This article is the twentieth in a series of articles
that takes our readers on a journey through International Financial
Reporting Standards (IFRS) with a special focus on the standards’
quintessential feature: they are principles-based. In this article, we
provide an overview of some of the most significant differences between
IFRS and U.S. generally accepted accounting principles (GAAP) with
regard to share-based payments. Actual differences in the accounting
treatment between the two frameworks depend on specific circumstances.
IFRS pronouncements relating to share-based payment transactions
include IFRS 2, Share-based Payment, IFRIC 8, Scope of
IFRS 2, and IFRIC 11, IFRS 2 - Group and Treasury Share
Transactions. U.S. GAAP for such transactions can be found in
FASB Statement No. 123(R), Share-Based Payment, together with
various interpretations. Under both frameworks, share-based payments
generally occur when equity instruments are used to “pay for” goods or
services, and such transactions are considered to be real economic
transactions that must be reflected in the financial statements.
However, when the two frameworks are applied in practice, nuances emerge
and can result in significant differences in how the awards are
recognized.
One of the most common differences between IFRS 2 and Statement No.
123(R) is in the treatment of a graded vesting award (i.e., an
award with multiple vesting dates and where different parts may have
different expected terms). Under Statement No. 123(R), an entity must
make a policy decision about whether to recognize compensation cost on a
straight-line basis over the requisite service period for (a) each
separately vesting portion of the award as if the award was,
in-substance, multiple awards, or (b) the entire award as whole. Under
IFRS, each vesting portion is treated separately using the “multiple
awards” approach.
IFRS 2 states that if the fair value of the equity instruments cannot
be estimated reliably, the entity is allowed to measure the equity
instruments at their intrinsic value. However, it explains that in
virtually all cases, the estimated fair value of employee share options
at grant date can be measured with sufficient reliability. Statement
No. 123(R) allows non-public entities to make a policy decision of
whether to measure all of its liabilities incurred under share-based
payment arrangements at fair value or to measure all such liabilities
at intrinsic value.
External providers of goods or services can be paid with share-based
payment awards, and these transactions are under the scope of both IFRS
2 and Statement No. 123(R). However, under IFRS, for equity-settled
share-based payments there is a rebuttable presumption that the fair
value of the goods or services received can be estimated reliably. The
measurement date is when goods are obtained or services are received.
Under U.S. GAAP, those transactions are measured at the fair value of
the consideration received, or the fair value of the equity instruments
issued, whichever is more reliably measurable. The measurement date is
the earlier of either the date at which a commitment for performance
by the counterparty to earn the equity instruments is reached or the
date at which the counterparty's performance is complete.
Deferred taxation is another area where IFRS 2 and Statement No. 123(R)
take a different approach. Under IFRS, the approach to deferred
taxation is based on the estimated future tax deduction, which is
revised at each reporting date. Under U.S. GAAP, the deductible
temporary difference must be based on the compensation cost recognized
for financial reporting purposes.
This summary analysis of differences is not exhaustive. Other
differences exist between the two frameworks, but a complete analysis
can be performed only based on specific facts and circumstances.
For further information, please contact Bob Dohrer (robert.dohrer@rsmi.com) or
Marco Marcellan (marco.marcellan@rsmi.com)
in our International Assurance Services Group.
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