The goods or services received or acquired in an equity-settled share-based payment transaction are recognised as the goods are obtained or the services are received, with a corresponding increase in equity.

The goods or services received in a share-based payment transaction may qualify for recognition as an asset. If not, they are recognised as an expense.

Services are typically consumed immediately, in which case an expense is recognised as the counterparty renders service. Goods might be consumed over a period of time or, in the case of inventories, sold at a later date, in which case an expense is recognised when the goods are consumed or sold. However, sometimes it is necessary to recognise an expense before the goods or services are consumed or sold, because they do not qualify for recognition as assets. For example, an entity might acquire goods as part of the research phase of a project to develop a new product. Although those goods have not been consumed, they might not qualify for recognition as assets under the applicable IFRS.

It will normally be relatively straightforward to ascertain when goods are received, but this is not necessarily so when services are involved. The approach to be adopted in relation to the timing of recognition depends largely on the concept of vesting. If equity instruments vest immediately then, in the absence of evidence to the contrary, it is presumed that the consideration for the instruments (e.g. employee services) has been received. The consideration (i.e. an expense or asset, as appropriate) should, therefore, be recognised in full, with a corresponding increase in equity.

The goods or services acquired in a share-based payment transaction should be recognised, either as an expense or as an increase in assets, when they are received.

Group situations and location of share-based payment charge

It is not always clear which entity or entities within a group should bear the IFRS 2 charge. For example, this could arise where an award has been granted to employees who provide services to a number of entities within a group; or where employees are remunerated by a service entity for services to a number of operating entities; or where individuals are directors of both the parent entity and an operating subsidiary.

The charge should be borne by the entity that is, in substance, the employer.

The facts surrounding each situation should be assessed by considering a range of factors, including the following: Which entity obtains the benefits associated with the employee. For example, where an individual is a director of both the parent entity and an operating subsidiary, consider whether the director is being rewarded for services to the group as a whole (contributing to strategic decisions for the group, or perhaps implementing a restructuring programme) or for services to the operating subsidiary’s business.

The latter would point towards the subsidiary being the employer. Whether there is a service entity arrangement in place (that is, employment contracts are with one entity but services are provided to other entities in the group). For example, where an individual performs services for a large number of group operating entities, and the time spent at each entity varies (or might change) from time to time, this could indicate that the service entity is the employer.

Which entity ultimately bears the employment cost (either directly or through a management recharge)?

Although one entity might physically pay the employee, the cost might be recharged to another group entity that receives services from the employee. The IFRS 2 charge would generally be expected to follow other employee costs. The nature of any management recharges.

For example: Whether management costs (such as wages and salaries, overheads and other administrative expenses) are charged back individually (such that the entity’s income statement includes each cost as a separate line item) or as part of a larger ‘block’ management recharge. A larger ‘block’ of recharges might indicate that the entity receiving the management recharge for the employee is, in substance, the employer. Whether the employee’s costs are recharged to another entity at a margin. This might indicate that the entity receiving the management recharge is, in substance, the employer. Which entity sets the employee’s salary, appraises the employee and determines any bonus.

The IFRS 2 charge would generally sit with an entity performing such functions.

Which entity has issued the employee’s contract, and which entity the employee considers to be their employer?

As in the above bullet point, an entity performing such functions would generally be the employer. The nature of the employee’s contract – for example, whether the employee’s contract states that they can be required to work for a number of group entities or whether they are temporarily seconded to a specific operating entity. An entity to which an employee is temporarily seconded would be the employer for the period of the secondment.

Timing of recognition and vesting period

Management should presume that equity instruments awarded to employees that vest immediately represent consideration for services already rendered. The presumption can be rebutted on sufficient evidence. The entity should recognise the employee services received in full on the date when the equity instruments are granted.

[Para 15]

Many equity instruments do not vest until the employees have completed a specified period of service. Management should presume that services are to be rendered over the vesting period. The vesting period is defined as “the period during which all the specified vesting conditions of a share-based payment arrangement are to be satisfied”

Timing of recognition and vesting period

Goods or services acquired in a share-based payment transaction should be recognised when they are received. Typically, it will be a question of fact as to when this occurs; but, as in the case of employee services, it might not always be obvious.

No distinction is drawn in IFRS 2 between vesting periods during which employees have to satisfy specific performance conditions and vesting periods during which there are no particular requirements other than to remain in the entity’s employment.

So, consider the example of an award where specific performance conditions need to be satisfied over, say, the next three years for the options to be exercisable but, even then, they can only be exercised after a further year has elapsed, and the employee forfeits the options if they leave prior to exercise; in this case, the period over which employee services should be recognised is the four-year period, until the options vest and employees become unconditionally entitled to them, and not the shorter period during which the employees should satisfy specific performance conditions. In some share-based payment plans, awards vest in stages or instalments over the vesting period. For example, an employee is granted 100 options, with 25% of the options vesting annually over four years.

This is known as ‘staged’ vesting (or ‘tranched’ or ‘graded’ vesting). Where the share-based payment is subject to different vesting periods, each of these instalments is accounted for as a separate award.

In this example, 25% of the award is recognised over one year, 25% recognised over two years, 25% recognised over three years, and 25% recognised over four years. In some arrangements, employees can leave employment before the end of the full vesting period and are allowed to keep a proportion of the award (that is, pro rata vesting). Where employees are entitled to pro rata shares when they cease employment, staged vesting should be applied.

Period over which vesting conditions are satisfied: retirement-eligible employee

The following examples illustrate the period over which all specified vesting conditions are to be satisfied, which could be different for different employees in the same share award plan. Example – Award exercisable on chosen retirement date an employee is 58 years old and is granted some options that vest over five years if he continues in employment. But he has the option to retire anytime between 60 and 65 (inclusive), without requiring the employer’s consent. If the employee chooses to retire at 60, he is able to keep the options, which become exercisable at that date. In this example, the vesting period for this individual is two years; this is because he becomes entitled to (and can walk away with) the options at the age of 60, whether or not he chooses to keep working beyond that time.

Period over which vesting conditions are satisfied: award with a performance period shorter than the service period

An entity normally awards options annually, instead of an annual bonus, based on performance for the year. The entity grants options representing an annual bonus in 20X4, in respect of the year to December 20X3. The award is not exercisable for three years; and employees who do not stay with the entity throughout this period will forfeit the options. In this situation, the employees expect that they will receive a bonus each year.

