Share-based payments IFRS 2 handbook November 2018 kpmg.com/ifrs Contents Variety increases complexity 1 1 Introduction 2 2 Overview 8 3 Scope 15 4 Classification of share-based payment transactions 49 5 Classification of conditions 66 6 Equity-settled share-based payment transactions with employees 81 7 Cash-settled share-based payment transactions with employees 144 8 Employee transactions – Choice of settlement 161 9 Modifications and cancellations of employee share-based payment transactions 177 10 Group share-based payments 208 11 Share-based payment transactions with non-employees 257 12 Replacement awards in a business combination 268 13 Other application issues in practice 299 14 Transition requirements and unrecognised share-based payments 317 15 First-time adoption of IFRS 320 Appendices I Key terms 333 II Valuation aspects of accounting for share-based payments 340 III Table of concordance between IFRS 2 and this handbook 374 Detailed contents 378 About this publication 385 Keeping in touch 386 Acknowledgements 388 Variety increases complexity In October 2018, the International Accounting Standards Board (the Board) published the results of its research project on sources of complexity in applying IFRS 2 Share-based Payment. The Board concluded that no further amendments to IFRS 2 are needed. It felt the main issues that have arisen in practice have been addressed and there are no significant financial reporting problems to address through changing the standard. However, it did acknowledge that a key source of complexity is the variety and complexity of terms and conditions included in share-based payment arrangements, which cannot be solved through amendments to the standard. Therefore, the core principles of the standard are likely to remain unchanged for the coming years. This updated handbook aims to help you apply IFRS 2 in practice and explains the conclusions that we have reached on many interpretative issues. It’s based on actual questions that have arisen in practice around the world and includes illustrative examples and journal entries to elaborate or clarify the practical application of IFRS 2. We hope this handbook will help you apply the complex accounting and valuation requirements of this standard to share-based payment transactions. Kim Heng Anthony Voigt KPMG’s global IFRS employee benefits leadership team KPMG International Standards Group © 2018 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 2 | Share-based payments – IFRS 2 handbook 1 Introduction 1.1 Background Historically, the range of specific requirements orf the accounting for share-based payments in national GAAPs has been diverse. Some countries have a relatively long tradition of accounting for share-based payments. For example, in the US, APB 25 Accounting for Stock Issued to Employees was issued in 1972, and in 2005 was superseded by ASC Topic 718 Compensation – Stock Compensation (formerly known as FAS 123(R)). In Canada, HB 3870 Stock-Based Compensation and Other Stock-Based Payments has been in effect for a number of years and contains recognition requirements for share-based payment transactions. In contrast, some countries in the EU still have no requirements for the recognition and measurement of share-based payment transactions in place for entities not required to apply IFRS Standards®. IFRS 2.BC29–BC60 Share-based payments were first observed in the 1960s, primarily in the US. Consequently, the history of international requirements for the accounting for share-based payments is relatively short compared with other areas of accounting. The development phase of these requirements internationally was accompanied by controversial discussions about whether the recognition of cost for share-based payments that are settled in own equity instruments is justified at all – i.e. whether such accounting would meet the objectives of financial reporting. Some argued that transactions settled in equity are transactions between the shareholders and the third party, rather than between the entity and the third party. Some people still express concerns about accounting entries that result in a debit to expense and a credit to equity. Previously, IAS 19 Employee Benefits contained disclosure requirements for equity compensation issued to employees, but there were no recognition or measurement requirements in IFRS for such transactions before the publication of IFRS 2 Share-based Payment. The first milestone in the development of today’s standard was in July 2000 when the G4+1, which included the predecessor of the Board, the International Accounting Standards Committee (IASC), issued a discussion paper on the topic. The debates resulted in mandatory requirements for share-based