Cancellation and settlement – best estimate of cancellation expense
On 1 January 2012, an entity (A) granted 150 employees an award of free shares, with a grant date fair value of £5, conditional upon continuous service and performance targets over the 3-year period ending 31 December 2014. The number of shares awarded varies according to the extent to which targets (all non-market vesting conditions) have been met, and could result in each employee still in service at 31 December 2014 receiving a minimum of 600, and a maximum of 1,000 shares.
On 1 July 2013, A is acquired by B, following which all of A’s share awards are cancelled. At the time of the cancellation, 130 of the original 150 employees were still in employment. At that time, it was A’s best estimate that, had the award run to its full term, 120 employees would have received 900 shares each. Accordingly the cumulative expense recognised by A for the award as at the date of takeover would, under the normal estimation processes of IFRS 2 discussed at 6.1 to 6.4 above, be £270,000 (900 shares × 120 employees × £5 × 18/36).
How should A account for the cancellation of this award?
The opening phrase of paragraph 28(a) – ‘the entity shall account for the cancellation …as an acceleration of vesting’ – suggests that A should recognise a cost for all 130 employees in service at the date of cancellation. However, the following phrase – ‘[the entity] shall therefore recognise immediately the amount that would otherwise have been recognised for services received over the remainder of the vesting period’ – suggests that the charge should be based on only 120 employees, the best estimate, as at the date of cancellation of the number of employees in whom shares will finally vest. In our view, either reading of paragraph 28(a) is possible.
There is then the issue of the number of shares per employee that should be taken into account in the cancellation charge. Should this be 1,000 shares per employee (the maximum amount that could vest) or 900 shares per employee (the amount expected by the entity at the date of cancellation actually to vest)?
In our view, the intention was probably that the cancellation charge should be based on the number of shares considered likely, at the date of cancellation, to vest for each employee (900 shares in this example). However, given the lack of clarity in the wording of the standard – as discussed above – an entity could also choose an accounting policy based on the maximum number of shares (1000 shares in this example).