2022-05-20
Added · Updated
Publicly-held companies must apply CPC 10(R1) for share-based payments. Equity-settled transactions require recognizing goods/services and equity increases at fair value, adjusting for vesting conditions and remeasuring liabilities for cash-settled deals. Modifications, cancellations, and net-settlement features have specific accounting treatments, including immediate expense recognition for accelerated vesting.
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SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000
Approves the consolidation of Technical Pronouncement CPC 10(R1) of the Accounting Pronouncements Committee – CPC, which deals with share-based payment.
THE PRESIDENT OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL – CVM makes public that the Board, in a meeting held on April 14, 2022, based on §§ 3 and 5 of art. 177 of Law No. 6,404, of December 15, 1976, combined with items II and IV of § 1 of art. 22 of Law No. 6,385, of December 7, 1976, as well as arts. 5 and 14 of Decree No. 10,139, of November 28, 2019,
APPROVED the following Resolution:
Art. 1 It makes mandatory for publicly-held companies the Technical Pronouncement CPC 10(R1), which deals with share-based payment, issued by the Accounting Pronouncements Committee - CPC, as consolidated in Annex “A” to this Resolution.
Art. 2 Deliberation 650, of December 16, 2010, is hereby revoked, from the effective date of this Resolution.
Art. 3 This Resolution enters into force on July 1, 2022.
Electronically signed by
MARCELO BARBOSA
President
SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000
ANNEX “A”
ACCOUNTING PRONOUNCEMENTS COMMITTEE
TECHNICAL PRONOUNCEMENT CPC 10 (R1)
SHARE-BASED PAYMENT
Correlation to International Financial Reporting Standards – IFRS 2 (IASB – BV 2010)
Summary Item
OBJECTIVE 1
SCOPE 2 – 6
RECOGNITION 7 – 9
SHARE-BASED PAYMENT TRANSACTIONS SETTLED IN EQUITY INSTRUMENTS 10 – 29 Overview 10 – 13A Transaction in which services are received 14 – 15 Transaction measured based on the fair value of the equity instrument granted 16 – 25 Determination of the fair value of the equity instrument granted 16 – 18 Treatment of vesting condition 19 – 21 Treatment of non-vesting condition 21A Treatment of automatic vesting feature 22 After the vesting date 23 Fair value of the equity instrument cannot be measured reliably 24 – 25 Modifications to the terms and conditions under which the equity instrument was granted, including cancellations and settlements 26 – 29 SHARE-BASED PAYMENT TRANSACTIONS SETTLED IN CASH 30 – 33 SHARE-BASED PAYMENT TRANSACTIONS WITH A CASH SETTLEMENT OPTION 34 – 43 Share-based payment transaction in which the terms of the agreement permit the counterparty to choose the settlement form 35 – 40 Share-based payment transaction in which the terms of the agreement permit the entity to choose the settlement form 41 – 43
SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SHARE-BASED PAYMENT TRANSACTIONS BETWEEN ENTITY WITHIN THE SAME GROUP 43A – 43D DISCLOSURE 44 – 52 TRANSITIONAL PROVISIONS 53 – 59 EFFECTIVE DATE 60 – 63 REVOCATION OF INTERPRETATIONS 64 APPENDICES A Terms used in this Technical Pronouncement B Application Guide
Objective
Scope
2. The entity shall apply this Pronouncement to account for all share-based payment transactions, including:
(a) share-based payment transactions settled by delivery of equity instruments; (b) share-based payment transactions settled in cash; and (c) transactions by which the entity receives or acquires goods or services and the terms of the agreement confer on the entity or the supplier of those goods or services the choice of the settlement form of the transaction, which may be in cash (or other assets) or by issuing equity instruments, except as indicated in items 3A to 6. In the absence of specifically identifiable goods or services, other circumstances may indicate that the goods or services have been (or will be) received, in which case this Technical Pronouncement shall be applied.
3A. A share-based payment transaction may be settled by another entity within the group (or by a shareholder of any entity within the group) in the interest of the entity that receives or acquires goods or services. Item 2 shall be applied to the entity that:
(a) receives goods or services when another entity within the same group (or a shareholder of any other entity within the group) has the obligation to settle the share-based payment transaction; or (b) has the obligation to settle the share-based payment transaction when another entity within the same group receives the goods or services, unless the transaction is clearly for any other purpose than payment for goods or services provided to the entity receiving them.
For the purposes of this Technical Pronouncement, a transaction involving an employee (or other party) as a holder of the entity’s equity instruments does not constitute a share-based payment transaction. For example, if the entity grants to all holders of a specific class of equity instruments the right to acquire additional equity instruments of the entity at a price that is lower than the fair value of those equity instruments, and an employee receives such right by being a holder of that specific class of equity instruments, the granting or exercise of that right is not subject to the requirements of this Pronouncement.
As stated in item 2, this Technical Pronouncement shall be applied to share-based payment transactions by which goods or services are acquired by an entity. Goods include inventories, consumable materials, property, plant and equipment, intangible assets or other non-financial assets. However, the entity shall not apply this Technical Pronouncement to transactions by which the entity acquires goods that form part of the net assets acquired in a business combination, as defined in Technical Pronouncement CPC 15 - Business Combinations, in combinations of entities or businesses under common control, as described in items B1 to B4 of Technical Pronouncement CPC 15, or in the contribution of a business to form a jointly controlled entity, as defined in Technical Pronouncement CPC 19 - Joint Arrangements. Thus, the issuance of an equity instrument in a business combination to effect the obtaining of control of another entity is not within the scope of this Technical Pronouncement. Nevertheless, equity instruments granted to employees of the acquired entity (in return for the continuation of services rendered) is a transaction that is within the scope of this Technical Pronouncement. Similarly, the cancellation, replacement or other modification of share-based payment agreements as a result of a business combination or other corporate restructuring shall be accounted for in accordance with this Technical Pronouncement. Technical Pronouncement CPC 15 provides guidance on determining whether equity instruments issued in a business combination are part of the amount transferred to obtain control of the acquiree (and therefore within the scope of Technical Pronouncement CPC 15) or whether they represent a return for the continuation of services for the post-combination period (and therefore within the scope of this Technical Pronouncement CPC 10).
This Pronouncement shall not be applied to share-based payment transactions by which the entity receives or acquires goods or services under a contract within the scope of items 8 to 10 of CPC 39 – Financial Instruments: Presentation or items 2.4 to 2.7 of CPC 48 – Financial Instruments.
6A. This Technical Pronouncement uses the term fair value differently in some respects from the definition of fair value in Technical Pronouncement CPC 46 – Fair Value Measurement. Therefore, when applying this Technical Pronouncement, the entity shall measure fair value in accordance with this Technical Pronouncement, and not by Technical Pronouncement CPC 46.
Recognition
The entity shall recognize the goods or services received or acquired in a share-based payment transaction when it obtains the goods or as it receives the services. In contrast, the entity shall recognize the corresponding increase in equity if the goods or services are received in a share-based payment transaction settled in equity instruments, or shall recognize a liability if the goods or services are acquired in a share-based payment transaction settled in cash (or with other assets).
Goods or services received or acquired in a share-based payment transaction that do not qualify for recognition as assets shall be recognized as an expense of the period.
Normally, an expense arises from the consumption of goods or services. For example, services are normally consumed immediately, and in this case, the expense shall be recognized as the counterparty renders the services. Goods may be consumed over a period of time or, in the case of inventories, sold at a future date, and in this case, the expense shall be recognized when the goods are consumed or sold. However, it may sometimes be necessary to recognize the expense before the goods or services are consumed or sold, because they do not qualify as an asset for recognition purposes. For example, the entity may acquire goods as part of the research phase of a new product development project. Although said goods have not been consumed, they may not qualify as an asset for recognition purposes, in accordance with Technical Pronouncements of the CPC or other accounting standards applicable to the case.
Share-based payment transactions settled in equity instruments
Overview
For share-based payment transactions settled by delivery of equity instruments, the entity shall measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless the fair value cannot be estimated reliably. If the entity cannot measure reliably the fair value of the goods and services received, it shall measure their respective fair values, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted.
For the purposes of applying item 10 to transactions with employees and other similar service providers 2, the entity shall measure the fair value of the services received by reference to the fair value of the equity instruments granted, since it is normally not possible to estimate reliably the fair value of the services received, as explained in item 12. The fair value of these equity instruments shall be measured at the grant date.
As a rule, shares, share options or other equity instruments are granted to employees as part of their remuneration package, in addition to salaries and other benefits. Normally, it is not possible to measure, directly, the services received by specific components of the employees' remuneration package. It may also not be possible to measure the fair value of the remuneration package as a whole independently, without directly measuring the fair value of the equity instruments granted. Moreover, shares and share options are sometimes granted as part of a bonus payment agreement, rather than being granted as part of the employees' basic remuneration. Objectively, this is an incentive for employees to remain with the entity or a reward for their efforts in improving the entity's performance. By benefiting employees with the grant of shares or share options, in addition to other forms of remuneration, the entity aims to obtain marginal benefits. Due to the difficulty of directly measuring the fair value of the services received, the entity shall measure them indirectly, i.e., it shall take as a reference the fair value of the equity instruments granted.
