IFRS for SMEs — U.S. GAAP Comparison Wiki - 14 March 2010

Share-based-Payment

SME Par.            IFRS
SME            U.S.
GAAP

Scope of this section

26.1             This
section specifies the accounting for all share-based payment transactions
including:

 

 

   1.
equity-settled share-based payment transactions, in which the entity acquires
goods or services as consideration for equity instruments of the entity
(including shares or share options);

   2.
cash-settled share-based payment transactions, in which the entity acquires
goods or services by incurring liabilities to the supplier of those goods or
services for amounts that are based on the price (or value) of the entity’s
shares or other equity instruments of the entity; and

   3.
transactions in which the entity receives or acquires goods or services and the
terms of the arrangement provide either the entity or the supplier of those
goods or services with a choice of whether the entity settles the transaction
in cash (or other assets) or by issuing equity instruments.

 

 

            FASB
ASC 505-50 applies to share-based payments to non-employees.  FASB ASC 718 applies to share-based
payment transactions with employees and employee stock ownership plans.

 

 

FASB ASC 718 contains guidance on determining whether to
classify an award as equity or a liability.

 

 

Under IFRS for SMEs, the definition of an employee is
broader than the U.S. GAAP definition.

26.2             Cash-settled
share-based payment transactions include share appreciation rights. For
example, an entity might grant share appreciation rights to employees as part
of their remuneration package, whereby the employees will become entitled to a
future cash payment (rather than an equity instrument), based on the increase
in the entity’s share price from a specified level over a specified period of
time. Or an entity might grant to its employees a right to receive a future
cash payment by granting to them a right to shares (including shares to be
issued upon the exercise of share options) that are redeemable, either
mandatorily (eg upon cessation of employment) or at the employee’s option.              

Recognition

26.3             An
entity shall recognise the goods or services received or acquired in a
share-based payment transaction when it obtains the goods or as the services
are received. The entity shall recognise a corresponding increase in equity if
the goods or services were received in an equity-settled share-based payment
transaction, or a liability if the goods or services were acquired in a
cash-settled share-based payment transaction.             A
grantor shall recognize the goods acquired or services received in a
share-based payment transaction when it obtains the goods or as services are
received. FAS 123(R), paragraph 5, sequence 83.1A grantor may need to recognize
an asset before it actually receives goods or services if it first exchanges
share-based payment for an enforceable right to receive those goods or
services. Nevertheless, the goods or services themselves are not recognized
before they are received. FAS 123(R), paragraph 5, sequence 84

 

 

A grantor shall recognize either a corresponding increase in
equity or a liability, depending on whether the instruments granted satisfy the
equity or liability classification criteria established in FASB ASC paragraphs
718-10-25-6 through 25-19.

26.4             When
the goods or services received or acquired in a share-based payment transaction
do not qualify for recognition as assets, the entity shall recognise them as
expenses.              

Recognition when there are vesting conditions

26.5             If
the share-based payments granted to employees vest immediately, the employee is
not required to complete a specified period of service before becoming
unconditionally entitled to those share-based payments. In the absence of
evidence to the contrary, the entity shall presume that services rendered by
the employee as consideration for the share-based payments have been received.
In this case, on grant date the entity shall recognise the services received in
full, with a corresponding increase in equity or liabilities.             U.S.
GAAP contains extensive guidance about vesting conditions and attribution of
compensation cost.

26.6             If
the share-based payments do not vest until the employee completes a specified
period of service, the entity shall presume that the services to be rendered by
the counterparty as consideration for those share-based payments will be
received in the future, during the vesting period. The entity shall account for
those services as they are rendered by the employee during the vesting period,
with a corresponding increase in equity or liabilities.              

Measurement of equity-settled share-based payment
transactions

             Measurement
principle

26.7             For
equity-settled share-based payment transactions, an entity shall measure the
goods or services received, and the corresponding increase in equity, at the
fair value of the goods or services received, unless that fair value cannot be
estimated reliably. If the entity cannot estimate reliably the fair value of
the goods or services received, the entity shall measure their value, and the
corresponding increase in equity, by reference to the fair value of the equity
instruments granted. To apply this requirement to transactions with employees
and others providing similar services, the entity shall measure the fair value
of the services received by reference to the fair value of the equity
instruments granted, because typically it is not possible to estimate reliably
the fair value of the services received.             Share-based
payments to non-employees generally are measured at the earlier of the
completion of performance and the performance commitment date, based on the
fair value of the instruments issued. However, if the fair value of the goods
or services can be determined objectively, then their value may be used
instead.

