Topic 304 - Share-based payments

IFRS 2 Share‑based Payment

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

• 304.1.1.1

• IFRIC Agenda Decision - Price difference between the institutional offer price and the retail offer price for shares in an IPO

• 304.1.1.2

• IFRIC Agenda Decision – Accounting for reverse acquisitions that do not constitute a business

• 304.1.1.3

• IFRIC Agenda Decision - Share plans with cash alternatives at the discretion of the entity

• 304.1.1.4

• IFRIC Agenda Decision - Special Purpose Acquisition Companies (SPAC): Accounting for Warrants at Acquisition

• 304.3.1.1

• IFRIC Agenda Decision - Share plans with cash alternatives at the discretion of employees: grant date and vesting periods

• 304.14.1.1

• IFRIC Agenda Decision - Timing of the recognition of intercompany recharges

304.1.1.1

IFRIC Agenda Decision - Price difference between the institutional offer price and the retail offer price for shares in an IPO

July 2014 - The Interpretations Committee received a request to clarify how an entity should account for a price difference between the institutional offer price and the retail offer price for shares issued in an initial public offering (IPO).

The submitter refers to the fact that the final retail price could be different from the institutional price because of:

The submitter described a situation in which the issuer needs to fulfil a minimum number of shareholders to qualify for a listing under the stock exchange’s regulations in its jurisdiction. In achieving this minimum number the issuer may offer shares to retail investors at a discount from the price at which shares are sold to institutional investors.

The submitter asked the Interpretations Committee to clarify whether the transaction should be analysed within the scope of IFRS 2.

The Interpretations Committee considered whether the transaction analysed involves the receipt of identifiable or unidentifiable goods or services from the retail shareholder group and, therefore, whether it is a share-based payment transaction within the scope of IFRS 2. Paragraph 13A of IFRS 2 requires that if consideration received by the entity appears to be less than the fair value of the equity instruments granted or liability incurred, then this situation typically indicates that other consideration (ie unidentified goods or services) has been (or will be) received by the entity. The Interpretations Committee noted that applying this guidance requires judgement and consideration of the specific facts and circumstances of each transaction.

In the circumstances underlying the submission, the Interpretations Committee observed that the entity issues shares at different prices to two different groups of investors (retail and institutional) for the purpose of raising funds, and that the difference, if any, between the retail price and the institutional price of the shares in the fact pattern appears to relate to the existence of different markets (one that is accessible to retail investors only and another one accessible to institutional investors only) instead of the receipt of additional goods or services, because the only relationship between the entity and the parties to whom the shares are issued is that of investee-investors. 

Consequently, the Interpretations Committee observed that the guidance in IFRS 2 is not applicable because there is no share-based payment transaction. 

The Interpretations Committee also noted that the situation considered is different to the issue on which it had issued an agenda decision in March 2013 (‘Accounting for reverse acquisitions that do not constitute a business’). In that fact pattern the Interpretations Committee observed that the accounting acquirer received a stock exchange listing from the listed non-operating entity, which the listed non-operating entity had previously possessed and was able to transfer to the accounting acquirer. In that agenda decision the Interpretations Committee concluded that any difference in the fair value of the shares deemed to have been issued by the accounting acquirer and the fair value of the accounting acquiree’s identifiable net assets represents a service received by the accounting acquirer. 

The Interpretations Committee observed that in the fact pattern considered in this submission the listing is not received from the institutional or retail shareholders. It further observed that the fair value of the shares issued to retail investors is different from the fair value of the shares issued to institutional investors. The fact that a regulatory requirement is met by virtue of issuing the retail shares does not indicate that unidentifiable goods or services were received from the purchasers. 

On the basis of this analysis, the Interpretations Committee determined that, in the light of the existing IFRS requirements, sufficient guidance exists and that neither an Interpretation nor an amendment to a Standard was necessary. Consequently, the Interpretations Committee decided not to add this issue to its agenda.

