Presented by Lisa Mladenovic Share Based Payments - webinar slides.pdf · IFRS – Share Based...

IFRS – Share Based PaymentsPresented by Lisa Mladenovic

IFRS – Share Based Payments

Overview – Where to start????

Graded vesting

IFRS 1

ForfeituresDeadlines!!


Overview - agendaFirst time adoption of IFRS – things to consider

• Optional IFRS 1 exemption – retrospectively apply IFRS 2 or not?• Canadian GAAP vs. IFRS – highlights of key differences

Scope – what transactions are included?

Cash settled transactions vs. Equity settled transactions – what’s the difference?

Groups of companies – specific requirements

Recognition• General requirements• Timing• Vesting & non-vesting conditions


Overview - agendaMeasurement

• Equity settled:Fair valueValuation modelsFactors affecting valuation

• Cash settled• Settlement options

Modifications – includes cancellations and settlements

Graded vesting – how does it work?

What about privately held companies? How are they affected?

Financial statement presentation and disclosure implications


First Time Adoption of IFRSOptional IFRS 1 exemption – retrospectively apply IFRS 2 or not?Equity SettledFirst time adopters are encouraged to apply IFRS 2 retrospectively to equity instruments that were:

granted on or before November 7, 2002; orgranted after November 7, 2002 and vested before the transition date

(January 1, 2010).

Under IFRS 1 entities may elect not to retrospectively apply IFRS 2 and additionally, note that for equity settled instruments, IFRS 2 may only be applied to these equity instruments if it has publicly disclosed the fair value of those equity instruments, determined at the measurement date as defined in IFRS 2.

As a result, full retrospective application of IFRS 2 will be disallowed for many entities if they have not disclosed publicly the fair value of the equity instruments granted in previous years.


First Time Adoption of IFRSOptional IFRS 1 exemption – retrospectively apply IFRS 2 or not?

Note that ‘disclosed publicly’ is not specifically defined in IFRS 2 but can be interpreted to mean disclosure in the financial statements in the year when the instruments were granted.

The reasoning for this approach is not specifically detailed in the Basis for Conclusions to IFRS 2. Concerns that valuations for retrospective application could be influenced by the benefit of hindsight may be part of the logic for this decision.

The impact of using this exemption is similar to the transitional provisions in IFRS 2 which states that “for equity-settled share-based payment transactions, the entity shall apply this IFRS to grants of shares, share options or other equity instruments that were granted after November 7, 2002 and had not yet vested at the effective date of this IFRS”.


First Time Adoption of IFRS

Cash settledFirst time adopters are encouraged, but note required to apply IFRS 2

retrospectively to share based payment transactions that were settled before the transition date.

If IFRS 2 is applied retrospectively, a first time adopter is not required to restate comparatives if it relates to a date earlier than November 7, 2002.

Optional IFRS 1 exemption – retrospectively apply IFRS 2 or not?


Graphic Summary of IFRS 1 Optional Exemption


First Time Adoption of IFRSIFRS 1 Optional Exemption – what are other companies doing???Rogers Communications


First Time Adoption of IFRSIFRS 1 Optional Exemption – what are other companies doing???Teck Resources Limited


First Time Adoption of IFRSIFRS 1 Optional Exemption – what are other companies doing???Bell Aliant Inc.


First Time Adoption of IFRSCanadian GAAP vs. IFRS – highlights of key differences

ScopeDifferences between IFRS and Canadian GAAP as to which transactions are covered under the share-based payments standard

Cash settled transactionsDifference in how these transactions are measured when transitioning to IFRS

Employee vs. Non-EmployeeWhen transitioning to IFRS note that there are differences in how to treat non-employee transaction and in the definition of an employee as compared to Canadian GAAP.

VestingConsider vesting and non-vesting conditions and graded vesting – both areas differ under IFRS from Canadian GAAP.

