First Impressions: Amendments to IFRS 2 Group Cash-settled Share-based Payment Transactions

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1 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions International Financial Reporting tandards

2 Foreword The International Accounting tandards Board (IAB) published Group Cash-settled hare-based ayment Transactions Amendments to IFR 2 (the amendments) on 18 June reviously there was no specific guidance on the attribution of cash-settled share-based payments to the entity receiving goods or when that entity had no obligation to settle the transaction. The requirement for attribution of share-based payments referred only to equity-settled share-based payments. Therefore, there was diversity in practice for cash-settled share-based payment transactions. The amendments align the attribution principle for cash-settled share-based payments to the principle that was established for equity-settled share-based payment transactions. In addition, cash payments based on the equity instruments of any group entity now meet the definition of a share-based payment transaction. reviously, the definition referred only to equity instruments of the entity. For example, prior to the amendments, if a parent made a cash payment to the of its subsidiary based on the value of the parent s shares, then the subsidiary may not have been required to account for the transaction as a share-based payment. If the subsidiary had made the payment, then the subsidiary may not have been required to account for the transaction as a share-based payment because the payment was made based on the parent s shares. Instead, the subsidiary may have treated it as an employee benefit under IA 19 Employee Benefits. The attribution principle under IFR 2 hare-based ayment differs from the approach taken for employee benefits such as salaries, bonuses and profit-sharing plans accounted for under IA 19. Under IA 19, an entity that has no obligation to fund payment of the does not recognise an expense. However, under IFR 2 as amended an entity that receives in a group share-based payment transaction without having an obligation to settle the transaction recognises a cost for the share-based payment and a corresponding increase to capital. Developing accounting standards for separate financial statements is difficult when there is no clear concept of whether the separate financial statements represent the entity on a stand-alone basis or include amounts attributable to the entity from the perspective of the group financial statements. With these amendments the IAB has confirmed that the entity that receives goods or in a share-based payment transaction accounts for those goods or. There are still questions about what IFRs require regarding attribution of non-share-based payments made by other group entities in the separate financial statements of the entity receiving the benefits of the goods or. The amendments do not give any clear indication of the IAB s views on this issue. Mary Tokar KMG International tandards Group Kim Bromfield KMG in outh Africa

3 About this publication This publication has been produced jointly by the KMG International tandards Group (part of KMG IFRG Limited) and the Department of rofessional ractice of KMG in outh Africa. We would like to acknowledge the principal authors of this publication. They are Ingo Rahe, Emmanuel Lahouste, Joanna Osborne and Mary Tokar of the KMG International tandards Group, and Kim Bromfield, Heather de Jongh and ieter van der Zwan of the Department of rofessional ractice of KMG in outh Africa. Content Our First Impressions publications are prepared upon the release of a new International Financial Reporting tandard (IFR), interpretation or other significant amendment to the requirements of IFRs. They include a discussion of the key elements of the new requirements and highlight areas that may result in a change of practice. Examples are provided to assist in assessing the impact of implementation. This edition of First Impressions considers the requirements of Group Cash-settled hare-based ayment Transactions Amendments to IFR 2 (the amendments). The text of this publication is referenced to IFR 2 hare-based ayment, and to selected other current IFRs in issue at 1. References in the left-hand margin identify the relevant paragraphs of the IFRs. In many cases further interpretation will be needed in order for an entity to apply IFRs to its own facts, circumstances and individual transactions. Further, some of the information contained in this publication is based on initial observations developed by the KMG International tandards Group, and these observations may change as practice develops. We will update and supplement the interpretative guidance and examples in this publication by adding additional interpretative guidance to Insights into IFR, our practical guide to IFRs. Other ways KMG member firms professionals can help We have a range of publications that can assist you further, including Insights into IFR and illustrative financial statements for interim and annual reporting under IFRs. Technical information is available at For access to an extensive range of accounting, auditing and financial reporting guidance and literature, visit KMG s Accounting Research Online. This Web-based subscription service can be a valuable tool for anyone who wants to stay informed in today s dynamic environment. For a free 15-day trial, go to and register today.