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304.1.1.2

IFRIC Agenda Decision – Accounting for reverse acquisitions that do not constitute a business

March 2013 - The Interpretations Committee received requests for guidance on how to account for transactions in which the former shareholders of a non-listed operating entity become the majority shareholders of the combined entity by exchanging their shares for new shares of a listed non-operating entity. However, the transaction is structured such that the listed non-operating entity acquires the entire share capital of the non-listed operating entity.

In the absence of a Standard that specifically applies to this transaction the Interpretations Committee observed that the analysed transaction has some features of a reverse acquisition under IFRS 3 because the former shareholders of the legal subsidiary obtain control of the legal parent. Consequently, it is appropriate to apply by analogy, in accordance with paragraphs 10⁠–⁠12 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the guidance in paragraphs B19⁠–⁠B27 of IFRS 3 for reverse acquisitions. Application of the reverse acquisitions guidance by analogy results in the non-listed operating entity being identified as the accounting acquirer, and the listed non-operating entity being identified as the accounting acquiree. The Interpretations Committee noted that in applying the reverse acquisition guidance in paragraph B20 of IFRS 3 by analogy, the accounting acquirer is deemed to have issued shares to obtain control of the acquiree.

If the listed non-operating entity qualifies as a business on the basis of the guidance in paragraph B7 of IFRS 3, IFRS 3 would be applicable to the transaction. However, if the listed non-operating entity is not a business, the transaction is not a business combination and is therefore not within the scope of IFRS 3. Because the analysed transaction is not within the scope of IFRS 3, the Interpretations Committee noted that it is therefore a share-based payment transaction which should be accounted for in accordance with IFRS 2.

The Interpretations Committee observed that on the basis of the guidance in paragraph 13A of IFRS 2, any difference in the fair value of the shares deemed to have been issued by the accounting acquirer and the fair value of the accounting acquiree’s identifiable net assets represents a service received by the accounting acquirer. The Interpretations Committee concluded that, regardless of the level of monetary or non-monetary assets owned by the non-listed operating entity, the entire difference should be considered to be payment for a service of a stock exchange listing for its shares, and that no amount should be considered a cost of raising capital. The Interpretations Committee observed that the service received in the form of a stock exchange listing does not meet the definition of an intangible asset because it is not “identifiable” in accordance with paragraph 12 of IAS 38 Intangible Assets (ie it is not separable). The service received also does not meet the definition of an asset that should be recognised in accordance with other Standards and the Conceptual Framework.

The Interpretations Committee also observed that on the basis of the guidance in paragraph 8 of IFRS 2 which states that “when the goods or services received or acquired in a share-based payment transaction do not qualify for recognition as assets, they shall be recognised as expenses”, the cost of the service received is recognised as an expense.

On the basis of the analysis above, the Interpretations Committee determined that, in the light of the existing IFRS requirements, neither an interpretation nor an amendment to Standards was necessary and consequently decided not to add this issue to its agenda.

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304.1.1.3

IFRIC Agenda Decision - Share plans with cash alternatives at the discretion of the entity

May 2006 - The IFRIC considered whether an employee share plan in which the employer had the choice of settlement in cash or in shares, and the amount of the settlement did not vary with changes in the share price of the entity should be treated as a share‑based payment transaction within the scope of IFRS 2.

The IFRIC noted that IFRS 2 defines a share‑based payment transaction as a transaction in which the entity receives goods or services as consideration for equity instruments of the entity or amounts that are based on the price of equity instruments of the entity.

The IFRIC further noted that the definition of a share‑based payment transaction does not require the exposure of the entity to be linked to movements in the share price of the entity. Moreover, it is clear that IFRS 2 contemplates share‑based payment transactions in which the terms of the arrangement provide the entity with a choice of settlement, since they are specifically addressed in paragraphs 41⁠–⁠43 of IFRS 2. The IFRIC therefore believed that, although the amount of the settlement did not vary with changes in the share price of the entity, such share plans are share‑based payment transactions in accordance with IFRS 2 since the consideration may be equity instruments of the entity.

The IFRIC also believed that, even in the extreme circumstances in which the entity was given a choice of settlement and the value of the shares that would be delivered was a fixed monetary amount, those share plans were still within the scope of IFRS 2.

