Changes proposed to accounting standard for share based payments
01/12/2014
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The Australian Accounting Standards Board is seeking comment on proposed changes to AASB 2 ‘Share-based Payment‘. The proposed changes are consistent with changes the International Accounting Standards Board (IASB) is proposing to make to IFRS 2 Share-based Payment, and will address:

(a) the effects of vesting conditions on the measurement of a cash-settled share-based payment;

(b) the classification of share-based payment transactions with net settlement features; and

(c) the accounting for a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled.

The proposed changes will:

(a) clarify that accounting for the effects of vesting and non-vesting conditions on the measurement of a cash-settled share-based payment should follow the approach used for measuring equity-settled share-based payments in paragraphs 19-21A of IFRS 2;

(b)  specify that if an entity settles a share-based payment arrangement net by withholding a specified portion of the equity instruments to meet the statutory tax withholding obligation, then the transaction should be classified as equity-settled in its entirety, if the entire share-based payment would otherwise be classified as equity-settled if it had not included the net settlement feature; and

(c) specify the accounting for modifications to the terms and conditions of a cash-settled share-based payment transaction that results in a change in its classification from cash-settled to equity-settled, so that:

(i) the share-based payment transaction is measured by reference to the modification- date fair value of the equity instruments granted as a result of the modification;

(ii) the liability recognised in respect of the original cash-settled share-based payment is de-recognised upon the modification, and the equity-settled share-based payment is recognised to the extent that services have been rendered up to the modification date; and

(iii) the difference between the carrying amount of the liability as at the modification date and the amount recognised in equity at the same date is recorded in profit and loss immediately.

Basically, valuations of cash settled share-based payments are considered a cash liability, and have to be re-valued at each reporting date. This can be a pain for cash settled share-based payments subject to a market condition for vesting, such as relative TSR. This invariably means getting an external valuation using a Monte Carlo simulation. While many advisers, including Guerdon Associates, construct efficient mathematical programs for these valuations, the work involved in such things as determining who should remain in the peer group, capital adjustments for each peer and other matters make the process relatively expensive. The proposed changes confirm the method most people use, and hence also confirm that it remains an expense for companies.

The standard will also clarify the treatment of equity settled plans that are required to withhold equity equal to tax owed. This applies to many Australian companies that provide share-based payments to overseas employees. The good news is that these transactions will still permit equity settled share-based payments to be accounted for as such.

Lastly, the standard will permit cash-settled payments converted to equity settled payments to be accounted for as equity settled.

The proposals can be seen HERE.

Comments should be submitted to the AASB by 25 February 2015.

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