4 Contents 1. Overview of new accounting requirements 4 2. Key implementation issues 5 3. cope 6 4. Classification Recognition and measurement Effective date and transition 19 Appendix I: Overview of simplified scenarios scope and classification Appendix II: Illustrative examples 22 23

5 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions 4 1. Overview of new accounting requirements The amendments expand IFR 2 to bring group cash-settled share-based payment transactions into the scope of the standard. The amendments introduce the notions of a: receiving entity, i.e., the entity that receives goods or in a share-based payment arrangement; and settling entity, i.e., the entity that has the obligation to settle the share-based payment transaction. A group share-based payment transaction is a share-based payment transaction in which the receiving entity, the settling entity and the entity whose equity instruments are granted or whose equity instruments are the underlying measure for a cash payment (reference entity) are in the same group from the perspective of the ultimate parent. A share-based payment that is settled by a shareholder outside the group also is in the scope of IFR 2, as long as the reference entity is in the same group as the receiving entity. A receiving entity without any obligation to settle the transaction accounts for a share-based payment transaction as equity-settled. A settling entity accounts for a share-based payment transaction: as equity-settled if it is obliged to settle in its own equity instruments; and as cash-settled otherwise. Recharge arrangements do not affect classification. Existing recognition and measurement requirements for equity-settled and cash-settled sharebased payment transactions apply. The amendments apply retrospectively for annual periods beginning on or after 1 January 2010, subject to the transitional requirements in IFR 2.

6 5 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions 2. Key implementation issues At first glance the new concept of group share-based payment transactions introduced by the amendments looks like a big change. In practice, the most significant impact is likely to be on the financial statements of subsidiaries or sub-groups that receive when another group entity or shareholder has the obligation to settle the cash-settled share-based payment. reviously, it may have been the practice for the receiving entity not to account for the transaction at all; however, under the amendments all share-based payment transactions need to be accounted for by the receiving entity. For the entity that has the obligation to settle a cash share-based payment, there is likely to be less of a change as the extent of the change is likely to be limited to the timing of recognition. However, the amendments do not impact only subsidiaries and sub-groups, but also the consolidated financial statements of the ultimate parent. Under the amendments, a cash-settled share-based payment granted and settled by a shareholder outside the group is accounted for by the group if the reference entity is within the group. rior to the amendments the emphasis in accounting for group share-based payments was on identifying the grantor. Under the amendments the emphasis is on identifying the entity with the obligation to settle the transaction. If the entity identified as the grantor is not the entity with the obligation to settle the transaction, then the amendment may affect accounting for both equitysettled and cash-settled share-based payment transactions. Classification of a share-based payment transaction is made independently for each reporting entity. As a consequence, for example, one transaction could be classified as equity-settled in the separate financial statements of the subsidiary and as cash-settled in the consolidated financial statements of the parent. If market conditions and / or non-vesting conditions are attached to the transaction, then the amounts recognised can differ significantly in the respective entities, since accounting for the transaction as equity-settled prohibits a true-up for market and non-vesting conditions. The effect of retrospective application on equity-settled share-based payments that have vested prior to the beginning of the comparative period and cash-settled share-based payments that have been settled prior to the beginning of the comparative period is expected to be limited to adjustments of line items within shareholders equity.

