Share-Based Payment.

LACPA- IFRS 2July 5, 2006 Roger Nasr

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Agenda

• Overview of IFRS 2– Scope and Definition

– Recognition

– Measurement

– Vesting Conditions

– Valuation

• Case studies– Grant date

– Graded vesting

– Market conditions

Overview

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

• Scope exclusions– Issuance of shares in a business combination (IAS 22)

– Share based payments in the scope of IAS 32 & 39

– Share based payments other than for goods or services

• Definition

–Transaction in which an entity receives or acquires goods or services in exchange for:

– Equity instruments OR

– Based on the price of equity instruments

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Types

–Equity settled

–Cash settled

–Choice between the two alternatives

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Share based payments

Goods or servicesEquity instruments/

Liabilities (linked to share price)

Asset Expense Equity Liability

New – IFRS 2Share based payments

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Equity settled

Fair value grant day only

No changes in fair value

Cash settled

Fair value each balance sheet

date

Changes in fair value in P&L until

exercise

With cash alternative

Equity component(measure at grant date only)

Cash component(Measure at each balance

sheet)

Changes if fair value follow split

New – IFRS 2Overview of recognition

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Equity settled

Employees or similar Other than employees

Fair value grant date only

Value goods or services at date received

Expense allocated over vesting period

Expense recognised as goods or services are used

New – IFRS 2Equity settled payments

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

• Vesting conditions means that the employee does not get the right to exercise options, unless certain conditions are met

• Two types of vesting conditions– Market based

– Achieve a target share price or share price relative to an index

– Non-market based

– Employment

– Accounting key figures (e.g. EPS, revenue targets)

– Personal targets

– IPO of the company

– Sale of the company

Vesting conditions

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

1. Non-market basedvesting condition

Fair value excludes vesting conditions

True-upAdjust number of shares or

vesting date for actual results

2. Market based vesting condition

Fair value includes these vesting conditions

No true-upDo not adjust number of

shares or vesting date for actual results

• Issuance of fully vested shares• relates to past service therefore expensed immediately

• Issuance of shares with a vesting period• relates to services over vesting period: expense over vesting

period

• Two types of vesting conditions:`

OR

Vesting Conditions

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

New – IFRS 2Valuation models

Black-Scholes method Binomial method

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Example

500

100 options each that vest if employed in 3 years

Fair value per option = $15

Total grant date value?

Adjust expense for actual vested shares since there is a non-market vesting condition

$750,000 (=500x100x15) $250 each year

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Example (continued)

$200,000

Year 1

$200,000

Year 2

$200,000

Year 3

$600,000 total expense over three years (50,000 options x 80%) x $15

If 80% are expected to vest (and does vest)

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Example (continued)

$212,500

Year 1

(250 x 0.85)

$227,500

Year 2

(500 x 0.88 - 212.5)

$224,500

Year 3

(750 x 0.886 - (212.5 + 227.5))

Total expense = $664,500 ($15 x 44,300)

IFAt the end of year 1: expect 85% of options to vestAt the end of year 2: expect 88% of options to vest

At the end of year 3: 44,300 shares (or 88.6%) actually vest

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Example (continued)

- $400,000

Year 3

- (250 x 0.8) x 2

$0 total expense reduced to zero because no options vest

All employees resign during period 3 without receiving options

(or another non-market vesting condition is not met)

$200,000

Year 1

(250 x 0.8)

$200,000

Year 2

(250 x 0.8)

Case studies

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

• Accounting for a grant of options with graded vesting conditions– What expense is recognised in year 2 and why?

Case study 1

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

• Grant date– Why is the determination of grant date important? How does grant

date impact the period over which any expense relating to a share-based payment is recognised? (discussion)

– What is the grant date for the share options?

– Over what period should the expense in relation to the share options be recognised?

– Does this have any impact on the determination of the fair value of the share options granted?

Case study 2

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

• Definitions of market conditions– Determine whether the vesting conditions for the share-based

payment transaction of Lamentana and Benson should be considered a market condition or a non-market condition

Case study 3

IFRS 2 Share-Based Payment © 2006 Deloitte - Roger Nasr

Questions