Amending Standard

Amendments to the Guidance on implementing AASB 2

Paragraph IG19 is amended and paragraphs IG19A–IG19B are added. IG Examples 12A–12C are added. Deleted text is struck through and new text is underlined.

Cash-settled share-based payment transactions

...

IG19 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. If the share appreciation rights do not vest until the employees have completed a specified period of service, the entity recognises the services received, and a liability to pay for them, as the employees render service during that period. The liability is measured, initially and at the end of each reporting period until settled, at the fair value of the share appreciation rights by applying an option pricing model, and the extent to which the employees have rendered service to date in accordance with paragraphs 30–33D of AASB 2. Changes in fair value are recognised in profit or loss. Therefore, if the amount recognised for the services received was included in the carrying amount of an asset recognised in the entity’s statement of financial position (egfor example, inventory), the carrying amount of that asset is not adjusted for the effects of the liability remeasurement. Example 12 illustrates these requirements for a cash-settled share-based payment transaction that is subject to a service condition. Example 12A illustrates these requirements for a cash-settled share-based payment transaction that is subject to a performance condition.

IG Example 12
…

IG Example 12A
Background
An entity grants 100 cash-settled share appreciation rights (SARs) to each of its 500 employees on the condition that the employees remain in its employ for the next three years and the entity reaches a revenue target (CU1 billion in sales) by the end of Year 3. The entity expects all employees to remain in its employ.
For simplicity, this example assumes that none of the employees’ compensation qualifies for capitalisation as part of the cost of an asset.
At the end of Year 1, the entity expects that the revenue target will not be achieved by the end of Year 3. During Year 2, the entity’s revenue increased significantly and it expects that it will continue to grow. Consequently, at the end of Year 2, the entity expects that the revenue target will be achieved by the end of Year 3.
At the end of Year 3, the revenue target is achieved and 150 employees exercise their SARs. Another 150 employees exercise their SARs at the end of Year 4 and the remaining 200 employees exercise their SARs at the end of Year 5.
Using an option pricing model, the entity estimates the fair value of the SARs, ignoring the revenue target performance condition and the employment-service condition, at the end of each year until all of the cash-settled share-based payments are settled. At the end of Year 3, all of the SARs vest. The following table shows the estimated fair value of the SARs at the end of each year and the intrinsic values of the SARs at the date of exercise (which equals the cash paid out).
Year			Fair value of one SAR	Intrinsic value of one SAR
1			CU14.40	–
2			CU15.50	–
3			CU18.20	CU15.00
4			CU21.40	CU20.00
5			CU25.00	CU25.00
Application of requirements			Number of employees expected to satisfy the service condition	Best estimate of whether the revenue target will be met
Year 1			500	No
Year 2			500	Yes
Year 3			500	Yes
Year	Calculation		Expense	Liability
			CU	CU
1	SARs are not expected to vest: no expense is recognised	–	–	–
2	SARs are expected to vest: 500 employees × 100 SARs × CU15.50 × 2⁄3	–	516,667	516,667
3	(500–150) employees × 100 SARs × CU18.20 x 3⁄3–CU516,667	120,333	–	637,000
	+ 150 employees × 100 SARs × CU15.00	225,000	–	–
	Total	–	345,333	–
4	(350–150) employees × 100 SARs × CU21.40–CU637,000	(209,000)	–	428,000
	+ 150 employees × 100 SARs × CU20.00	300,000	–	–
	Total	–	91,000	–
5	(200–200) employees × 100 SARs × CU25.00–CU428,000	(428,000)	–	–
	+ 200 employees × 100 SARs × CU25.00	500,000	–	–
	Total	–	72,000	–
	Total	–	1,025,000	–

Share-based payment transactions with a net settlement feature for withholding tax obligations

IG19A Paragraphs 33E and 33F require an entity to classify an arrangement in its entirety as an equity-settled share-based payment transaction if it would have been so classified in the absence of a net settlement feature that obliges the entity to withhold an amount for an employee’s tax obligation associated with a share-based payment. The entity transfers that amount, normally in cash, to the tax authority on the employee’s behalf. Example 12B illustrates these requirements.

