U.K. Standard Setter Proposes Changes On Share-Based Payment Transactions Rule

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By David R. Jones

April 20 — The U.K. Financial Reporting Council launched a consultation on April 20 to align its financial reporting standard on share-based payment transactions more closely with international financial reporting standards.

The council, which sets the U.K.’s accounting standards, published an exposure draft— FRED 61—that would make narrow-scope amendments to its Financial Reporting Standard 102: Share-based payment transactions with cash alternatives.

The proposed changes come after “the FRC was informed of potential unintended consequences” when entities apply FRS 102 to share option arrangements, according to the exposure draft.

‘Onerous to Apply.'

Stakeholders informed the council that the requirements in FRS 102 applicable to share-based payment transactions—in cases where the entity can choose to settle in cash or equity instruments—differ from those in IFRS 2: Share-Based Payment.

The current requirements also differ from previous U.K. and Irish generally accepted accounting principles.

As a result, FRS 102 can be “onerous to apply and may result in inappropriate accounting outcomes,” the exposure draft said.

Proposed Changes

Under the proposal, the FRC would change Section 26 of FRS 102 to make the standard more consistent with IFRS 2 and previous U.K. and Irish GAAP where an entity can choose to settle in cash or equity.

FRED 61 also would make the requirements more general to include those cases “where the settlement method is dependent on an external event,” the exposure draft said.

Retaining Cash Settlement Provision

The proposal, however, would retain FRS 102's current requirement to recognize a liability if the recipient can require settlement in cash.

“As part of this consultation the FRC is not seeking views on other aspects of the share-based payment accounting requirements set out in FRS 102,” FRED 61 said.

Complaints About Current Standard

The council only recently has received complaints about FRS 102 requirements, the FRC's Accounting Council noted in a statement included in the exposure draft.

Specifically, current accounting rules for share-based payment transactions that give a reporting entity the option to settle in cash or equity “could result in cash-settlement accounting under FRS 102 when the same transactions would be accounted for as equity-settled” under IFRS 2, the Accounting Council said.

Burden of Cash-Settlement Accounting

Applying FRS 102 could result in an entity recognizing a liability, despite the fact that FRS 102's recognition benchmarks for a liability haven't been clearly met.

“Cash-settlement accounting is also more onerous than equity-settled accounting since it requires the measurement of the obligation at fair value at each reporting date,” according to the Accounting Council statement.

The Accounting Council recommended that the FRC issue the FRED 61 draft amendments.

Intended to Cut Compliance Costs

Along with bringing FRS 102 in line with IFRS 2 and with U.K. and Irish GAAP, FRED 61 aims to bolster the quality of financial reporting and cut compliance costs.

The FRC proposed no transition period for the amendments to take effect, and the changes would come into force for accounting periods beginning on or after Jan. 1, 2015.

First Reporting Period

The Jan. 1 effective date marks the first reporting period that U.K. entities must issue financial statements comply with FRS 102. The effective date for exposure draft along with four other FRC revised standards that took effect on Jan. 1 as part of “fundamentally reformed financial reporting,” the FRC said.

As some entities will have already begun preparing to apply FRS 102 and others will start soon, the amendments must be finalized “as quickly as possible in order to minimise disruption to this process,” the Accounting Council said.

Comments on FRED 61 must be received by June 1, 2015.

IASB Considers Similar Action

The International Accounting Standards Board is considering its own narrow-based amendments to modify IFRS 2 in response to stakeholder concerns about how to treat share-based payments under the international standard.

“The objective of the project is to clarify the accounting for a modification of a share-based payment arrangement that changes its classification from cash-settled to equity-settled,” the IASB said.

ED Issued

The board published an exposure draft in November 2014, which would make three changes to IFRS 2. The proposal is designed to clarify the classification and measurement of share-based payment transactions.

The comment period on the IASB exposure draft ended March 25, and the board currently is conducting redeliberations on the proposal, the IASB website said.

To contact the reporter on this story: David R. Jones in London at correspondents@bna.com

To contact the editor responsible for this story: Xing Gao at xgao@bna.com

The draft amendments to FRS 102 are available at https://www.frc.org.uk/Our-Work/Publications/Accounting-and-Reporting-Policy/FRED-61-Draft-Amendments-to-FRS-102-Share-based-File.pdf

For a discussion on Accounting for Share-Based Compensation, see 5109-2nd, Accounting for Share-Based Compensation, at 5109.II.C.1.d.


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