OtherSettlement alternatives, non-compensatory plans, modifications and others


Scope – What’s Included?Scope

IFRS contains very few scope exclusions and applies to all share based payments except for those that qualify as financial instruments under IAS 39 or IAS 32. This differs from Canadian GAAP in that CICA 3870excludes related party transactions (other than those with the principal shareholder) and equity instruments granted as part of a business combination. Consequently, more transactions may be accounted for as share-based payments under IFRS.


Scope – What’s Included?Scope – Employee Definition


Scope – What’s Included?Scope – employees and others providing similar services defined

Individuals who render personal services to the entity andeither (a) the individuals are regarded as employees for legal or tax purposes, (b) the individuals work for the entity under its direction in the same way as individuals who are regarded as employees for legal or tax purposes, or (c) the services rendered are similar to those rendered by employees. For example, the term encompasses all management personnel, ie those persons having authority and responsibility for planning, directing and controlling the activities of the entity, including non‐executivedirectors.

Individuals who render personal services to the entity andeither (a) the individuals are regarded as employees for legal or tax purposes, (b) the individuals work for the entity under its direction in the same way as individuals who are regarded as employees for legal or tax purposes, or (c) the services rendered are similar to those rendered by employees. For example, the term encompasses all management personnel, ie those persons having authority and responsibility for planning, directing and controlling the activities of the entity, including non‐executivedirectors.


Scope – What’s Included?Why does the employee vs. non-employee determination matter????


Cash Settled vs. Equity SettledCash Settled

“A share-based payment transaction in which the entity acquires goods or services by incurring a liability to transfer cash or other assets to the supplier of those goods or services for amounts that are based on the price (or value) of equity instruments (including shares or share options) of the entity or another group entity.”

Equity Settled

“A share-based payment transaction in which the entitya)receives goods or services as consideration for its own equity instruments (including shares or share options); orb)receives goods or services but has no obligation to settle the transaction with the supplier.”


Cash Settled – what changes on transition???

The difference for cash settled transactions

when moving to IFRS relates to

how its measured


Groups of Companies


RecognitionGeneral requirements – should you recognize?

Recognize as the goods or services are received

Equity settled – corresponding increase in equity

Cash settled – liability

Asset vs. Expense classification for goods or services received:

Expense – services, research, consumption of goods

Asset – goods, must meet definition


RecognitionTiming – when to recognize? Impact of vesting & non-vesting conditions

Equity SettledConsider definition of vesting per IFRS 2 (Appendix A)

“To become an entitlement. Under a share-based payment arrangement, a counterparty’s right to receive cash, other assets, or equity instruments of the entity vests when the counterparty’s entitlement is no longer conditional on the satisfaction of any vesting conditions”

So what are vesting conditions?“....either service conditions or performance conditions. Service conditions require the counterparty to complete a specified period of service. Performance conditions require the counterparty to complete a specified period of service and specified performance targets to be met...”


RecognitionVesting & non-vesting conditions – some examples from IFRS 2 (IG24):

Vesting ConditionsVesting Conditions


RecognitionVesting & non-vesting conditions – some examples from IFRS 2 (IG24) continued:

Non ‐ Vesting ConditionsNon ‐ Vesting Conditions


MeasurementEquity settled:

Fair valueFor employees: use the fair value of the equity instruments grantedFor non-employees: use the fair value of goods or services received on the date they are received unless cannot be reliably estimated.

Valuation models – how to determine fair value!!1) Fair value of goods or services received – should consider all factors

including volume rebates, discounts;2) Fair value of the equity instruments granted – best approach is to base

on market prices of equity instrument at the grant date

What if the equity instruments are not traded in the market? Examples include stock options or privately held shares. A valuation model must be used to estimate the fair value


Measurement – most common valuation models


MeasurementFactors affecting valuation:

Exercise price;Current price of underlying shares;Expected life of the option;Expected volatility of the share price;Dividends expected on the shares; Risk-free interest rate for the life of the option;Performance conditions;Non-transferability;Stated exercise conditions;Behavioural considerationsLong-term nature; and Effects on the capital structure of the entity


MeasurementVesting conditions – how do they affect valuation/measurement?

