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Wiley IFRS: Practical Implementation Guide and Workbook
Case Study 2
An employee has been granted share options to buy shares on the condition that the employee remains in
employment for two years and that the entity' s earnings per share increases by at least 30% over that pe–
riod. The share option will vest only if both those conditions are satisfied.
Required
How will these conditions affect the accounting for the share-based payment?
Solution
The performance conditions will both have to be met for the shares to vest. However, the expense for
share options is still recognized over the vesting period irrespective of whether those share options are
exercised or not. No adjustments other than perhaps a reclassification of the equity are made after the
vesting date. In the case of share options, for example, no adjustments are made even if those share op–
tions are not exercised.
4.6 Modification s to equity instruments are to be treated as additional instruments in thei r own
right. IFRS 2 effective ly requires an ent ity to ignore any mod ification if it does not incre ase the
tot al fair value of the share-based payment s or if it is not otherwise beneficial to the employee. Th is
means that eve n if the total fa ir value of the eq uity instruments granted is reduced as a result of
changes to its term s and conditions, the expense relatin g to the origina l opti on is still recognized as
if the modi fication had not happened . Any mod ification that increases the total fair value of the
sha re-bas ed payment is recogn ized as an expense over the period from the date that the modifi ca–
tion occurred until the date on which the shares ves t.
4.7 If a modification occ urs after the vesting period, the increase in fai r va lue should be recog–
nized immediately over any rev ised ves ting period. If the modification provides some additional
benefi t to the emp loyees-for example, a performance condition migh t be elim inated-this shou ld
be taken into acco unt in determi ning the number of equity instruments that are expected to invest.
4.8 If the equity instrument is canceled or sett led during the vesting period, it is treated as if the
ves ting date had been brough t forward, and the balance of the fair va lue not yet expensed is
charged to income immediatel y. If compensation is paid for the ca nce lation or settlement, any ca sh
paid up to the fa ir value of the options at the date of the ca nce latio n is deducted from equity and
any amount paid in excess of the fai r value is treated as an expense . If an ent ity ca nce ls an equity
instrument and issues replace men t instruments, the transact ion is treated as a modification. The
incremental fa ir value is the difference between the fair value of the replace ment instrument and
the fair value of the original instrument.
Practical Insight
Zurich Fina ncial Services used Exposure Draft (ED) 2,
Share-Based Payment,
in its finan cia l
sta tements for the year ended December 31, 2003 . Th e result was an increase in the opening
balance of reserves of $ 135 million to reflect as add itional pa id-i n cap ita l the fair value of
share-base d payments made .
5. CASH-SETTLED TRANSACTIONS
5.1
Cash-settl ed share-base d payment transactions occur where goods or services are paid for at
amounts that are based on the price of the entity's shares or other equity instruments. The expense
for cash- settl ed transactions- for example, share appreciation rights-is basically the cas h paid by
the entity. Share apprec iation rights entitle employees to cas h payments eq ual to the increase in the
share price of a give n number of the entity' s shares over a given period. A ca sh-sett led transaction
creates a liabi lity. Th e cos t that is recognized for this liab ility is based on the fair value of the in–
strume nt at the repo rting date. The fair value of the liabi lity is remeasured at each reporting until it
is finally settled.