So, they are providing services in 20X3 to earn the right to equity instruments. But there is an additional period of service that they are required to complete until the equity instrument vests unconditionally with them. So, the expense should be recognised over the performance period (20X3) and the service period (20X4 to 20X6). The vesting period is a total of four years. If the employee was not required to stay with the entity for the three-year period, the vesting period would not include the three-year delay until the award was exercisable; the three-year delay would simply be a post-vesting restriction.

Amount to be recognised in each reporting period: accounting for ‘last man standing’ arrangements

In a ‘last man standing’ arrangement, awards are granted to a group of employees and are reallocated equally among the remaining employees if any of the employees terminates employment prior to completion of the service (vesting) period. When an employee leaves, the estimated number of total awards that will ultimately vest is not expected to change; therefore, there is no accounting consequence arising from the reallocation. It is not accounted for as the forfeiture of existing awards and the grant of new awards, as would be done under US GAAP.

Credit entry

An equity-settled transaction creates no obligation to transfer economic benefits, so it is recognised as an increase in equity. A cashsettled transaction gives rise to an obligation, and a liability should be recognised.

Credit entry in equity-settled transactions

With regard to equity-settled transactions, IFRS 2 does not specify where, in equity, the credit entry should be recognised. This is a complicated area, and entities might need to take legal advice to comply with local legislation. The credit to equity will be presented in the statement of changes in equity.

It will not be presented in a statement of other comprehensive income; this is because it reflects the issue of an equity instrument and does not represent a gain.

Impact on distributable profits

IFRSs do not address how to determine distributable profits. Such matters are dealt with under national legislation. In the case of share-based payment (and the related topic of employee share trusts), several questions are raised:

• Does the expense in respect of an equity-settled share-based payment transaction represent a realised loss?
• Does the opposing credit entry to equity represent a realised profit?
• What is the impact on distributable profits of deducting the cost of acquiring shares through an employee share trust from equity?
• If an employee share trust makes a profit on the sale of surplus shares, is this distributable by the sponsoring entity?

The answers to the above questions should be dealt with under national legislation.

Grant date

Grant date is defined in IFRS 2 as “the date at which the entity and another party (including an employee) agree to a share-based payment arrangement, being when the entity and the counterparty have a shared understanding of the terms and conditions of the arrangement.

At grant date the entity confers on the counterparty the right to cash, other assets, or equity instruments of the entity, provided the specified vesting conditions, if any, are met. If that agreement is subject to an approval process (for example, by shareholders), grant date is the date when that approval is obtained”.

Determining the grant date

The parties involved in a share-based payment arrangement will generally have a shared understanding of the arrangement’s terms and conditions. But some terms might need to be confirmed at a later date. For example, an entity’s board of directors might agree to issue share options to senior management, but the exercise price of those options will be set by the remuneration committee that meets in three months’ time; in that case, the grant date is when the exercise price is set by the remuneration committee and communicated to the employees, even though the service period starts when the awards are offered to senior management.

Where performance conditions are subject to change (such as when the condition will be achievement of a budgeted amount of income in a future year, but that budget has not yet been set), there cannot be a shared understanding of the terms and conditions of the arrangement and the grant date has not yet been reached. But services might be performed before the grant date. Similar questions are raised where equity instruments are granted subject to an approval process. This is considered in the following example.

Example – Grant subject to approval process

An entity’s directors usually include, in letters to new employees, the offer of options to subscribe for shares in the entity. In February 20X5, the entity offered, to new employees, options over 10,000 shares at the then market price of C10 per share. The letters stated that the board of directors supported the offer. The awards were approved by the shareholders in June 20X5; by that time, the market price of the entity’s shares had risen to C15; the fair value of the options had also increased.

What is the grant date for the purposes of IFRS 2?

The possibilities are:

The date on which the original offers were made – February 20X5. The date on which the awards were approved by shareholders – June 20X5. The allotment of shares (or rights to shares, in general) has to be authorised by shareholders in general meeting or by the entity’s articles. In this case, the award of options was subject to shareholder approval; so, the grant date is the date on which that approval was obtained (that is, June 20X5). In practice, many entities have in place a pre-existing authorisation from shareholders to cover potential awards of equity instruments to employees before the next AGM.

If such pre-authorisation existed in this case, the grant date would generally be considered to have been February 20X5. The situation might differ where the board of directors, as majority shareholders, controls the entity.

Where the directors’ shareholding gives them the necessary power to authorise the award (for example, if there is no shareholders’ agreement or similar that requires the consent of the minority), the directors might be able to regard their meeting as being a properly constituted shareholders’ meeting for this purpose; as a matter of good practice, they should record themselves as meeting in that form.

In the example above, the grant date was considered to be June 20X5; but employees might have begun to provide services to the entity before that date. An expense is recognised as employee services are received; so, if employees have already begun providing services, an expense is recognised in respect of a share-based payment arrangement in advance of the grant date.

In this situation, the grant date fair value of the equity instruments should be estimated (for example, by reference to the fair value of the equity instruments at the balance sheet date). An expense will be based on an estimated amount until the grant date has been established. At that point, the entity should revise the earlier estimates, so that the amounts recognised for services received in respect of the grant are based on the grant date fair value of the equity instruments. It is vital that the grant date is correctly established, because this is the point at which the fair value of the equity-settled share-based payment is measured.

Determining the grant date where an award is subject to shareholder approval

An award is communicated to individual employees on 1 December 20X5, subject to shareholder approval. The award is approved by shareholders on 1 February 20X6, on the same terms as had been communicated to employees. A letter to formalise the award is sent to individual employees on 1 March 20X6. The award is subject to an approval process (in this example, by shareholders); so, the grant date is the date when that approval is obtained. T

he letter to formalise the award is mainly administrative; the employees and the employer have a shared understanding on 1 February 20X6; so, this is the grant date. The vesting period starts on 1 December 20X5, because this is when employees become aware of the nature of the award and begin providing services.

Determining the grant date where the employees are notified individually

An award is approved by the board/shareholders on 1 December 20X5. The general terms and conditions of the award set out the relevant employee population that will participate in the award, but provide insufficient information to determine each employee’s share. The general terms and conditions are posted to the website on 31 December 20X5. The employees are individually informed of their shares on 1 February 20X6.

The grant date is when both parties agree to a share-based payment arrangement. The word ‘agree’ is used in its usual sense; this means that there should be an offer and acceptance of that offer. So, the date when one party makes an offer to another party is not always the grant date. In some instances, the counterparty explicitly agrees to the arrangement – for example, by signing a contract. In other instances, agreement might be implicit – for example, for many share-based payment arrangements with employees, the employees’ agreement is evidenced when they start providing services in exchange for the award.

