Shares granted to managers will vest, if the entity’s earnings increase by more than 20% by the end of year two.
Share options granted to sales executives will vest, if the entity’s sales increase by an average of 10% per year.
Shares granted to the entity’s lawyers will vest, if the entity is successful in winning a law case defended by the lawyers.
Share options granted to senior executives vest, if the share price increases from $4 to $5 by the end of year three.
Shares granted to board members will vest and become exercisable immediately, if and when the entity’s share price increases by 20%.
Share options granted to sales executives vest when the share price has an average annual increase of 3% over a period of four years.
IAS 19 & IFRS 2

43. Non Market Conditions- Theory
For transactions with the employees the fair value of the equity instruments granted needs to be determined at grant date.
IFRS 2 requires that the fair value should NOT include any effects of non market vesting conditions included in the share based payment arrangement.
Instead of incorporating the non market conditions into the measurement of the equity instruments the conditions are incorporated by adjusting the number of equity instruments during the vesting period to the number that is expected to vest ultimately by the end of the vesting period.
This is called the true-up model because the number of equity instruments expected to vest (truly) is assessed and adjusted at every year end during the vesting period
IAS 19 & IFRS 2

44. Non Market Conditions- Practice
An entity has granted 100 shares options to each of its 500 employees. Each grant is conditional upon the employee remaining in the employ of the entity for the nest three years. It’s a Non market vesting conditions Fair value at grant date The entity estimates at grant date that the fair value of each share option is $4. (Important note: this fair value ignores the question of whether the non market vesting condition will be satisfied during the vesting period) Number of shares expected to vest Year 1: in the 1st year 20 employees leave. By the end of the year 1 the entity estimates that 55 more employees will have left by the end of the year three. Year 2: during the 2nd year 22 employees leave. The entity revises its estimate of the previous year and determines that a further 18 will leave during year three. Year 3: in the 3rd year. 15 employees leave. Therefore in total 57 employees have left during the three year vesting period. Calculate: The amount of expense to be recognized each year as per above expectation.
IAS 19 & IFRS 2

45. Market conditions- Theory
The accounting treatment for market condition differs from the accounting treatment for non market conditions.
IFRS 2 states that market conditions such as target share prices upon which vesting is conditional should be taken into account when estimating the fair value of the equity instruments granted.
This means that an entity will recognize the services received from an employee who satisfies all non market vesting conditions irrespective of whether that market condition is satisfied.
In other words it makes no difference whether that share price target is achieved. The possibility of the share price target not being met will already have been built into the fair value measurement at grant date
IAS 19 & IFRS 2

46. Market Condition- Practice
At the beginning of year one, an entity grants 10,000 share options to a senior executive.
Non market vesting condition: Vesting conditional upon the executive remaining in the entity’s employ until the end of year three.
Market vesting condition: Increase from $15 to $20 per share.
The share option cannot be exercised unless the share price has increased from $15 at the beginning of year one to above $20 by the end of year three.
If this target has been met by the end of year three (the share price has gone above $20). Then the share options can be exercised at any time during the nest six years (by the end of year nine).
 Fair value measurement
Takes both possibilities into account
At grant date, the entity applies options pricing model that takes into account the possibility that the share price.
Will exceeds the $20 target level by the end of year three, which will result in the share option becoming exercisable.
Does not exceed the $20 target level by the end of year three, which will result in the share options being forfeit.
 Fair value result
The final estimate of the fair value including this market condition, comes to $4.50
The share price at the end of the year one is $18. Calculate the amount of expense to be recognized for year one.
IAS 19 & IFRS 2

47. Modifications
The general rule is that, apart from dealing with reductions due to failure to satisfy vesting conditions, the entity must always recognise at least the amount that would have been recognised if the terms and conditions had not been modified (that is, if the original terms had remained in force).
If the change reduces the amount that the employee will receive, there is no reduction in the expense recognised in profit or loss.
If the change increases the amount that the employee will receive, the difference between the fair value of the new arrangement and the fair value of the original arrangement (the incremental fair value) must be recognised as a charge to profit.
The extra cost is spread over the period from the date of the change to the vesting date.
If a change to a vesting condition makes it less likely that options will vest (for example, a target is made harder to meet or the vesting period increased), the entity continues to account for the arrangement as if the original conditions still apply.
If a change to a vesting condition makes it more likely that options will vest (for example, a target is eliminated), the entity accounts for the arrangement based on the number of options that are expected to vest under the new conditions
An entity may alter the terms and conditions of share option schemes during the vesting period.
For example, it might increase or reduce the exercise price of the options, which makes the scheme less favourable or more favourable to employees.
It might also change the vesting conditions, to make it more likely or less likely that the options will vest
IAS 19 & IFRS 2