Cash settledFair value of liabilityRe-measure at each reporting date until settled and re-measure again at settlement date using an option pricing modelChanges in fair value recognized in profit or lossRecognize liability as services are received


Measurement


ModificationsModifications – includes cancellations and settlements:

What types of modifications may occur? For example: change in exercise price or the number of equity instruments granted

Many considerations:


Graded VestingUnder IFRS, each tranche in an award is considered as a separate grant with a different vesting date and fair value. Each grant is accounted for on that basis. This is more commonly known as the accelerated method.

How does this differ from Canadian GAAP?

Under Canadian GAAP section 3870 there is a choice available:

(1)Recognize as separate arrangements (graded vesting); or

(2)Recognize as a single pool with a fair value based on the average life of the instruments

If your organization is using #2 you will need to change the approach to graded vesting.


Graded VestingConsider this example of the impact using a constant fair value:

Company ABC grants 400 share options to its CEO

Each option’s fair value is $10

Vesting period is 4 years with 100 options vesting each year

Under Canadian GAAP – Company ABC used the single pool method

Canadian GAAP

Year 1 Year 2 Year 2 Year 2

Award $1,000 $1,000 $1,000 $1,000


Graded VestingConsider this example of the impact using a constant fair value:

Under IFRS– Company ABC must use graded vesting – each tranche is for 100 options at a fair value of $10

IFRS

Year 1 Year 2 Year 2 Year 2

Tranche 1 $1,000

Tranche 2 500 $500

Tranche 3 333 333 $334

Tranche 4 250 250 250 $250

Total $2,083 $1,083 $584 $250


Graded VestingKeep in mind – that was a simplified example as each tranche must be separately valued for the different factors. Consider the following factors that would be different for each tranche:

Factors

Expected Life

Risk free interest rate

Volatility

Term


Privately Held CompaniesWhat about privately held companies? How are they affected?

For those private companies that elect to adopt IFRS as opposed to Private enterprises reporting under Canadian GAAP there is no longer an option to exclude expected volatility when calculating fair value of equity awards.

How can volatility be estimated when the stock is not traded?

Consider volatility of a group of similar public entitiesConsider whether a reliable measurement can be determined – if not, the grant is

measured at intrinsic value and adjusted at each reporting date for any changes in intrinsic value until they are exercisedWhat is intrinsic value? See IFRS 2 [Appendix A]

“…the difference between the fair value of the shares to which the counterparty has the (conditional or unconditional) right to subscribe or which it has the right to receive, and the price (if any) the counter-party is (or will be) required to pay for those shares.”

For example – a share option with an exercise price of $15 a share and a fair value of $20 has an intrinsic value of $5.


Presentation and DisclosurePresentation and Disclosure Requirements

An entity should disclose information that enables users of the financial statements to understand the nature and extent of share‐based payment arrangements that existed during the period, therefore, at least the following should be disclosed:

•a description of each type of share‐based payment arrangement that existed at any time during the period, including the general terms and conditions of each arrangement such as vesting requirements, the maximum term of options granted, and the method of settlement (e.g., whether in cash or equity);

•the number and weighted average exercise prices of share options for each of the following groups of options:

outstanding at the beginning of the period,granted during the period,exercised during the period,forfeited during the period,expired during the period,outstanding at the end of the period, and exercisable at the end of the period


Presentation and DisclosurePresentation and Disclosure Requirements continued

• for share options exercised during the period, the weighted average share price at the date of exercise. If options were exercised on a regular basis throughout the period, the weighted average share price during the period may instead be disclosed; and

• for share options outstanding at the end of the period, the range of exercise prices and weighted average remaining contractual life. If the range of exercise prices is wide, the outstanding options should be divided into ranges that are meaningful for assessing the number and timing of additional shares that may be issued and the cash that may be received upon exercise of those options.