So, the grant date in this example is 1 February 20X6. The vesting period begins on 31 December 20X5, because this is when the employees become aware of the award’s general terms and conditions and begin providing services but does not have sufficient information to understand the key terms and conditions.

Determining the grant date: communication to employees following standard communication procedures

On 10 June 20X1, the key terms and conditions of an entity’s share-based payment award were discussed with all employees concerned. Employees were also informed that the award was subject to board approval, which was expected to be obtained on 20 June 20X1. As anticipated, the award was approved by the board on 20 June 20X1.

Management followed the normal process for communications: it sent the full terms and conditions of the award to the employees’ home addresses; and the employees received them in the following few days. We believe that the grant date is 20 June 20X1, in view of the following points: the key terms and conditions were communicated to employees; employees had no opportunity to further negotiate the terms and conditions following board approval; the entity followed its normal communication procedures to provide full terms and conditions to employees; and there was a very short period of time between board approval and employees receiving the full terms and conditions. The vesting period starts on 10 June 20X1, because this is when employees became aware of the nature of the award and began providing services.

Determining the grant date: services received before the grant date

A new compensation package for key employees is announced on 1 January 20X5. The plan covers the calendar year 20X5; it incorporates the results of the year’s annual appraisal process; and it includes a new share option plan. The option plan is subject to approval by shareholders. The shareholders approve the plan on 28 February 20X6. The fair value of the share options is measured at the grant date (that is, 28 February 20X6).

If the agreement between the entity and its employees is subject to an approval process (for example, by shareholders), the grant date cannot be earlier than the date on which that approval is obtained. But IFRS 2 requires the entity to recognise employee services as they are received. In this case, the expense will be recognised in advance of the grant date, so the vesting period will start on 1 January 20X5. This is the date when the employees begin providing services to satisfy the condition attached to the compensation package (that is, the date from which the employees become aware that they are working towards the award). [IFRS 2 para 7].

Management should then estimate the grant date fair value for the purpose of recognising the expense during the period between the service commencement date and the grant date. Management should revise the estimate in each reporting period, until the grant date has been established. Once the grant date has been established, the recognised expense is based on the actual grant date fair value of the equity instruments in the period of change.

Determining the grant date where an award is subject to the discretion of the remuneration committee

Employees are awarded share options that will vest if a total shareholder return (TSR) performance target is achieved over a three-year period. But the remuneration committee has discretion to refuse the award if it is not satisfied that the TSR position achieved is supported by the underlying performance of the business.

Where the remuneration committee has discretion to override an award, even though a performance condition has been achieved, there is no shared understanding at the date when the award is made. The employee does not have an understanding of how the remuneration committee will exercise its discretion. The grant date does not occur until the remuneration committee operates its overriding discretion at the end of the vesting period. So, the fair value of the award would be estimated at each reporting date from the date that services are provided; and final measurement would occur at the end of the vesting period.

[Para 122]

This could give rise to significantly greater charges in the income statement than where the grant date occurs at the time when the award is made. In certain circumstances, it might be possible to conclude that the grant date has been achieved when the award is made. For example, where a remuneration committee has discretion to alter the award, but only where the value of each individual’s award is not adversely affected, the grant date might have been achieved for the guaranteed element of the award.

Or, where the remuneration committee has never actually exercised its discretion to override, and the entity can prove that it does not expect to do so in the future, or it is only in very exceptional circumstances that the discretion could be exercised (and employees share this understanding), it might be possible to conclude that the grant date has occurred.

In substance, the discretion is a power to modify the award rather than an approval. But this would be difficult to achieve where a discretion clause is set out in the articles. Where it is concluded that the grant date has occurred when the award is made, the circumstances surrounding the award should be carefully assessed and the situation explained in the financial statements. Where material, it should be disclosed as a significant accounting policy judgement under IAS 1.

Vesting conditions

A counterparty to a share-based payment arrangement might be required to complete a specified period of service before its equity instruments vest. The goods or services obtained by the reporting entity are recognised over that period of service.

Vesting conditions

For example, an entity grants options to its employees with a grant date fair value of C300,000. These options vest in three years’ time, and the only condition is that the employees remain in the entity’s service for that period.

If all of the options do vest (that is, none of the employees leave the entity), the amount charged as an expense each year will be C100,000. This will be the case, regardless of any movements in the price of the entity’s shares. So, even if the options have an intrinsic value of, say, C500,000 when they are exercised, the amount charged as an expense will be unchanged. Having determined the ‘price’ of employee services when the options were granted, this remains fixed.

In reality, employee share trusts (and equity-settled share-based payment transactions generally) are seldom that simple. There are usually performance conditions to be satisfied before employees are absolutely entitled to the equity instruments. For example, the number of options to which employees are entitled under a bonus plan could depend on a specified increase in profit or growth in the entity’s share price.

Even in the simple example described in the previous paragraph, the amount charged as an expense in each period will vary according to the latest estimate of the likely number of employees who will remain for three years and, as a result, the number of options that will vest. The fair value of equity instruments granted is not re-measured; but the estimate of the number of equity instruments that are likely to vest is revised, if necessary, until the instruments actually do vest.

Vesting conditions only include the requirements to be satisfied for an employee to obtain the award. For example, there could be a restriction on employees selling shares received from an award after they have become entitled to them. This is a post-vesting restriction and not a vesting condition.

Conditions that should be satisfied before a counterparty becomes unconditionally entitled to the equity instruments that have been granted to it are referred to as vesting conditions. Vesting conditions are either service conditions or performance conditions. The vesting period is the period during which all of the specified vesting conditions are to be satisfied.

Non-compete provisions

Share-based payment awards might include non-compete provisions; these could apply either during or after the vesting period. Non-compete provisions can be vesting conditions or post-vesting restrictions, depending on the specific circumstances, which would result in different accounting treatments. This is a complex area, and management should seek specialist advice.

Example

Following the acquisition of a management-owned business, the directors and former owners of the subsidiary are awarded share options that vest and are exercisable after three years. During this period, the directors should not establish a separate company or seek to win customers from the acquired business; if they do so, the options will be forfeited. The non-compete provision is a vesting condition. If one of the directors sought to win customers from the acquired business, this would be a failure of a vesting condition and the share options would be forfeited.

Implications of vesting and non-vesting conditions

Other conditions in a share-based payment transaction (such as a requirement to save or a requirement to hold shares) are ‘non-vesting conditions. Non-vesting conditions are taken into account when determining the award’s fair value. The following table, taken from the guidance in IFRS 2, summarises the implications of vesting and non-vesting conditions on accounting for share-based payment transactions:

In summary, service vesting conditions (which are non-market conditions) and non-market performance conditions are not incorporated into the grant date fair value calculation. But IFRS 2 requires market performance conditions and non-vesting conditions to be incorporated into the grant date fair value calculation.