The IFRIC believed that, since the requirements of IFRS 2 were clear, the issue was not expected to create significant divergence in practice. The IFRIC therefore decided not to add the issue to the agenda.

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304.1.1.4

IFRIC Agenda Decision - Special Purpose Acquisition Companies (SPAC): Accounting for Warrants at Acquisition

October 2022 - The Committee received a request about an entity’s acquisition of a special purpose acquisition company (SPAC). The request asked how the entity accounts for warrants on acquiring the SPAC.

In the fact pattern the Committee discussed:

a. the entity acquires a SPAC that has raised cash in an initial public offering (IPO), obtaining control of the SPAC. The purpose of the acquisition is for the entity to obtain the cash and the SPAC’s listing on a stock exchange. The SPAC does not meet the definition of a business in IFRS 3 Business Combinations and, at the time of the acquisition, has no assets other than cash.

b. before the acquisition, the SPAC’s ordinary shares are held by its founder shareholders and public investors. The ordinary shares are determined to be equity instruments as defined in IAS 32 Financial Instruments: Presentation. In addition to ordinary shares, the SPAC had also issued warrants to both its founder shareholders and public investors (the SPAC warrants): i. founder warrants were issued at the SPAC’s formation as consideration for services the founders provided. ii. public warrants were issued to public investors with ordinary shares at the time of the IPO.

c. the entity issues new ordinary shares and new warrants to the SPAC’s founder shareholders and public investors in exchange for the SPAC’s ordinary shares and the legal cancellation of the SPAC warrants. The SPAC becomes a wholly-owned subsidiary of the entity and the entity replaces the SPAC as the entity listed on the stock exchange.

d. the SPAC’s founder shareholders and public investors are not SPAC employees nor will they provide services to the entity after the acquisition.

e. the fair value of the instruments the entity issues to acquire the SPAC exceeds the fair value of the SPAC’s identifiable net assets.

Which IFRS Accounting Standard applies to the SPAC acquisition? 

Paragraph 2(b) of IFRS 3 states that IFRS 3 does not apply to ‘the acquisition of an asset or a group of assets that does not constitute a business’. In such cases, that paragraph requires the acquirer to ‘identify and recognise the individual identifiable assets acquired … and liabilities assumed’.

In the fact pattern discussed, the acquisition of the SPAC is the acquisition of an asset or a group of assets that does not constitute a business. Therefore, the entity identifies and recognises the individual identifiable assets acquired and liabilities assumed as part of the acquisition.

What are the individual identifiable assets acquired and liabilities assumed?

In the fact pattern discussed, the entity acquires the cash held by the SPAC. The entity also considers whether it assumes the SPAC warrants as part of the acquisition and, consequently, whether it assumes a liability if those warrants are classified as financial liabilities.

In assessing whether it assumes the SPAC warrants as part of the acquisition, the entity considers the specific facts and circumstances of the transaction, including the terms and conditions of all agreements associated with the acquisition. For example, the entity considers the legal structure of the transaction and the terms and conditions of the SPAC warrants and the new warrants the entity issues.

The entity might conclude that the facts and circumstances are such that it:

a. assumes the SPAC warrants as part of the acquisition—in this case, the entity issues ordinary shares to acquire the SPAC and assumes the SPAC warrants as part of the acquisition. The entity then issues new warrants to replace the SPAC warrants it has assumed.

b. does not assume the SPAC warrants as part of the acquisition—in this case, the entity issues both ordinary shares and new warrants to acquire the SPAC and does not assume the SPAC warrants.

Additional considerations applicable when an entity concludes that it assumes the SPAC warrants as part of the acquisition 

How does the entity account for SPAC warrants assumed as part of the acquisition?

In the fact pattern discussed, the SPAC’s founder shareholders and public investors are not SPAC employees nor will they provide services to the entity after the acquisition. Instead, the SPAC's founder shareholders and public investors hold the SPAC warrants solely in their capacity as owners of the SPAC. Therefore, the entity applies IAS 32 to determine whether the SPAC warrants are financial liabilities or equity instruments.

How does the entity account for the replacement of the SPAC warrants?

The entity applies IAS 32 and IFRS 9 Financial Instruments to account for the replacement of the SPAC warrants with new warrants.

