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IFRS2 - What’s so difficult about “date of grant”?

Everyone knows when an option has been granted don’t they? It’s obvious? The legal document will say “date of grant”. Surely that is all the evidence that we need?

Where IFRS2 is concerned the answer can be “not necessarily” and this can have important consequences.

IFRS2 defines the grant date for an option as “the date ..... when the [Company] and the [employee] have a “shared understanding of the terms and conditions of the arrangement...”.

The standard doesn’t elaborate any further on these few words but over time a practice has evolved in certain common scenarios.

UK Save As You Earn (SAYE) plans

It is often the case that the grant involves an invitation and application process; the Company invites employees to apply for options and then determines how many options will be provided to each applicant once it has all the applications. This process can sometimes involve a scaling down if more shares have been applied for than are available.

Under the invitation and acceptance process the exercise price is set just before the invitation is issued but the actual grant of the options (and the date on which a “shared understanding” arises) can often be up to 30 days later (or 42 days where a scaling down occurs). What this means is that there is no “shared understanding” until a point after the exercise price has been determined. As a result, we may have a quoted price of £2 per share and an exercise price of £1.60 (20% discount) but the share price after 42 days have elapsed could be substantially higher or lower. In the former case the IFRS2 fair value to be expensed will be higher than was expected.

Long Term Incentive Plans (LTIP)

There can be similar issues applying to LTIP awards. For example, the Remuneration Committee may agree the schedule of LTIP awards in its February meeting but employees are not individually informed of their awards until 1 April. The applicable date for the IFRS2 valuation is therefore 1 April. Again, the company’s share price may have moved quite considerably and the IFRS2 value may be materially different to that which was expected.

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