This is discussed in more detail below. The following diagram illustrates the principles discussed in this section:

Service Conditions

Service conditions are vesting conditions that require the counterparty to complete a specified period of service during which services are provided to the entity. A service condition does not require a performance target to be met.

Amount to be recognised in each reporting period: service vesting conditions

After the fair value of the goods or services received has been measured (either directly or indirectly) and the period over which it should be recognised has been determined, the amount to be recognised in each reporting period needs to be calculated. Example – Grant of equity instruments with a service condition

On 1 January 20X5, entity A makes an award of 1,000 options to each of its 60 employees, on condition that the recipients remain in entity A’s employment for three years. The grant date fair value of each option is C5. At the award date, management estimated that 10% of employees (that is, six employees) would leave the entity before the end of three years. During 20X6, it became apparent that fewer employees than expected were leaving; so, management revised its estimate of the number of leavers to only 5% (that is, three employees). At the end of 20X7, awards to 55 employees actually vested.

The amount recognised as an expense in each year is as follows:

Year	Expense for the year C	Cumulative expense	Calculation of cumulative expense
31 December 20X5	90,000	90,000	54 (that is, 60 × 90%) × 1,000 × 5 × 1⁄3
31 December 20X6	100,000	190,000	57 (that is, 60 × 95%) × 1,000 × 5 × 2⁄3
31 December 20X7	85,000	275,000	55 × 1,000 × 5

Amount to be recognised in each reporting period: Grant of shares with non-recourse loans to employees

On 1 January 20X9, entity S makes an award of 1,000 shares to each of its 10 employees. The award is structured as a non-recourse loan. The entity ‘lends’ each employee C50,000 to purchase the shares from entity S; so, there is no cash flow. The only conditions associated with the award are that the recipients should remain in entity S’s employment for four years, and they should elect to repay the balance of the loan or return the shares at the end of the specified service period. If the employee does not complete the service period, the shares are returned to the entity and the loan is forgiven. Any dividends declared during the service period are applied against the loan balance. As discussed, the IFRS IC confirmed that non-recourse loan arrangements of this nature are, in substance, option arrangements with a reducing exercise price (being the notional face value of the loan).

So, it is the fair value of the services received (by reference to the fair value of the awards), rather than the face value of the loan, that should be recognised as an expense over the vesting period. At grant date, the fair value of each award is C40. This fair value reflects the fact that any dividends declared are used to reduce the exercise price. Management estimates that all employees will remain employed by the entity over the term of the award. Dividends of C4 were declared each year.

The expense profile would be as follows:

In practice (and separate from the accounting expense), the entity would track the exercise price that would have to be paid by each employee if they satisfied the vesting criteria and elected to exercise the option. This would not, however, be accounted for as a receivable.

This represents the employee’s exercise price, at the end of the vesting period, and would be as follows: Individual employee option exercise price Total option exercise prices for all participating employees

Amount to be recognised in each reporting period: Staged vesting (also known as tranched or graded vesting)

Entity I grant 1,000 share options to employees on 1 January 20X7. If an exit event (defined in the articles as a listing or change in control) occurs between 1 January 20X7 and 31 December 20Y0, employees who are still in service at the exit date will be entitled to exercise all of their outstanding options. Also, 25% of the options vest each year until the exit date (provided the employee is in service at the particular year-end), as follows:

At the 31 December 20X7 reporting date, management concluded that a listing was probable and expected that it would occur after three and a half years (that is, on 30 June 20Y0). The expense will be calculated in award tranches; this will result in a frontloaded IFRS 2 charge. If no employees are expected to leave the entity and the anticipated exit date does not change, the charge for the first two years of the arrangement is as follows:

The following diagram illustrates ‘front-loading’ of the expense in similar circumstances. For simplicity, the grant date fair value of each option within each tranche has been taken as C10; so the fair value of 250 options is C2,500.

Employees would not necessarily provide more service or work harder in the first year, when the charge is the highest; the reason for the higher charge is that the employees are working towards a number of different awards with different vesting periods.

Performance conditions

Performance conditions are defined as:

“A vesting condition that requires :

1. the counterparty to complete a specified period of service (ie a service condition); the service requirement can be explicit or implicit; and
2. specified performance target(s) to be met while the counterparty is rendering the service required in

(a). The period of achieving the performance target(s):

1. shall not extend beyond the end of the service period; and
2. may start before the service period on the condition that the commencement date of the performance target is not substantially before the commencement of the service period.

A performance target is defined by reference to:

1. the entity’s own operations (or activities) or the operations or activities of another entity in the same group (ie a non-market condition); or
2. the price (or value) of the entity’s equity instruments or the equity instruments of another entity in the same group (including shares and share options) (ie a market condition).

A performance target might relate either to the performance of the entity as a whole or to some part of the entity (or part of the group), such as a division or an individual employee.”

Principles for determining whether a condition is a performance vesting condition

The following principles are appropriate for determining whether a condition is a performance vesting condition: The condition occurs during the service period. As explained, vesting conditions are the conditions that determine whether the entity receives the services that entitle the counterparty to receive the award. Conversely, if a condition’s outcome will only be determined after any required service period has finished, the condition is not a vesting condition; this is because it does not determine whether the entity receives services in exchange for the award granted.

Examples include where an employee has to work for three years but there is an EPS target based on a longer, say, five-year period; or where an employee has to work for three years and will become entitled to an award if the entity has listed (whether or not the employee is still working for the entity at the time of listing).

The condition needs to be achievable and either determines the length of period during which the employee has to provide services or in some way reflects a measure of the quality of those services. Achieving the condition, or target, could be partly within the employee’s control, but cannot be wholly within their control (see next bullet point).

The condition is not wholly within the control of either the employee or the employer. Where the outcome of a condition (other than whether or not the employee completes the service period relating to the performance condition) is wholly within the control of the employee, it is not a performance condition.

If the employee can unilaterally decide whether or not the target is achieved, services are not required. Examples include the requirement to hold a specified number of shares or to continue saving (in the context of matching share awards and SAYE plans respectively).

Performance conditions

Performance conditions include performance targets (such as revenue targets, EPS growth, total shareholder return (TSR) hurdles and share price growth). The performance condition should relate to the entity or some part of the entity or the group.

A non-market condition which does not relate to the entity’s operations or activities should be treated as a non-vesting condition which should be considered when estimating the grant date fair value. Performance conditions can be either market or non-market conditions.