However, because the entity negotiated the replacement of the SPAC warrants as part of the SPAC acquisition, it determines whether it accounts for any of the new warrants it issues as part of that acquisition. No IFRS Accounting Standard specifically applies in making this determination. Therefore, the entity applies paragraphs 10–11 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors in developing and applying an accounting policy that results in information that is relevant and reliable.

Does the entity also acquire a stock exchange listing service?

In the fact pattern discussed, the SPAC’s stock exchange listing does not meet the definition of an intangible asset because it is not ‘identifiable’ as described in paragraph 12 of IAS 38 Intangible Assets. Accordingly, the stock exchange listing is not an identifiable asset acquired. Nonetheless, the Committee observed that:

a. paragraph 2 of IFRS 2 states that ‘an entity shall apply this IFRS in accounting for all share-based payment transactions, whether or not the entity can identify specifically some or all of the goods or services received … In the absence of specifically identifiable goods or services, other circumstances may indicate that goods or services have been (or will be) received, in which case this IFRS applies.’

b. paragraph 13A of IFRS 2 states that ‘… if the identifiable consideration received (if any) by the entity appears to be less than the fair value of the equity instruments granted or liability incurred, typically this situation indicates that other consideration (ie unidentifiable goods or services) has been (or will be) received by the entity. The entity shall measure the identifiable goods or services received in accordance with this IFRS. The entity shall measure the unidentifiable goods or services received (or to be received) as the difference between the fair value of the share-based payment and the fair value of any identifiable goods or services received (or to be received).’

The fair value of the instruments the entity issues to acquire the SPAC exceeds the fair value of the identifiable net assets acquired. Therefore, the Committee concluded that, in applying paragraphs 2 and 13A of IFRS 2, the entity:

a. receives a stock exchange listing service for which it has issued equity instruments as part of a share-based payment transaction; and

b. measures the stock exchange listing service received as the difference between the fair value of the instruments issued to acquire the SPAC and the fair value of the identifiable net assets acquired.

Which IFRS Accounting Standard applies to the instruments issued?

Depending on the specific facts and circumstances of the transaction, the entity issues ordinary shares—or ordinary shares and new warrants—in exchange for acquiring cash, for acquiring the stock exchange listing service and for assuming any liability related to the SPAC warrants. The Committee observed that:

a. IAS 32 applies to all financial instruments, with some exceptions. These exceptions include ‘financial instruments, contracts and obligations under share-based payment transactions to which IFRS 2 Share-based Payment applies …’ (paragraph 4 of IAS 32).

b. IFRS 2 applies to ‘share-based payment transactions in which an entity acquires or receives goods or services. Goods includes inventories, consumables, property, plant and equipment, intangible assets and other non-financial assets …’ (paragraph 5 of IFRS 2).

Therefore, the Committee concluded that the entity applies:

a. IFRS 2 in accounting for instruments issued to acquire the stock exchange listing service; and

b. IAS 32 in accounting for instruments issued to acquire cash and assume any liability related to the SPAC warrants—these instruments were not issued to acquire goods or services and are not in the scope of IFRS 2.

Additional considerations applicable if the entity concludes that it does not assume the SPAC warrants as part of the acquisition

Which types of instrument were issued for the SPAC’s net assets and which were issued for the service?

If the entity concludes that the facts and circumstances are such that it does not assume the SPAC warrants as part of the acquisition, the entity issues both ordinary shares and new warrants to acquire cash and a stock exchange listing service. In this case, the entity determines to what extent it issued each type of instrument to acquire (i) the cash, and (ii) the stock exchange listing service. No IFRS Accounting Standard specifically applies to this determination. Therefore, the entity applies paragraphs 10–11 of IAS 8 in developing and applying an accounting policy that results in information that is relevant and reliable.

