IFRS 2 fixed bonus pool

[IFRS1054]

Hi everyone,

I have an interesting bonus arrangement that I'm determining the accounting treatment for.
Essentially, based on a monetary target there will be a 'bonus pool'. Depending on the results for the year this will either by higher or lower.
The employees can elect to have up to 50% (IF ANY) of their portion of the bonus pool paid out in cash. The remainder will be paid out in shares based on the share price at the date of vesting ((portion of bonus pool - cash payment (if any)) / share price at vest date = shares to be allocated). (note; this means they can elect to have all the bonus paid as shares).

From my understanding, a cash payment relating to this bonus arrangement would be treated under IAS 19.
The remainder would be treated under IFRS 2, recognising both a liability and equity on grant date. Seeing it will be based on a fixed monetary amount (rather than the share price on the vesting date) on grant date we would recognise a liability and technically there would also be an equity portion but this would be valued at 0. On date of vesting, you would transfer the liability to equity depending on how many shares would be elected for (by the employees).

My question mainly is, when there is not a clear portion to be allocated as cash payment and share allocation, how should I determine which portion should be allocated to IAS 19 and IFRS 2? Is this based on an estimate of expected cash payment v share allocation?
Also, when it's based on a fixed monetary value (based on making the target rather than a share price). What would be the fair value of the liability at grant date? Will this just be the expected bonus adjusted for time value of money (discounted until grant date)?

Thanks!

[Marek Muc]

Is the total bonus amount fixed, with the settlement being either in cash or shares? In other words, does this mean a variable number of shares is required to settle the fixed bonus amount? It would be helpful if you could provide a brief numerical example to illustrate this arrangement.

[IFRS1054]

Hi Marek, yes that is correct. I'll provide an example below:

The bonus is dependent on results for the year. But say with the budgeted results, the formula to determine the bonus results with a pool of $1,000.
They can elect to have half of this (50%) paid in cash. The remainder ($500) will be paid out as shares. Say the fair value of the shares at vesting date is $1. They will be allocated 500 shares ($500 / 1). So the employees would receive $500 cash and $500 worth of shares.
They can also elect to have the whole amount paid in shares. Then they would be allocated 1,000 shares (1,000 / 1). $1000 worth of shares.

However, something I've noticed is that the board actually have the final say on what election of cash / shares will be paid (but still being the maximum amount of cash settlement being 50%). From my understanding this changes things slightly (Per IFRS 2.41). However, I don't know if this changes anything for this arrangement due to things being set on a fixed monetary value rather than a share price.

[Marek Muc]

Thanks for illustrating this. From what I can see, this is purely within the scope of IAS 19 and not IFRS 2, given that the bonus is not dependent on share value.

[JRSB]

Since there is a guaranteed element settled in shares, is that not a 'share based payment' regardless of whether it's tied to share value'?

[Marek Muc]

Only the monetary amount is guaranteed, not the number of shares. So, the shares are merely a method of settlement, not the actual consideration for the services performed.

[IFRS1054]

I read a few academic examples and I found a few of the big 4's guidance around this matter recommend to still recognise under IFRS 2. But I suppose it doesn't matter too much. It will end up having the same P&L impact.

[Leo]

It matters if it's equity settled?

[Marek Muc]

@IFRS1054 - Please share the most relevant excerpt

[IFRS1054]

Hi Marek, see quote below. This is taken from KPMG's share based payment guidance but I also found similar advice from EY's guidance on share based payments.

If a variable number of equity instruments to the value of a fixed amount is
granted, commonly known as ‘shares to the value of’, then we believe that such an
arrangement is an equity-settled share-based payment

[Marek Muc]

Thanks! They certainly hold a different opinion.

[IFRS1054]

Hi Merek, I was just looking at this again. I think it would be preferable to recognise it based on IAS 19 (less disclosure requirements), however what is your argument in reference to the standard for this?
I was just looking at the general definitions of IFRS 2, stating:

A share-based payment is a transaction in which the entity receives goods or services either as consideration for its equity instruments or by incurring liabilities for amounts based on the price of the entity's shares or other equity instruments of the entity.

Because it states "as consideration for its equity instruments" how could you argue it would not fall under this standard?