Modifications of Share-based Payment account for the CHANGES in share-based payments that an entity incorporates as per IFRS 2.
Table of Contents
- Modifications of Share-based Payment – Modifications of Equity Settled SBP
- Modifications of Share-based Payment – Give & Take Modifications
- Modifications of Share-based Payment – Modifications that Change the Classification of SBP
- Modifications of Share-based Payment – Cancellation of Equity Settled SBP
- Synopsis
| (a) Modifications that are beneficial | (b) Modifications that are Not beneficial |
1. Modifications that are Beneficial to Employees
| (a) Increase in FV of the Equity Settled SBP i.e – Decrease in the Exercise Price – Relaxation of Market Performance Conditions – Relaxation of Non-Vesting Conditions |
Additionally, recognize Incremental Fair Value (FV) Measured at the ‘Modification Date’ over the modified vesting period.
[Incremental Fair Value (FV) = FV of ‘Equity Instruments’ after Modification – FV of ‘Equity Instruments’ Before Modification]
| (b) Increase in No. of Equity Instruments Granted |
Additionally, recognize the Fair Value of Additional Equity Instruments granted Measured at ‘Modification Date’ over the period from date of Modification to the end of vesting period of the additional Equity Instruments.
| (c) Other Beneficial Modifications i.e – Relaxation of Service Conditions – Relaxation of Non-Market Performance Conditions |
Take MODIFIED vesting conditions into account Recognizing Expense for SBP.
2. Modifications that are Not Beneficial to Employees
| (a) Decrease in FV of the Equity Settled SBP i.e – Increase in Exercise Price – Tightening of Market Performance Conditions – Tightening of Non-Vesting Conditions |
IGNORE.
| (b) Decrease in No. of Equity Instruments Granted |
Apply ‘Cancellation Accounting‘ for those cancelled SBP arrangement.
| (c) Other Non-Beneficial Modifications i.e – Tightening of Service Condition – Tightening of Non-Market Performance Conditions |
IGNORE.
Modifications having both favorable and unfavorable changes to the terms of Equity Settled Share-based Payment.
For Instance, a Share Option grant can be Modified by reducing the exercise price (give) and simultaneously reducing the number of options granted (take).
1. Accounting (As Per IFRS 2)
Consider the Net Effect of BOTH the Modifications and if the Net Effect is Beneficial then this should be accounted for by applying the requirements for ‘beneficial modifications’ to the net change.
1. Cash Settled SBP to Equity Settled SBP
This occurs when a ‘New Equity Settled SBP‘ is identified as a replacement for Cash Settled SBP.
1.1 Accounting (As Per IFRS 2)
| De-recognize the liability for Cash Settled SBP. |
| Recognize Equity Settled SBP (i.e. SBPR) at its FV as at the Modification date to the extent that the ‘Services’ been rendered. |
| Recognize any difference between the liability de-recognized and SBPR recognized into P&L immediately. |
2. Equity Settled SBP to Cash Settled SBP
This occurs when a Cash Alternative at the employee’s discretion is subsequently added to an Equity Settled SBP that results in a Re-classification as a Financial Liability.
2.1 Accounting (As Per IFRS 2)
At the ‘Modification Date’, RECLASSIFY an amount equal to the FV of liability from equity (SBPR) to liability.
| Liability to be Recognized > SBPR Already Recognized |
|---|
| Approach 1; Recognize the excess as an expense in P&L at the date of Modification. |
| Approach 2; Recognize the entire amount of liability as a reclassification from equity and do NOT recognize any loss in P&L. |
[EITHER approach to be used as an ‘Accounting Policy’ to be applied consistently.]
| Liability to be Recognized < SBPR Already Recognized |
|---|
| – No gain is recognized in P&L for the difference between SBPR recognized and the amount reclassified to liability i.e the difference remains in equity (SBPR). |
| – Subsequently, recognize the SBP expense on the basis of FV of ‘Equity Instruments’ at grant date. |
| – Any subsequent Re-Measurement of the liability (from the Modification date to settlement date) is recognized in P&L. |
| – Firstly, recognize SBP expense at FV of ‘Equity Instruments‘ at the grant date as if NO Modification had occured. The amount is credited partially to the liability and partially to equity in proportion of FV of liability and remaining SBPR on the Modification date. |
| – Second, Re-Measure the liability by applying the requirements of Cash Settled SBP with any gain/loss to be RECOGNIZED in P&L. |
Equity Settled SBP can be cancelled during the vesting period EITHER by:
- Employee(s) by waiving the SBP; OR
- Employer with or without any compensation for such cancellation.
1. Cancellation without Compensation
Cancellation of Equity Settled SBP is accounted for as ‘Accelerated Vesting‘ i.e Immediately recognize the expense for the amount that would have been recognized for services over the remaining vesting period.
2. Cancellation with Compensation
2.1 Compensation – Cash Payment
| Cancellation of Equity Settled SBP is accounted for as Accelerated Vesting. |
| Payment against cancellation is accounted for as Re-purchase of Equity to the extent that it does NOT exceed the FV of the ‘Equity Instruments’ granted, MEASURED at the ‘Re-purchase date‘. |
| Payment in EXCESS of FV of the Equity Re-purchase on the ‘Re-purchase date‘ is recognized as an expense in P&L. |
2.2 Compensation – New Equity Settled SBP
| New Equity Settled SBP Identified as Replacement for Cancelled Equity Settled SBP |
|---|
| The principles of ‘Modification Accounting‘ are applied; – ‘Cancelled SBP’ is accounted for in the usual manner. – Incremental Fair Value Measured at the date on which the ‘Replacement Award’ issued is recognized over the Modified vesting period. |
[Incremental Fair Value = FV of Replacement Award – Net FV of Cancelled Award]
And,
Net FV of Cancelled Award = FV of Cancelled Award Measured at Cancellation Date – Any Payment Made to Employees
| New Equity Settled SBP Not Identified as Replacement for Cancelled Equity Settled SBP |
|---|
| Cancelled Equity Settled SBP treated as ‘Accelerated Vesting‘. |
| ‘New Equity Settled SBP’ is accounted for SEPARATELY. |
Synopsis
Modifications of Share-based Payment under IFRS 2 REFER to changes in the terms or conditions of existing ‘Share-based Payments’. When Modification(s) occur, Entities should Re-assess the fair value of the ‘Modified Awards’ at the date of the Modification.
Any Incremental fair value (FV) arising from the Modification is recognized over the remaining vesting period. If the Modification results in the ‘Cancellation’ and the grant of ‘Replacement’, the original and new awards are treated separately. Adjustments to the recognized equity and deferred tax balances reflect the Modified terms.
Chartered Accountant – ICAP
Bachelor of Accounting (Honours) – AeU, Malaysia