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Guest Article

Deloitte logo

(From the February 23, 2004 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IASB Issues Rule on Expensing Stock Options


The International Accounting Standards Board on February 19 issued International Financial Reporting Standard 2, Share-Based Payment 2 (IFRS 2), to require companies following international accounting standards to expense stock option grants beginning next year, according to an IASB press release. Although IFRS 2 will not apply to U.S. companies, the Financial Accounting Standards Board is expected to propose a similar rule in March. The fact the IASB has now issued IFRS 2 puts additional pressure on the FASB to act on this issue.

The IASB press release highlights the following as IFRS 2's main requirements:

  • The IFRS requires an entity to recognize share-based payment transactions in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity. There are no exceptions to the IFRS, other than for transactions to which other Standards apply.
  • In principle, transactions in which goods or services are received as consideration for equity instruments of the entity should be measured at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the entity is required to measure the transaction by reference to the fair value of the equity instruments granted.
  • For transactions with employees and others providing similar services, the entity is required to measure the fair value of the equity instruments granted, because it is typically not possible to estimate reliably the fair value of employee services received. The fair value of the equity instruments granted is measured at grant date.
  • For transactions with other parties (i.e., other than employees and those providing similar services), there is a rebuttable presumption that the fair value of the goods and services received can be estimated reliably. That fair value is measured at the date the entity obtains the goods or the counterparty renders service. In rare cases, if the presumption is rebutted, the transaction is measured by reference to the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders service.
  • For goods or services measured by reference to the fair value of the equity instruments granted, the IFRS specifies that, in general, vesting conditions are not taken into account when estimating the fair value of the shares or options at the relevant measurement date (as specified above). Instead, vesting conditions are taken into account by adjusting the number of equity instruments included in the measurement of the transaction amount so that, ultimately, the amount recognized for goods or services received as consideration for the equity instruments granted is based on the number of equity instruments that eventually vest.
  • The IFRS requires the fair value of equity instruments granted to be based on market prices, if available, and to take into account the terms and conditions upon which those equity instruments were granted. In the absence of market prices, fair value is estimated, using a valuation technique to estimate what the price of those equity instruments would have been on the measurement date in an arm's length transaction between knowledgeable, willing parties.
  • The IFRS also sets out requirements if the terms and conditions of an option or share grant are modified (e.g., an option is repriced) or if a grant is cancelled, repurchased, or replaced with another grant of equity instruments.
  • For cash-settled share-based payment transactions, the IFRS requires an entity to measure the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the entity is required to remeasure the fair value of the liability at each reporting date and the date of settlement, with any changes in value recognized in profit or loss for the period.
  • The IFRS also sets out requirements for share-based payment transactions in which the terms of the arrangement provide either the entity or the supplier of goods or services with a choice of whether the entity settles the transaction in cash or by issuing equity instruments.
  • The IFRS prescribes various disclosure requirements to enable users of financial statements to understand:
    a) the nature and extent of share-based payment arrangements that existed during the period; b) how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined; and c) the effect of share-based payment transactions on the entity's profit or loss for the period and on its financial position.

Please contact your Deloitte advisor if you have any questions or need additional information.


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have questions or need additional information about this article, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094).

Copyright 2003, Deloitte.


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