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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”https://uk.frs102.com/members/premium-toolkit/section-27/” type=”big” color=”red”] Return to Section 27 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Modifications to the terms and conditions on which equity instruments were granted
Extract from FRS102: Section 26.12
26.12 If an entity modifies the vesting conditions in a manner that is beneficial to the employee, for example, by reducing the exercise price of an option or reducing the vesting period or by modifying or eliminating a performance condition, the entity shall take the modified vesting conditions into account in accounting for the share-based payment transaction, as follows:
(a) If the modification increases the fair value of the equity instruments granted (or increases the number of equity instruments granted) measured immediately before and after the modification, the entity shall include the incremental fair value granted in the measurement of the amount recognised for services received as consideration for the equity instruments granted.
The incremental fair value granted is the difference between the fair value of the modified equity instrument and that of the original equity instrument, both estimated as at the date of the modification. If the modification occurs during the vesting period, the incremental fair value granted is included in the measurement of the amount recognised for services received over the period from the modification date until the date when the modified equity instruments vest, in addition to the amount based on the grant date fair value of the original equity instruments, which is recognised over the remainder of the original vesting period.
(b) If the modification reduces the total fair value of the share-based payment arrangement, or apparently is not otherwise beneficial to the employee, the entity shall nevertheless continue to account for the services received as consideration for the equity instruments granted as if that modification had not occurred.
OmniPro comment
The accounting for a modification is driven by whether the option is beneficial for the employees or not.
If the modification increases value to the employee, then the expense previously recognised under the original grant continues to be recognised under the original vesting period plus the incremental fair value of the modification released from that date to the end of the modified vesting period.
The incremental value is the fair value of instrument under new terms at the date of modification less fair value of original instrument at the date of modification.
If the modification decreases in value to the employee then the expense previously recognised under the original grant continues to be posted. No other adjustments are made.
Examples of modifications include the following:
- a reduction in the vesting period;
- a reduction in the exercise price of the option;
- an increase in the equity instruments granted; and
- the modification or elimination of a performance condition.
Example 21: Modification – repricing
In year 1 Company A issued employees with 100 share options per employee with a fair value at that date of CU80 which is exercisable in three years time. In year 1, this would be accounted for in a similar way to the above examples for each of the three years regardless of the modification.
In year 2, Company A modifies the options (by reducing the exercise price). The fair value of the original option at that date was CU70 and the modified repriced option has a fair value of CU75. This is treated as an increase (regardless of the fact that it is less than the fair value when the grant was originally issued) and therefore the CU5 would be recogised over the remaining life of the vesting period (i.e. 2 years assuming the modification occurred at the start of year 2). Therefore, the amount to be posted to the profit and loss as an expense would be CU250 (CU5*100 share options=CU500/2yrs*1yr past= CU250)
If the fair value was CU65, there would be a loss of CU5 which would not be accounted for. No changes would be made.
Example 22: Modification – increase in number of options
Company A issued employees with 100 share options per employee with a fair value at that date of CU80 which is exercisable in three years time. In year 1, this would be accounted for in a similar way to the above examples.
At the start of year 2, the company modified the terms such that an additional 50 options would be provided to employees after 3 years. The fair value of this modification on that date was CU5. Therefore in this case, no change would be made to the accounting for the original grant of 100 shares. Instead an additional expense would be recognised over the remaining life of 2 years for the CU5 fair value (i.e. CU5*50 options= CU250/2yrs* 1yrs past= CU125 as an expense for each employee assuming there is no change in expectation of employees leaving before the 3 year period). This would be accounted for in the same way as any other share option as detailed in the examples above.
Cancellations and settlements
Extract from FRS102: Section 26.13
26.13 An entity shall account for a cancellation or settlement of an equity-settled share-based payment award as an acceleration of vesting, and therefore shall recognise immediately the amount that otherwise would have been recognised for services received over the remainder of the vesting period.
OmniPro comment
IFRS 2 requires cancellation accounting to be applied to a reduction in the number of equity instruments when a modification reduces both the number of equity instruments granted and the total fair value of the award. Section 26 is silent in this regard however it is likely IFRS 2 guidance should be used based on the hierarchy stated in this section of FRS 102.
