Modification of equity-settled award to cash-settled award
A Modified award with same fair value as original award
On 1 January 2013 an entity granted an equity-settled award, with a fair value at that date of €500, and vesting if the employee is still in service on 31 December 2016. On 1 January 2015, the award is modified so as to become cash-settled, but its terms are otherwise unchanged. The fair value at that date of both alternatives is €150. The liability is actually settled for €180 on 31 December 2016.
During 2013 and 2014 the entity recognises a cumulative expense of €250, being the proportion of the grant date fair value of the equity-settled award of €500 attributable to 2/4 of the vesting period.
At 1 January 2015, it is necessary to recognise a liability of €75 (€150 × 2/4 – see 9.3.2 above). The full amount of this liability is recognised as a reduction in equity under both Approaches as there is no difference between the fair value of the original and modified awards as at the modification date.
As the award is continuing, there is no acceleration at the modification date of the as yet unrecognised amount of the grant date fair value of the original award (€250, being €500 × 2/4), as would occur in an immediate settlement (see 7.4 above).
During 2015 and 2016 (the period from modification to settlement date), the entity recognises an increase of €105 in the fair value of the liability (€180 – €75). During this period it also recognises employee costs totalling €280, being the remaining grant date fair value of €250 (€500 total less €250 expensed prior to modification) plus the post-modification remeasurement of the liability of €30 (€180-€150). The balance of €175 is credited to equity.
In total the entity recognises an expense of €530, being the original grant date fair value of the equity-settled award of €500 plus the post-modification remeasurement of the liability of €30. This adjustment of €30 is consistent with the approach taken in IG Example 9 in the implementation guidance to IFRS 2 (see 10.1.4 and Example 32.40 below).
B Modified award with greater fair value than original award
On 1 January 2013 an entity granted an equity-settled award, with a fair value at that date of €500, and vesting if the employee is still in service on 31 December 2016. On 1 January 2015, the award is modified so as to become cash-settled, with the new award having a higher fair value than the original award. At that date, the fair value of the original award is €150, but that of the cash-settled replacement award is €170. The liability is actually settled for €200 on 31 December 2016.
During 2013 and 2014 the entity recognises a cumulative expense of €250, being the proportion of the grant date fair value of the equity-settled award of €500 attributable to 2/4 of the vesting period.
At 1 January 2015, it is necessary to recognise a liability of €85 (€170 × 2/4 – see 9.3.2 above). Under Approach 1 the difference between the fair value of the original equity-settled award and the modified award (€20 in total) is not recognised immediately as an expense but is spread over the remainder of the vesting period (i.e. starting from the date of modification). The liability of €85 is therefore recognised as a reduction in equity. Under Approach 2, the difference between the fair value of the original equity-settled award and the modified award is expensed immediately to the extent that the vesting period has already expired (€20 × 2/4) with the remainder being expensed in the post-modification period.
As the award is continuing, there is no acceleration at the modification date of the as yet unrecognised amount of the grant date fair value of the original award (€250, being €500 × 2/4) as would occur in an immediate settlement (see 7.4 above).
During 2015 and 2016 (the period from modification to settlement date), the entity recognises an increase of €115 in the fair value of the liability (€200 – €85). During this period, under Approach 1 it also recognises employee costs totalling €300, being the remaining grant date fair value of €250 (€500 total less €250 expensed prior to modification) plus the incremental modification fair value of €20 (€170-€150) plus the remeasurement of the liability of €30 (€200-€170) between modification date and settlement date. The balance of €185 is credited to equity. For Approach 2, the expense and the credit to equity during this period are €10 less than under Approach 1 because a proportionate amount of the incremental fair value was expensed immediately at the modification date.
In total the entity recognises an expense of €550, being the original grant date fair value of the equity-settled award of €500 plus the incremental fair value of €20 arising on modification of the award plus the post-modification remeasurement of the liability of €30. This remeasurement adjustment of €30 is consistent with the approach taken in IG Example 9 in the implementation guidance to IFRS 2.
C Modified award with lower fair value than original award
On 1 January 2013 an entity granted an equity-settled award, with a fair value at that date of €500, and vesting if the employee is still in service on 31 December 2016. On 1 January 2015, the award is modified so as to become cash-settled, but its terms are otherwise unchanged. At that date, the fair value of the original award is €150, but that of the cash-settled replacement award is €130. The liability is actually settled for €180 on 31 December 2016.
