3.2 Share-Based Payments

Measurement of equity-settled share-based payments

Awards issued to nonemployees in exchange for services that are similar to employee services are measured on the same basis as employee awards (i.e., a grant-date fair-value-based measure). Share-based payment awards issued to nonemployees in exchange for goods or for services that are not similar to employee services are measured as of the date the entity obtains the goods or the counterparty renders the service. The awards should be measured on the basis of the fair value of the goods or services received unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the entity should measure their value by reference to the fair value of the equity instruments granted. However, there is a rebuttable presumption that the fair value of the goods or services received can be estimated reliably.

The measurement date is generally the date on which the equity-classified awards are granted.

Modification accounting — awards for which vesting is improbable but becomes probable

Compensation cost is recognized on the basis of the grant-date fair value of the original award plus the incremental value of the modified award on the modification date.

Compensation cost is recognized on the basis of the modified award’s fair-value-based measure as of the modification date.

Graded vesting awards with only service conditions

Graded vesting awards with only service conditions are recognized and measured only as, in substance, multiple awards.

An accounting policy election is made to treat graded vesting awards as either a single award (straight-line cost recognition) or, in substance, multiple awards for both recognition and measurement.

Performance targets satisfied after the requisite service period

Performance targets satisfied after the requisite service period are treated as a nonvesting condition. Therefore, the condition is reflected in the awards’ fair-value-based measure.

Such performance targets are treated as a vesting condition for performance conditions that can be met after the employee’s requisite service period or nonemployee’s vesting period. Therefore, the performance target should not be directly reflected in the awards’ fair-value-based measure.

Classification — bearing the risks and rewards of ownership for a reasonable period (put options)

A share-based payment award that can be redeemed for cash at fair value at the employee’s option must be classified, at least in part, as a liability. There is no exception for an employee that bears the risks and rewards of share ownership for a reasonable period of time.

A share-based payment award that could be cash settled at the grantee’s option does not have to be classified as a liability if it requires the grantee to bear the risks and rewards of share ownership for a “reasonable period of time” after vesting (defined as a period of at least six months).

Forfeitures of awards

An entity is required to estimate expected forfeitures.

For awards with service conditions, an entity makes an entity-wide accounting policy election (separately for employee awards and nonemployee awards) to either (1) estimate the total number of awards for which the employee’s requisite service period or nonemployee’s vesting period will not be rendered (i.e., estimate expected forfeitures) or (2) account for forfeitures when they occur.

Modification accounting — equity to liability

Any excess is recognized in additional paid-in capital (APIC). The same holds true if the fair value of a modified award is less than or equal to the fair value of the original award (the offsetting amount is recorded to APIC).

Any excess of the fair value of the modified award over the grant-date fair value of the original award is recorded as additional compensation cost. When the fair value of a modified award is less than or equal to the grant-date fair value of the original award, the offsetting amount is in APIC.

Modification accounting — liability to equity

As of the date of the modification, the existing liability is derecognized. The fair value of the equity instruments granted at the modification date is recognized in equity to the extent to which goods or services have been received. Any difference between the liability derecognized and the amount recognized in equity is reflected immediately in the income statement.

Upon modification, the liability is reclassified to equity. To the extent that the fair value of the modified award is less than the fair value of the liability at the time of the modification, the difference is deemed to be a capital contribution and recognized in equity. If the fair value of the modified award is higher than the liability, the excess is generally recognized as compensation expense prospectively over the employee’s remaining requisite service period or nonemployee’s vesting period.

Liability classification — share-based payment arrangements

IFRS 2 focuses on whether the award can be cash settled.

ASC 718 provides more detailed requirements that may result in the classification of more share-based arrangements as liabilities.

Recognition of payroll taxes

If taxes on an employer’s payroll are related to a stock-based compensation plan, an entity expenses them in the income statement when it recognizes the related expense. To account for such payroll taxes, the entity should apply the related guidance on cash-settled share-based payments.

Under ASC 718, payroll tax liabilities related to share-based payment awards should be recognized on the date that the measurement and payment of the tax is triggered (e.g., upon exercise or vesting).

Repurchasing shares to satisfy employer’s statutory tax withholding requirements

If an entity (1) has the ability to repurchase shares issued upon exercise or vesting to satisfy its statutory withholding requirements for an employee and (2) is statutorily required to settle taxes of share-based payment awards in this way, the entity classifies the award as equity-settled in its entirety. If the settlement for taxes exceeds the withholding limit, only the excess number of equity shares withheld is separated and accounted for as a cash-settled share-based payment.

For awards that can be redeemed, in part, for cash at fair value to cover the employer’s statutory withholding requirements for an employee, there is an exception to liability classification. However, if the settlement amount of the awards exceeds the withholding limit, the entire award is classified as a liability.

Awards indexed to a condition other than a performance, service, or market condition (such as conditions indexed to the consumer price index [CPI])

Because IFRS 2 focuses on whether an award will be cash settled, the award may not be classified as a liability unless it is actually cash settled. The entity should consider whether this indexed condition meets the definition of a “non-vesting condition” and, therefore, would be reflected in the award’s fair value.

These arrangements are classified as liabilities, and the additional condition should be reflected in the award’s fair value.

Share-based payment awards with a performance condition based upon the occurrence of a liquidity event (e.g., an initial public offering [IPO] or a change in control)

For awards in which a liquidity event is assessed as a performance condition, compensation cost is recognized if and when the liquidity event is expected to occur.

Often, it will not be possible to conclude that a liquidity event such as an IPO is expected to occur until the plans for the liquidity event are well advanced.

A liquidity event such as a change in control or an IPO is generally not considered probable (i.e., a future event is likely to occur) until it occurs. Accordingly, an entity generally does not recognize compensation cost related to awards that vest upon a change in control or an IPO until the event occurs.