Performance conditions that include a market condition (often referred to as market performance conditions) are incorporated into the grant date fair value of an award. So, an expense will be recorded, even if the market performance condition is not met (assuming that all other service and non-market performance vesting conditions are met).

The treatment of performance conditions that include a non-market condition is similar to that of service conditions (that is, they are not included in the grant date fair value). Instead, non-market performance conditions are taken into consideration when estimating the number of awards that will vest. So, on a cumulative basis, no amount is recognised for goods or services received where an award does not vest because a specified non-market performance condition has not been met.

As for service conditions, the IFRS 2 expense can change during the vesting period as a result of a change in the non-market performance vesting conditions expectation.

Market conditions

The full definition of ‘market condition’ is:

“A performance condition upon which the exercise price, vesting or exercisability of an equity instrument depends that is related to the market price (or value) of the entity’s equity instruments (or the equity instruments of another entity in the same group), such as:

• attaining a specified share price or a specified amount of intrinsic value of a share option; or
• achieving a specified target that is based on the market price (or value) of the entity’s equity instruments (or the equity instruments of another entity in the same group) relative to an index of market prices of equity instruments of other entities.

A market condition requires the counterparty to complete a specified period of service (ie a service condition); the service requirement can be explicit or implicit.”

Examples of market conditions

The following table illustrates some of the more common market conditions associated with share-based payment arrangements:

• Market conditions (affecting the fair value of the award) Achieve a minimum share price by a specified date.
• Achieve a total shareholder return target.
• Outperform a share price index.

Amount to be recognised in each reporting period: market performance conditions; Grant of equity instruments with a market condition

On 1 January 20X5, entity F makes an award of 10,000 options to each of its 50 senior management employees, on condition that the employees remain in the entity’s employment until the end of 20X7. But the share options cannot be exercised unless the share price has increased from C10 at the beginning of 20X5 to at least C17.50 at the vesting date of 31 December 20X7; if the condition is satisfied, the options can be exercised at any time during the following two years at a price of C10. At grant date, the fair value of each option (which takes into account the possibility that the share price will be at least C17.50 at 31 December 20X7) is C4.

At the award date, management estimated that 10% of employees would leave the entity before the end of three years; so, 45 awards would vest. During 20X6, it became apparent that more employees than expected were leaving; so, management revised its estimate of the number of awards that would vest to 42. At the end of 20X7, awards to 40 employees actually vested. Where awards are granted with market conditions, the services received from a counterparty (who satisfies all other vesting conditions) are recognised, irrespective of whether the market conditions are satisfied. [IFRS 2 para 21]. In other words, it makes no difference whether share price targets are achieved – the possibility that a share price target might not be achieved has already been taken into account when estimating the fair value of the options at grant date. So, the amounts recognised as an expense in each year are the same, regardless of whether the share price has reached C17.50 by the end of 20X7.

The amount recognised as an expense in each year is as follows:

Amount to be recognised in each reporting period: market performance conditions; Grant of equity instruments where the length of the vesting period varies based on share price growth

The facts are the same as in previous EXPERT Q&A, except that the vesting condition concerns the growth in entity C’s share price rather than its earnings. So, the shares will vest on the following dates: at the end of 20X5, if the share price increases by more than 20%; at the end of 20X6, if the share price increases by more than an average of 15% over the two-year period; and at the end of 20X7, if the share price increases by more than an average of 10% over the three-year period. The fair value of each award is C6; but this takes into account the possibility that the share price targets will be achieved during the next three years, as well as the possibility that they will not be achieved (that is, it is a weighted average value, taking account of all possible outcomes). At grant date, management estimated that the most likely outcome of the market condition, consistent with the fair value of C6, was that the share price target would be reached by the end of 20X6.

Management also estimated that 450 awards would vest. But the target was actually reached in 20X7; and 418 awards vested at 31 December 20X7. Where the length of the vesting period could vary, depending on when a performance condition is satisfied, an entity should base its accounting on an estimate of the expected length of the vesting period, according to the most likely outcome of the performance condition.

But, if the performance condition is a market condition, the estimate of the expected length of the vesting period should be consistent with the assumptions used in estimating the fair value of the options granted; and it should not be subsequently revised. So, entity C should treat the award as if it did vest at the end of 20X6 (at that time, 445 employees remained in employment). The fact that the award actually vested at the end of 20X7 – after a further 27 employees had left the entity – is ignored. The amount recognised as an expense in each year is as follows:

If the actual vesting period was shorter than originally estimated, the charge should be accelerated in the period that the entity settles the share-based payment; this is in line with the general principle of recognising the charge over the vesting period. As a result of the shortening of the service period, the estimate of number of awards expected to meet the service condition should be trued up to the actual number.

So, if the share price target was met at 31 December 20X5 and 450 employees actually satisfied the service vesting condition on this date, the expense for 20X5 would be C2,700,000, (that is, 450 × 1,000 × 6).

Non-market conditions

[Para 19]

Vesting conditions other than market conditions are non-market conditions. Non-market conditions are ignored when estimating the fair value of a share-based payment. The entity should recognise the goods or services that it has acquired during the vesting period, based on the best available estimate of the number of equity instruments expected to vest.

It should revise that estimate, if necessary, where subsequent information indicates that the number of equity instruments expected to vest differs from previous estimates. Finally, on the vesting date, the entity should revise the estimate to equal the number of equity instruments that actually vest.

Examples of non-market conditions

The following table illustrates some of the more common non-market conditions associated with share-based payment arrangements:

Non-market conditions (affecting the number of awards that vest)

• Remain in employment for a specified period of time.
• Achieve earnings per share or profit targets.
• Complete a particular project.
• Successful IPO.

Revising estimates due to service or nonmarket conditions

An entity grants options to its employees with a grant date fair value of C300,000. These options vest in three years’ time, and the only condition is that the employees remain in the entity’s service for that period.

Management might have estimated at grant date that 10% of employees will leave the entity before the end of three years. So, the expense in the first year would be reduced by 10% to C90,000 (that is, C300,000 × 1/3 × 90%). If it becomes apparent during the second year that fewer employees are leaving, management might revise its estimate of the number of leavers to only 5%. So, an expense of C100,000 will be recognised in the second year; this means that the cumulative expense at the end of the second year is C190,000 (that is, C300,000 × 2/3 × 95%). At the end of the third year, 94% of the options do vest.