7 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions 6 3. cope Groups and shareholders employ a wide variety of different methods to deliver share-based payments to suppliers of goods and. In our experience, the structure of the share-based payment, for example which group entity settles the payment and the form of settlement, is influenced by local laws and regulations. IFR 2.IN2A, 2, The main purpose of the amendments is to clarify the scope of IFR 2 and the accounting for group 3A cash-settled share-based payment transactions in the separate or individual financial statements of the group entities involved in the transaction. However, since the scope requirements in IFR 2.2 and.3a are not limited to separate and individual financial statements, our first impression is that the requirements also apply to any consolidated financial statements of any sub-groups within a group. IFR 2.IN2A The guidance contained in IFRIC 8 cope of IFR 2 and IFRIC 11 IFR 2 Group and Treasury hare Transactions has been incorporated into the amendments to IFR 2. Accordingly, the interpretations have been withdrawn. Insight 3.1 When considering the consolidated financial statements of the group from the perspective of the ultimate parent, we believe that this amendment has limited effect. Our first impression is that the only change at this level is to include in the standard s scope transactions in which a shareholder that is not part of the group settles a share-based payment arrangement in cash to suppliers of goods or to the group. This is discussed later in this section. IFR 2.3, 3A The amendments introduce a comprehensive concept for group share-based payment transactions by replacing IFR 2.3 and amending the definitions of share-based payment arrangements and share-based payment transactions. The new concept: identifies the different roles of the entities involved in a share-based payment transaction; covers not only transactions settled by a shareholder but also those settled by another group entity; covers not only transactions in which the entity s own equity instruments are granted, but also those of another group entity. The standard applies to cash payments that are based on the equity instruments of any group entity; covers both equity-settled and cash-settled share-based payment transactions; and defines a group as the ultimate parent of the reporting entity and its subsidiaries. To describe the roles in a group share-based payment transaction, the amendments introduce the notions of: receiving entity, i.e., the entity that receives goods or in a share-based payment transaction; and settling entity, i.e., the entity that has the obligation to settle the share-based payment transaction. A transaction meets the definition of a share-based payment transaction from the perspective of the receiving entity if the receiving entity is in the same group as the entity whose equity instruments are granted or on whose equity instruments a cash payment is based ( reference entity ). Therefore, the amendments address not only group share-based payment transactions, but also share-based payment transactions that are settled by a shareholder that is outside the group.

8 7 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions Application to group share-based payment transactions A share-based payment in which the settling entity, the receiving entity and the reference entity have the same ultimate parent meets the definition of a share-based payment arrangement. This is regardless of whether the share-based payment is settled in equity instruments or in cash (or other assets). The transaction is accounted for as a share-based payment transaction by the receiving entity and the settling entity. If the reference entity is neither a receiving nor a settling entity, i.e., its equity instruments are just a medium or benchmark used to facilitate the transaction, then the transaction is not a share-based payment transaction from its perspective as it is not a party to the share-based payment arrangement. In the following we have analysed four simplified scenarios applying the principles as illustrated above. For a more comprehensive overview of simplified standard scenarios please refer to Appendix I. That appendix illustrates whether a share-based payment transaction is in the scope of IFR 2 and how it is classified for eight scenarios. IFR 2.BC268B One of the main objectives of the amendments was to address share-based payment transactions in which the receiving entity has no obligation to settle the transaction with the counterparty to the share-based payment transaction. Example 1: arent grants a cash payment to the of its subsidiary. The cash payment is based on the price of the equity instruments of. has the obligation to settle the transaction with the. Cash based on s shares Is this transaction a share-based payment Before the After the transaction under IFR 2 from the amendments amendments perspective of: s consolidated financial statements s separate financial statements s separate or individual financial statements Insight 3.2 In the table above, we use and to emphasise the change in the scope of IFR 2 based on the definitions in the standard. The extent of any change in accounting for an entity involved in such transactions will depend on how they were accounted for previously. rior to the amendments: From the perspective of s consolidated financial statements, the transaction was within the scope of IFR 2, since the cash payment is based on the equity instruments of s group (IFR 2.2(b)). This issue is discussed in our publication Insights into IFR, 6 th Edition 2009/10, From the perspective of s separate financial statements, it was not clear whether the definition of a cash-settled share-based payment transaction in IFR 2.2(b) was met because the cash payment is not based on the entity s own equity instruments. ince had to reflect the obligation to settle the cash payment, would have accounted for an obligation, for example, under IFR 2 by analogy or under IA 39 Financial Instruments: Recognition and Measurement.

