Proposed Amendments on Share-Based Payment - Example

PROPOSED AMENDMENTS ON SHARE-BASED PAYMENT (IFR 2) Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Words: 2000 Table of Contents Overview 1 Proposed change 1 Conclusion 8 Overview According to IFRS 2, Share-based payment arises when an entity makes payment using equity or price based on the share price for good or services received by the firm. The scope revolves within the method of settlement of the consideration. The extent of the framework covers both employees and nonemployees (Chorafas, 2006). The framework exemption entails; The IFRS 2 does not consider issuance of shares as a means of consideration in business combination but classified under IFRS 3 ‘Business combination’ (Financial instruments, 2009), and Payment based on IAS 32 ‘Financial Instrument: presentation’ or IAS 39 ‘Financial Instrument: recognition and measurement’ paragraph 5-7 (Financial instruments, 2009). The treatment of share-based payment has double entry effect since it increases equity and reduces the account settled (Deloitte, n.d.). The vesting period, the fair value of payment and grant date are mandatory in recognition and measurement of share-based payment (Chorafas, 2006). The current IFRS 2 framework has few discrepancies and complexity. Therefore, the proposal looks to provide an avenue of eliminating these issues arising from current framework as elaborated below. Proposed change The proposed change in IFRS2 seeks to simplify and correct issues related to five areas. The proposed amendments borrow a lot from FASB Statement No.123 (R) though the section shows consistency with IFRS 2. The areas of concern are elaborated below; Firstly, the share-based payment measurement for employees in a public and non-public organization requires amendment. The new proposal amendment of IFR 2 will ensure that non-public company account base its share-based payment on their fair value if not possible to estimate the expected volatility of the stock price (Deloitte, n.d.). In that connection, the company uses historical volatility to measure the value of share-based payment instrument. The use of appropriate industry sector index is required in determining the historical volatility of payment which cannot be measured conveniently. Secondly, the IFR 2 on differed tax recognition on share-based payment has discrepancies in recognition. The proposal amendment looks into a period of recognition of differed payment during the preparation of books of account. The need arose due to different countries’ tax policies and regulation (Deloitte, n.d.). The proposal requires IFR 2 to recognize differed tax of share-based payment at grant-date. Consequently, gain or loss in share price will not reflect in the books of accounts until the compensation is treated for tax purposes. Therefore, increases in share price which result in tax benefit are recognized after-tax payment is made. Thirdly, the current IFRS 2 approach of measuring excess tax benefit from share-based payment shows complexity. The new proposal seeks to simplify the approach of measuring excess tax benefit of share-based payments. The amendments will measure excess tax benefit using a portfolio approach. The portfolio approach enables compensation paid-in capital offered to offset write-offs of differed tax (Deloitte, n.d.). The approach reduces the amount of work required in recognizing and measuring excess tax compared to individual approach since shared-based payments are treated collectively. Fourthly, the IFRS 2 amendments target steps in differentiating compensatory or non-compensatory for share-based payment. The proposal eases the stringent measures in determining either compensatory or non-compensatory on employee share purchase plan. The amendments will ensure that it eliminates instances of recognition of compensation cost which does not give rise to any compensation (Missaoui, 2010). Lastly, the period of recognition of share-based payment for nonemployees requires amendments to make it clear for recording in books of account. The affected items include compensation of contractors and other parties that who are eligible for compensation of nonemployees. The amendments require the payment measured based on either earlier of; The date at which counterparty is expected to earn the share-based payment according to the contract of service or, Date of completion of performance according to counterparty agreement with the company. The FASB issue 96-18 reiterates the same approach in measuring share-based payment to nonemployee (Missaoui, 2010). The above amendment brings great milestone in financial reporting process making it easy, increase uniformity and errors. The evaluation provides in-depth analysis by comparing current and proposed IFRS 2 framework and need for making these changes. Proposal Evaluation The gaps created in IFRS 2 can result in improper reporting which results to wrong information conveyed to users of accounting information (Financial Accounting