The cumulative expense over the vesting period is C282,000 (that is, C300,000 × 3/3 × 94%); so, the expense in the third year is C92,000. In a more extreme example, management might estimate (in the first year of an employee share option plan) that a particular long-term profit target will be met. So, an expense of, say, C100,000 is recognised.

During the second year, following a serious downturn in the entity’s fortunes, management might consider that there is little chance that the target will be met. If it estimates that no options will vest, the cumulative expense at the end of the second year will be adjusted to zero; as a result, the expense to date of C100,000 will be reversed in the second year. Of course, if the vesting condition had been a market condition rather than a profit target, no adjustment would be made.

Note that, if management cancelled the award in year 2, on the basis that it will never vest, we believe that the application of IFRS 2’s cancellation requirements that most align with the principles in the standard would result in accelerated recognition of an expense.

Revising estimates after vesting date

In previous Expert Q&A, changes have been made to estimates during the vesting period. But no further adjustments should be made after the vesting date, regardless of whether the equity instruments are later forfeited (or, in the case of share options, the options are not exercised).

Under IFRS 2, the lapse of a share option at the end of the exercise period does not change the fact that the original transaction occurred (that is, goods or services were received as consideration for the issue of an equity instrument).

The lapse of a share option does not represent a gain to the entity, because there is no change to the entity’s net assets. In other words, such an event does not affect the entity’s financial position, even though some might see it as being a benefit to the remaining shareholders. In effect, one type of equity interest (that is, the option holders’ interest) becomes part of another type of equity interest (that is, the shareholders’ interest).

So, in the example described, there will be no adjustment to the total expense of C282,000 after vesting, even if none of the options are exercised. The method of revising estimates is consistent with that applied in the Implementation Guidance to IFRS 2. Where estimates are revised in a period, the cumulative expense to the end of that period is ‘trued up’; and the amount recognised in the period is simply the difference between that cumulative expense and the equivalent cumulative expense at the end of the previous period.

Awards conditional on an IPO

IFRS 2 does not deal explicitly with awards that are conditional on an initial public offering (IPO). As noted above, an expense in respect of an award of options is recognised immediately if the award vests immediately; or it is recognised over the vesting period if one exists.

In the case of an IPO (or similar exit event), the award will generally not vest until the IPO occurs (and employees are still employed by the entity at that time). So, it is reasonable to conclude that the vesting period will commence no later than the grant date and end on the IPO date.

But this raises two questions:

• What will the grant date be?
• How can the date of a future IPO be estimated reliably?

The grant date will depend on the facts of the individual award. Sometimes, an award will be subject to approval at the time of the IPO; in that case, the grant date would correspond with the IPO date. On other occasions, shareholder approval will have been obtained when the award is made or at some other time in advance of the IPO.

But IFRS 2 requires an expense to be recognised when employee services are received, regardless of when the grant date is determined to occur. So, where the grant date falls after the employees have begun to provide services, the fair value of the award should be estimated at the end of each reporting period until the grant date is established; and it is revised once the grant date has been established. Where an award is conditional on an IPO occurring, but employee service up to the IPO date is not required (or perhaps service is only required for part of the period), the IPO condition becomes a non-vesting condition.

The more difficult question concerns how the date of a future IPO can be estimated reliably. Where the length of the vesting period varies (depending on when a performance condition is satisfied), an estimate is made on the basis of the most likely outcome.

In practice, it might be difficult to estimate the date of an IPO; but a reasonable estimate should be made, although it might need to be revised. This is illustrated below.

Example

The directors of an entity with a June year end are contemplating a listing of the entity’s shares. An award of unvested shares is made to employees on 31 March 20X5, but the shares vest only in the event of an IPO. The entity will not pay dividends before an IPO. Employees who leave the entity before the IPO occurs will lose their entitlement to the shares. When the award is made, the directors estimate that a stock market listing will be achieved in three years’ time. But, during the remainder of 20X5 and the first half of 20X6, the entity performs well.

Following discussions with the entity’s bankers, the directors decide to seek a listing by the end of 20X6. Due to unforeseen circumstances, this target is not achieved, but the shares are finally listed on 31 August 20X7. If the directors have the authority to make the share award to the employees, the grant date will be 31 March 20X5; and the fair value of the award will be measured on that date. If the award is subject to shareholder approval at the IPO date, fair value will be estimated (for example, by reference to the fair value of the shares at each balance sheet date); and it will be revised at the grant date when the shareholder approval is obtained.

When the award is made, the directors estimate that the listing could be achieved in three years’ time; so, an expense in respect of employee services is recognised over this period. By 30 June 20X6, the directors have revised their estimate of the listing date to the end of 20X6, so recognition of the expense is accelerated. By 30 June 20X7, the listing has not yet occurred; but the process has commenced, and the directors estimate that listing will be achieved within two months.

So, the expense for the year ending 30 June 20X7 will be based on this estimate. For the three financial years ending 30 June 20X7, the estimated vesting period for the share award (for the purpose of recognising an expense under IFRS 2) is as follows: Year Vesting period 30 June 20X5 Three years, ending 31 March 20X8 30 June 20X6 One year and nine months, ending 31 December 20X6 30 June 20X7 Two years and five months, ending 31 August 20X7 The estimated length of the vesting period is not factored into the grant date fair value of the award; this is because the condition to provide employee services until the IPO date is a non-market vesting condition. In this case, because there are no dividends paid on the shares before they vest, the grant date fair value would be the share price. The estimate of awards expected to vest should be revised at each reporting date as a result of the change in service period. Where awards vest only on an exit event such as an IPO, and an exit event is not probable, no expense is recognised.

Awards conditional on an IPO: interaction with other vesting conditions

As in the example an entity’s directors are contemplating a listing of the entity’s shares. The entity awards share options to 10 employees on 31 March 20X5. The grant date is achieved on this date. The award is exercisable in full on an IPO. An employee who leaves the entity before an IPO has occurred (if determined to be a good leaver) could exercise options on a pro rata basis (based on the length of time that the employee has served since the award was granted, as a proportion of the maximum five-year period that the award might be in existence).

The arrangement’s terms and conditions define a good leaver as someone who is made redundant, dies or retires on reaching normal retirement age.

There is a cut-off date, so that unvested awards will lapse after five years (that is, on 31 March 20Y0). On 30 June 20X5, the directors estimate that a listing will be achieved on 31 March 20X8. One employee will reach normal retirement age on 31 December 20X6 and is expected to be a good leaver before 31 March 20X8. All other employees are expected to remain with the entity beyond 31 March 20X8. On 30 June 20X6, following a change in the entity’s circumstances, the directors take the view that the entity is unlikely to float before 31 March 20Y0.

