This article is the twentieth in a series of articles that takes our readers on a journey through International Financial Reporting Standards (IFRS) with a special focus on the standards’ quintessential feature: they are principles-based. In this article, we provide an overview of some of the most significant differences between IFRS and U.S. generally accepted accounting principles (GAAP) with regard to share-based payments. Actual differences in the accounting treatment between the two frameworks depend on specific circumstances.
IFRS pronouncements relating to share-based payment transactions include IFRS 2, Share-based Payment, IFRIC 8, Scope of IFRS 2, and IFRIC 11, IFRS 2 - Group and Treasury Share Transactions. U.S. GAAP for such transactions can be found in FASB Statement No. 123(R), Share-Based Payment, together with various interpretations. Under both frameworks, share-based payments generally occur when equity instruments are used to “pay for” goods or services, and such transactions are considered to be real economic transactions that must be reflected in the financial statements. However, when the two frameworks are applied in practice, nuances emerge and can result in significant differences in how the awards are recognized.
One of the most common differences between IFRS 2 and Statement No. 123(R) is in the treatment of a graded vesting award (i.e., an award with multiple vesting dates and where different parts may have different expected terms). Under Statement No. 123(R), an entity must make a policy decision about whether to recognize compensation cost on a straight-line basis over the requisite service period for (a) each separately vesting portion of the award as if the award was, in-substance, multiple awards, or (b) the entire award as whole. Under IFRS, each vesting portion is treated separately using the “multiple awards” approach.
IFRS 2 states that if the fair value of the equity instruments cannot be estimated reliably, the entity is allowed to measure the equity instruments at their intrinsic value. However, it explains that in virtually all cases, the estimated fair value of employee share options at grant date can be measured with sufficient reliability. Statement No. 123(R) allows non-public entities to make a policy decision of whether to measure all of its liabilities incurred under share-based payment arrangements at fair value or to measure all such liabilities at intrinsic value.
External providers of goods or services can be paid with share-based payment awards, and these transactions are under the scope of both IFRS 2 and Statement No. 123(R). However, under IFRS, for equity-settled share-based payments there is a rebuttable presumption that the fair value of the goods or services received can be estimated reliably. The measurement date is when goods are obtained or services are received. Under U.S. GAAP, those transactions are measured at the fair value of the consideration received, or the fair value of the equity instruments issued, whichever is more reliably measurable. The measurement date is the earlier of either the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or the date at which the counterparty's performance is complete.
Deferred taxation is another area where IFRS 2 and Statement No. 123(R) take a different approach. Under IFRS, the approach to deferred taxation is based on the estimated future tax deduction, which is revised at each reporting date. Under U.S. GAAP, the deductible temporary difference must be based on the compensation cost recognized for financial reporting purposes.
This summary analysis of differences is not exhaustive. Other differences exist between the two frameworks, but a complete analysis can be performed only based on specific facts and circumstances.
For further information, please contact Bob Dohrer (robert.dohrer@rsmi.com) or Marco Marcellan (marco.marcellan@rsmi.com) in our International Assurance Services Group.
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