399 / 488
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Wiley IFRS: Practical Implementation Guide and Workbook
8. DISCLOSURE
8.1 IFRS 2 requires extensive disclosure requirements under three main headings:
(I)
Information that enables users of financial statements to understand the nature and extent
of the share-based payment transactions that existed during the period
(2) Information that allows users to understand how the fair value of the goods or services re–
ceived or the fair value of the equity instruments that have been granted during the period
was determined
(3) Information that allows users of financial statements to understand the effect of expenses
that have arisen from share-based payment transactions on the entity's income statement in
the period
8.2 A key date for the Standard's transitional provisions is November 7, 2002, the publication
date of the Exposure Draft on share-based payments. The Standard is applicable to equity instru–
ments granted after November 7, 2002, but not yet vested on the effective date of the Standard,
which is January
1,
2005. IFRS 2 applies to liabilities arising from cash-settled transactions that
exist at January
1,
2005.
Placebo, a public limited company, purchased all of the shares of Medicine, a public limited company,
by issuing ordinary shares of Placebo. The business combination was accounted for as an acquisition.
Medicine had been the subject of a management buyout where all of the shares were currently owned by
the management of the company . As part of the purchase consideration, Placebo had agreed to pay a
further amount to the management team if the company's earnings per share increased by 50% over the
next year and if the management team was still employed by Placebo at the end of this period. The con–
tingent consideration was I ordinary share in Placebo for every 10 shares held by the management team.
Placebo has also issued share options to certain employees of Medicine as a goodwill gesture on the ac–
quisition of the company.
Placebo is a company that has the dollar as its functional currency. The company is registered on several
stock exchanges and currently has a quotation on the German stock exchange. The market price of the
quotation is currently €25 per share. Share options issued to the employees of Medicine were those that
were currently quoted on the German stock exchange. The share options have a vesting period of three
years.
Required
Discuss the implications of the above events.
Solution
The shares issued to the management team for the purchase of the company, Medicine, would not be
within the scope of IFRS 2. They would be dealt with under IFRS 3,
Business Combinations,
as the ac–
quisition was essentially a business combination. However, the shares issued as contingent consideration
mayor may not be accounted for under IFRS 2. The nature of the issue of shares will need to be exam–
ined. The question is whether the additional shares that are going to be issued are compensation or
whether they are part of the purchase price. There is a need to understand why the acquisition agreement
includes a provision for a contingent payment. It is possible that the price paid initially by Placebo was
quite low and, therefore, this represents further purchase consideration. However, in this instance, the
additional payment is linked to continuing employment. Therefore , it could be argued that because of the
link between the contingent consideration and continuing employment, it represents a compensation ar–
rangement, which should be included within the scope of IFRS 2.
Medicine has received the benefit of the services provided by its employees. As a result, it should record
the expense that relates to this share-based payment even though the share options have been granted by
Placebo.
There is no embedded derivative in this share-based payment to employees that would be accounted for
under lAS 39. It may seem that there is an embedded derivative because the shares are quoted in another
currency. However, equity-settled share-based payments should always be denominated in the entity's
functional currency. Therefore, the total fair value of the options at the date of the grant will be deter–
mined in dollars and not in euros. The value of the grant would not change over the life of the options
even if the exchange rate or market price fluctuates.