9 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions 8 From the perspective of s separate financial statements, the transaction was not addressed specifically by the standard. This is because the requirement to treat grants made by group entities (or shareholders) as share-based payment transactions referred only to equity-settled transactions (IFR 2.3). However, in our view application of the standard by analogy may have been appropriate. This issue is discussed in our publication Insights into IFR, 6th Edition 2009/10, If IFR 2 had been applied, then there would be no change for if equity-settled classification previously had been used. The amendments also cover transactions in which the receiving entity has the obligation to settle with a cash payment that is based on the equity instruments of another group entity rather than on its own equity instruments. Example 2: ubsidiary grants a cash payment to its. The cash payment is based on the price of the equity instruments of its parent. has the obligation to settle the transaction. Cash based on s shares Is this transaction a share-based payment transaction under IFR 2 from the perspective of: s consolidated financial statements s separate or individual financial statements s separate or individual financial statements Before the amendments After the amendments Insight 3.3 rior to the amendments, from the perspective of s separate or individual financial statements, the definition of a cash-settled share-based payment transaction in IFR 2.2(b) was not met because the cash payment is not based on the entity s own equity instruments. However, may have accounted for the transaction as an employee benefit in the scope of IA 19 Employee Benefits. The amendments further clarify the accounting for transactions in which three different group entities are involved: Example 3: E, a subsidiary of parent, grants a cash payment to the of subsidiary. The cash payment is based on the price of the equity instruments of. E has the obligation to settle the transaction. Is this transaction a share-based payment transaction under IFR 2 from the perspective of: s consolidated financial statements E Cash based on s shares s separate financial statements E s separate or individual financial statements s separate or individual financial statements Before the amendments After the amendments

10 9 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions Insight 3.4 rior to the amendments: From the perspective of E s separate financial statements, the definition of a cash-settled share-based payment transaction in IFR 2.2(b) was not met because the cash payment is not based on the entity s own equity instruments. However, E reflected the obligation to settle the cash payment. ee Insight 3.2 above for a discussion of s separate financial statements. From the perspective of s separate financial statements, the transaction was not covered by the standard. ee Insight 3.2 above for a discussion on s separate financial statements. Example 4: Ultimate parent U grants a cash payment to the of subsidiary, which is held via an intermediate parent. The cash payment is based on the price of the equity instruments of. U has the obligation to settle the transaction. U Cash based on s shares Is this transaction a share-based payment transaction under IFR 2 from the perspective of: U s consolidated financial statements U s separate financial statements s consolidated financial statements s separate financial statements s separate or individual financial statements Before the amendments After the amendments Insight 3.5 rior to the amendments, in our view an intermediate entity such as had an accounting policy choice as to whether or not to account for the transaction as a share-based payment transaction in its separate financial statements. This matter is discussed in our publication Insights into IFR, 6th Edition 2009/10, The amendments are silent regarding whether the intermediate entity accounts for a sharebased payment transaction in its separate financial statements. Our first impression is that the accounting policy choice remains available. is only the reference entity and is not a direct party to the share-based payment transaction and therefore it appears that attribution is not required. However it seems difficult to preclude attribution as U has only an indirect interest in and can realise the benefits of the contribution only via. Application to share-based payment transactions when the reference entity is outside the group In contrast to examples 1 to 4 above, when the reference entity is not in the same group as the receiving and the settling entity, then the transaction is not a share-based payment transaction from the perspective of the receiving entity.

11 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions 10 Example 5: A joint venture (JV) grants a cash payment to its. The cash payment is based on the price of the equity instruments of one of its investors (I). JV has the obligation to settle the transaction. I Cash based on I s shares Is this transaction a share-based payment transaction under IFR 2 from the perspective of: JV s separate or individual financial statements JV Before the amendments After the amendments rior to the amendments this transaction was not in the scope of IFR 2 from the perspective of the JV. Under the amendments it remains outside the scope since the cash payment is based on the equity instruments of I, which is not in the same group as JV. ince JV has an obligation to pay cash to its for, the transaction would be accounted for under IA 19. Application to share-based payment transactions that are settled by a shareholder outside the group A receiving entity also is required to recognise a share-based payment when a transaction that is based on a reference entity within the same group as the receiving entity is settled by a shareholder outside the group. Insight 3.6 rior to the amendments, a receiving entity was required to recognise a share-based payment transaction when a shareholder outside the group transferred equity instruments of the receiving entity (or another group entity) to a supplier of goods or to the entity. Our first impression is that the amendments expand the scope of IFR 2 to include cash-settled transactions settled by a shareholder outside the group if the payments are based on the entity s equity instruments (or those of another group entity). Our first impression is that transfers of equity instruments of a shareholder outside the group or cash payments based on the value of the equity instruments of a shareholder outside the group do not result in a share-based payment transaction that is required to be accounted for under IFR 2 for the entity. Example 6: An investor (I) grants a cash payment to the of its joint venture (JV). The cash payment is based on the price of the equity instruments of JV. I has the obligation to settle the transaction. I Cash based on JV s shares Is this transaction a share-based payment transaction under IFR 2 from the perspective of: JV s separate or individual financial statements JV Before the amendments After the amendments