For the purposes of applying the provisions of item 10 to transactions with parties other than employees, there shall be a rebuttable presumption that the fair value of the goods or services received can be estimated reliably. Thus, the fair value of these shall be measured at the date when the entity obtains the goods or when the counterparty renders the services. In rare cases, the entity shall rebut this presumption because it cannot measure reliably the fair value of the goods or services received, in which case it shall measure the goods or services received, and the corresponding increase in equity, indirectly, i.e., by reference to the fair value of the equity instruments granted, measured at the date when the entity obtains the goods or the counterparty renders the services.
13A. In particular, if the identifiable consideration received (whatever it is) by the entity appears to be lower than the fair value of the equity instruments granted or of the liability incurred, this situation typically indicates that other consideration (i.e., goods or services not identifiable) have been (or will be) received by the entity. The entity shall measure the identifiable goods and services received in accordance with this Technical Pronouncement. The entity shall measure the non-identifiable goods and services received (or to be received) by the difference between the fair value of the share-based payment and the fair value of any goods or services received (or to be received). The entity shall measure the non-identifiable goods and services received at the grant date. However, for transactions settled in cash, the liability shall be remeasured at the end of each reporting period, until it is settled in accordance with items 30 to 33.
Transaction in which services are received
If the right to the equity instruments granted vests immediately, then the counterparty is not required to complete a specific period of time rendering services before becoming unconditionally entitled to those equity instruments. In the absence of evidence to the contrary, the entity shall presume that the services rendered by the counterparty are the consideration for the equity instruments granted. In this case, at the grant date, the entity shall recognize the total amount of services received, with the corresponding increase in equity.
If the right to the equity instruments granted does not vest until the counterparty completes a specific period of time rendering services, the entity shall presume that the services to be rendered by the counterparty, in consideration for the equity instruments granted, will be received in the future, over the vesting period. The entity shall account for the services rendered by the counterparty as they are rendered, over the vesting period, with the corresponding increase in equity. For example:
(a) if share options are granted to an employee conditional on three years of service, then the entity shall presume that the services to be rendered by the employee, in consideration for the share options, will be received in the future, over the three years established as the vesting period; (b) if share options are granted to an employee conditional on achieving performance targets and remaining with the entity until the performance targets are achieved, and the duration of the vesting period varies depending on when the performance targets are achieved, the entity shall presume that the services to be rendered by the employee, in consideration for the share options granted, will be received in the future, over the expected vesting period. The entity shall, at the grant date, estimate the duration of the vesting period, based on the most likely outcome of the performance condition. If the performance condition is a market condition, the estimate of the duration of the vesting period shall be consistent with the assumptions used in estimating the fair value of the options granted, and shall not be subsequently revised. If the performance condition is not a market condition, the entity, if necessary, shall revise the estimate of the duration of the vesting period, if subsequent information indicates that the duration of this period differs from previous estimates.
Transaction measured based on the fair value of the equity instrument granted
Determination of the fair value of the equity instrument granted
For transactions measured based on the fair value of the equity instruments granted, the entity shall measure the fair value of the equity instruments granted at the measurement date, based on market prices if available, taking into account the terms and conditions under which the equity instruments were granted (subject to the requirements of items 19 to 22).
If market prices are not available, the entity shall estimate the fair value of the equity instruments granted using an valuation technique to estimate at what price the respective equity instruments could be traded, at the measurement date, in an arm's length transaction between knowledgeable and willing parties. The valuation technique shall be consistent with generally accepted valuation methodologies for pricing financial instruments, and shall incorporate all factors and assumptions that market participants, knowledgeable and willing to negotiate, would take into
1 This Technical Pronouncement uses the phrase "by reference to" instead of "by", because the transaction is objectively measured by multiplying the fair value of the equity instrument granted, measured at the date specified in items 11 or 13 (whichever is applicable to the case), by the number of equity instruments that meet the vesting condition, as explained in item 19.
2 In the subsequent items of this Technical Pronouncement, references to employees also include other similar service providers.
SECURITIES AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 account.
SECURITY AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 consideration in the establishment of the price (subject to the requirements of items 19 to 22).
18. Appendix B contains additional guidance for measuring the fair value of shares and share options, focusing on the specific terms and conditions that are common characteristics of the grant of shares or share options to employees.
Treatment of vesting conditions
19. The grant of equity instruments may be conditional, subject to the fulfillment of specified vesting conditions. For example, the grant of shares or share purchase options to an employee is normally conditioned on the employee remaining with the entity for a specified period of time. In addition, there may be performance conditions to be met, such as achieving a certain growth in profits or a certain increase in the entity's share price. Vesting conditions, provided they are not market conditions, should not be taken into account when estimating the fair value of the shares or share purchase options at the measurement date. On the other hand, vesting conditions, provided they are not market conditions, must be considered in the adjustment of the number of equity instruments included in the measurement of the transaction value, such that the recognized amount of products or services received in exchange for the granted equity instruments is estimated based on the quantity of equity instruments for which the right is eventually acquired (eventually vest). Thus, on a cumulative basis, no value should be recognized for the products or services received if the granted equity instruments do not acquire the right (do not vest) due to non-fulfillment of the vesting conditions, provided they are not market conditions, for example, the counterparty did not fulfill the specified service period or the performance condition was not achieved, subject to the requirements of item 21.
20. For the purposes of applying the provisions of item 19, the entity must recognize the amount related to the products or services received during the vesting period, based on the best available estimate of the quantity of equity instruments expected to vest, and must revise such estimate whenever subsequent information indicates that the expected number of equity instruments that will vest will be different from the previous estimate. At the vesting date, the entity must revise the estimate to equal the number of equity instruments that actually vested (ultimately vested), subject to the requirements of item 21.
21. Market conditions, such as the target price from which the vesting right (or exercise right) of the shares is conditioned, must be considered when estimating the fair value of the granted equity instruments. Therefore, for the grant of equity instruments with market conditions, the entity must recognize the products or services received from the counterparty that satisfies all other vesting conditions (for example, services received from an employee who provided services over the specified period), regardless of whether the market conditions have been satisfied.
Treatment of non-vesting conditions
SECURITY AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 21A. Similarly, the entity must consider all non-vesting conditions when estimating the fair value of the granted equity instruments. Therefore, for the grant of equity instruments subject to non-vesting conditions, the entity must recognize the products and services received from the counterparty that fulfilled all vesting conditions, which are not market conditions (for example, services received from an employee who provided services over the specified period), regardless of whether the non-vesting conditions have been satisfied.
Treatment of automatic renewal feature
22. In the case of options with an automatic renewal feature, this automatic renewal feature should not be considered when estimating the fair value of the granted options at the measurement date. Instead, the automatic renewal feature should be accounted for as a new option granted, if and when an option with an automatic renewal feature is subsequently granted.
After the vesting date
23. After recognizing the products and services received, in accordance with items 10 to 22, and the corresponding increase in equity, the entity must not make any subsequent adjustment to equity after the vesting date. For example, the entity must not subsequently reverse the recognized amount of services received from an employee if the equity instruments that generated the vesting right subsequently forfeit said right, or, in the case of share options, if these are not exercised (expire). However, this requirement does not eliminate the need for the entity to recognize the transfer within equity, that is, the transfer of one component to another within equity.
Fair value of the equity instrument cannot be measured reliably
24. The requirements contained in items 16 to 23 must be applied when the entity is required to measure the share-based payment transaction with reference to the fair value of the granted equity instruments. In rare cases, the entity may not be able to reliably estimate the fair value of the granted equity instruments at the measurement date, as required in items 16 to 22. Only in these rare cases, the entity must alternatively:
(a) measure the equity instruments at their intrinsic value, initially at the date the entity obtains the products or the counterparty provides the services and, subsequently, at the end of each of the entity's reporting periods and at the final settlement date, with any change in intrinsic value recognized in the period's result. In the grant of share options, the final settlement of the share-based payment agreement occurs when the options are effectively exercised, when their exercise right is forfeited (for example, when the employee is dismissed) or when they expire (for example, after the end of the fixed period for exercising the option); or (b) recognize the products or services received based on the quantity of equity instruments that ultimately vest or (if applicable) that are effectively exercised. When applying this requirement to the case of share options, for example, the entity must recognize the products or services received during the vesting period, if any, in accordance with the provisions of items 14 and 15, except for the requirements contained in item 15(b) regarding market conditions, which are not applicable. The value recognized for the products or services received during the vesting period must be determined based on the number of share options expected to vest. The entity must revise its estimate whenever subsequent information indicates that the expected number of share options that will vest diverges from the previous estimate. At the vesting date, the entity must revise its estimate to equal the number of equity instruments that actually vested. After the vesting date, the entity must reverse the recognized amount for the products or services received if the share options subsequently have their exercise right forfeited or expire after the end of the fixed period for exercising the option.
25. If the entity applies item 24, it is not necessary to apply the provisions of items 26 to 29 because any modifications to the terms and conditions under which the entity's equity instruments are granted must be taken into account when applying the intrinsic value method treated in item 24. However, if the entity settles a grant of equity instruments for which item 24 has been applied:
(a) if the settlement occurs during the vesting period, the entity must account for the settlement as an acceleration of the vesting period and, therefore, must immediately recognize the amount that would be recognized as services received over the remaining vesting period; (b) any payment made in the settlement must be accounted for as a repurchase of equity instruments, that is, in an equity reduction account, except if the payment exceeds the intrinsic value of the equity instruments measured at the repurchase date. Any excess must be recognized as a period expense.