The Committee observed that:

a. an entity could allocate the shares and new warrants to the acquisition of cash and the stock exchange listing service on the basis of the relative fair values of the instruments issued (that is, in the same proportion as the fair value of each type of instrument to the total fair value of all issued instruments). For example, if 80% of the total fair value of the instruments issued comprises ordinary shares, the entity could conclude that 80% of the fair value of instruments issued to acquire cash also comprises ordinary shares.

b. an entity could use other allocation methods if they meet the requirements in paragraphs 10–11 of IAS 8. However, an accounting policy that results in the entity allocating all the new warrants issued to the acquisition of the stock exchange listing service solely to avoid the new warrants being classified as financial liabilities applying IAS 32 would not meet these requirements.

Conclusion

The Committee concluded that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to determine how to account for warrants on acquiring a SPAC in the fact pattern the Committee discussed. Consequently, the Committee decided not to add a standard-setting project to the work plan.

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304.3.1.1

IFRIC Agenda Decision - Share plans with cash alternatives at the discretion of employees: grant date and vesting periods

May 2006 - The IFRIC considered an employee share plan in which employees were given a choice of having cash at one date or shares at a later date. At the date the transactions were entered into, the parties involved understood the terms and conditions of the plans including the formula that would be used to determine the amount of cash to be paid to each individual employee (or the number of shares to be delivered to each individual employee) but the exact amount of cash or number of shares would be known only at a future date. The IFRIC was asked to confirm the grant date and vesting period for such share plans.

The IFRIC noted that IFRS 2 defines grant date as the date when there is a shared understanding of the terms and conditions. Moreover, IFRS 2 does not require grant date to be the date when the exact amount of cash to be paid (or the exact number of shares to be delivered) is known to the parties involved.

The IFRIC further noted that share‑based payment transactions with cash alternatives at the discretion of the counterparty are addressed in paragraphs 34⁠–⁠40 of IFRS 2. Paragraph 35 of IFRS 2 states that, if an entity has granted the counterparty the right to choose whether a share‑based payment transaction is settled in cash or by issuing equity instruments, the entity has granted a compound financial instrument, which includes a debt component (ie the counterparty’s right to demand cash payment) and an equity component (ie the counterparty’s right to demand settlement in equity instruments). Paragraph 38 of IFRS 2 states that the entity shall account separately for goods or services received or acquired in respect of each component of the compound financial instrument. The IFRIC therefore believed that the vesting period of the equity component and that of the debt component should be determined separately and the vesting period of each component might be different.

The IFRIC believed that, since ‘grant date’ is defined in IFRS 2 and the requirements set out in paragraphs 34⁠–⁠40 of IFRS 2 were clear, the issues were not expected to create significant divergence in practice. The IFRIC therefore decided that the issues should not be added to the agenda.

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304.14.1.1

IFRIC Agenda Decision - Timing of the recognition of intercompany recharges

May 2013 - The Interpretations Committee received a request for clarification about IFRS 2 Share-based Payment relating to intragroup recharges made in respect of share-based payments.

In the submitter’s example, the parent company of an international group grants share-based awards to the employees of its subsidiaries. The obligation to settle these awards is the parent’s. The awards are based on the employee’s service to the subsidiary. The subsidiary and the parent both recognise the share-based transaction in accordance with IFRS 2—typically over the vesting period of the awards. The parent has also entered into recharge agreements with its subsidiaries that require the subsidiaries to pay the parent the value of the share-based awards upon settlement of the awards by the parent.

The submitter asked whether the subsidiary’s liability to its parent in respect of these charges should be recognised from the date of grant of the award or at the date of exercise of the award.

Outreach conducted suggests that there is diversity in practice in the recognition of these liabilities. Some respondents view the recharge and the share-based payments as linked and recognise both from the date of grant over the vesting period. Others think that the recharge is a separate transaction recognised by analogy with liabilities, the distribution of equity or as an executory contract.

When discussing accounting for the intercompany recharge transaction, the Interpretations Committee was concerned at the breadth of the topic. It thought that resolving this issue would require it to address the accounting for intragroup payment arrangements generally within the context of common control and that any conclusions drawn could have unintended consequences on the treatment of other types of intercompany transactions. In the absence of guidance about intercompany transactions within existing Standards and the Conceptual Framework, they did not think that they would be able to resolve this issue efficiently. For that reason, the Interpretations Committee decided not to add this issue to its agenda.

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