12 11 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions rior to the amendments this transaction was not in the scope of IFR 2 from the perspective of JV, since the shareholder grants a cash payment rather than an equity instrument. After the amendments this transaction is in the scope of IFR 2 from the perspective of JV, since cashsettled share-based payment transactions settled by shareholders now are included in the definitions. However, our first impression is that this is the case only when the reference entity is in the same group as the receiving entity as the following example highlights. Example 7: An investor (I) grants its own equity instruments to the of its joint venture (JV). I has the obligation to settle the transaction. I I s equity instruments Is this transaction a share-based payment transaction under IFR 2 from the perspective of JV s separate or individual financial statements JV Before the amendments After the amendments Before and after the amendments, this transaction is not clearly in the scope of IFR 2 from the perspective of JV, since the equity instruments granted are those of a shareholder that is not a group entity. ince the reference entity is not within the same group as the receiving entity, our first impression is that the transaction is not a share-based payment transaction from the perspective of the receiving entity. Insight 3.7 rior to the amendments an entity that granted a share-based payment was required to account for it and an entity needed to assess which entity was the grantor of a group share-based payment transaction (see IFRIC 8.6). In our view, the grantor could differ from the entity that has the obligation to settle the transaction. This issue is discussed in our publication Insights into IFR, 6th Edition 2009/10, Under the amendments, an entity is required to account for a share-based payment transaction if it has the obligation to settle the share-based payment transaction (settling entity); the guidance in IFRIC 8.6 has not been incorporated into the amendments. Consequently, some entities may need to reassess the recognition and classification of share-based payments involving group entities.

13 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions 12 Key messages The amendments expand the scope of IFR 2 to bring group cash-settled share-based payment transactions into the scope of the standard. After the amendments the definition of a share-based payment includes payments in cash or other assets based on the price (or value) of equity instruments of any group entity, and not only of the receiving entity. The amendments introduce the notion of receiving entity, i.e., the entity that receives goods or in a share-based payment arrangement, and settling entity, i.e., the entity that has the obligation to settle the share-based payment transaction. A group share-based payment transaction is a share-based payment transaction in which the receiving entity, the settling entity and the entity whose equity instruments are granted or whose equity instruments are the underlying measure for a cash payment (the reference entity) are in the same group from the perspective of the ultimate parent. This applies to both equitysettled and cash-settled share-based payment transactions. A share-based payment that is settled by a shareholder outside the group also is in the scope of IFR 2, as long as the reference entity is in the same group as the receiving entity.