Modification of the terms and conditions under which the equity instrument was granted, including cancellation and settlement
26. The entity may modify the terms and conditions under which the equity instruments were granted. For example, it may reduce the exercise price of the options granted to employees (that is, reprice the options), which increases the fair value of these options. The requirements contained in items 27 to 29 for accounting for the effects of modifications are in the context of share-based payment transactions with employees. However, such requirements must also be applied to share-based payment transactions with other parties, other than employees, that are measured by the fair value of the granted equity instruments. In the latter case, any reference in items 27 to 29 to the grant date must, instead of the grant date, be interpreted with respect to the date the entity obtains the products or the counterparty provides the services.
27. The entity must recognize, at a minimum, the services received, measured at the grant date, at the fair value of the granted equity instruments, unless these equity instruments do not vest due to non-fulfillment of some specified vesting condition at the grant date (except if it is a market condition). This must be applied regardless of any modifications to the terms and conditions under which the equity instruments were granted, or of cancellation or settlement of the grant of the equity instruments. Additionally, the entity must recognize the effects of modifications that result in an increase in the fair value of the share-based payment agreements or that otherwise benefit the employees. Appendix B contains guidance for applying this procedure.
28. If the grant of an equity instrument is cancelled or settled during the vesting period (except when the cancellation of the grant occurs due to forfeiture of the vesting right, when the vesting conditions are not fulfilled):
(a) the entity must account for the cancellation or settlement as an acceleration of the vesting period and, therefore, must immediately recognize the amount that would be recognized as services received over the remaining vesting period; (b) any payment made to the employee upon cancellation or settlement of the grant must be accounted for as a repurchase of an equity instrument, that is, in an equity reduction account, except if the payment exceeds the fair value of the granted equity instrument, measured at the repurchase date. Any excess must be recognized as a period expense. However, if the share-based payment agreement has liability components, the entity must remeasure the fair value of the corresponding liability at the date of cancellation or settlement. Any payment made to settle these liability components must be accounted for as extinguishment of the liability; (c) if new equity instruments are granted to employees and at the grant date of these new equity instruments the entity identifies the new equity instruments granted as a replacement for the cancelled equity instruments, the entity must account for the grant of the new equity instruments (in replacement of the cancelled ones) in the same way that a modification of the originally granted equity instruments would be treated, in accordance with item 27 and the guidance contained in Appendix B. The incremental fair value arising from the new grant must be the difference between the fair value of the new equity instruments given in replacement and the net fair value of the cancelled equity instruments, at the grant date of the new equity instruments given in replacement. The net fair value of the cancelled equity instruments is their fair value, immediately before cancellation, less the amount of any payment made to the employees, upon cancellation of the equity instruments, which must be accounted for in an equity reduction account, in accordance with item 28(b). If the entity does not identify the new equity instruments granted as a replacement for the cancelled equity instruments, the entity must account for them as a new grant of equity instruments. 28A. If the entity or the counterparty can choose whether or not to fulfill a non-vesting condition, the entity must treat the failure of the entity or the counterparty to fulfill said non-vesting condition over the vesting period as a cancellation.
29. If the entity repurchases equity instruments that have vested, the payment made to the employees must be accounted for in an
SECURITY AND EXCHANGE COMMISSION OF BRAZIL (CVM) Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 equity reduction account, except for the amount that exceeds the fair value of the repurchased equity instruments, measured at the repurchase date. Any excess must be recognized as a period expense.
Share-based payment transaction settled in cash
30. For share-based payment transactions settled in cash, the entity must measure the goods or services acquired and the liability incurred through the fair value of the liability, subject to the requirements of items 31 to 33D. Until the liability is settled, the entity must remeasure the fair value of the liability at the end of each reporting period and at the settlement date, with any changes in fair value recognized in the period's result.
31. For example, the entity may grant share appreciation rights to its employees as part of their remuneration package. Thus, employees gain the right to receive future cash payments (instead of an equity instrument), based on the increase in the entity's share price, from a specified level, over a specified period of time. Alternatively, the entity may grant its employees the right to receive future cash payments by granting them rights to shares (including shares to be issued upon exercise of share options), which are redeemable, or mandatorily (for example, at the end of the employment contract), or at the employee's option. These agreements are examples of share-based payment transactions settled in cash. Share appreciation rights are used to illustrate some of the requirements of items 32 to 33D. However, the requirements in these items must be applied to all share-based payment transactions settled in cash.
32. The entity must recognize the services received, and the corresponding liability for these services, as the services are provided by the employees. For example, some share appreciation rights vest immediately, and employees are not required to complete a specified service period to become eligible to receive future cash payments. In the absence of evidence to the contrary, the entity must presume that the services provided by the employees, in exchange for the share appreciation rights, have been received. Thus, the entity must immediately recognize the services received and the corresponding liability for these services. If the share appreciation rights do not vest until the employees have completed the specified service period, the entity must recognize the services received and the corresponding liability for these services as the services are provided by the employees, over this specified period.
33. The liability must be measured, initially and at the end of each reporting period, until its settlement, at the fair value of the share appreciation rights, by applying an option pricing model and considering the terms and conditions under which the share appreciation rights were granted, and to the extent that the services have been provided by the employees up to the date, subject to the requirements of items 33A to 33D. The entity may modify the terms and conditions under which the cash-settled share-based payment is granted. Guidelines for modifying a share-based payment transaction that changes its classification from cash-settled to equity-settled are presented in items B44A to B44C in Appendix B.
Treatment of vesting and non-vesting conditions 33A. The cash-settled share-based payment transaction may be conditioned on the satisfaction of specified vesting conditions. There may be performance conditions that must be met, such as the entity achieving specified growth in profit or the specified increase in the entity's share price. Vesting conditions, other than market conditions, should not be considered in estimating the fair value of the cash-settled share-based payment at the measurement date. Instead, vesting conditions, other than market conditions, must be considered by adjusting the number of awards included in the measurement of the liability arising from the transaction. 33B. To apply the requirements of item 33A, the entity must recognize the value for the goods or services received during the vesting period. This amount must be based on the best available estimate of the number of awards expected to vest. The entity must revise this estimate, if necessary, if subsequent information indicates that the number of awards expected to vest differs from previous estimates. At the vesting date, the entity must revise the estimate to equal the number of awards that ultimately vested. 33C. Market conditions, such as the target share price to which the vesting (or exercise ability) is conditioned, and non-vesting conditions, must be taken into account in estimating the fair value of the share-based payment and in measuring the fair value at the end of each reporting period and at the settlement date. 33D. As a result of applying items 30 to 33C, the final accumulated value recognized for goods or services received in exchange for the cash-settled share-based payment must be equal to the cash that is paid.
Share-based payment transaction with net-settlement feature and withholding of source taxes 33E. Tax laws or regulations may require the entity to withhold an amount for the employee's tax obligation associated with the share-based payment and to transfer this amount, usually in cash, to the tax authority on behalf of the employee. To comply with this obligation, the terms of the share-based payment agreement may allow or require the entity to withhold the number of equity instruments equal to the monetary value of the employee's tax obligation from the total number of capital instruments that would otherwise have been issued to the employee upon exercise (or vesting) of the share-based payment (that is, the share-based payment agreement has the "net settlement criterion"). 33F. As an exception to the requirements of item 34, the transaction described in item 33E must be classified in its entirety as an equity-settled share-based payment transaction, if it had been classified as such in the absence of the net-settlement feature. 33G. The entity must apply item 29 to account for the withholding of share resources for the payment to the tax authority of the employee's tax obligation associated with the share-based payment. Consequently, the payment made must be accounted for as a deduction from equity for the shares withheld, except to the extent that the payment exceeds the fair value at the net settlement date of the entity's own equity instruments withheld.
COMMISSION OF SECURITIES AND EXCHANGE COMMISSION Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000
33H. The exception in item 33F does not apply to:
(a) a share-based payment agreement with a net settlement feature for which there is no obligation for the entity, according to tax laws or regulations, to withhold the amount related to the employee's tax obligation associated with that share-based payment; or (b) any equity instrument that the entity withholds in excess of the employee's tax obligation associated with the share-based payment (that is, the entity withheld an amount of shares that exceeds the monetary value of the employee's tax obligation). These excess withheld shares must be accounted for as a share-based payment settled in cash when that value is paid in cash (or other assets) to the employee.
Share-based payment transaction with cash settlement alternative
Share-based payment transaction whose agreement terms allow the counterparty to choose the form of settlement
If the entity has granted the counterparty the right to choose whether the share-based payment transaction will be settled in cash or through the issuance of equity instruments, the entity has granted a composite financial instrument, which presents a debt component (that is, the counterparty's right to request cash payment) and an equity component (that is, the counterparty's right to demand settlement in equity instruments instead of cash). For transactions entered into with parties other than employees, through which the fair value of the products or services received is directly measured, the entity must measure the equity component of the composite financial instrument by the difference between the fair value of the products or services received and the fair value of the debt component, at the date the products or services are received.
