The UITF has recently provided clarification of the application of FRS 20 in the context of arrangements within groups.
The Urgent Issues Task Force (UITF) Abstract 44 "FRS 20 (IFRS 2) – Group and Treasury Share Transactions" provides clarity when applying FRS 20 in three situations which are not explicitly dealt with in the standard.
- Arrangements involving an entity’s own equity instruments where the entity chooses or is required to purchase its own shares in order to satisfy its obligation.
- Arrangements involving an entity’s own equity instruments where the award is made, or will be settled, not by the entity but by the entity’s shareholders.
- Arrangements where goods or services are received in exchange for equity instruments of another member of the same group.
The abstract mirrors an IFRIC interpretation in respect of IFRS 2 and applies for periods beginning on or after 1 March 2007.
It is not unusual for these situations to arise when an entity awards its employees either shares or share options in return for their services. Accounting for the first two circumstances is relatively straightforward. Any arrangement in which an entity receives goods or services as consideration for its own equity instruments should be accounted for as ‘equity settled’ in accordance with FRS 20, regardless of who will actually settle the arrangement or how the equity instruments needed are obtained. Equity-settled share-based payments are reflected in the accounts by charging through the profit and loss account an expense based on the fair value of the equity instrument measured at the grant date. The credit side of the double entry is taken directly to equity to reflect the shares which are, or will be, issued.
The requirements of the abstract become more complicated when looking at arrangements involving groups.
Consider the circumstances where the employees of a subsidiary are granted options over the shares of the parent company. UITF 44 specifies how the transaction should be accounted for in the subsidiary’s accounts and this is dependent on which entity (the parent or the subsidiary) granted the options to the employees.
If the grant was made by the parent directly to the subsidiary’s employees, then the transaction is accounted for as equity settled in the subsidiary’s accounts with the credit entry treated as a capital contribution from the parent.
However, if the grant was made by the subsidiary, the subsidiary must reflect a ‘cash-settled share-based payment’ in its accounts. The rationale is that this is more consistent with the principles of FRS 20 because the subsidiary has an obligation to provide its employees with the equity instruments of its parent. Cash settled share-based payments are reflected in the accounts by expensing the fair value of the equity instrument through the profit and loss account over the vesting period. The credit side of the entry is shown as a liability and the fair value of this liability (and hence the fair value of the instrument) must be re-measured at each balance sheet date until the options vest.
On consolidation, adjustments will be required to ensure that the group accounts reflect the substance of the arrangement from the group perspective and show the transaction as equity settled.
Smith & Williamson Commentary
The abstract mirrors exactly the requirements of IFRIC 11 which received a great deal of resistance while still in draft form. It is clear from the ASB’s press release, which talks about "an additional burden on subsidiaries out of proportion to the benefit to the users of their accounts" that they are less than happy with the final versions of IFRIC 11 and UITF 44. The ASB have always publicly stated their support for convergence of UK GAAP to IFRS, however their comments in relation to this abstract have indicated a willingness to at least consider the practicalities of detailed IFRS requirements where cost may outweigh benefit.
…More Clarification Needed?
Currently, neither the IFRIC interpretation nor the UITF Abstract deals with how to account for funding arrangements between the parent and subsidiary, e.g. where the subsidiary agrees to pay the parent an amount equal to the difference between the exercise price of the options and the fair value of the shares at the date of exercise. The UITF is concerned that this issue may need clarification and is considering whether it is necessary to develop additional guidance as a supplement to UITF 44.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.