14 13 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions 4. Classification After an entity has determined that it has a share-based payment transaction in the scope of IFR 2 (see section 3), the next step is to determine the classification of the transaction. The classification will be either equity-settled or cash-settled. IFR 2.43A The classification of the share-based payment transaction depends on the nature of the award granted and whether the entity has an obligation to settle the transaction. If the entity has no such obligation, then the transaction is accounted for as equity-settled: Obligation to settle? Yes No Nature of the Own equity instruments Cash or other assets award Equity-settled Cash-settled Equity-settled Equity-settled IFR 2.43A A share-based payment transaction is classified from the perspective of each reporting entity rather than by making a single classification determination, e.g., from the perspective of the consolidated financial statements of the ultimate parent. Therefore a single share-based payment transaction could be classified as equity-settled in the financial statements of a subsidiary that receives the and cash-settled in the group s consolidated financial statements, or vice versa. Identification of the reporting entity, and whether it is the separate entity or consolidated group, is important when there is an obligation to settle the transaction in equity instruments of another group entity. This is because, from the perspective of the separate financial statements of the reporting entity, the equity instruments would be classified as cash or other assets, but from the perspective of the consolidated financial statements they may qualify as own equity instruments, depending on the level in the group at which the consolidated financial statements under consideration are prepared. The following illustrative examples show how the principle of classification as presented in the table above is combined with the principle of considering the perspective of the entity. Classification of group share-based payment transactions in the financial statements of the receiving entity IFR 2.43B(a) A receiving entity classifies a group share-based payment transaction as equity-settled if it has an obligation to settle in its own equity instruments. Example 8: s shares ubsidiary grants a share-based payment to its. The payment will be settled in equity instruments of. as the receiving entity has an obligation to settle in its own equity instruments. accounts for the transaction in its financial statements as equitysettled. arent also accounts for the transaction as equity-settled in its consolidated financial statements, since, from s group perspective, it has an obligation to settle in equity instruments of the group. Neither of these accounting treatments has changed with the amendments.

15 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions 14 IFR 2.43B A receiving entity classifies a group share-based payment transaction as cash-settled if it has an obligation to settle in cash or other assets. Other assets include the equity instruments of another group entity. Example 9: s shares ubsidiary grants a share-based payment to its. The payment will be settled in equity instruments of parent. as the receiving entity has an obligation to settle in cash or other assets since the equity instruments are not s equity instruments. Therefore classifies the transaction in its financial statements as cashsettled. IFR 2.43B(b) A receiving entity classifies a group share-based payment transaction as equity-settled if it has no obligation to settle the payment. Example 10: s shares arent grants a share-based payment to the of subsidiary. The payment will be settled in equity instruments of. as the receiving entity has no obligation to settle the payment. classifies the transaction in its financial statements as equity-settled. ee example 11 below for a discussion of the classification from the perspective of the settling entity (). IFR 2.43C Classification of group share-based payment transactions in the financial statements of the settling entity A settling entity classifies a group share-based payment transaction as equity-settled if it has the obligation to settle in its own equity instruments. Example 11: s shares arent grants a share-based payment to the of subsidiary. The payment will be settled in equity instruments of. as the settling entity has the obligation to settle the payment in own equity instruments. classifies the transaction in its separate and consolidated financial statements as equity-settled. A settling entity classifies a group share-based payment transaction as cash-settled if it has the obligation to settle in cash or other assets. Other assets include the equity instruments of another group entity.

16 15 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions Example 12: arent grants a share-based payment to the of subsidiary. The payment will be settled in equity instruments of. s shares From the perspective of s separate financial statements, as the settling entity has an obligation to settle in cash or other assets since the equity instruments are not s own equity instruments. Therefore classifies the transaction as cash-settled in its separate financial statements. In contrast, from its group perspective, has an obligation to settle in equity instruments of the group and therefore classifies the transaction as equity-settled in its consolidated financial statements. IFR 2.43D Recharge arrangements In the context of a group share-based payment transaction, the settling entity may require the receiving entity to reimburse it for settling the transaction with the counterparty. uch an intragroup payment arrangement often is referred to as a recharge arrangement. The existence of a recharge arrangement between the settling entity and the receiving entity does not change the character of the share-based payment transaction, and therefore would not affect the classification of the share-based payment transaction as equity-settled or cash-settled. Key messages A share-based payment transaction is classified as equity-settled or cash-settled in each set of financial statements from the perspective of the reporting entity. Therefore the classification in the receiving entity s and settling entity s financial statements may differ. imilarly, the classification may differ between the separate and the consolidated financial statements of the same entity for transactions involving equity instruments of a group entity. Therefore sharebased payment transactions that are classified as cash-settled at the group level may need to be classified as equity-settled at a subsidiary level (or vice versa). A receiving entity that has no obligation to settle the transaction classifies the share-based payment transaction as equity-settled. A settling entity classifies the share-based payment transaction depending on the nature of the award: if it has the obligation to settle in own equity instruments, then it accounts for it as equity settled; if it has the obligation to settle in cash or other assets, including equity instruments of another group entity, then it accounts for it as cash-settled. The existence of recharge arrangements does not affect the classification of the transaction in the reporting entity s financial statements.