For other transactions, including transactions with employees, the entity must measure the fair value of the composite financial instrument at the measurement date, taking into consideration the terms and conditions under which the rights to cash or equity instruments were granted.
To apply item 36, the entity must first measure the fair value of the debt component and then measure the fair value of the equity component, taking into consideration that the counterparty has to lose the right to receive cash in order to receive the equity instrument. The fair value of the composite financial instrument is the sum of the fair values of the two components. However, share-based payment transactions in which the counterparty can opt for the form of settlement are usually structured in such a way that the fair value of the settlement alternative is the same as that of the other. For example, the counterparty may opt to receive share options or share appreciation rights settled in cash. In such cases, the fair value of the equity component is zero and, consequently, the fair value of the composite financial instrument is the same as that of the debt component of that instrument. Conversely, if the fair values of the settlement alternatives are different, the fair value of the equity component will usually be greater than zero and, in this case, the fair value of the composite financial instrument will be greater than the fair value of the debt component of that instrument.
The entity must account separately for the products or services received or acquired in relation to each component of the composite financial instrument. For the debt component, the entity must recognize the products or services acquired and the corresponding liability to pay for said products or services, as the counterparty provides the products or renders the services, in compliance with the requirements applicable to share-based payment transactions settled in cash (items 30 to 33). For the equity component (if any), the entity must recognize the products or services received, and an increase in equity, as the counterparty provides the products or renders the services, in compliance with the requirements applicable to share-based payment transactions settled in equity instruments (items 10 to 29).
At the settlement date, the entity must remeasure the liability at its fair value. If the entity issues equity instruments in settlement, instead of settling the operation with cash payment, the liability must be transferred directly to equity, in exchange for the issuance of equity instruments.
If, at the time of settlement, the entity pays in cash instead of issuing equity instruments, this payment must be used to settle the entire liability. Any equity component previously recognized must remain within equity. Having opted for cash receipt in settlement, the counterparty loses the right to receive equity instruments. However, this requirement does not eliminate the need for the entity to recognize a transfer within equity, that is, from one component to another within equity.
Share-based payment transaction whose agreement terms allow the entity to choose the form of settlement
For the share-based payment transaction whose agreement terms and conditions allow the entity to opt for the settlement of the transaction in cash or through the issuance of equity instruments, the entity must assess whether it has a present obligation to settle in cash and account for the share-based payment transaction in accordance with that assessment. The entity has a present obligation to settle in cash if the choice for settlement in equity instruments lacks commercial substance (due, for example, to the entity being legally prohibited from issuing shares), or in the case of the entity having a past practice, or established policy of cash settlement, or in the case of generally effecting cash settlement whenever the counterparty so requests.
If the entity has a present obligation to settle in cash, it must account for this transaction in accordance with the requirements applicable to share-based payment transactions settled in cash, as set forth in items 30 to 33.
If no obligation exists, the entity must account for this transaction in accordance with the requirements applicable to share-based payment transactions settled with equity instruments, as set forth in items 10 to 29. Upon settlement:
(a) if the entity opts to carry out the settlement in cash, the payment must be accounted for as a repurchase of equity participation, that is, in an equity reduction account, except in the situation described in item (c); (b) if the entity opts to carry out the settlement through the issuance of equity instruments, no accounting record is required (except for the transfer of one equity component to another, if necessary), except in the situation described in item (c); (c) if the entity opts to carry out the settlement through the alternative with the highest fair value, observed at the settlement date, the entity must recognize an additional expense regarding the excess value, that is, the difference between the amount paid in cash and the fair value of the equity instruments that would otherwise have been issued, or the difference between the fair value of the equity instruments issued and the cash amount that would otherwise have been paid, whichever is applicable.
Share-based payment transaction between entities of the same group
43A. For share-based payment transactions between entities of the same group, in their separate or individual financial statements, the entity benefiting from the products or services must measure the products or services received as a share-based payment transaction settled in equity instruments or as a share-based payment transaction settled in cash, after assessing:
(a) the nature of the grants; and
(b) their rights and obligations.
The amount to be recognized by the entity benefiting from the products or services may differ from the amount recognized by the consolidated group or by another entity in the group that is settling the share-based payment transaction.
43B. The entity benefiting from the products or services must measure the products or services received as a share-based payment transaction settled in equity instruments when:
(a) the grants are its own equity instruments; or (b) the entity has no obligation to settle the share-based payment transaction.
The entity must subsequently remeasure said share-based payment transaction only for changes in vesting conditions that are not market conditions in accordance with items 19 to 21. In all other circumstances, the entity benefiting from the products or services must measure the products or services received as a share-based payment transaction settled in cash.
43C. The entity that is settling a share-based payment transaction, when another entity in the group is the beneficiary of the products or services, must recognize the operation as a share-based payment transaction settled in equity instruments, only in the case that settlement occurs through its own equity instruments. Otherwise, the operation must be recognized as a share-based payment transaction settled in cash.
43D. Some transactions within the group involve agreements titled "repayment," through which an entity of the group is required to pay another entity of the group to cover share-based payment provisions to suppliers of products or services. In these cases, the entity benefiting from the products or services must account for the share-based payment transaction in accordance with item 43B, regardless of intragroup "repayment" agreements.
Disclosure
The entity must disclose information that allows users of the financial statements to understand the nature and extent of share-based payment agreements that existed during the period.
To make effective compliance with item 44, the entity must disclose, at minimum, the following:
(a) description of each type of share-based payment agreement that was in force at some point during the period, including, for each agreement, the general terms and conditions, such as vesting requirements, the maximum term of the grants, and the settlement method (for example, if in cash or in equity instruments). An entity with substantially similar types of share-based payment agreements may aggregate this information, unless separate disclosure for each agreement is necessary to meet the principle contained in item 44; (b) the quantity and the weighted average exercise price of share options for each of the following groups of options:
(i) outstanding at the beginning of the period; (ii) granted during the period; (iii) forfeited during the period; (iv) exercised during the period; (v) expired during the period; (vi) outstanding at the end of the period; and (vii) exercisable at the end of the period; (c) for share options exercised during the period, the weighted average share price on the exercise date. If the options are exercised on a regular basis throughout the period, the entity may, instead, disclose the weighted average share price during the period; (d) for share options outstanding at the end of the period, the range of exercise prices and the weighted average remaining contractual life. If the range of exercise prices is very
COMMISSION OF SECURITIES AND EXCHANGE COMMISSION Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000
wide, the outstanding options must be divided into ranges that have significance to assess the quantity and the term in which additional shares may be issued and the amount of cash that may be received upon the exercise of these options.
The entity must disclose information that allows users of the financial statements to understand how the fair value of the products or services received or the fair value of the equity instruments granted was determined during the period.
If the entity has measured the fair value of the products or services received indirectly, that is, by reference to the fair value of the equity instruments granted, to make effective the principle contained in item 46, the entity must disclose at minimum the following:
(a) for share options granted during the period, the weighted average fair value of these options at the measurement date and information on how this fair value was measured, including:
(i) the option pricing model used and the model inputs, including the weighted average share price, exercise price, expected volatility, option life, expected dividends, the risk-free interest rate, and any other model inputs, including the method used and assumptions assumed to incorporate the effects of expected early exercise; (ii) how the expected volatility was determined, including an explanation of the extent to which the expected volatility was based on historical volatility; and (iii) if and how any other characteristics of the granted option were incorporated in the measurement of its fair value, such as, for example, a market condition; (b) for other equity instruments granted during the period (that is, other than share options), the quantity and the weighted average fair value of these equity instruments at the measurement date, and information regarding how the fair value was measured, including:
(i) if the fair value was not measured based on an observable market price, how it was determined; (ii) if and how expected dividends were incorporated in the measurement of the fair value; and (iii) if and how any other characteristics of the granted equity instruments were incorporated in the measurement of their fair value; (c) for share-based payment agreements that were modified during the period:
(i) an explanation of these modifications;
(ii) the incremental fair value granted (as a result of these modifications); and (iii) information regarding how the incremental fair value granted was measured, consistently with the requirements set forth in items (a) and (b), when applicable;
If the entity has directly measured the fair value of the products or services received during the period, the entity must disclose how the fair value was determined, such as, for example, if the fair value was measured by the market price for these products or services.
If the entity refuted the premise contained in item 13, it must disclose such fact, and give an explanation regarding the reasons why this premise was refuted.
The entity must disclose information that allows users of the financial statements to understand the effects of share-based payment transactions on the entity's period results and on its financial position.
To make effective the principle contained in item 50, the entity must disclose at minimum the following:
(a) the total expense recognized in the period arising from share-based payment transactions through which the products or services received were not qualified for recognition as assets and, therefore, were recognized immediately as expense, including separate disclosure of part of the total expenses that arise from transactions accounted for as share-based payment transactions settled in equity instruments; (b) for liabilities arising from share-based payment transactions:
(i) book balance at the end of the period; and (ii) total intrinsic value at the end of the period of liabilities for which the counterparty's rights to receive cash or other assets have been vested (had vested) at the end of the period (such as, for example, share appreciation rights that have been vested).
