Preface

Accounting for modifications and cancellations of employee share-based payment transactions requires assessing changes to fair value, vesting periods, and non-market performance conditions to ensure compliance with IFRS 2.”

Key considerations include handling incremental fair value, changes to service conditions, and transitions from cash-settled to equity-settled share-based payments, ensuring accurate recognition of costs and liabilities.”

The accounting implications of beneficial and non-beneficial modifications, such as adjusting for additional equity instruments or accelerated vesting, must align with IFRS standards and reflect the revised terms of the arrangement.

The accounting treatment for a modification of a share-based payment arrangement depends on whether the modification alters the classification of the arrangement and whether the changes benefit the counterparty.

Modifications That Do Not Change the Classification of the Arrangement:

IFRS 2 differentiates between beneficial and non-beneficial modifications. The following flowchart outlines the categories of modifications and their respective accounting implications, assuming that the modification does not affect the classification of the share-based payment.

Increases in Fair Value of Share-Based Payments

Increases in Fair Value of Equity Instruments Granted

When a modification increases the fair value of the equity instruments granted—such as by lowering the exercise price of a share option—the incremental fair value is recognized over the remaining modified vesting period. The original grant-date fair value, however, continues to be recognized over the remaining original vesting period.

Increases in Fair Value of Share-Based Payments

Determining Incremental Fair Value

The incremental fair value of a modified share-based payment is the difference between the fair value of the modified arrangement and that of the original arrangement, both measured at the date of the modification.

When assessing whether there is an increase in fair value due to a modification, the same principles used for determining grant-date fair value apply. This means that service conditions and non-market performance conditions are not considered in the fair value calculation. For instance, if a share-based payment arrangement with a non-market performance condition is modified to alter only that target, the incremental fair value may be zero if all other terms remain unchanged. This is because the fair value, excluding service and non-market performance conditions, remains consistent before and after the modification.

Conversely, if a market condition or non-vesting condition is reduced or removed, this can result in an increased fair value. Market and non-vesting conditions impact the fair value of an equity-settled share-based payment, so modifications affecting these conditions can alter the incremental fair value.

For awards containing market conditions, if the modification makes it easier to meet the condition or eliminates it entirely, this is generally considered beneficial to employees. The original market condition affects the fair value of the award at the modification date. If the original market condition was unlikely to be met before the modification, the fair value of the award at the modification date may be significantly lower than the fair value at the grant date.

Modifications and Cancellations of Employee Share-Based Payment Transactions

Increases in Number of Equity Instruments Granted

When a modification increases the number of equity instruments granted, the entity recognizes the fair value of the additional instruments at the date of modification. The additional share-based payment cost is then spread over the period from the date of modification to the end of the vesting period for these new instruments. For example, if additional shares are issued to maintain the economic position of a share-based payment holder following a decline in share price, the increased fair value must be recognized accordingly.

Beneficial Modifications of Service and Non-Market Performance Conditions

Modifications that benefit employees, such as reducing the vesting period or altering or eliminating non-market performance conditions, result in recognition of the remaining grant-date fair value based on the revised conditions. This adjustment is made with true-up to actual outcomes. If a service condition is modified, the new vesting period is used to apply the modified grant-date method, and cumulative amounts are recalculated based on the updated vesting conditions.

Acceleration of Vesting in Response to Termination

If an employee leaves before the vesting date and the entity amends the terms to allow the award to vest despite incomplete service, this can be seen as a modification rather than a forfeiture. The fair value of the original award is recognized immediately, and the new award, if granted, is also recognized immediately. If the modification results in accelerated vesting, it is treated as a modification rather than a cancellation, following the same principles applied to replacement awards.

Modification in Response to Employer Termination

If an entity terminates an employee’s contract, potentially precluding them from providing required services, and then amends the share-based payment terms or grants a new award to ensure vesting, this is considered a beneficial modification. The accounting treatment for such modifications should be the same as for cases where the employee cancels the award.

Modification of Non-Market Performance Conditions

A modification to a non-market performance condition does not affect the modification-date fair value. The entity determines if the modification benefits the employee, and if so, the revised vesting conditions are used to recognize the share-based payment cost. Changes to non-market performance conditions may not always constitute a modification but could be predetermined adjustments.

Non-Beneficial Modifications

Modifications that decrease the fair value of the share-based payment, such as reducing the number of equity instruments granted, are generally treated as cancellations. If the vesting conditions are modified in a way that is not beneficial, such as increasing the vesting period or adding new conditions, the original grant-date fair value is recognized over the original vesting period.

Change from Cash-Settled to Equity-Settled Share-Based Payments

When a share-based payment arrangement transitions from cash-settled to equity-settled due to a modification, the following accounting steps should be taken:

1. Derecognition of Liability: Remove the liability associated with the cash-settled share-based payment from the financial statements.
2. Measurement and Recognition: Measure the new equity-settled share-based payment at its fair value as of the modification date. Recognize this fair value in equity based on the extent to which services have been rendered up to that point.
3. Profit or Loss Adjustment: Immediately recognize in profit or loss any difference between the carrying amount of the liability and the amount recognized in equity.

Modifications Changing the Nature of the Arrangement

If a modification changes a share-based payment arrangement to an employee benefit under IAS 19 Employee Benefits, apply the accounting treatment by analogy. This includes:

• Reclassification: Adjust the accounting treatment to reflect that the new arrangement is an employee benefit rather than a share-based payment. This may involve changing the attribution method to align with IAS 19 requirements.
• Measurement and Recognition: Measure and recognize the new benefit according to the general provisions of IAS 19 applicable to the type of employee benefit provided.

Our CFO services provide comprehensive guidance on share-based payment modifications and cancellations, ensuring compliance with IFRS standards and accurate financial reporting for complex arrangements.