17 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions Recognition and measurement IFR 2.43A IFR 2.43A IFR 2.B53 Accounting for a share-based payment transaction The amendments do not introduce any changes of principle in the recognition and measurement of equity-settled and cash-settled share-based payment transactions. After determining the classification of the share-based payment in the financial statements of the reporting entity (see section 4) the recognition and measurement of the share-based payment transaction follows the currently effective accounting requirements in IFR and IFR The amounts recognised in the financial statements of the receiving and settling entities may differ. This is because classification could be different in the financial statements of the receiving and settling entities. Equity-settled share-based payments involving are measured once at grant date and the number of instruments is adjusted only to reflect the number of instruments for which any service and non-market performance conditions are satisfied. In contrast, a cashsettled share-based payment is re-measured to equal the amount ultimately paid (see Appendix II examples 1 and 3). A receiving entity that has no obligation to settle the transaction with the counterparty to the share-based payment transaction accounts for the transaction as equity-settled and recognises an expense, unless the goods or service received qualify for recognition as an asset, and an increase in its equity as a contribution. Insight 5.1 A settling entity recognises an increase in equity or liabilities, depending on the classification of the share-based payment transaction. However, there is no guidance on how a settling entity that is different from a receiving entity accounts for the debit entry. Consider the following examples: arent is the settling entity When a parent grants rights to its equity instruments to of a subsidiary, receives goods or indirectly through in the form of an increased investment in, i.e., receives from that are paid for by, thereby increasing the value of. Therefore, in our view the equity-settled share-based payment transaction should be recognised by as an increase in its investment in and a corresponding increase in equity over the period in which the provide the to. This issue is discussed in our publication Insights into IFR, 6 th Edition 2009/10, IFR 2.IG19 However, when a parent classifies a share-based payment transaction as cash-settled, then our first impression is that only the grant-date fair value of the share-based payment would qualify as part of the investment in and any remeasurement of the liability is recognised in profit or loss (see Appendix II examples 1 and 3). This first impression is based on the guidance in IFR 2 regarding the capitalisation of cash-settled share-based payments. Remeasurements of cash-settled share-based payments are required to be recognised in profit or loss rather than as an adjustment of the amount capitalised. For example, if the costs of rendered by an engineer in a cash-settled share-based payment arrangement were capitalised as a cost of software development, then IFR 2.IG19 specifies that subsequent remeasurement of the share-based payment would not adjust the amount recognised for received. In addition, if the remeasurement of the share-based payment is a net reduction in the liability, then such a circumstance could be an indication of impairment of the assets capitalised.

18 17 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions Ultimate arent is the settling entity An ultimate parent U grants a share-based payment to the of its subsidiary and will settle the transaction in its own equity instruments. is held indirectly by U via parent. Our first impression is that regardless of whether, as an intermediate parent, recognises the transaction as a share-based payment transaction (see Insight 3.5), the value of U s investment in increases by granting the share-based payment arrangement to s, and therefore U should recognise the cost of the share-based payment as a cost of investment in. Another group entity is the settling entity E grants a share-based payment to the of and will settle the transaction in its own equity instruments. E is another group entity without a shareholding relationship with (a fellow subsidiary of ). As E neither receives nor has an investment in, our first impression is that E should recognise the cost of the share-based payment in equity as a distribution to its parent over the vesting period. This is because E could be seen to be settling the transaction on behalf of its parent. IFR 2.B59- B61 Accounting for transfers of A group share-based payment may be granted to subject to the completion of a service period within the group. During the vesting period may transfer from one group entity to another. Under the terms of the agreement such a transfer is not considered a failure to meet a vesting condition because the remain in service within the group. rior to the amendments, IFRIC 11 addressed the accounting for transfers of within a group in a share-based payment transaction by each of the group entities when the parent granted its equity instruments to of its subsidiaries. The amendments incorporate the principles set out in IFRIC 11 and expand them to address scenarios in which the subsidiaries classify the share-based payment transactions as cash-settled, in which case: Each subsidiary measures the received by reference to the grant-date fair value of the equity instruments granted and for the proportion of the vesting period served with each subsidiary. Each subsidiary recognises any change in the fair value of the equity instruments during the service period of the with each subsidiary. The amendments provide high level principles and no guidance on how to apply them in practice. The amendments do not address the attribution to the subsidiaries of the changes in fair value occurring from vesting date to settlement date.

