FRC thematic review: key findings on IFRS 2 share-based payments
Overview of the FRC’s IFRS 2 thematic review
The FRC has issued its latest thematic review focusing on key recognition, measurement, classification, and disclosure requirements of IFRS2 Share-based payments. The insights and recommendations from this review are also relevant for entities reporting under UK GAAP given the similarities of IFRS and UK GAAP in this area. The FRC report focused on employee related share-based transactions and includes examples of good practice and common pitfalls when applying the standard.
Key findings from the FRC review
Classification of share-based payment transactions
Share-based payment transactions should be classified as either equity or cash-settled depending on the nature of the obligation. For share-based payment transactions with a settlement choice, the accounting treatment is dependent on whether the counterparty or entity has the settlement choice. The FRC review identified inconsistencies between share-based disclosures and other disclosures in the financial statements, including unexplained cash outflows in the cash flow statement, which indicated an element of cash-settlement for a share-based payment transaction classified as equity settled.
Best practice disclosures
The most useful disclosures explained how companies had classified their share-based payment transactions, explaining:
- Whether each share award was classified as equity or cash-settled.
- Whether a settlement alternative existed and which party had the choice of settlement.
- How the company intends to settle the awards.
- How the award was recognised and measured in the financial statements.
Measurement and recognition
Share-based payment transactions should be measured at fair value. The Black-Scholes model was used to estimate grant date fair value where there were no market conditions, with a Monte-Carlo model used when the award had market conditions.
Best practice disclosures
Good disclosures clearly explained how the company recognises and measures their various share-based payment arrangements, including the valuation model used.
Share-based payment transactions amongst group entities
The accounting for share-based payment transactions may differ in the consolidated, parent and subsidiary financial statements. A group share-based payment scheme usually exists where awards in the parent are granted to subsidiary employees. However, accounting policies and disclosures often did not contain sufficient detail on how such awards were accounted for by the parent or when an employee benefit trust (EBT) was used.
The accounting in the parent company financial statements is important as it impacts distributable reserves and ability to pay dividends. The ICAEW publication Tech-02-17 provides guidance on how share-based payments impact distributable profits.
Best practice disclosures
- Explain how the parent entity has accounted for awards made to employees of subsidiaries.
- Describe how an EBT was accounted for, details of the transactions the EBT had entered into and what any EBT reserve balance represents.
Tax associated with share-based payments
The FRC observed a lack of transparency in tax accounting treatment for share-based payment arrangements. This included current and deferred tax impacts, along with any employment tax obligations.
Best practice disclosures
- Explain how the excess tax benefit is measured and recognised.
- Describes the nature of the employment tax obligation, when it becomes payable, and how it is calculated.
Key expectations for share-based payment transactions
In addition to the best practice disclosures, the FRC set out their key expectations regarding companies with share-based payment transactions:
- Clearly explain the valuation technique and assumptions in determining fair value of instruments granted.
- Disclose judgement made and accounting policies applied, particularly where there is a choice of how a share-based payment is settled.
- Provide clear and concise material disclosures, ensuring internal consistency.
- Assess and explain the tax implications.
- Ensure the effect of group schemes is considered and explained.
How we can support you with IFRS 2 and financial reporting
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