Preface

Accounting for cancellations or settlements during the vesting period involves recognizing the accelerated vesting amount, ensuring compliance with IFRS standards and accurate financial reporting.”

Key considerations include addressing cancellations by employees or entities, managing payments exceeding fair value, and applying consistent policies for share-based payment arrangements.”

Choosing between recognizing based on the number of instruments that could have vested or those expected to vest impacts expense recognition and financial reporting outcomes for share-based payments.

Accelerated Vesting: When equity instruments are cancelled or settled during the vesting period, either by the entity or by the counterparty, these transactions are accounted for as if the vesting had been accelerated. This means that the total amount that would have been recognized over the remaining vesting period is recognized immediately.

Cancellation by Employee: Cancellations initiated by the employee are rare and occur when the employee voluntarily waives the share-based payment. More commonly, cancellations happen when the employee fails to meet a non-vesting condition tied to the share-based payment arrangement. This failure is treated as a cancellation by the employee.

Cancellation by Entity: When the entity cancels a share-based payment grant, employees often expect compensation for this cancellation. The accounting treatment depends on the nature of the payment made in exchange for the cancellation:

1. Payments Equal to Fair Value:
   • If the payment does not exceed the fair value of the equity instruments granted (measured at the repurchase date), it is accounted for as a repurchase of an equity interest.
2. Payments Exceeding Fair Value:
   • If the payment exceeds the fair value of the equity instruments granted, the excess amount is recognized as an expense.

The same principles apply to the repurchase of vested equity instruments. If the payment for repurchasing vested equity instruments is within the fair value, it is treated as an equity transaction. If it exceeds the fair value, the excess is treated as an expense.

 Accounting for Failure to Provide Service Due to Termination

When a share-based payment is cancelled, the amount recognized should be the amount that would have been recognized over the remainder of the vesting period had the cancellation not occurred. However, there is some ambiguity in the standard about what “the amount that otherwise would have been recognised for services received over the remainder of the vesting period” means.

This can be interpreted in two ways:

1. Number of Instruments That Could Have Vested:
   • This approach involves recognizing the share-based payment as if all service and non-market performance conditions were met for the cancelled awards, assuming none of the instruments have been forfeited already. This method aligns with the requirement to recognize granted equity instruments unless they do not vest.
2. Number of Instruments Expected to Vest:
   • This approach involves estimating the number of instruments expected to vest at the original vesting date as of the cancellation date. It assumes that the entity would have recognized only the grant-date fair value of those instruments expected to vest on an ongoing basis.

Choosing an Accounting Policy

Entities should choose an accounting policy for recognizing the accelerated amount on cancellation and apply it consistently. The policy choice is between:

• Number of Instruments That Could Have Vested: Recognizing the share-based payment as if all service and non-market performance conditions were met for the cancelled awards.
• Number of Instruments Expected to Vest: Estimating the number of instruments expected to vest at the original vesting date as of the cancellation date.

This policy choice determines how the accelerated amount is calculated and recognized in financial statements. Both approaches have different implications for the recognition of expenses and the timing of recognizing those expenses.

Summary

• Cancellation Accounting: Recognize the amount that would have been recognized over the remainder of the vesting period immediately.
• Consistent Policy Choice: Entities should select and consistently apply an accounting policy to handle the accelerated amount on cancellation.

One approach involves recognizing the payment as if all conditions were met, while the other estimates the number of instruments expected to vest, providing different outcomes in financial reporting.

Our CFO services provide tailored support in managing share-based payment cancellations, ensuring compliance with IFRS and consistency in financial reporting. Get in touch with us.