19 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions 18 Key messages The recognition and measurement requirements for group share-based payments follow the general accounting requirements for equity-settled and cash-settled share-based payment transactions, which are unchanged. A receiving entity without an obligation to settle the transaction recognises a capital contribution. Amounts recognised for a single share-based payment transaction can differ in the respective financial statements of the settling and receiving entities. The amendments expand IFR 2 to include principles on how subsidiaries should account for transfers of within a group in a cash-settled share-based payment transaction. If market conditions and / or non-vesting conditions are attached to the transaction, then the amounts recognised can differ significantly in the respective entities, since accounting for the transaction as equity-settled prohibits a true-up for market and non-vesting conditions.

20 19 First Impressions: Amendments to IFR 2 Group Cash-settled hare-based ayment Transactions 6. Effective date and transition IFR 2.63 Effective date The amendments to IFR 2 are effective for annual periods beginning on or after 1 January 2010; early application is permitted. If an entity applies these amendments from an earlier date, then it discloses that fact. IFR 2.63 Transition The amendments are applied retrospectively and comparatives are adjusted in accordance with IA 8 Accounting olicies, Changes in Accounting Estimates and Errors subject to the transitional requirements of IFR 2: IFR 2.58 For cash-settled share-based payment transactions that are not settled at the effective date of IFR 2, the standard is applied retrospectively, except that an entity is not required to restate comparative information to the extent that the information relates to a period or date that is earlier than 7 November IFR 2.53 For equity-settled share-based payment transactions, the standard is applied retrospectively to the extent that the equity instruments were granted after 7 November 2002 and are not vested at the effective date of IFR 2. Insight 6.1 Applying the transitional requirements of the amendments could raise some issues in practice. When another group entity has the obligation to settle a share-based payment transaction in cash then the receiving entity does not recognise any liability because it accounts for the transaction as equity-settled. Therefore IFR 2.58 does not seem to apply. However, cash, but no equity instrument, is granted in this share-based payment transaction. Therefore IFR 2.53 does not seem to apply directly either. Our first impression is that a subsidiary that accounts for a transaction as equity-settled should apply IFR 2.53 even if the share-based payment is settled by another entity in cash. Applying IFR 2.53 to this fact pattern is consistent with the general principle of applying the requirements for equity-settled share-based payment transactions. When the transitional requirements of IFR 2 summarised previously refer to the effective date of IFR 2, our first impression is that the amendments refer to the effective date of the original IFR 2, i.e., 1 January Accordingly, the amendments would be applied retrospectively to equity-settled transactions vested and cash-settled transactions settled after 1 January However, we expect the impact of retrospective application to be limited when vesting or settlement occurred before the beginning of the earliest comparative period. The most likely impact of retrospective application to vested / settled awards will be for cash-settled share-based payment transactions in which the parent (or another group entity) is the settling entity and previously the subsidiary had not reflected the share-based payment in its financial statements. Under the amendments the share-based payment transaction would be classified as equitysettled in the subsidiary s financial statements. Therefore the subsidiary s financial statements would be adjusted to reflect the cost and an equal increase in contributed capital. Retrospective application results only in a restatement within equity at the beginning of the earliest comparative period unless some cost still is capitalised as part of an asset (e.g., inventory). Example: On 1 January 2004 parent granted a share-based payment to the of its subsidiary subject to a six-year vesting period ending on 31 December The transaction will be settled by in cash based on s share price in and have reporting periods ending on 31 December.

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