payment transactions – i.e. IFRS 2 – being issued in 2004. Modifications to address practice issues continue to the date of this publication. Effective for annual periods beginning Document1 Issued on or after Discussion paper Accounting for July 2000 Share-based Payment - Exposure draft ED 2 Share-based 7 November 2002 Payment - IFRS 2 Share-based Payment 19 February 2004 1 January 2005 2 IFRIC 8 Scope of IFRS 2 12 January 2006 1 May 2006 © 2018 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 1 Introduction 3 1.1 Background Effective for annual periods beginning Document1 Issued on or after IFRIC 11 IFRS 2 – Group and 2 2 November 2006 1 March 2007 Treasury Share Transactions Amendments Vesting Conditions 17 January 2008 and Cancellations 1 January 2009 Improvements to IFRSs 2009 16 April 2009 1 July 2009 Amendments Group Cash- settled Share-based Payment 18 June 2009 1 January 2010 Transactions Amendments within the Annual 6 May 2010 Improvements Project 2010 1 July 2010 Amendments within the Annual Improvements to IFRSs 2010– 12 December 2013 1 July 2014 2012 Cycle Amendments Classification and Measurement of Share-based 20 June 2016 1 January 2018 Payment Transactions Notes 1. Besides the pronouncements listed in the table, IFRS 2 has been amended as a consequence of amendments to other standards, principally the revised version of IFRS 3 Business Combinations issued in 2008, which itself was amended by the Improvements to IFRSs 2010. Other standards, including IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 13 Fair Value Measurement issued in May 2011, and IFRS 9 Financial Instruments issued in July 2014, have also made minor consequential amendments to IFRS 2. 2. IFRIC 8 and IFRIC 11 were withdrawn by the amendments Group Cash-settled Share- based Payment Transactions issued in June 2009. IFRIC 8 addressed the issue of whether IFRS 2 applies to share-based payment transactions in which the entity cannot specifically identify some or all of the goods or services received. Places where this issue arose included South Africa, where such payments were being made to historically disadvantaged individuals as a result of Black Economic Empowerment schemes. IFRIC 11 addressed the issue of whether transactions in which the entity chooses or is required to buy equity instruments from another party should be accounted for as equity-settled or as cash-settled. It further addressed the issue of how to account for a transaction in the separate or individual financial statements of a subsidiary, if the equity instruments of the parent are granted either by the parent or by the subsidiary. For those countries applying IFRS 2 to separate financial statements of parents and subsidiaries, the interpretation also contained an important decision by the IFRS Interpretations Committee (formerly the International Financial Reporting Interpretations Committee (IFRIC)) that recharges between group entities should not be taken into account in determining the classification of a share-based payment transaction. © 2018 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. 4 | Share-based payments – IFRS 2 handbook IFRS 2.64 Both interpretations were withdrawn by the amendments Group Cash-settled Share-based Payment Transactions, which provided expanded guidance for group share-based payments, in particular for cash-settled share-based payment transactions, and incorporated the guidance from IFRIC 8 and IFRIC 11 into IFRS 2. In December 2004, the Interpretations Committee issued a draft interpretation D11 Changes in Contributions to Employee Share Purchase Plans, in which it aimed to resolve the issue of how to account for employee share purchase plans (ESPPs) when an employee ceases to contribute or changes from one ESPP to another. An example of transactions in which these issues arose are those related to the UK’s save as you earn share-based payment scheme, in which employees invest part of their salary to buy the entity’s shares at a discounted price. Commentators responded to the Interpretations Committee that the attempt to interpret IFRS 2 to resolve the issue was unlikely to be successful without a change in the standard. The Interpretations Committee and the Board agreed that the standard before those amendments did not address the accounting for conditions that did not relate to the employee’s service and as a result the amendments Vesting Conditions and Cancellations were issued early in 2008, following an exposure draft issued early in 2006. The amendments changed the definition of vesting conditions and introduced specific accounting requirements for non-vesting conditions. Annual Improvements to IFRSs 2010–2012 Cycle clarified the definition of ‘vesting conditions’