prepare any necessary entries in e s consolidated financial statements for the years 613376
Mandatory investment by employee of cash bonus into shares with discretionary matching award by employer
On 1 January 2013 an employee is told that he is to participate in a bonus scheme which will pay £1,000 if certain performance criteria are met for the year ended 31 December 2013. The bonus will be paid on 1 January 2014. 50% will be paid in cash and the employee will be required to invest the remaining 50% in as many shares as are worth £500 at 1 January 2014. Thus, if the share price were £2.50, the employee would receive £500 cash and 200 shares. These shares are fully vested.
If this first award is achieved, the entity has the discretion, but not the obligation, to award an equal number of additional shares (‘matching shares’) – in this case 200 shares – conditional upon the employee remaining in service until 31 December 2015. The award of any matching shares will be made on 1 January 2014.
The 50% of the bonus paid in cash is outside the scope of IFRS 2 and within that of IAS 19 (see Chapter 33). The 50% of the annual bonus settled in shares is an equity-settled share-based payment transaction within the scope of IFRS 2, since there is no discretion over the manner of settlement. The measurement date for this element of the bonus is 1 January 2013 and the vesting period is the year ended 31 December 2013, since all vesting conditions have been met as at that date. Notwithstanding that the two legs of the award strictly fall within the scope of two different standards, the practical effect will be to charge an expense over the year ended 31 December 2013.
In our view, it is necessary to consider whether the entity’s discretion is real or not, this being a matter for judgement in the light of individual facts and circumstances.
In some cases the entity’s discretion to make awards may be more apparent than real. For example, the awards may simply be documented as ‘discretionary’ for tax and other reasons. It may also be that the entity has consistently made matching awards to all eligible employees (or all members of a particular class of eligible employees), so that it has no realistic alternative but to make matching awards if it wants to maintain good staff relations. In such cases, it may be helpful to consider what the accounting for the ‘matching’ award would be if it were a pure cash award falling within paragraph 21 of IAS 19:
‘An entity may have no legal obligation to pay a bonus. Nevertheless, in some cases, an entity has a practice of paying bonuses. In such cases, the entity has a constructive obligation because the entity has no realistic alternative but to pay the bonus. The measurement of the constructive obligation reflects the possibility that some employees may leave without receiving a bonus.’
This is discussed further in Chapter 33 at 6.1.3.
In making the determination of whether a constructive obligation would exist under IAS 19, it would be necessary to consider past data (e.g. the percentage of employees who have received matching awards having received the original award).
If it is concluded that the entity does not have a constructive obligation to make a matching award, the accounting treatment would follow the legal form of the transaction. On this view, the grant date (and therefore measurement date) would be 1 January 2014, and the vesting period two years from 1 January 2014 to 31 December 2015.
If it is concluded that the entity does have a constructive obligation to make a matching award, the effect is that the matching award of shares is equivalent to the mandatory matching award in Example 32.57 above, and should therefore be accounted for in the same way – i.e. the measurement date is 1 January 2013 and the vesting period is the three years ended 31 December 2015.
The discussion in 8.10 above is relevant to the valuation of the matching equity award.