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DISCLOSURE
IFRS 2 requires extensive disclosure requirements under three main headings:
1. Information that enables users of financial statements to understand the nature and extent of the share-based payment transactions that existed during the period
2. Information that allows users to understand how the fair value of the goods or services received or the fair value of the equity instruments that have been
granted during the period was determined
3. Information that allows users of financial statements to understand the effect of expenses that have arisen from share-based payment transactions on the entity’s
statement of comprehensive income in the period
A key date for the Standard’s transitional provisions is November 7, 2002, the publication date of the Exposure Draft on share-based payments. The Standard is
applicable to equity instruments granted after November 7, 2002, but not yet vested on the effective date of the Standard, which is January 1, 2005. IFRS 2 applies to
liabilities arising from cash-settled transactions that exist at January 1, 2005.
Facts
CASE STUDY 7
Placebo, a public limited company, purchased all of the shares of Medicine, a public limited company, by issuing ordinary shares of Placebo. The business
combination was accounted for as an acquisition. Medicine had been the subject of a management buyout where all of the shares were currently owned by
the management of the company. As part of the purchase consideration, Placebo had agreed to pay a further amount to the management team if the
company’s earnings per share increased by 50% over the next year and if the management team was still employed by Placebo at the end of this period.
The contingent consideration was one ordinary share in Placebo for every ten shares held by the management team.
Placebo has also issued share options to certain employees of Medicine as a goodwill gesture on the acquisition of the company.
Placebo is a company that has the dollar as its functional currency. The company is registered on several stock exchanges and currently has a quotation on
the German stock exchange. The market price of the quotation is currently €25 per share. Share options issued to the employees of Medicine were those
that were currently quoted on the German stock exchange. The share options have a vesting period of three years.
Required
Discuss the implications of the above events.
Solution
The shares issued to the management team for the purchase of the company, Medicine, would not be within the scope of IFRS 2. They would be dealt
with under IFRS 3, Business Combinations, as the acquisition was essentially a business combination. However, the shares issued as contingent
consideration may or may not be accounted for under IFRS 2. The nature of the issue of shares will need to be examined. The question is whether the
additional shares that are going to be issued are compensation or whether they are part of the purchase price. There is a need to understand why the
acquisition agreement includes a provision for a contingent payment. It is possible that the price paid initially by Placebo was quite low and, therefore, this
represents further purchase consideration. However, in this instance, the additional payment is linked to continuing employment. Therefore, it could be
argued that because of the link between the contingent consideration and continuing employment, it represents a compensation arrangement, which should
be included within the scope of IFRS 2.
Medicine has received the benefit of the services provided by its employees. As a result, it should record the expense that relates to this share-based
payment even though the share options have been granted by Placebo.
There is no embedded derivative in this share-based payment to employees that would be accounted for under IAS 39. It may seem that there is an
embedded derivative because the shares are quoted in another currency. However, equity-settled share-based payments should always be denominated in
the entity’s functional currency. Therefore, the total fair value of the options at the date of the grant will be determined in dollars and not in euros. The
value of the grant would not change over the life of the options even if the exchange rate or market price fluctuates.
Note, however, that if the share options were to be cash settled, the liability would be recorded as a eurodenominated liability that would have to be
remeasured at the end of each reporting period. Any changes in the fair value of this liability would be recognized in profit and loss.
Facts
CASE STUDY 8