Changes expected to accounting treatment of share based payments

 

The accounting expense of share based payments features in all company remuneration reports.  It is based on the international accounting standard IFRS 2 (translated to AASB 2 for Australian companies).  Now the International Financial Review Board (IFRB) is proposing revising the standard, including:

 

New definitions for “service” and “performance” conditions;

An assumption that a performance period that exceeds a service period nullifies the performance requirement as a vesting condition

 

The draft standards will significantly impact the accounting treatment and expense incurred for many companies. 

 

New definitions for “service” and “performance” conditions

 

After 7 years the accounting profession at last did a reality check and took note of what people actually running companies had been telling them for years.  That is, most broad based relative TSR plans are not motivating because executive do not have influence or control over outcomes.  There, they are NOT incentives, and therefore the condition they are subject to is NOT a performance condition.

 

So performance relative to an index has been noted by the revised standard so that it now a “non-vesting” condition. 

 

A performance period that exceeds a service period nullifies the performance requirement as a vesting condition

 

The IASB observed that the current IFRS 2 does not explicitly require the duration of a performance target to be wholly within the period of the related service requirement for it to constitute a performance condition.  The definition highlights a feature that distinguishes a performance condition from a non-vesting condition: a performance condition has an explicit or implicit service requirement and a non-vesting condition does not.

 

This has a major ramification for a growing trend in UK, US, and Australian executive equity plans.  For better governance, boards have been seeking to ensure that management focus on ensuring sustainable legacies for their successors.  This is facilitated by ensuring LTI plans remain “on foot” after retirement of good leavers.  Therefore, instead of focussing on maximizing their bonus in their last years and letting the long-term sustainability of the business going to hell in a hand basket, executives are motivated to develop good successors.

 

The effective date for the changes is 1 January 2014.

 

Both of these changes will have implications for expensing and disclosing executive remuneration, which will be addressed in future articles.

You can read the proposals HERE.

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