48. Cash Settled Share Based Payments
Example 1
An entity purchases stock (inventory) from a supplier. The terms and conditions of the agreement provide that the consideration is a cash payment due six months after the stock is delivered.
The amount of the cash payment is based on the closing share price at that delivery date.
 Example 2
As part of its remuneration package, an entity grants 250 share appreciation rights (SARs) to each of its 600 employees. Provided that the employees remain in the entity’s employ for the next four years.
This means that the employees will become entitled to a future cash payment based on the increase (appreciation) in the entity’s share price from a specified level over a specified period of time
IAS 19 & IFRS 2

49. Cash Settled Share Based Payment
Initial
A liability must be recognized when goods are acquired or as services are rendered for which the compensation is a cash-settled share based payment
The entity must initially measure the goods or services acquired and the liability incurred at the fair value of the liability.
Subsequent
Until liability is settled the entity must re-measure the fair value of the liability at:
Each reporting date and
At the date of settlement
With any changes in fair value recognized in profit or loss for the respective period.
IAS 19 & IFRS 2

50. Cash Settled Share Based Payment
If the cash settled share-based payment
Expire due to failure to meet a vesting condition (either market or non market vesting condition) or
Is forfeited.
Then the liability is reversed and a gain recognized in that period.
No expense is recognized if all the vesting conditions have not been satisfied
IAS 19 & IFRS 2

51. Cash Settled Share Based Payment
7-Nov-18
Cash Settled Share Based Payment
Illustration __
On 1 January 20X1 an entity grants 100 cash share appreciation rights (SAR) to each of its 300 employees, on condition that they continue to work for the entity until 31 December 20X3. During 20X1, 20 employees leave. The entity estimates that a further 40 will leave during 20X2 and 20X3.
During 20X2, l0 employees leave. The entity estimates that a further 20 will leave during 20X3.
During 20X3, 10 employees leave.
The fair values of one SAR for each year are shown below.
20X1 $10.00
20X2 $12.00
20X3 $15.00
Calculate the amount to be recognised as an expense for each of the three years ended 31 December 20X3 and the liability to be recognised in the statement of financial position at 31 December for each of the three years.
Solution
Year Liability at YE Expense
$000 $000
20X1
(( ) x 100 x 10 x 1/3)
20X2
(( ) x 100 x 12 x 2/3)
20X3
(( ) x 100 x 15)
IAS 19 & IFRS 2
IAS 19 & IFRS 2 E

52. Share Based Payments with cash alternatives
Some employees’ share-based payment transactions allow the employee to choose whether to receive cash or equity instruments. This means that a compound financial instrument is granted to the employee, i.e. a financial instrument with both a debt and equity component.
Example
An entity grants 10 employees the right to choose one of the following
500 phantom shares (i.e. right to a cash) payment equal to the value of 500 shares), or
550 shares
The grant is conditional upon the employees remaining in the entity’s employ for the next four years. If the share alternative is chosen, the shares must be held for a further four years. If the cash alternative is chosen the cash will be received by the end of the four year period. The respective employees who have chosen the cash alternative will forfeit the right to receive shares.
IAS 19 & IFRS 2

53. Share Based Payment with Cash alternative
There are two alternative types of share based payment transactions with cash alternatives where either the
Counter party, or
company
Has the choice of settlement
IAS 19 & IFRS 2

54. Option with Counter Party
Some employee share based payment arrangements allow the employee to choose whether to receive cash/other assets or equity instruments.
This means that a compound financial instrument has been granted, i.e. a financial instrument with both a debt and equity compound.
IAS 19 & IFRS 2

55. Option with the Company
For a share based payment transaction in which the terms of the arrangement provide the entity with the choice of whether to settle in cash or by issuing equity instruments, the entity must determine whether it has a present obligation to settle in cash and account for the share based payment transaction accordingly.
An entity has a present obligation to settle in cash if:
The choice of settlement in equity instruments has no commercial substance (e.g. because the entity is legally prohibited from issuing shares) or
The entity has a past practice or a stated policy of setting in cash or
Generally settles in cash whenever the counterparty asks for cash settlement.
If the entity has a present obligation to settle in cash, it must account for the share-based payment transactions in accordance with the requirements applying to cash settled share based payment transactions.
IAS 19 & IFRS 2

56. IFRS 2 Share Based Payments
A company issued share option on June 20X6 to pay for the purchase of inventory. The inventory is eventually sold on 31 December 20X8. The value of the inventory on June 20X6 was $6m and this value was unchanged up to the date of sale. The sale proceeds were $8m. The shares issued have a market value of $6.3m.
How will this transaction be dealt with in the financial statements?
Types.. Equity Settled, Cash Settled and with Cash alternative
With employees and others providing similar services and for goods and services
Market and non market vesting conditions
Grant date… Intrinsic value… True up model
Related DT implications
A company operates in a country where it receives a tax deduction equal to the intrinsic value of the share options at the exercise date. The company grants share options to its employees with a fair value of $4.8m at the grant date. The company receives a tax allowance based on the intrinsic value of the options which is $4.2m. The tax rate applicable to the company is 30% and the share options vest in three-years’ time.
7-Nov-18
IAS 19 & IFRS 2

57. IAS 19 & IFRS 2