Mandatory investment by employee of cash bonus into shares with mandatory matching award by employer
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 and he remains in service. The bonus will be paid on 1 January 2014. 50% will be paid in cash and the employee will be 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 would receive £500 cash and 200 shares. These shares are fully vested.
If this first award is achieved, the entity is required to award an equal number of additional shares (‘matching shares’) – in this example 200 shares – conditional upon the employee remaining in service until 31 December 2015. The award of any matching shares will be made on 1 January 2014.
Annual bonus
The 50% of the bonus paid in cash is outside the scope of IFRS 2 and within that of IAS 19 (see Chapter 33). The 50% of the annual bonus settled in shares is an equity-settled share-based payment transaction within the scope of IFRS 2, since there is no discretion over the manner of settlement. The measurement date for this element of the bonus is 1 January 2013 and the vesting period is the year ended 31 December 2013, since all vesting conditions have been met as at that date. Notwithstanding that the two legs of the award strictly fall within the scope of two different standards, the practical effect will be to charge an expense over the year ended 31 December 2013.
Matching shares
The terms of the award of 200 matching shares have the effect that the entity has committed, as at 1 January 2013, to award shares with a value of £500 as at 1 January 2014, subject to satisfaction of:
- a performance condition relating to the year ended 31 December 2013; and
- a service condition relating to the three years ended 31 December 2015.
Those terms are understood by all parties at 1 January 2013, which is therefore the measurement date. The fact that the matching award is not formally made until 1 January 2014 is not relevant, since there has been a binding commitment to make the award, on terms understood both by the entity and the employee, since 1 January 2013 (see 5.3 above).
The vesting period is the three years ended 31 December 2015. As at 31 December 2013 only one of the vesting conditions (i.e. the performance condition) has been met. The further vesting condition (i.e. the service condition) is not met until 31 December 2015.
The discussion in 8.10 above is relevant to the valuation of the equity elements of the award.