26.8             For
transactions with employees (including others providing similar services), the
fair value of the equity instruments shall be measured at grant date. For
transactions with parties other than employees, the measurement date is the
date when the entity obtains the goods or the counterparty renders service.             Equity-classified
grants to employees generally are measured based on the grant date fair value
of the equity instruments issued.

 

 

Nonpublic entities are allowed to measure stock-based
compensation awards by using the fair-value (preferred) method or the
calculated-value method. In come cases, a nonpublic entity could use the
intrinsic-value method.

26.9             A
grant of equity instruments might be conditional on employees satisfying
specified vesting conditions related to service or performance. For example, a
grant of shares or share options to an employee is typically conditional on the
employee remaining in the entity’s employ for a specified period of time. There
might be performance conditions that must be satisfied, such as the entity
achieving a specified growth in profit (a non-market vesting condition) or a
specified increase in the entity’s share price (a market vesting condition).
All vesting conditions related to solely employee service or to a non-market
performance condition shall be taken into account when estimating the number of
equity instruments expected to vest. Subsequently, the entity shall revise that
estimate, if necessary, if new information indicates that the number of equity
instruments expected to vest differs from previous estimates. On vesting date,
the entity shall revise the estimate to equal the number of equity instruments
that ultimately vested. All market vesting conditions and non-vesting
conditions shall be taken into account when estimating the fair value of the
shares or share options at the measurement date, with no subsequent adjustment
irrespective of the outcome.             U.S.
GAAP contains extensive guidance about vesting conditions.

 

 

Estimates of the number of equity-settled instruments that
vest are adjusted to the actual number that vests. No adjustment is made for
failure to achieve a market condition.

             Shares

26.10             An
entity shall measure the fair value of shares (and the related goods or
services received) using the following three-tier measurement hierarchy:

 

 

   1. If an
observable market price is available for the equity instruments granted, use
that price.

   2. If an
observable market price is not available, measure the fair value of equity
instruments granted using entity-specific observable market data such as

         1. a recent
transaction in the entity’s shares, or

         2. a recent
independent fair valuation of the entity or its principal assets.

   3. If an
observable market price is not available and obtaining a reliable measurement
of fair value under (b) is impracticable, indirectly measure the fair value of
the shares or share appreciation rights using a valuation method that uses
market data to the greatest extent practicable to estimate what the price of
those equity instruments would be on the grant date in an arm’s length
transaction between knowledgeable, willing parties. The entity’s directors
should use their judgement to apply the most appropriate valuation method to
determine fair value. Any valuation method used should be consistent with
generally accepted valuation methodologies for valuing equity instruments.

 

 

            Observable
market prices of identical or similar equity or liability instruments in active
markets are the best evidence of fair value and, if available, shall be used as
the basis for the measurement of equity and liability instruments awarded in a
share-based payment transaction with employees. FAS 123(R), paragraph A7,
sequence 277.1Determining whether an equity or liability instrument is similar
is a matter of judgment, based on an analysis of the terms of the instrument
and other relevant facts and circumstances. FAS 123(R), paragraph A7, sequence
278 For example, awards to employees of a public entity of shares of its common
stock, subject only to a service or performance condition for vesting
(non-vested shares), shall be measured based on the market price of otherwise
identical (that is, identical except for the vesting condition) common stock at
the grant date. FAS 123(R), paragraph A7, sequence 277.2

 

 

If observable market prices of identical or similar equity
or liability instruments of the entity are not available, the fair value of
equity and liability instruments awarded to employees shall be estimated by
using a valuation technique that meets all of the following criteria: FAS
123(R), paragraph A8, sequence 279.1

 

 

   1. It is
applied in a manner consistent with the fair value measurement objective and
the other requirements of this FASB ASC 718. FAS 123(R), paragraph A8, sequence
279.2.1

   2. It is
based on established principles of financial economic theory and generally
applied in that field. FAS 123(R), paragraph A8, sequence 279.2.2.1 Established
principles of financial economic theory represent fundamental propositions that
form the basis of modern corporate finance (for example, the time value of
money and risk-neutral valuation). FAS 123(R), paragraph A8, sequence 281

   3. It
reflects all substantive characteristics of the instrument (except for those
explicitly excluded by FASB ASC 718, such as vesting conditions and reload
features). FAS 123(R), paragraph A8, sequence 279.2.2.2.1

 

 

That is, the fair values of equity and liability instruments
granted in a share-based payment transaction shall be estimated by applying a
valuation technique that would be used in determining an amount at which
instruments with the same characteristics (except for those explicitly excluded
by FASB ASC 718) would be exchanged.

