Discretionary investment by employee of cash bonus into shares with no matching award
On 1 January 2013 an employee is told that he is to participate in a bonus scheme which will pay £1,000 if certain performance criteria are met for the year ended 31 December 2013. The bonus will be paid on 1 January 2014. 50% will be paid in cash and the employee will be permitted, but not required, to invest the remaining 50% in as many shares as are worth £500 at 1 January 2014. Thus, if the share price were £2.50, the employee could choose to receive either (a) £1,000 or (b) £500 cash and 200 shares. Any shares received are fully vested.
The 50% of the bonus automatically paid in cash is outside the scope of IFRS 2 and within that of IAS 19 (see Chapter 33).
The 50% of the bonus that may be invested in shares falls within the scope of IFRS 2 as a share-based payment transaction in which the terms of the arrangement provide the counterparty with the choice of settlement. This is the case even though the value of the alternative award is always £500 and does not depend on the share price (see 10.4 above).
The measurement date of the award is 1 January 2013 and the vesting period is the year ended 31 December 2013. The methodology set out in IFRS 2 for awards where the counterparty has a choice of settlement would lead to recognition over the vesting period of a liability component of £500 and an equity component of zero (see 10.1.2 above). If in fact the employee took shares at vesting, the £500 liability would be transferred to equity.