IFRS 2 requires the following approach which should be followed when similar issues occur under FRS 102:
(a) if the cancellation or settlement occurs during the vesting period, it is treated as an acceleration of vesting and the entity recognises immediately the amount that would otherwise have been recognised for services received over the remainder of the vesting period.
(b) Where an entity pays compensation for a cancelled award:
– any compensation up to the fair value of the award at cancellation or settlement date (whether before or after vesting) is accounted for as a deduction from equity, as being equivalent to the redemption of the equity instruments.
– Any compensation paid in excess of the fair value of the award at cancellation or settlement date (whether before or after vesting) is accounted for as an expense in profit or loss; and
-If the share based payment arrangement includes liability components, the fair value of the liability is remeasured at the date of cancellation or settlement. Any payment made to settle the liability component is accounted for as an extinguishment of the liability.
(c) If the entity grants new equity instruments during the vesting period and on the date that they are granted, identifies them as replacing the cancelled or settled instruments, the entity is required to account for the new equity instruments as if they were a modification of the cancelled or settled award. Otherwise it accounts for the new instruments as an entirely new award.
See example below illustrating the above requirements.
Example 23: Cancellation and settlement of a share option during vesting period
At the start of year 1, Company A granted 10 share options to each of its 100 employees on the condition that they stay in employment for four years (i.e. option exercisable after that period).
The fair value of the option is determined to be CU10. At the end of year 1 the entity estimates 90% of employees will remain in service for the vesting period. The expense estimated to be recognised at year 1 is as follows:
Year 1 = 10 shares * CU10 * 100 employees = CU10,000*90% of employees expected to remain in service = CU9,000. Therefore CU9,000 should be recognised over the four year period. Hence CU2,250 (CU9,000/4yrs) should be recognised as an expense for each year based on assumptions at the end of year 1.
At the end of year 2, the company encountered very tough trading conditions and as a result there was a significant fall in the company’s value. Company A decided to cancel the share options which had a fair value of CU5 at that date and in return provide a payment to employees of CU7. The number of employees still employed by the company at that time was 80.
|
|
Cumulative Expense |
Expense for Year |
|
Year 1 |
CU2,250 |
CU2,250 |
|
Year 2 |
CU8,000* |
CU5,750 (CU8,000-CU2,250) |
* Year 2= under Section 26.13 the full amount has to be recognised immediately. 80 employees *10 share options per employee * CU10= CU8,000
The journal required in year 2 is:
|
|
CU |
CU |
|
Dr Employee Costs |
8,000 |
|
|
Cr Shares Based Payment Reserve |
|
8,000 |
The payment of the CU7 per share option on cancellation should be accounted for as follows:
|
|
CU |
CU |
|
Dr Share Based Payment Reserve (CU5 being the fair value of the original grant at the date of cancellation*80 employees *10 share options) |
4,000 |
|
|
Dr Employee Costs (CU7 being the amount paid-CU5 being the fair value of the original grant at the date of cancellation * 80 employees * 10 share options) |
1,600 |
|
|
Cr Bank (CU7*80 employees*10 share options per employee) |
|
5,600 |
Forfeitures
A forfeiture occurs where either a service or non-market performance condition is not met during the vesting period, because this effects the number of awards vested. A market or non vesting condition is not a forfeiture.
The treatment for forfeitures differs from that of a cancellation. It does not result in an acceleration of the expense as the entity could not avoid cancelling the options.
Example 24: Forfeiture
At the start of year 1, Company A granted 10 share options to an employee on the condition that they stay in employment for four years (i.e. option exercisable after that period).
The fair value of the option is determined to be CU15. At the end of year 1 the entity estimates the employee will remain in service for the vesting period. The expense estimated to be recognised for year 1 is as follows:
|
|
CU |
CU |
|
Dr Employee Cost (10 Share Options*CU15) |
150 |
|
|
Cr Share Based Payment inequality |
|
150 |
At the end of year 2, the company’s performance decreased and the company had to lay off this employee. In this instance as the employee was made redundant for genuine reasons, the expense recognised to date for that employee is reversed similar to the way in which a change in estimate occurs. i.e. the journal will be to:
|
|
CU |
CU |
|
Dr Share based Payment Reserve |
150 |
|
|
Cr Employee Cost |
|
150 |
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