During 2013 and 2014 the entity recognises a cumulative expense of €250, being the proportion of the grant date fair value of the equity-settled award of €500 attributable to 2/4 of the vesting period.
At 1 January 2015, it is necessary to recognise a liability of €65 (€130 × 2/4 – see 9.3.2 above). The full amount of this liability is recognised as a reduction in equity under both Approaches as the fair value of the modified award is lower than that of the original award. No gain is recognised for the reduction in fair value consistent with the general principle in IFRS 2 that the cost recognised for an equity-settled award must be at least the grant date fair value of the award.
As the award is continuing, there is no acceleration at the modification date of the as yet unrecognised amount of the grant date fair value of the original award (€250, being €500 × 2/4) as would occur in an immediate settlement (see 7.4 above).
During 2015 and 2016 (the period from modification to settlement date), the entity recognises an increase of €115 in the fair value of the liability (€180 – €65). During this period it also recognises employee costs totalling €300, being the remaining grant date fair value of €250 (€500 total less €250 expensed prior to modification) plus the remeasurement of the liability of €50 (€180-€130) between modification date and settlement date. The balance of €185 is credited to equity.
In total the entity recognises an expense of €550, being the original grant date fair value of the equity-settled award of €500 plus the post-modification remeasurement of the liability of €50. This adjustment of €50 is consistent with the approach taken in IG Example 9 in the implementation guidance to IFRS 2 (see 10.1.4 and Example 32.40 below).
Whilst the overall liability in Scenario C is the same as that in Scenario A above, the total expense and overall net credit to equity are higher even though the cash-settled award had a lower fair value at the modification date than that in Scenario A. This might appear illogical but is consistent with the approach in IG Example 9 and the requirement to recognise, as a minimum, the grant date fair value of the original equity-settled award together with any post-modification change in the fair value of the liability.
D Modified award with greater fair value than original award but settled for less than modification date fair value
On 1 January 2013 an entity granted an equity-settled award, with a fair value at that date of €500, and vesting if the employee is still in service on 31 December 2016. On 1 January 2015, the award is modified so as to become cash-settled, with the new award having a higher fair value than the original award. At that date, the fair value of the original award is €150, but that of the cash-settled replacement award is €170. The liability is actually settled for €125 on 31 December 2016.
During 2013 and 2014 the entity recognises a cumulative expense of €250, being the proportion of the grant date fair value of the equity-settled award of €500 attributable to 2/4 of the vesting period.
At 1 January 2015, it is necessary to recognise a liability of €85 (€170 × 2/4 – see 9.3.2 above). Under Approach 1 the difference between the fair value of the original equity-settled award and the modified award (€20 in total) is not recognised immediately as an expense but is spread over the remainder of the vesting period (i.e. starting from the date of modification). The liability of €85 is therefore recognised as a reduction in equity. Under Approach 2, the difference between the fair value of the original equity-settled award and the modified award is expensed immediately to the extent that the vesting period has already expired (€20 × 2/4) with the remainder being expensed in the post-modification period.
As the award is continuing, there is no acceleration at the modification date of the as yet unrecognised amount of the grant date fair value of the original award (€250, being €500 × 2/4) as would occur in an immediate settlement (see 7.4 above).
During 2015 and 2016 (the period from modification to settlement date), the entity recognises an increase of €40 in the fair value of the liability (€125 – €85). During this period, under Approach 1 it also recognises employee costs totalling €225, being the remaining grant date fair value of €250 (€500 total less €250 expensed prior to modification) plus the incremental modification fair value of €20 less a reduction of €45 (€170-€125) in the fair value of the liability since modification date. The balance of €185 is credited to equity. For Approach 2, the expense and the credit to equity during this period are €10 less than under Approach 1 because a proportionate amount of the incremental fair value was expensed immediately at the modification date.
In total the entity recognises an expense of €475, being the original grant date fair value of the equity-settled award of €500 plus the incremental fair value of €20 arising on modification of the award less the post-modification remeasurement of the liability of €45. This remeasurement adjustment of €45 is consistent with the approach taken in IG Example 9 in the implementation guidance to IFRS 2.