A restructuring programme is underway; and it is anticipated that three employees will be made redundant on 31 December 20X6. For the entity’s 30 June 20X5 year end, the award will be treated in two tranches. Awards are expected to vest on 31 March 20X8 for nine employees. The grant date fair value of their awards will be spread over the three-year vesting period − that is, three out of 36 months of the charge will be taken in the period to 30 June 20X5. The grant date fair value of the award for the good leaver will be spread over the 21-month vesting period to 31 December 20X6 (the date of eligibility for retirement) − that is, three out of 21 months’ charge will be taken in the period to 30 June 20X5.

The calculation for the good leaver will also take into account the fact that vesting will be on a pro rata basis − that is, based on 21 out of 60 months’ service. At 30 June 20X6, the charge in respect of the nine awards no longer expected to vest on an IPO will need to be reversed. But this will only be a partial reversal for the three employees who will be made redundant.

The charge in respect of these good leavers will now be spread over the shorter 21-month period from the grant date to 31 December 20X6; and it will be adjusted for the fact that it will vest on a pro rata basis. A charge will continue to be made for the employee expected to retire on 31 December 20X6.

Awards conditional on a change in control

An entity enters into an equity-settled share-based payment arrangement with employees; under the arrangement, each employee is entitled to 1,000 free shares, provided that: there is a change in control of the entity (that is, the majority of shareholders change); and the employee is employed by the entity on the date when the change in control occurs. The ‘change in control’ requirement is a non-market performance vesting condition. The accounting treatment is to estimate, at the grant date and at each reporting date, the number of awards that are expected to vest, based on: the number of employees who are expected to achieve the service period; and whether the change in control is probable. If, at the reporting date, the change in control is probable, the estimated length of the vesting period is revised and the cumulative expense is trued up. If the change in control becomes improbable, the cumulative charge recognised is reversed through the income statement.

Amount to be recognised in each reporting period: non-market performance conditions: earnings per share hurdle

On 1 January 20X5, entity G grants share options to employees in exchange for services in 20X5 and 20X6, on condition that entity G achieves its earnings per share (EPS) target of C0.23 per share for 20X5 and 20X6. The options’ fair value on grant date, ignoring this condition, is C100,000. Management assesses that there is a 60% probability of meeting the EPS target. The fair value of the options (including the EPS condition) is C65,000.

The EPS target is met for 20X5; and management also expects to meet the 20X6 target. The EPS target is a non-market performance condition; and so, the fair value used should not include the EPS hurdle. As a result, management should recognise an expense of C50,000 (1/2 × 100,000) in 20X5; this is based on an expectation that all of the options will vest at the end of 20X6. The only possible outcomes of the EPS condition are that either all options vest or no options vest.

Management has assessed that it is probable that the EPS condition will be met; this means that management expects 100% of the options to vest. If employees did not have to remain in service until the EPS target was met, that would mean that the award has vested, because it is no longer contingent on future service. The EPS target would be treated as a post-vesting restriction. In that case, it would be appropriate to use the fair value including the EPS hurdle (C65,000) to recognise an expense.

Amount to be recognised in each reporting period: non-market performance conditions: number of awards that vest depends on growth in earnings per share

On 1 January 20X5, entity B makes an award of shares to each of its 50 employees. The number of shares to which each employee will become entitled depends on growth in earnings per share (EPS). If EPS increases by an average of 10% over the next three years, each employee will receive 100 shares. If EPS increases by an average of 15%, each employee will receive 200 shares. If EPS increases by an average of 20%, each employee will receive 300 shares.

No shares will be awarded if EPS increases by less than 10%. The recipients of the award should also remain in the employment of entity B for three years. The grant date fair value of each share at 1 January 20X5 is C13. EPS is a non-market performance condition, because it is not dependent on share price. So, the condition is relevant in determining the number of awards that will vest. In the year ended 31 December 20X5, entity B’s EPS increased by 16%; and management forecast similar growth for the next two years.

So, management estimated that each employee would receive 200 shares. But 20X6 was a comparatively poor year: EPS increased by just 12%; and resulted in an average for the two-year period of 14%. Management cut back its forecast, and predicted growth of 14% for 20X7. On this basis, each employee would receive 100 shares. 20X7 was actually a much better year: EPS increased by 17%; and resulted in an average for the three-year period of 15%.

So, each employee received 200 shares. During 20X5, five employees left the entity; and management predicted a similar level of departures for the next two years; so, 35 awards would vest. Six employees departed during 20X6; but management maintained its forecast of five departures in 20X7; so, 34 awards would vest. But only three employees left during 20X7, so 36 awards actually vested. The amount recognised as an expense in each year is as follows:

This example illustrates how ‘truing up’ the cumulative expense in each period could result in the reversal of amounts that have previously been charged.

Amount to be recognised in each reporting period: non-market performance conditions: length of the vesting period varies depending on earnings growth

Reference to standard: IFRS 2 App A

On 1 January 20X5, entity C grants 1,000 shares to each of its 500 employees on condition that the employees remain in the employment of entity C throughout the vesting period. The shares will vest on the following dates:

• at the end of 20X5, if the entity’s earnings increase by more than 20%;
• at the end of 20X6, if the entity’s earnings increase by more than an average of 15% over the two-year period; and
• at the end of 20X7, if the entity’s earnings increase by more than an average of 10% over the three-year period.

If the entity’s earnings increase by less than an average of 10% over the three-year period, no shares will vest. The grant date fair value of each share at 1 January 20X5 is C6 (this amount is independent of the length of the vesting period, because no dividends are expected to be paid before 20X8).

During 20X5, earnings increased by 16%; and 25 employees left the entity. Management forecast that earnings would grow at a similar rate in 20X6; so, the share awards would vest at the end of 20X6. Management also estimated that a further 25 employees would leave the entity; so, 450 awards would vest.

During 20X6, earnings increased by only 10%. This resulted in an average for the two-year period of 13%; so, the awards did not vest. But management forecast that earnings growth for 20X7 would be at least 4%, thereby achieving the average of 10% per year. Thirty employees left the entity during 20X6; and management estimated a similar level of departures for 20X7; so, 415 awards would vest.

During 20X7, earnings increased by 10% (resulting in an average over the three-year period of 12%); and 27 employees left the entity. The amount recognised as an expense in each year is as follows:

* 1⁄2 not 1⁄3 because, at the end of 20X5, management expected the award to vest at the end of 20X6.

Amount to be recognised in each reporting period: non-market performance conditions: grant of options in which the exercise price varies depending on growth in earnings per share

On 1 January 20X5, entity D makes an award of 1,000 share options to each of its 50 senior employees.