If the information that must be disclosed by this pronouncement does not satisfy the principles contained in items 44, 46, and 50, the entity must disclose additional information to satisfy them. For example, if the entity classified any share-based payment transaction as settled in equity according to item 33F, the entity must disclose the estimate of the amount it expects to transfer to the tax authority to settle the employee's tax obligation, when it is necessary to inform users about the future effects of the cash flows associated with the share-based payment agreement.
Transitional Provisions
53 to 59. (Eliminated)
59A. The entity must apply the changes in items 30, 31, 33 to 33H and B44A to B44C, as described below. Prior periods should not be corrected.
(a) the changes in items B44A to B44C apply only to modifications that occur on the date, or after, when the entity applies these changes for the first time; (b) the changes in items 30, 31, and 33 to 33D must be applied to share-based payment transactions that are not settled on the date the entity applies the changes for the first time and to share-based payment transactions, with grant date on the date or after the date when the entity applies these changes for the first time. For share-based payment transactions not vested, granted before the date when the entity applies the changes for the first time, the entity must remeasure the liability on that date and recognize the effect of the remeasurement in opening retained earnings (or other component of equity, as appropriate) of the reporting period in which the changes were applied for the first time;
COMMISSION OF SECURITIES AND EXCHANGE COMMISSION Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000
(c) the changes in items 33E to 33H and 52 must be applied to share-based payment transactions that have not been vested (or vested, but not exercised) by the date when the entity applies the changes for the first time and to share-based payment transactions, with grant date on the date, or after, when the entity applies the changes for the first time. For share-based payment transactions (or their components) not vested (or vested, but not exercised), that were previously classified as share-based payments settled in cash, but now classified as settled in equity according to the changes, the entity must reclassify the book value of the share-based payment liability to equity, on the date when it applies the changes for the first time.
59B. Notwithstanding the requirements of item 59A, the entity may apply the changes described in item 63D retrospectively, subject to the transitional provisions of items 53 to 59, in accordance with CPC 23, if, and only if, it is possible, without being retrospectively. If the entity opts for retrospective application, it must do so for all these changes made.
Effectiveness
60 to 63A. (Eliminated)
Repeal of interpretations
SECURITY AND EXCHANGE COMMISSION COMMISSION
Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000
APPENDIX A
Terms used in this pronouncement
(This Appendix is an integral part of this pronouncement)
A share-based payment transaction settled in cash is a share-based payment transaction whereby the entity acquires goods or services by incurring a liability to transfer cash or other assets to the supplier of those goods or services for an amount that is based on the price (or value) of the equity instruments (including shares or share options) of the entity or another entity in the group.
Employees and other providers of similar services are individuals who provide personalized services to the entity and also (a) are regarded as employees for legal or tax purposes, or (b) work for the entity under its direction in the same way as individuals who are regarded as employees for legal or tax purposes, or (c) whose services rendered are similar to those rendered by employees. For example, the term covers all management personnel, that is, those persons with authority and responsibility for planning, directing and controlling the activities of the entity, including non-executive directors.
An equity instrument is a contract that evidences a residual interest in the assets of the entity after deducting all of its liabilities. 4
An equity instrument granted is the right (conditional or unconditional) to an equity instrument of the entity, conferred by the entity to another party through a share-based payment agreement.
A share-based payment transaction settled with equity instruments is a share-based payment transaction whereby the entity:
(a) receives goods or services in consideration for its own equity instruments (including shares and share options); or (b) receives goods or services, but has no obligation to settle the transaction with the supplier.
Fair value is the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm's length transaction.
Grant date is the date at which the entity and the counterparty (including employee) agree to a share-based payment arrangement, i.e., when the entity and the counterparty have a shared understanding of the terms and conditions of the arrangement. At the grant date, the entity confers on the counterparty the right to receive cash, other assets, or equity instruments of the entity, provided that specified vesting conditions, if any, are met. If the agreement is subject to an approval process (e.g., by shareholders), the grant date will be the date on which the approval is obtained.
4 CPC 00 – Conceptual Framework for Financial Reporting defines a liability as a present obligation of the entity to transfer an economic resource as a result of past events.
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000
Intrinsic value is the difference between the fair value of the shares that the counterparty has the right (conditional or unconditional) to subscribe to, or to receive, and the price (if any) that the counterparty is (or will be) required to pay for those shares. For example, a share option with an exercise price of $15, on a share whose fair value is $20, has an intrinsic value of $5.
Market condition is the performance target under which the exercise price, vesting, or exercisability of the equity instrument depends, being related to the market price (or value) of the equity instruments of the entity (or equity instruments of another entity in the same group), such as:
(a) achieving a specified share price, or achieving a specified amount of intrinsic value of the share option; or (b) reaching a specified target that is based on the market price (or value) of the equity instruments of the entity (or equity instruments of another entity in the same group) in relation to some market price index of equity instruments of other entities.
The market condition requires the counterparty to complete a specific period of service (i.e., service condition); the service requirement may be explicit or implicit.
Performance target is the vesting condition that requires:
(a) the counterparty to complete a specific period of service (i.e., service condition); the service requirement may be explicit or implicit; and (b) the specific performance target to be met, while the counterparty is rendering the service required in (a).
The performance target fulfillment period:
(a) must not extend beyond the end of the service period; and (b) may begin before the service period provided that the start date of the performance target is not substantially before the start of the service period.
The performance target is defined with reference to:
(a) the entity’s own (or activities) operations or operations or activities of another entity in the same group (i.e., non-market condition); or (b) the price (or value) of the equity instruments of the entity or equity instruments of another entity in the same group (including shares and share options) (i.e., market condition).
The performance target may relate to the performance of the entity as a whole or part of the entity (or part of the group), such as a division or an individual employee.
Service condition is the vesting condition that requires the counterparty to complete a specific period of service during which services are rendered to the entity. If the counterparty, for any reason, fails to render the service during the vesting period, it has not been able to satisfy the condition. The service condition does not require that the performance target be met.
Measurement date is the date on which the fair value of the equity instruments granted is measured for the purposes of this Technical Pronouncement. For transactions with employees and other providers of similar services, the measurement date is the grant date. For transactions with parties other than employees (and with those providing similar services), the measurement date is the date on which the entity obtains the products or when the counterparty renders the service.
Automatic grant feature is the feature that provides for the automatic grant of additional share options whenever the holder of the options exercises the previously granted options, using the entity’s shares instead of cash to pay the exercise price.
Automatic grant option is the new share option granted when the share is used to pay the exercise price of the previous share option.
Share-based payment agreement is an agreement between the entity (or another entity in the group 5 or any shareholder of any entity in the group) and the counterparty (including employee), which confers on the counterparty the right to receive:
(a) cash or other assets of the entity in amounts based on the price (or value) of the equity instruments (including shares and share options) of the entity or another entity in the group; or (b) equity instruments (including shares or share options) of the entity or another entity in the group, provided that specified vesting conditions are met.
Share-based payment transaction is the transaction whereby the entity:
(a) receives goods or services from the supplier of those goods or services (including employee) through a share-based payment agreement; or (b) incurs a liability to settle the transaction with the supplier, through a share-based payment agreement, when another entity in the group receives said goods or services.
Share option is a contract that confers on its holder the right, but not the obligation, to subscribe to the entity’s shares at a fixed or determinable price, for a specified period of time.
Vesting is to come to have the right. According to the share-based payment agreement, the counterparty’s right to receive cash, other assets, or equity instruments of the entity is vested when the counterparty’s right is no longer conditional on the fulfillment of any vesting conditions.
Vesting conditions are the conditions that determine whether the entity receives the services that enable the counterparty to receive cash, other assets, or equity instruments of the entity, by virtue of a share-based payment agreement. Vesting conditions are service conditions or performance conditions.
Vesting period is the period over which all the vesting conditions of a share-based payment agreement must be fulfilled.
(5) A group is defined in Appendix A of Technical Pronouncement CPC 36 – Consolidated Financial Statements, as being “the parent and its subsidiaries”, from the perspective that the entity reporting the final information will be the parent.
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000
APPENDIX B
Application Guide
(This Appendix is an integral part of this Pronouncement)
Estimating the fair value of equity instruments granted B1. Items B2 to B41 of this Appendix discuss the measurement of the fair value of shares and share options granted, focusing on the specific terms and conditions that are common characteristics of a share or share option grant to employees. Therefore, the subject will not be treated exhaustively. Furthermore, because the valuation issues discussed below are focused on shares and share options granted to employees, it is assumed that the fair value of shares or share options is measured at the grant date. However, many of the valuation issues discussed below (e.g., the determination of expected volatility) also apply in the context of estimating the fair value of shares or share options granted to parties other than employees, on the date the entity obtains the products or the counterparty renders the services.
Shares
B2. For shares granted to employees, the fair value of the shares must be measured by the market price of the entity’s shares (or estimated market price, if the shares are not publicly traded), adjusted by the terms and conditions under which the shares were granted (except for vesting conditions which must be excluded from the measurement of fair value, as set forth in items 19 to 21).