An entity should disclose information that enables users of the financial statements to understand how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined, therefore, at least the following should be disclosed if the entity has measured the fair value of goods and services received indirectly, by reference to the fair value of the equity instruments granted:



• for share options granted during the period, the weighted average fair value of those options at the measurement date and information on how the fair value was measured, including:

the option pricing model used and the inputs to that model, including the weighted average share price, exercise price, expected volatility, option life, expected dividends, the risk‐free interest rate, and any other inputs to the model, includingthe method used and the assumptions made to incorporate the effects of expected early exercise;

how expected volatility was determined, including an explanation of the extent to which it was based on historical volatility; and

whether and how any other features of the option grant were incorporated into the measurement of fair value, such as a market condition;

• for other equity instruments granted during the period (i.e., other than share options) the number and weighted average fair value of those equity instruments at the measurement date, and information on how that fair value was determined, including:



if the fair value was not measured on the basis of observable market price, how it was determined;whether and how expected dividends were incorporated into the measurement of fair value; andwhether and how any other features of the equity instruments granted were incorporated into the measurement of fair value; and

• for share‐based payment arrangements that were modified during the period:an explanation of those modifications;the incremental fair value granted as a result of those modifications; andinformation on how the incremental fair value was measured.

If the entity has measured directly the fair value of goods or services received during the period, disclosure is required of how that fair value was determined (e.g., whether fair value was measured at a market price); and if the fair value cannot be reliably estimated, that fact should be disclosed together with an explanation of why that is the case.


Presentation and Disclosure

Presentation and Disclosure Requirements continued

An entity should disclose information that enables users of the financial statements to understand the effect of share‐based payment transactions on its profit or loss for the period and on its financial position, therefore, at least the following should be disclosed:

•the total expense recognized for the period arising from share‐based payment transactions in which the goods or services received did not qualify for recognition as assets, and hence were recognized immediately as an expense, including separate disclosure of that portion of the total expense that arises from transactions accounted for as equity‐ settled share‐based payment transactions; and

•for liabilities arising from share‐based payment transactions:

the total carrying amount at the end of the period; and

the total intrinsic value at the end of the period of liabilities for which the counterparty’s right to cash or other assets had vested by the end of the period (e.g., vested share appreciation rights).


Presentation and Disclosure

Change from Canadian GAAP

1) for share options exercised during the period, the weighted average share price at the date of exercise. If options were exercised on a regular basis throughout the period, the weighted average share price during the period may instead be disclosed

2) for share options granted during the period ‐ how expected volatility was determined, including an explanation of the extent to which it was based on historical volatility

3) for liabilities arising from share‐based payment transactions:

the total carrying amount at the end of the period; and

the total intrinsic value at the end of the period of liabilities for which the counterparty’s right to cash or other assets had vested by the end of the period (e.g., vested share appreciation rights).


Helpful Linkshttp://www.iasb.org/IFRSs/IFRS.htm

http://www.cica.ca/ifrs//index.aspx

iGAAP – IFRS for Canada, A comprehensive reference by Deloitte, 3rd Edition:

http://www.cch.ca/product.aspx?WebID=100713CCH’s IFRS for Canada – online research tool:

Details: http://www.cch.ca/product.aspx?WebID=2830Trial: http://www.cch.ca/tax/FreeTrials.aspx?acct=1


Contact Information

Thank you!!! Contact information:

Lisa [email protected]

Visit www.cch.ca/ExpertEdgefor a complete list of webinars.


Questions?

Presented by Lisa Mladenovic Share Based Payments - webinar slides.pdf · IFRS – Share Based...

Documents

Transcript of Presented by Lisa Mladenovic Share Based Payments - webinar slides.pdf · IFRS – Share Based...