Preface

Accounting for forfeitures or cancellations of share-based payments requires adjusting for unmet service conditions, reflecting whether the employee voluntarily resigns or is terminated by the employer.

The amendments to IFRS 2 clarify that failing to complete the vesting period due to resignation or dismissal is treated as a forfeiture, ensuring transparency in the recognition of share-based payment transactions.

Specific clauses in share-based payment arrangements, such as acceleration of vesting in the event of employer-initiated termination, must be carefully accounted for to reflect the terms of the agreement accurately.

Introduction

Under the modified grant-date method, the estimated cost of share-based payments is adjusted for forfeitures resulting from an employee failing to meet the service condition. If an employee resigns before the end of the vesting period, it is clear that the required services have not been rendered, and this is treated as a forfeiture.

Prior to the amendments introduced to IFRS 2 by the Annual Improvements to IFRSs 2010–2012 Cycle, it was unclear whether an award should be considered forfeited if the employer terminated the employee’s services, thereby preventing the required service from being provided. The amendments clarified that failing to complete the service period, regardless of whether the employee resigns voluntarily or is dismissed by the employer, results in the service condition not being met. As a result, this failure is treated as a forfeiture. These amendments apply prospectively to share-based payment transactions with a grant date on or after 1 July 2014, though earlier adoption is permitted.

For share-based payment transactions with a grant date before 1 July 2014, where the entity does not elect to adopt the amendments early, two acceptable approaches to accounting for the termination of service by the employer are:

• Treating it as a forfeiture because the employer has not received the agreed services.
• Treating it as a cancellation because the employer is preventing the service from being provided. The implications of cancellations are discussed further in relevant sections.

Similarly, if an employee is unable to provide services due to a sale of an operation that results in employment termination, the approaches mentioned above are applicable if the grant date is before 1 July 2014, and the amendments are not adopted early.

Clauses for Failure to Meet Service Conditions

In certain share-based payment arrangements, clauses may specify the employee’s entitlements in the event of termination by the employer, such as acceleration of vesting. The accounting for these arrangements should reflect the specific terms set out in these clauses.

Clauses setting out entitlement in case of failure to meet service conditions because of action by employer

Share-based payment arrangements may contain clauses setting out the employee’s entitlement (e.g. acceleration of vesting) in the specific event of termination by the employer on the sale of an operation. The accounting should reflect the terms of the arrangement in these cases.                                       

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