B3. For example, if the employee has no right to receive dividends during the vesting period, this factor must be taken into account when estimating the fair value of the shares granted. Similarly, if the shares are subject to transfer restrictions after the vesting date, this factor must be considered, but only to the extent that post-vesting restrictions affect the price that a knowledgeable, willing market participant could pay for those shares. For example, if the shares are actively traded in an active market with deep liquidity, post-vesting transfer restrictions may have little, if any, effect on the price that a knowledgeable, willing market participant could pay for such shares.
Transfer restrictions or other restrictions existing during the vesting period should not be taken into account when estimating, at the grant date, the fair value of the shares granted, since these restrictions originate from the existence of vesting conditions, which must be considered as set forth in items 19 to 21.
Share Options
B4. For share options granted to employees, in many cases there is no available market price, due to the granted options being subject to terms and conditions that do not apply to traded options. If options with similar terms and conditions do not exist, the fair value of the granted options must be estimated by applying an option pricing model.
B5. The entity must consider factors that knowledgeable, willing market participants would consider in selecting the model to be applied in option pricing. For example, many options granted to employees have a long life and are usually exercisable during the period between the vesting date and the end of the option’s life, and are frequently exercised early. These factors must be considered when estimating the fair value of the options at the grant date. For many entities, this may make the use of the Black-Scholes-Merton formula unfeasible, as it does not allow for the exercise of the option before the end of the option’s life and may not adequately reflect the effects of expected early exercise. This formula also does not allow for expected volatility or other model input data to vary over the life of the option. However, for share options with a relatively short contractual life, or that must be exercised within a short period of time after the vesting date, the above-identified factors may not be applicable. In these cases, the Black-Scholes-Merton formula may produce a value that is substantially the same as that produced by a more flexible option pricing model.
B6. All option pricing models take into account, at a minimum, the following factors:
(a) the exercise price of the option;
(b) the life of the option;
(c) the current price of the underlying shares; (d) the expected volatility of the share price; (e) the expected dividends on the shares (if appropriate); and (f) the risk-free interest rate for the life of the option.
B7. Other factors that knowledgeable, willing market participants would consider in determining the price should also be taken into account (except for vesting conditions and automatic grant features, which must be excluded from the measurement of fair value in accordance with items 19 to 22).
B8. For example, a share option granted to an employee normally cannot be exercised during specified periods (e.g., during the vesting period or during periods specified by securities market regulators). This factor must be taken into account if the option pricing model applied otherwise assumes that the option can be exercised at any time during its life. However, if the entity uses an option pricing model that values options that can be exercised only at the end of their life, no adjustment will be required for the inability to exercise them during the vesting period (or other periods during the option’s life), due to the model assuming that options cannot be exercised during such periods.
B9. Similarly, another common factor in share options granted to employees is the possibility of early exercise of the option, for example, because the option is not freely transferable, or because the employee must exercise all options whose rights have been vested (vested options) by the end of their employment contract. The effects of early exercise must be taken into account, as set forth in items B16 to B21.
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000
B10. Factors that knowledgeable, willing market participants would not consider in determining the price of a share option (or other equity instrument) should not be taken into account when estimating the fair value of granted share options (or other equity instruments). For example, for share options granted to employees, factors that affect the value of the options only from the individual perspective of the employees are not relevant in estimating the price that would be calculated by a knowledgeable, willing market participant.
Option Pricing Model Inputs
B11. In estimating expected volatility and expected dividends on the underlying shares, the objective is to approximate the expectations that would be reflected in the current market price or the negotiated exchange price for the option. Similarly, when estimating the effects of early exercise of employee share options, the objective is to approximate the expectations that a third party external to the company, with access to detailed information on employee exercise behavior, could develop based on the information available at the grant date.
B12. Frequently, there is a probable range of reasonable expectations regarding volatility, dividends, and future exercise behavior. Therefore, the expected value must be calculated by weighting each amount within the range by its associated probability of occurrence.
B13. Expectations about the future are generally based on experience and modified when the future is expected to be reasonably different from the past. In some circumstances, identifiable factors may indicate that unadjusted past experience constitutes a relatively poor predictor of future experience. For example, if the entity with two distinct lines of business disposes of one of them - that with significantly lower risk - historical volatility may not be the best information on which to base expectations about the future.
B14. In other circumstances, historical information may not be available. For example, a recently listed entity will have little, if any, historical data on the volatility of its share price. Unlisted entities and recently listed entities are treated below.
B15. In summary, the entity should not simply base estimates on volatility, dividends, and future exercise behavior on historical data, without considering the extent to which past experience is expected to be a reasonable predictor of future experience.
Expected Early Exercise
B16. Employees frequently exercise their share options early for a variety of reasons. For example, employee share options are normally non-transferable. This causes employees to frequently exercise their share options early, as it is the only means of liquidating their positions. Furthermore, employees who terminate their employment contract are normally required to exercise any
COMISSÃO DE VALORES MOBILIÁRIOS
Rua Sete de Setembro, 111/2-5º e 23-34º Andares, Centro, Rio de Janeiro/RJ – CEP: 20050-901 – Brasil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2º, 3º e 4º Andares, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brasil - Tel.: (11) 2146-2000
COMMISSION OF SECURITIES AND EXCHANGE
Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 options whose rights have been acquired (vested options), within a short period of time, otherwise the stock options will have their right prescribed. This factor also causes early exercise of employee stock options. Other factors that can cause early exercise are risk aversion and the absence of wealth diversification.
B17. The means by which the effects of expected early exercise are considered depend on the type of option pricing model applied. For example, expected early exercise could be considered by using an estimate of the expected life of the option (which, for an employee stock option, is the period of time from the grant date to the date on which the option is expected to be exercised) as an input into the option pricing model (for example, in the Black-Scholes-Merton formula). Alternatively, expected early exercise could be modeled from a binomial model or other similar option pricing model, which uses contractual life as an input.
B18. The factors to be considered in estimating early exercise include:
(a) the extent of the vesting period, since the option normally cannot be exercised before the end of this period. Thus, the determination of the implications of the expected early exercise valuation is based on the premise that the options will have their rights acquired. The implications of vesting conditions are addressed in items 19 to 21; (b) the average length of time that similar options remained outstanding in the past; (c) the price of the underlying shares. Experience may indicate that employees tend to exercise options when the share price reaches a specified level above the exercise price; (d) the hierarchical level of employees within the organization. For example, experience may indicate that higher-level employees tend to exercise options later than those at lower levels (as addressed below, in item B21); (e) the expected volatility of the underlying shares. On average, employees tend to exercise stock options with high volatility earlier than those with low volatility.
B19. As noted in item B17, the effects of early exercise could be taken into account by using an estimate of the expected life of the options as an input into the option pricing model. When estimating the expected life of stock options granted to a group of employees, the entity may base this estimate on the weighted average expected life of options, appropriate to the entire set of employees or on the weighted average expected lives of options, appropriate to subgroups of employees within the total set of employees, based on more detailed data regarding employee exercise behavior (addressed below).
B20. The separation of granted options into groups of employees with relatively homogeneous exercise behavior is likely very important. The value of the option is not a linear function of the option term; the value increases at a decreasing rate as the term increases. For example, if all other assumptions are equal, although the two-year option has a higher value than the one-year option, it is not worth twice as much. This means that the calculation of the estimated option value based on a simple weighted average of option life, which
COMMISSION OF SECURITIES AND EXCHANGE
Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 encompasses a wide range of options with different lives, may overestimate the fair value of granted stock options. One way to avoid this is to separate the granted options into several groups, each with relatively narrow life intervals, included in the calculation of their respective weighted average life, so as to contribute to the reduction of overestimation.
B21. Similar considerations should be applied when using the binomial model or other similar models. For example, the experience of the entity granting options broadly to its employees, at all levels, may indicate that top executives tend to hold their options longer than employees at the middle management level, and that lower-level employees tend to exercise their options before any other group. Additionally, employees who are encouraged or required to maintain a minimum amount of their employer's equity instruments, including options, may on average exercise their options later than those employees who are not subject to these incentives or obligations. In these situations, the separation of options into groups of beneficiaries with relatively homogeneous exercise behavior will result in a more accurate estimate of the total fair value of granted stock options.
Expected Volatility
B22. Expected volatility is the measure of the value from which price oscillation is expected during a period. The measure of volatility used in option pricing models is the annualized standard deviation of the returns of continuously compounded stock returns over a period of time. Volatility is normally expressed in annual terms that are comparable, regardless of the time period used in the calculation; for example, price observations at daily, weekly, or monthly frequency.
B23. The return rate (which can be positive or negative) on a stock for a period should measure the economic benefit earned by a shareholder with dividends and with the appreciation (or depreciation) of the stock price.
B24. The expected annualized volatility of a stock is the interval within which the continuously compounded annual return rate is expected to be approximately two-thirds of the time. For example, saying that a stock with an expected continuously compounded return rate of 12% has a volatility of 30% means saying that the probability of the stock's return rate for a year being located between -18% (12% - 30%) and 42% (12% + 30%) is approximately two-thirds. If the stock price is $100 at the beginning of the year and no dividend will be paid at the end of the year, the expected price would be between $83.53 ($100 x e^-0.18) and $152.20 (100 x e^0.42), approximately two-thirds of the time.
