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- February 22, 2016 at 11:27 am #301548
hi,
Under IFRS2, cancellation of share option schemes for employees (e.g.when the option is out-of-the-money so it no more provides the necessary incentive it was designated to), apart from the reason of the cancellation being failure to meet the non-market vesting conditions, is accounted for as acceleration of vesting and the standard requires that the entity recognize immediately the amount that otherwise would have been recognized for services received over the remainder of the vesting period. this means that if the employee had to serve, say, four years before the options vested and the option was cancelled at the end of the first year, the entity has to recognize the remainder of the service costs, i.e. the costs that otherwise would have spread over three additional years fully and immediately in the year of cancellation, the accounting entry being debiting the service cost for the three-year costs and crediting the equity reserve.
what is the idea, or logic, behind the requirement that cancellation shall accelerate vesting, that in turn results in recognizing the costs that have not yet been incurred and how does that add to faithful presentation? besides, what is the idea behind crediting of the equity reserve by the three year cost (in my example) in practice? does it mean that the employee still gets the shares upon the cancellation?
thank you.
February 22, 2016 at 9:02 pm #301613Hi,
The accounting treatment is a bit counter-intuitive but your understanding of the rules is correct.
I believe that the IASB has kept the current accounting treatment as an anti-avoidance measure to prevent companies cancelling an award scheme ahead of time, possibly due to poor performance of the scheme.
It is unlikely that the employees will get the shares under the cancelled scheme but there is a possibility that the company would commence a new scheme to compensate the employees for the cancellation or alternatively offer a cash payment. If a cash payment is made then then debit entry can be used to reduce the equity balance created upon the cancellation.
It is all a bit odd but thankfully you won’t have to understand the logic behind the treatment on this one. All you will need to do is explain the accounting treatment, which you understand very well.
Keep up the hard work
Thanks
February 23, 2016 at 6:47 am #301637thank you for your early and insightful answer!
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