 

 

An estimate of the amount at which instruments similar to
employee share options and other instruments granted to employees would be
exchanged would factor in expectations of the probability that the requisite
service would be rendered and the instruments would vest (that is, that the
performance or service conditions would be satisfied). However the measurement
objective in FASB ASC 718 is to estimate the fair value at the grant date of
the equity instruments that the entity is obligated to issue when employees
have rendered the requisite service and satisfied any other conditions
necessary to earn the right to benefit from the instruments. Therefore, the
estimated fair value of the instruments at grant date does not take into
account the effect on fair value of vesting conditions and other restrictions
that apply only during the requisite service period. Under the fair-value-based
method required by FASB ASC 718, the effect of vesting conditions and other
restrictions that apply only during the requisite service period is reflected by
recognizing compensation cost only for instruments for which the requisite
service is rendered. FAS 123(R), paragraph A9, sequence 282 FAS 123(R),
paragraph A8, sequence 279.2.2.2.2

             Share
options and equity-settled share appreciation rights

26.11             An
entity shall measure the fair value of share options and equity-settled share
appreciation rights (and the related goods or services received) using the
following three-tier measurement hierarchy:

 

 

   1. If an
observable market price is available for the equity instruments granted, use
that price.

   2. If an
observable market price is not available, measure the fair value of share
options and share appreciation rights granted using entity-specific observable
market data such as for a recent transaction in the share options.

   3. If an
observable market price is not available and obtaining a reliable measurement
of fair value under (b) is impracticable, indirectly measure the fair value of
share options or share appreciation rights using an option pricing model. The
inputs for the model (such as the weighted average share price, exercise price,
expected volatility, option life, expected dividends, and the risk-free
interest rate) should use market data to the greatest extent possible.
Paragraph 26.10 provides guidance on determining the fair value of the shares
used in determining the weighted average share price. The entity should derive
an estimate of expected volatility consistent with the valuation methodology
used to determine the fair value of the shares.

 

 

           
 

             Modifications
to the terms and conditions on which equity instruments were granted

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:

 

 

   1. 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.

   2. 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.

 

 

            The
modification of equity-classified instruments results in the recognition of any
incremental fair value, but not any reduction in fair value. No minimum
compensation cost must be recognized when the modification of an
equity-classified award that at the date of modification is improbable of
vesting under the original terms.

             Cancellations
and settlements

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.             The
cancellation of a share-based payment results in acceleration of the
unrecognized cost.

Cash-settled share-based payment transactions

26.14             For
cash-settled share-based payment transactions, an entity shall measure the
goods or services acquired and the liability incurred at the fair value of the
liability. Until the liability is settled, the entity shall remeasure the fair
value of the liability at each reporting date and at the date of settlement,
with any changes in fair value recognised in profit or loss for the period.             Liability-classified
awards are initially measured at grant-date fair value. At each reporting date
until settlement, liability-classified awards are remeasured to fair value.

 

 

Nonpublic entities can choose to measure
liability-classified awards at fair value, calculated value or intrinsic value.

Share-based payment transactions with cash alternatives

26.15             Some
share-based payment transactions give either the entity or the counterparty a
choice of settling the transaction in cash (or other assets) or by transfer of
equity instruments. In such a case, the entity shall account for the
transaction as a cash-settled share-based payment transaction unless either

 

 

   1. the
entity has a past practice of settling by issuing equity instruments, or

   2. the
option has no commercial substance because the cash settlement amount bears no
relationship to, and is likely to be lower in value than, the fair value of the
equity instrument.

 

 

In circumstances (a) and (b), the entity shall account for
the transaction as an equity-settled share-based payment transaction in
accordance with paragraphs 26.7–26.13.             An
award is generally classified as a liability, if the employee has the choice of
settlement. If the choice of settlement resides with the entity, the award is
classified as equity unless the entity has an established practice of settling
in cash or doing so when the employee requests cash settlement.

Group plans

26.16             If
a share-based payment award is granted by a parent entity to the employees of
one or more subsidiaries in the group, and the parent presents consolidated
financial statements using either the IFRS for SMEs or full IFRSs, such
subsidiaries are permitted to recognise and measure share-based payment expense
(and the related capital contribution by the parent) on the basis of a
reasonable allocation of the expense recognised for the group.              

Government-mandated plans

26.17             Some
jurisdictions have programmes established under law by which equity investors
(such as employees) are able to acquire equity without providing goods or
services that can be specifically identified (or by providing goods or services
that are clearly less than the fair value of the equity instruments granted).
This indicates that other consideration has been or will be received (such as
past or future employee services). These are equity-settled share-based payment
transactions within the scope of this section. The entity shall measure the
unidentifiable goods or services received (or to be received) as the difference
between the fair value of the share-based payment and the fair value of any
identifiable goods or services received (or to be received) measured at the
grant date.           

 

http://wiki.ifrs.com/Share-based-Payment