B25. The factors to consider in estimating expected volatility include:
(a) the implied volatility of stock options traded on the entity's shares, or other traded instruments of the entity with option characteristics (such as convertible debt), if any; (b) the historical volatility of the stock price over the most recent period, which is generally compatible with the expected term of the option (considering the remaining contractual life of the option and the effects of expected early exercise);
COMMISSION OF SECURITIES AND EXCHANGE
Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 (c) the length of time the entity's shares have been publicly traded. A newly listed entity may have high historical volatility, compared to similar entities listed for a longer time. Additional guidance for newly listed entities is given below, in item B26; (d) the tendency of volatility to revert to its mean, i.e., its long-term average level, and other factors that indicate that future expected volatility may be different from past volatility. For example, if the entity's share price has been extraordinarily volatile for some identifiable periods of time, due to a failed attempt at a control acquisition offer, or as a result of a major restructuring, this period may be purged from the calculation of the historical annual volatility average; (e) appropriate and regular time intervals for price observations. Price observations must be consistent from one period to another. For example, the entity may use the closing price for each week or the highest price of the week, but should not use the closing price for some weeks and the highest price for other weeks. In addition, price observations must be expressed in the same currency as the exercise price.
Newly Listed Entities
B26. As noted in item B25, the entity must consider the historical volatility of the stock price over the most recent period that is generally compatible with the expected term of the option. If the newly listed entity does not have sufficient information on the historical volatility of its shares, it must nonetheless compute historical volatility for the longest period for which trading activity is available. It may also consider the historical volatility of similar entities following a comparable period of their lives. For example, an entity that has been listed for only one year and that has granted stock options with an expected average life of five years, may consider the pattern and level of historical volatility of entities in the same sector for the first six years in which the shares of these entities were publicly traded.
Non-Listed Entities
B27. A non-listed entity will not have historical information to consider when estimating expected volatility. Some factors to be considered in substitution are presented below.
B28. In some cases, the non-listed entity that regularly issues options or shares to its employees (or other parties) may have established an internal market for its shares. The volatility of the price of these shares may be considered when estimating expected volatility.
B29. Alternatively, the entity may consider the historical or implied volatility of similar listed entities, for which there is available information on share or option prices, to use in estimating expected volatility. This would be appropriate if the entity has based the value of its shares on the share price of similar listed entities.
B30. If the entity has not based its estimate of the value of its shares on the share price of
COMMISSION OF SECURITIES AND EXCHANGE
Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – CEP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – CEP: 01333-010 – Brazil - Tel.: (11) 2146-2000 similar listed entities and, instead, has used another valuation methodology for its shares, the entity may derive the estimate of expected volatility in a manner consistent with said valuation methodology. For example, the entity may value its shares based on net assets or based on profits. It could then consider the expected volatility in the amount of these net assets or profits.
Expected Dividends
B31. Determining whether expected dividends should be taken into consideration, when measuring the fair value of granted shares or stock options, depends on whether the counterparty has or does not have the right to dividends or dividend equivalents.
B32. For example, if employees are granted stock options and they have the right to dividends on the underlying shares or to dividend equivalents (which may be paid in cash or applied to reduce the exercise price) between the grant date and the exercise date, the granted options must be valued as if no dividend were paid on the underlying shares, i.e., the input data regarding expected dividends must be zero.
B33. Similarly, when the fair value of shares granted to employees is estimated on the grant date, no adjustment will be required regarding expected dividends, if employees have the right to receive dividends, to be paid during the vesting period.
B34. On the other hand, if employees do not have the right to receive dividends or dividend equivalents during the vesting period (or before the exercise date, in the case of an option), the valuation, on the grant date, of the rights to shares or options must take into account expected dividends. This means that, when the fair value of a granted option is estimated, expected dividends must be included in the application of the option pricing model. When the fair value of a granted share is estimated, this valuation must be reduced by the present value of expected dividends, to be paid during the vesting period.
B35. Option pricing models generally consider the expected dividend return rate. However, models can be modified to allow the use of the expected dividend amount instead of the return rate. The entity may use either the expected return rate or the expected payments. If the entity uses the expected payments, it must consider the historical pattern of dividend increases. For example, if the entity's policy has generally been to increase dividends by approximately 3% per year, its estimated option value should not assume a fixed dividend amount throughout the life of the option, unless there is evidence to support this premise.
B36. Generally, assumptions about expected dividends must be based on publicly available information. The entity that does not pay dividends and has no plans to do so must assume the expected dividend return rate equal to zero. However, a growing (emerging) entity, without a history of paying dividends, may expect to start paying dividends during the expected lives of its employees' stock options. These entities may use an average between their past dividend return rates (zero) and the average dividend return rate of a similarly comparable group.
Risk-Free Interest Rate
B37. Typically, the risk-free interest rate is the currently available implicit yield on zero-coupon government bonds, issued by the country in whose currency the exercise price is expressed, with a remaining term equal to the expected term of the option being evaluated (based on the remaining contractual life of the option and taking into account the effects of expected early exercise). It may be necessary to use a suitable substitute if there are no government bond issuances, or if circumstances indicate that the implicit yield rate on zero-coupon government bonds is not representative of the risk-free interest rate (for example, in highly inflationary economies). Furthermore, an appropriate substitute must be used if market participants usually determine the risk-free interest rate by using this substitute instead of the implicit yield rate on zero-coupon government bonds, when estimating the fair value of an option with a life equal to the expected term of the options being evaluated.
Effects of Capital Structure
B38. Normally, third parties, and not the entity, issue traded stock options. When these stock options are exercised, the issuer delivers the shares to the option holder. These shares are acquired from existing shareholders. Therefore, the exercise of traded stock options has no dilution effect.
B39. In contrast, if stock options are issued by the entity, new shares will be issued when said stock options are exercised (issued in fact or in substance, if such shares were previously repurchased and held in treasury). Given that the shares must be issued at the exercise price, rather than the current market price on the exercise date, this actual or potential dilution may reduce the share price, such that the option holder may not achieve as large a gain upon exercise as they would, otherwise, in the exercise of a similar traded option that does not produce dilution in the share price.
B40. If this has a significant effect on the value of granted stock options, it depends on several factors, such as the number of new shares to be issued upon exercise of the options compared to the number of shares already issued. In addition, if the market already expects that the granted options will be exercised, the market may have already computed, on the grant date, the potential dilution in the share price.
B41. However, the entity must consider whether the possible dilution effect of the future exercise of granted stock options could have an impact on its estimate of fair value on the grant date. Option pricing models can be adapted to consider this potential dilution effect.
Modifications to share-based payment agreements settled in equity instruments
B42. Item 27 requires that, regardless of any modifications to the terms and conditions under which equity instruments were granted, or the cancellation or settlement of the granted equity instruments, the entity must recognize, at a minimum, the services received measured, on the grant date, by the fair value of the granted equity instruments, unless these equity instruments do not vest due to non-fulfillment of a vesting condition (that is not a market condition) specified on the grant date. Additionally, the entity must recognize the effects of modifications that increase the total fair value of share-based payment agreements or that otherwise benefit employees.
B43. To apply the requirements of item 27:
(a) if the modification increases the fair value of the granted equity instruments (for example, by reducing the exercise price), measured immediately before and after the modification, the entity must include the incremental fair value granted in the measurement of the amount recognized for services received in exchange for the granted equity instruments. The incremental fair value granted is the difference between the fair value of the modified equity instrument and the fair value of the original equity instrument, both estimated on the modification date. If the modification occurs during the vesting period, the incremental fair value granted must be included in the measurement of the amount recognized for services received for the period from the modification date until the date on which the modified equity instruments vest, in addition to the amount based on the fair value, on the grant date, of the original equity instruments, which must be recognized over the remaining original vesting period. If the modification occurs after the vesting date, the incremental fair value granted must be recognized immediately, or over the vesting period if the employee is required to complete an additional service period before having an unconditional right to these modified equity instruments; (b) similarly, if the modification increases the number of equity instruments granted, the entity must include the fair value of the additional equity instruments granted, measured on the modification date, in the measurement of the amount recognized for services received in exchange for the granted equity instruments, consistent with the requirements of item (a). For example, if the modification occurs during the vesting period, the fair value of the additional equity instruments granted must be included in the measurement of the amount recognized for services received over the period from the modification date until the date on which the additional equity instruments vest, in addition to the amount based on the fair value, on the grant date, of the originally granted equity instruments, which must be recognized over the remaining original vesting period; (c) if the entity modifies the vesting conditions, in a manner that benefits employees, for example, by reducing the vesting period or by modifying or eliminating the performance condition (that is not a market condition, whose changes must be accounted for in accordance with item (a)), the entity must consider the modified vesting conditions when applying the requirements of items 19 to 21.
B44. In addition, if the entity modifies the terms or conditions of the equity instruments
granted, in order to reduce the total fair value of share-based payment arrangements, or that is not otherwise beneficial to employees, the entity must, however, continue to account for the services received in exchange for the equity instruments granted, as if that modification had not occurred (except for the cancellation of some or all of the granted equity instruments, which must be accounted for in accordance with paragraph 28). For example:
(a) if the modification reduces the fair value of the equity instruments granted, measured immediately before and immediately after the modification, the entity must not take that reduction into account in the fair value and must continue to measure the amount recognized for services received in exchange for equity instruments based on the fair value, at the grant date, of the equity instruments granted;
(b) if the modification reduces the number of equity instruments granted to employees, that reduction must be accounted for as a partial cancellation of the granted equity instruments, in accordance with the requirements of paragraph 28;
(c) if the entity modifies the vesting conditions in a way that does not benefit employees, for example, by increasing the vesting period or by modifying or including a performance condition (which is not a market condition, the changes to which must be accounted for in accordance with paragraph (a)), the entity must not take the modified vesting conditions into account when applying the requirements of paragraphs 19 to 21.