Standard Board, n.d.). The failure to give an accurate and fair performance and position of the company goes against reason behind accounting and auditing practice. Therefore, evaluation of the proposal seeks to identify loopholes or issues related to the current IFRS 2 and how the new proposal solves such issues. The assessment revolves around proposed amendments mentioned above. The discussion below looks deeper into issue considered in arriving at proposed changes required in IFRS 2. Firstly, share-based payment measurement for employees in the public and non-public organization in the current IFRS 2, measurement requirement of a share-based payment are uniform for both private and public firms (International accounting standards 2001, 2001). The weakness of generalization of these principles arises from the fact that fair value of share price for a public company can be easily obtained. The shares prices of companies are determined by forces of demand and supply. Also, share prices are based on information available in the public domain since they are required to provide full disclosure of financial and non-financial information that affects company going concern. In contrary, the private company does not trade its shares on public domain or tied to financial disclosure regulation. Therefore, a generalization of measurement of share price for compensation has its weakness. The isolation of private and public companies overcomes the weakness. The private firms can adopt the use of historical volatility derived from appropriate industry sector index (Missaoui, 2010). Secondly, the differed tax recognition on share-based payment according to current IFRS 2 does not recognize deferred tax in the time of award of the fair value of the share-based compensation. The framework allows recognition of deferred tax when intrinsic value is determinable and deductible for tax purpose. Consequently, an award at-the-money of share-based payment does not qualify for recognition as compensation cost until the reward is in-the-money. The amendment is suitable since it recognizes the deferred tax based on earlier of; The date at which counterparty is expected to earn the share-based payment according to the contract of service or, Date of completion of performance according to counterparty agreement with the company. While excess tax benefits are treated after the payment of tax is done. The approach ensures that the performance and position of the company do not have great deviation due to the high amount of deferred tax not considered as a result of IFRS 2 which does not recognize based on either date. Thirdly, individual instrument approach of measuring excess tax benefit from share-based payment in current IFRS 2 causes other device required for write-offs of differed tax not recognized as paid-capital but a component of net income (International financial reporting standard -- classification of rights issues, 2009). The approach creates confusion in determining deferred tax that qualifies for paid-capital and income determination. Therefore, adoption of portfolio approach overcomes such weakness. Fourthly, the measure of differentiating compensatory or non-compensatory for share-based payment arises due to the stringent requirement to determine whether the cost can be considered. The framework gives a loophole that disqualifies some share-based payment as a cost of compensation. The proposal eases the measures and allows comprehensive rule that allows all cost of compensation recognized and measured adequately. Lastly, IFRS 2 illustrates that period of recognition of share-based payment is determined by a modified grant-date method that is agreed upon between the company and nonemployee or counterparty, allowing the company to determine the recognition period based on modified grant-date can give loopholes for financial malpractices such as window dressing. Therefore, addressing the gaps by ensuring recognition is made earlier of (i) the date at which counterparty is expected to earn the share-based payment according to the contract of service or, (ii) date of completion of performance according to counterparty agreement with the company (Missaoui, 2010). Practical implication of the proposal The enhancement of transparency and accountability is crucial for every organization. The correctness of information enables users (management, investors, debtors, creditors, government, and other stakeholders) of financial information to make sound decisions. The confusion arising from the complexity of the current IFRS 2 can limit achievement aimed at the production of financial records. The complexity leads to the use of personal perception or different principles i.e. FASB in recognizing and measuring share-based payment. Therefore, financial information contravenes accounting rules and uniformity of reporting. The non-uniformity of reporting creates confusion and makes it difficult to carry out industry analysis (International financial reporting standard -- classification of rights issues, 2009). The industry analysis is important for investors to compare companies in the same industry to determine the best company to invest. The proposal seeks to eliminate complexity and issues related to recognition and measurement of share-based payment thus enhancing uniformity and errors in reporting. Therefore, the amendment will improve company ability to raise funds if its performance is impressive on the market. The elimination of non-uniformity gives companies a fair ground to compete in raising funds. Consequently, the adoption of the proposal enhances management efficiency, accountability, and transparency. The loopholes and complexity of financial reporting framework give unscrupulous members of management or directors to steal or pursue their interest instead of shareholders interest. The proposal seeks to eliminate such loopholes and complexity thus improving transparency and accountability of management and directors thus enabling financial reporting to serve its purpose of disseminating valid and fair financial information to its stakeholders. Also, a proposal for amendments to IFRS 2 improves management efficiency since streamline of reporting framework enhances the true and fair position of the company (International Financial Reporting Standards, n.d.). Therefore, management can devise correct and sound strategies that improve firm performance and position in the industry thus operating by shareholder objectives. The aim of adoption of this proposal brings convergence of IFRS 2 and FASB Statement (issue 96-18) which opens up accounting and auditing practice to a global platform. The ability global uniformity on reporting of share-based payment enhances the scope of expertise and other resources thus increasing proposal amendment received by IASB (Robinson, 2009). The universal framework improves the soundness of the international financial reporting standards through the elimination of minor loopholes and misinterpretation (International Financial Reporting Standards, n.d.). Lastly, the proposal will help both internal and external auditors during the audit process. The proposal seeks to simplify and bring convergence of financial reporting regulation framework. The reduction of complexity in financial reporting framework eliminates errors in coming up with audit opinion. Therefore, improvement of preciseness of information reduces penalties and reputational risk regarding wrong auditor’s opinion. Consequently, change in IFRS 2 will ease audit of international companies where parent and subsidiary companies are in different countries. For example, amendments seek to merge IFRS 2 to FASB submission (Issue 96-18) on share-based payment, therefore, reduces audit assumption in reconciling financial information using IFRS 2 and FASB submission (International Financial Reporting Standards, n.d.). Also, the convergence of financial reporting framework reduces the number of frameworks accountants and auditors needs to understand. The use of uniform financial regulation goes a long way in improving expertise, reducing confusion, and improving strengths of existing regulation. Conclusion In conclusion, the weighted merits and demerit of proposal evaluation determine whether to adopt or reject the proposal. The proposal shows that strengths outweigh weakness of the model. The new proposal reduces complexity and misinterpretation of share-based payment which is currently experienced in accounting and auditing field. Consequently, the difference between IFRS 2 and FASB on share-based payment creates more conflict. Therefore, IFRs should adopt the proposal to ensure ease of interpretation and implementation of the new IFRS 2 on share-based payment. Also, it eliminates confusion between IFRS and FASB measurement and recognition of share-based payment in books of accounts. Reference: Chorafas, D. (2006). IFRS, fair value and corporate governance. Oxford: Elsevier. Deloitte, (n.d.). IFRS 2 — Share-based Payment. [online] Iasplus.com. Available at: http://www.iasplus.com/en/standards/ifrs/ifrs2 [Accessed 19 Apr. 2016]. Financial Accounting Standard Board, (n.d.). Employee Share-Based Payment Accounting Improvements. [online] Fasb.org. Available at: http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=1176164543600 [Accessed 19 Apr. 2016]. Financial instruments. (2009). London, U.K.: IASC Foundation. International accounting standards 2001. (2001). London: International Accounting Standards Committee. International accounting standards explained. (2000). New York: Wiley. International financial reporting standard -- classification of rights issues. (2009). London: International Accounting Standards Board. International Financial Reporting Standards, (n.d.). IAS 32 - IFRS. [online] IFRS.org. Available at: http://www.ifrs.org/Documents/IAS32.pdf [Accessed 19 Apr. 2016]. Missaoui, B. (2010). IFRS 3 im Wandel. Hamburg: Diplomica Verlag. Robinson, T. (2009). 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