Share-based Payments: IFRS 2

1. Share-based Payments:IFRS 2

2. General Recognition Principles of IFRS 2 • IFRS 2 contains specific requirements for: • Equity-settled (shares, share options, warrants) • Cash-settled (share appreciation rights) • Compound instrument containing both equity and cash-settled components (bifurcate) Recognize goods or services received at fair value when the goods are obtained or as services are received When the goods or services do not qualify for recognition as assets, an expense is recognized For equity-settled share-based payment transactions a corresponding increase in equity is recognized; and For cash-settled share-based payment transactions a corresponding liability is incurred

3. Overview of Accounting Requirements of IFRS 2 • Equity-settled share-based payment transactions • Measure goods/services and corresponding increase in equity at FV of goods/services received unless FV cannot be estimated reliably, then use FV of equity instruments (usually the case for employee awards) • Use grant-date FV with no remeasurement in subsequent periods for employee awards, but estimate and true-up for forfeitures • Cash-settled share-based payment transactions • Measure goods/services and the liability incurred at FV of the liability • Start with grant-date FV, but liability is remeasured at FV through P&L until settlement (estimate and true-up for forfeitures) • Option of either equity-settled or cash-settled at holder’s election • Account for as a cash-settled transaction (a compound financial instrument if settlement values differ) if entity has incurred a liability to settle in cash

4. Recognition ExampleCash-settled Transaction • Subsequent estimates of: Fair value Intrinsic value • End year x1 $4.00 $1.50 • End year x2 $4.25 $3.00 • End year x3 $4.50 $4.25 • Settlement date $4.00 $4.00 • Vesting conditions: • Three year continued employment (service condition) • Assumptions: • 100 stock appreciation rights granted on January 1, 20X1 • Best estimate is that all employees remain in service over the vesting period • Grant date fair value of each right is $3.00

5. IFRS and U.S. GAAP Differences:Share-Based Payments: Classification IFRS 2 Classification • Liability-classified if cash settled (including at employee’s option) • Puttable shares always liability-classified unless contingently puttable • Compound instrument if employee has choice of settlement: - liability component measured first - balance is equity component FAS 123R Classification • Liability-classified if: • Grantor can be compelled to deliver cash or other assets • No equity holder relationship established (e.g., “other” conditions, fixed monetary amount awards) • Puttable shares equity-classified if (a) employee has made a substantial investment and bears risks and rewards of ownership for a “reasonable period” and (b) redemption price is at FV • Generally liability classified unless it is a tandem award Case Study 1: Choice of settlement

6. IFRS and U.S. GAAP Differences:Share-Based Payments: Grant date and Scope IFRS 2 Grant date • Date the entity and employee agree to a share-based payment arrangement and have a shared understanding of the terms and conditions of the arrangement Scope • Applies to all share-based payment arrangements • We would expect a high degree of correlation between the calculation of the award and the share price for a transaction to be classified a share-based payment FAS 123R Grant date • Date the employer and employee have a mutual understanding of the terms and conditions of the award and the employee begins to benefit from or be adversely affected by changes in the employer’s share price Scope • Applies to share-based payment arrangements with employees and is applied by analogy to share-based payment arrangements with non-employees • A transaction that is based, at least in part, on the price of an entity’s shares would be considered a share-based payment. This threshold does not require a high degree of correlation between the calculation of the award and the share price, unlike IFRSs

7. IFRIC 11 – Group and Treasury Share Transactions • IFRIC 11 addresses the following: • Classification of “group” SBP transactions in financial statements of entity that receives the services • Transfer of employees between group entities • Transactions involving an entity’s own equity instruments • Applies to awards granted to employee and non-employees • Confirms that the accounting for the acquisition of shares is separate from the classification of the SBP

8. IFRIC 8 – Scope of IFRS IFRIC 8 applies to transactions where the entity cannot identify specifically the goods or services received in return for a share-based payment Unidentifiable goods or services received should be measured as difference between fair value of the share-based payment and fair value of identifiable consideration received Potential application to schemes put in place by entities to comply with government policies e.g., Black Economic Employment (BEE) schemes in South Africa

9. IFRS and U.S. GAAP Differences:Share-Based Payments: Attribution IFRS 2 • Service inception prior to grant date (shareholder approval) • Recognize cost based on estimated FV • Revise FV through grant date • Graded vesting • Each tranche is considered separate award • Results in front-loading recognition (FIN 28) FAS 123R • Service inception date can never occur before shareholder approval received (unless perfunctory). Service inception date can precede grant date • Graded vesting • Accounting policy decision (if vests based on service) to use either (a) straight-line method or (b) FIN 28 approach • Case Study 2: Income taxes and share-based payment transactions

10. IFRS and U.S. GAAP Differences:Share-Based Payments: Attribution (Cont’d) IFRS 2 • Changes in requisite service period • Recognize with cumulative effect in current period FAS 123R • Changes in requisite service period • If no change in total compensation cost, unrecognized compensation cost recognized prospectively from date of change based on revised estimate of requisite service period • If change in total compensation cost, recognize cumulative effect in current period

11. IFRS and U.S. GAAP Differences:Share-Based Payments: Modifications IFRS 2 • Improbable  Probable modifications • Modification of terms applied to original and incremental grant date FV • Floor = FV at original grant date • No guidance provided when modification changes classification from cash-settled to equity FAS 123R • Improbable  Probable modifications (Type III) • Treat original award as though would not have vested • No floor • For modifications from cash-settled to equity: • Compare the fair value of the instrument immediately before modification to the fair value of the modified award and recognize any incremental compensation cost

12. IFRS and U.S. GAAP Differences:Share-Based Payments: Deferred Taxes IFRS 2 Deferred tax assets measured based on amount for which deduction is expected (intrinsic value of awards in U.S.) Remeasure deferred tax asset based on share price (intrinsic value) at each reporting date If intrinsic value at settlement is less than grant-date fair value, cumulative tax benefit recognized is based on intrinsic value FAS 123R Deferred tax assets measured based on fair value of awards Do not remeasure deferred tax asset. Assess for recoverability using more-likely-than not framework in FAS 109 If intrinsic value at settlement is less than grant-date fair value, deficiency can be offset against prior excess amounts within APIC