Accounting for a modification of a share-based payment transaction that changes its classification from cash-settled to equity-settled
B44A. If the terms and conditions of a cash-settled share-based payment transaction are modified so as to become an equity-settled share-based payment transaction, the transaction must be accounted for as such from the date of the modification.
Specifically:
(a) the equity-settled share-based payment transaction must be measured at the fair value of the equity instruments granted at the date of the modification. The equity-settled share-based payment transaction must be recognized in equity at the date of the modification, to the extent that goods or services are received;
(b) the liability of the cash-settled share-based payment transaction, at the date of modification, must be derecognized at that date;
(c) any difference between the carrying amount of the liability derecognized and the amount of equity recognized at the date of the modification must be recognized immediately in profit or loss.
B44B. If, as a result of the modification, the vesting period is extended or shortened, the application of the requirements of paragraph B44A must reflect the modified vesting period. The requirements of paragraph B44A must be applied even if the modification occurs after the vesting period.
B44C. A cash-settled share-based payment transaction may be cancelled or settled (except for a transaction cancelled for failure to meet vesting conditions). If own equity instruments are granted and, at the grant date, the entity identifies them as substitutes for the cancelled cash-settled share-based payment transaction, the entity must apply paragraphs B44A and B44B.
Share-based payment transactions between entities in the same group
B45. Paragraphs 43A to 43C deal with the accounting for share-based payment transactions between entities in the same group for separate and individual financial statements. Paragraphs B46 to B61 guide how to apply the requirements of paragraphs 43A to 43C. As noted in paragraph 43D, share-based payment transactions between entities in the same group may be brought about for a variety of reasons, depending on the facts and circumstances. Accordingly, this discussion is not exhaustive and assumes that when the entity receives goods or services but does not have an obligation to settle the transaction, that transaction must be treated as a capital contribution from the parent to the subsidiary, regardless of any intragroup contractual agreements for "reimbursement."
B46. Although the following discussion is directed at transactions with employees, it is also applicable to similar share-based payment transactions with other providers of goods or services who are not employees. A contractual agreement between the parent and its subsidiary may require the subsidiary to pay the parent for the provision of equity instruments to employees. The following discussion does not address how to account for such intragroup payment contractual agreements.
B47. Four issues frequently arise from share-based payment transactions between entities in the same group. For convenience, the following examples deal with issues related to a parent and its subsidiary.
Share-based payment agreements involving the entity’s own equity instruments
B48. The first issue assesses whether the following transactions, involving the entity’s own equity instruments, must be accounted for as equity-settled or as cash-settled, in accordance with the requirements of this Technical Pronouncement:
(a) the entity grants to its employees rights to equity instruments of the entity (for example, share options), and alternatively has the choice or is required to acquire equity instruments (i.e., treasury shares) from another party to satisfy its obligations to its employees; and
(b) the entity’s employees are granted rights to equity instruments of the entity (for example, share options), either by the entity itself or by shareholder companies, and the entity’s shareholder companies provide the necessary equity instruments.
B49. The entity must account for share-based payment transactions through which it receives services in exchange for its own equity instruments as equity-settled. This procedure must be applied regardless of whether the entity has the choice or is required to acquire those equity instruments from another party to satisfy its obligations to its employees under a share-based payment agreement. This procedure must also be applied regardless of:
(a) whether the employees’ rights to the entity’s equity instruments were granted by the entity itself or by its shareholder company; or
(b) whether the share-based payment agreement was settled by the entity itself or by its shareholder company.
B50. If a company, which is a shareholder, has an obligation to settle the transaction with the investee’s employees, it will provide the investee’s equity instruments instead of its own equity instruments. Accordingly, if the investee belongs to the same group as the shareholder company, in accordance with paragraph 43C, the shareholder company must measure its obligation in accordance with the requirements applicable to cash-settled share-based payment transactions in its separate financial statements, and in accordance with those requirements applicable to equity-settled share-based payment transactions in its consolidated financial statements.
Share-based payment agreements involving the parent’s equity instruments
B51. The second issue concerns share-based payment transactions between two or more entities within the same group, involving the equity instrument of another entity in the group. For example, the subsidiary’s employees are granted rights to the parent’s equity instruments in exchange for services rendered to the subsidiary.
B52. Accordingly, the second issue gives attention to the following share-based payment agreements:
(a) the parent grants rights to its equity instruments directly to the employees of its subsidiary: the parent (and not the subsidiary) has the obligation to provide the subsidiary’s employees with its equity instruments; and
(b) the subsidiary grants rights to the parent’s equity instruments to its employees: the subsidiary has the obligation to provide its employees with the parent’s equity instruments.
Parent grants rights to its equity instruments to the employees of its subsidiary (paragraph B52(a))
B53. The subsidiary has no obligation to provide the parent’s equity instruments to its employees (of the subsidiary). Therefore, in accordance with paragraph 43B, the subsidiary must measure the services received from its employees in accordance with the requirements applicable to equity-settled share-based payment transactions, and recognize the corresponding increase in its equity as a contribution (capital injection) from its parent.
B54. The parent has an obligation to settle the transaction with the subsidiary’s employees by providing its own equity instruments. Accordingly, in accordance with paragraph 43C, the parent must measure its obligation in accordance with the requirements applicable to equity-settled share-based payment transactions.
Subsidiary grants rights to the parent’s equity instruments to its employees (paragraph 52(b))
B55. Because the subsidiary does not meet any of the conditions of paragraph 43B, it must account for the transaction with its employees as cash-settled. This requirement must be applied regardless of how the subsidiary obtains the equity instruments to satisfy its obligation to its employees.
Share-based payment agreements involving cash-settled payments to employees
B56. The third issue relates to how the entity that receives goods or services from its suppliers (including employees) must account for share-based payment agreements that are cash-settled, when the entity itself has no obligation to make the payments required to its suppliers. For example, based on the following agreements in which the parent (and not the entity itself) has an obligation to make the cash payments required to the entity’s employees:
(a) the entity’s employees will receive cash payments that are linked to the price of their equity instruments;
(b) the entity’s employees will receive cash payments that are linked to the price of the parent’s equity instruments.
B57. The subsidiary has no obligation to settle the transaction with its employees. Therefore, the subsidiary must account for the transaction with its employees as an equity-settled transaction and recognize the corresponding increase in its equity as a contribution (capital injection) from its parent. The subsidiary must "remeasure" the cost of the transaction subsequently for any changes arising from non-market vesting conditions not met, in accordance with paragraphs 19 to 21. This procedure differs from the measurement of the transaction as cash-settled in the group’s consolidated financial statements.
B58. Because the parent has an obligation to settle the transaction with the employees, and the consideration is cash, the parent (and the consolidated group) must measure its obligation in accordance with the requirements applicable to cash-settled share-based payment transactions contained in paragraph 43C.
Transfer of employees between entities in the same group
B59. The fourth issue relates to share-based payment agreements of the economic group that involve employees of more than one entity in the group. For example, the parent may grant rights to its equity instruments to employees of its subsidiaries, conditioned on the full provision of continued services to the group for a specified period of time. The subsidiary’s employee may have their employment transferred to another subsidiary during the vesting period, without the employee’s rights to the parent’s equity instruments under the original share-based payment agreement being affected. If the subsidiaries have no obligation to settle the share-based payment transaction with their employees, they must account for the transaction as equity-settled. Each subsidiary must measure the services received from the employees with reference to the fair value of the equity instruments at the date the rights to those equity instruments were originally granted by the parent, as defined in Appendix A, and with reference to the proportion of the vesting period in which the employee provided services to each subsidiary.
B60. If the subsidiary has an obligation to settle the transaction with its employees through the parent’s equity instruments, it must account for the transaction as cash-settled. Each subsidiary must measure the services received based on the fair value of the equity instruments, at the grant date, and based on the proportion of the vesting period in which the employee provided services to each subsidiary. Additionally, each subsidiary must recognize any change in the fair value of the equity instruments during the employee’s service period dedicated to each subsidiary.
B61. That employee, after being transferred between entities in the group, may not meet a vesting condition that is not a market condition, as defined in Appendix A, i.e., the employee leaves the group before completing the specified service period. In this case, because the vesting condition is related to the provision of services to the group, each subsidiary must adjust the amount previously recognized in relation to the services received from the employees, in accordance with the principles of paragraph 19. Thus, if the rights to the equity instruments granted by the parent are not vested due to the employee’s failure to meet vesting conditions that are not market conditions, no amount must be recognized, on a cumulative basis, for the services received from the employees, in the financial statements of any entity in the group.
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Source: Comissão de Valores Mobiliários — original document · Summary generated with machine assistance and reviewed before publication; the authoritative text is the regulator's original document. How RegAlert works
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