IG Example 12B
Background
The tax law in jurisdiction X requires entities to withhold an amount for an employee’s tax obligation associated with a share-based payment and transfer that amount in cash to the tax authority on the employee’s behalf.
On 1 January 20X1 an entity in jurisdiction X grants an award of 100 shares to an employee; that award is conditional upon the completion of four years’ service. The entity expects that the employee will complete the service period. For simplicity, this example assumes that none of the employee’s compensation qualifies for capitalisation as part of the cost of an asset.
The terms and conditions of the share-based payment arrangement require the entity to withhold shares from the settlement of the award to its employee in order to settle the employee’s tax obligation (that is, the share-based payment arrangement has a ‘net settlement feature’). Accordingly, the entity settles the transaction on a net basis by withholding the number of shares with a fair value equal to the monetary value of the employee’s tax obligation and issuing the remaining shares to the employee on completion of the vesting period.
The employee’s tax obligation associated with the award is calculated based on the fair value of the shares on the vesting date. The employee’s applicable tax rate is 40 per cent.
At grant date, the fair value of each share is CU2. The fair value of each share at 31 December 20X4 is CU10.
The fair value of the shares on the vesting date is CU1000 (100 shares × CU10 per share) and therefore the employee’s tax obligation is CU400 (100 shares × CU10 × 40%). Accordingly, on the vesting date, the entity issues 60 shares to the employee and withholds 40 shares (CU400 =40 shares × CU10 per share). The entity pays the fair value of the withheld shares in cash to the tax authority on the employee’s behalf. In other words, it is as if the entity had issued all 100 vested shares to the employee, and at the same time, repurchased 40 shares at their fair value.
Application of requirements
			Dr.	Cr.	Cr.
			Expense	Equity	Liability
Year	Calculation		CU	CU	CU
1	100 shares × CU2 × 1⁄4		50	(50)	–
2	100 shares × CU2 × 2⁄4 –CU50		50	(50)	–
3	100 shares × CU2 × 3⁄4 –(CU50 + CU50)		50	(50)	–
4	100 shares × CU2 × 4⁄4 –(CU50 + CU50 + CU50)		50	(50)	–
	Total		200	(200)	–
The journal entries recorded by the entity are as follows:
During the vesting period
Accumulated compensation expense recognised over the vesting period
Dr Expense	200
	Cr Equity	200
Recognition of the tax liability(a)
Dr Equity	400
	Cr Liability	400
Settlement of tax obligation
Cash paid to the tax authority on the employee’s behalf at the date of settlement
Dr Liability	400
	Cr Cash	400
(a) The entity considers disclosing an estimate of the amount that it expects to transfer to the tax authority at the end of each reporting period. The entity makes such disclosure when it determines that this information is necessary to inform users about the future cash flow effects associated with the share-based payment.

Accounting for a modification of a share-based payment transaction that changes its classification from cash-settled to equity-settled

IG19B The following example illustrates the application of the requirements in paragraphs B44A of AASB 2 to a modification of the terms and conditions of a cash-settled share-based payment transaction that becomes an equity-settled share-based payment transaction.

IG Example 12C
Background
On 1 January 20X1 an entity grants 100 share appreciation rights (SARs) that will be settled in cash to each of 100 employees on the condition that employees will remain employed for the next four years.
On 31 December 20X1 the entity estimates that the fair value of each SAR is CU10 and consequently, the total fair value of the cash-settled award is CU100,000. On 31 December 20X2 the estimated fair value of each SAR is CU12 and consequently, the total fair value of the cash-settled award is CU120,000.
On 31 December 20X2 the entity cancels the SARs and, in their place, grants 100 share options to each employee on the condition that each employee remains in its employ for the next two years. Therefore the original vesting period is not changed. On this date the fair value of each share option is CU13.20 and consequently, the total fair value of the new grant is CU132,000. All of the employees are expected to and ultimately do provide the required service.
For simplicity, this example assumes that none of the employees’ compensation qualifies for capitalisation as part of the cost of an asset.
Application of requirements
At the modification date (31 December 20X2), the entity applies paragraph B44A. Accordingly:
(a)	from the date of the modification, the share options are measured by reference to their modification-date fair value and, at the modification date, the share options are recognised in equity to the extent to which the employees have rendered services;
(b)	the liability for the SARs is derecognised at the modification date; and
(c)	the difference between the carrying amount of the liability derecognised and the equity amount recognised at the modification date is recognised immediately in profit or loss.
At the modification date (31 December 20X2), the entity compares the fair value of the equity-settled replacement award for services provided through to the modification date (CU132,000 × 2⁄4 = CU66,000) with the fair value of the cash-settled original award for those services (CU120,000 × 2⁄4 = CU60,000). The difference (CU6,000) is recognised immediately in profit or loss at the date of the modification.
The remainder of the equity-settled share-based payment (measured at its modification-date fair value) is recognised in profit or loss over the remaining two-year vesting period from the date of the modification.
		Dr. Expense	Cumulative expense	Cr. Equity	Cr. Liability
Year	Calculation	CU	CU	CU	CU
1	100 employees ×100 SARs x CU10 × 1⁄4	25,000	–	–	25,000
2	Remeasurement before the modification 100 employees x 100 SARs × CU12.00 × 2⁄4–25,000	35,000	60,000	–	35,000
	Derecognition of the liability, recognition of the modification date fair value amount in equity and recognition of the effect of settlement for CU6,000 (100 employees x 100 share options × CU13.20 × 2⁄4)–(100 employees × 100 SARs × CU12.00 × 2⁄4)	6,000	66,000	66,000	(60,000)
3	100 employees × 100 share options × CU13.20 × 3⁄4–CU66,000	33,000	99,000	33,000	–
4	100 employees x 100 share options × CU13.20 × 4⁄4–CU99,000	33,000	132,000	33,000	–
	Total			132,000	–

Commencement of the legislative instrument

For legal purposes, this legislative instrument commences on 31 December 2017.

Obtaining a copy of this Accounting Standard

Other enquiries

Contents

Preface

Standards amended by AASB 2016-5

Main features of this Standard

Accounting Standard AASB 2016-5

Accounting Standard AASB 2016-5

Objective

Application

Amendments to AASB 2

Commencement of the legislative instrument

	Kris Peach
Dated 21 July 2016	Chair – AASB