Cash-settled share based payment outside scope of IFRS 2

[xuerebx]

Hi all

In a situation where a Parent company P issued cash-settled shares based payments (P was and still is the settling entity) to employees of its Subsidiary S which fell under the scope of IFRS 2 (DR P/L, CR Equity reserve in S's books), and where subsequently P lost control of S but the share options remained effective, IFRS 2 does no longer apply in the separate financial statements of S. This because the employees of S are granted rights to equity instruments in an entity that is no longer a group entity.

However, it is unclear which standard then applies in the books of S, and consequently what the accounting implications on the separate financial statements of S entail.

1. My tentative view – in the books of S - is to discontinue any IFRS 2 accounting going forward (no longer booking an expense and crediting equity, however a counter argument could be made that the share options are remunerating S’s employees and thus discontinuing the accounting is not reflecting the economics of the transaction).
2. Alternatively somehow apply IAS 19 (DR P/L, CR ? not a liability as there is no obligation for S, so perhaps equity i.e. similar to IFRS 2 accounting)

I’d appreciate your views – thanks!

PS: Great forum you have going on here!

[Marek Muc]

Hi, interesting case and indeed not covered specifically (unlike the acquirer's view that is covered in IFRS 3.B62A-B)

I think that the best and only reasonable option is to continue accounting as if still under IFRS 2. From the S's point of view, it does not make a huge difference who is the sponsoring entity - even the parent is an 'external' entity as far as the financials of S are concerned. And as you pointed, S's employees are still remunerated by P for their services

PS. thanks and welcome

[xuerebx]

Makes sense - thanks for replying!

Any other differing opinions are welcome, it's an interesting topic and unfortunately not much guidance is available.

[JRSB]

I was starting to think from a group perspective, but I agree that for S only nothing has changed in some ways

[pub_acco]

Interesting case I have a bit different view. This arrangement sounds like a gift from P to S, and usually a gift from a parent to its subsidiary, no matter whether that is a share-based payment or not, is deemed to be a capital contribution because the parent is assumed to be acting in its capacity as an owner. In this way IFRS 2's treatment makes sense, but if P has surrendered all the shares in S, I don't really find a reasoning to treat the gift as a capital transaction. And the default mode of accounting for a gift from an external party should be income through PL (ie Dr. PL, Cr. PL).

But it would be complex if P still holds, say, 10% of shares in S. Also, it is very likely that the new parent of S has paid some money to P for the arrangement on behalf of S. If so, it is reasonable to treat the arrangement as a capital contribution, but as a gift from the new parent, not from P.

[Marek Muc]

I like the last point very much! I.e. the share-based payment must have been taken into account when negotiating acquisition terms between the old parent and new parent, and therefore in substance the remainder of vesting period is sponsored by the new parent

[JRSB]

Yes, or worse, it's taken into account in an ongoing relationship between old parent and new parent - the optionholders' ongoing services charged via management service between S and old P,