The recipients of the award should remain in entity D’s employment for three years. The exercise price of each option is C10; but this will drop to C8 if EPS increases by an average of 10% over the next three years; if EPS increases by an average of 15% or more, the exercise price will drop to C6.

The grant date fair value of each option on 1 January 20X5 is as follows: C6 if the exercise price is C10; C9 if the exercise price is C8; and C12 if the exercise price is C6. In the year ended 31 December 20X5, entity D’s EPS increased by 16%; and management predicted similar growth for the next two years. But 20X6 was a comparatively poor year: EPS increased by just 12%; and this resulted in an average for the two-year period of 14%.

So, management cut back its forecast and predicted growth of 14% for 20X7. 20X7 was actually a much better year: EPS increased by 17%; this resulted in an average for the three-year period of 15%; so, the options were exercisable at C6. During 20X5, five employees left the entity; and management predicted a similar level of departures for the next two years; so, 35 awards would vest. Six employees departed during 20X6, but management maintained its forecast of five departures in 20X7; so, 34 awards would vest.

However, only three employees left during 20X7; so, 36 awards actually vested. Because the exercise price varies according to the outcome of a performance condition that is not a market condition, the effect of that performance condition (that is, the possibility that the exercise price might be C10, C8 or C6) is not taken into account when estimating the fair value of the share options at the grant date. Instead, the fair value of the options is estimated under each scenario; and the accounting in each period reflects the most likely outcome.

So, the amount recognised as an expense in the first year assumes that the exercise price will be C6; on that basis, the fair value of each option is C13. For 20X6, the exercise price is forecast to be C8; so, the fair value of each option is C9. In both cases, the fair value is as measured at the grant date. The amount recognised as an expense in each year is as follows:

Amount to be recognised in each reporting period: non-market performance conditions: expected life of options depends on earnings per share

On 1 January 20X5, entity E grants 1,000 share options to employees. Each option entitles the employee to purchase one share at a fixed price. The options are exercisable as follows: between 1 January 20X7 and 31 December 20X7, if the entity meets its EPS target for 20X5 and 20X6; or on 1 January 20X7, if any of the 20X5 and 20X6 EPS targets are not met. The options’ grant date fair values are C1.20 if the options are exercisable on 1 January 20X7; or they are C2 if the options are exercisable between 1 January 20X7 and 31 December 20X7. At 31 December 20X5, management determined that the 20X5 EPS target was met, and it expected to meet the 20X6 EPS target. But the 20X6 EPS target was not met.

No employees left the entity, and all 1,000 options ultimately vested. Entity E should recognise an expense of C1,000 for 20X5 (1,000 options × C2 × 50% of the vesting period); this is because it met its 20X5 EPS target and, at the balance sheet date, expected to meet the 20X6 EPS target.

At 31 December 20X6, management should convert from the grant date fair value of C2 to C1.20, because the non-market EPS condition was not met. It should recognise an expense of C200 for 20X6 (1,000 options × C1.2 × 100% of the vesting period, less C1,000 expensed in 20X5); this would bring the total expense recognised over the two years to C1,200.

Non-vesting conditions

Non-vesting conditions are conditions other than service and performance conditions. Non-vesting conditions include the requirement to hold shares after they vest or to invest in a savings contract. Although such requirements occur during the vesting period, they are often wholly within the control of the employee; and the conditions are not related to duties specified in an employee’s employment contract.

They do not determine whether the entity receives the services linked to shares.

Non-vesting conditions

A typical save as you earn (SAYE) plan (common in the UK) has terms that require employees to contribute a maximum of 250 per month to an employee share trust. Employees contribute to the SAYE plan for five years; after that time, they can receive their cash back (plus accrued interest) or they can use the cash to acquire shares at a 20% discount to the market price on the grant date. An employee who stops saving receives a reimbursement of all amounts saved to date, plus interest; but they should withdraw from the plan and forfeit their right to acquire shares.

The requirement to hold shares is seen in matching share plans. For example, employees are offered a share award which gives them part of their bonus in shares. On becoming entitled to the bonus and shares, employees can elect to hold their shares for three years; at that time, the entity will give each employee an additional share for every share still held, provided that the employee is still in service. Non-vesting conditions should be incorporated into the grant date fair value of the award.

So, the award’s grant date fair value might be lower than for awards without such a requirement; this is because it takes into account the probability of employees failing to save (and so withdrawing from the plan) or selling their restricted shares (and thus losing the matching shares).

An employee’s failure to save or failure to hold restricted shares is treated as a cancellation. This results in the acceleration of any unvested portion of the award on the date when the employee ceases to save or sells the restricted shares.

Employee share purchase plans

In some jurisdictions, ‘share-save’ plans give employees the opportunity to subscribe for shares, often at a discount on the market price. This could be paid for by payroll deductions instead of a lump sum payment. Employee share purchase plans (or similar broad-based employee share plans) are not exempt from IFRS 2’s scope.

The IASB considered an exemption for plans similar to employee share purchase plans (such as save as you earn (‘SAYE’) plans in the UK and employee share ownership plans (‘ESOPs’) in the US) and other broad-based employee share plans. But they concluded that the accounting for such plans should be the same as for other employee share plans.

The IASB also rejected the suggestion that plans should be exempted if the discount available to employees was small, so that its impact was likely to be immaterial; so, they should be treated like any other equity-settled share-based payment arrangement. But, unlike many other arrangements, some employee share purchase plans impose a condition on their members that requires regular saving. If an employee stops saving, they forfeit their right to subscribe for shares. A requirement to save is a non-vesting condition; so, a failure to save should be treated as a cancellation.

Example – Save as you earn (SAYE) plan cancellation

An entity enters into an SAYE plan with its employees. The terms of the plan are that: Employees will contribute C250 per month to an employee share trust. The employee is required to contribute to the SAYE plan for five years; after that time, the employee can choose to receive their cash back (plus accrued interest) or use this cash to acquire shares at a 20% discount on the market price at the grant date. An employee who stops saving receives a reimbursement of all amounts saved to date (plus interest) but should withdraw from the plan and forfeit their right to acquire shares. Where an employee fails to save, the entity should account for this as a cancellation.

The requirement to save does not meet the definition of a service or performance condition; and so, failure to save cannot be interpreted as a failure to fulfill a service or performance condition. This results in the acceleration of any unvested portion of the award at the date when the employee stops saving and receives their cash. The probability of employees ceasing to save (and so losing the equity option) will need to be taken into account when calculating the grant date fair value.