prepare any necessary entries in e s financial statements as at dec 31 01 e intends 613358

Award with employee cash-settlement alternative introduced after grant

At the beginning of year 1, the entity grants 10,000 shares with a fair value of $33 per share to a senior executive, conditional upon the completion of three years’ service. By the end of year 2, the fair value of the award has dropped to $25 per share. At that date, the entity adds a cash alternative to the grant, whereby the executive can choose whether to receive 10,000 shares or cash equal to the value of 10,000 shares on vesting date. The share price is $20 on vesting. The implementation guidance to IFRS 2 proposes the following approach.

For the first two years, the entity would recognise an expense of $110,000 per year, (representing 10,000 shares × $33 × 1/3), giving rise to the cumulative accounting entry by the end of year 2:

The addition of a cash alternative at the end of year 2 constitutes a modification of the award, but does not increase the fair value of the award at the date of modification, which under either settlement alternative is $250,000 (10,000 shares × $25), excluding the effect of the non-market vesting condition as required by IFRS 2.

The fact that the employee now has the right to be paid in cash requires the ‘split accounting’ treatment set out in 10.1 above. Because of the requirement, under the rules for modification of awards (see 7.3 above), to recognise at least the fair value of the original award, the total fair value of the equity alternative of the award is deemed to remain $330,000. This is then reduced (in accordance with the rules in 10.1 above) to reflect the fact that the equity-settlement option would entail the sacrifice of the cash-settled option (modification date fair value $250,000), giving an implied value for the equity-settlement option of $80,000 ($330,000 – $250,000).

The award is now 2/3 through its vesting period, implying that the cumulative amount accounted for in equity should be only $53,333 ($80,000 × 2/3), as opposed to the $220,000 that has actually been accounted for in equity. Accordingly, the difference of $166,667 is transferred from equity to liabilities, the entry being:

The $166,667 carrying amount of the liability can be seen as representing 2/3 of the $250,000 fair value of the liability component at modification date.

From now on, the accounting for the equity component will be based on this implied value of $80,000. This results in the following accounting entry for the expense in year 3.

This results in a total cumulative expense for the award of $280,000 ($220,000 for years 1 and 2 and $60,000 for year 3), which represents the actual cash liability at the end of year 3 of $200,000 plus the $80,000 deemed excess of the fair value of the equity component over the liability component at the end of year 2.

The $280,000 expense could also be analysed (as is done by the implementation guidance to IFRS 2 itself), as representing the grant date fair value of the award ($330,000) less the movement in the fair value of the liability alternative ($50,000, representing the fair value of $250,000 at the end of year 2 less the fair value of $200,000 at vesting). The implementation guidance may have adopted this approach to support an argument that, despite all appearances to the contrary, this methodology does not breach the fundamental principle of the modification rules for equity-settled transactions that the minimum expense recognised for a modified award should be the expense that would have been recognised had the award not been modified (see 7.3 above).