The present obligation test for cash settlement

Learning objectives

• Explain that the transaction is accounted for as cash-settled to the extent that the entity has incurred a liability to settle in cash.L2
• Assess whether a present obligation to settle in cash exists from the practices and terms of the plan.L3

Normative references

• IFRS 2 §34For a transaction with a choice of settlement, the entity accounts for the transaction, or the components of that transaction, as cash-settled to the extent that it has incurred a liability to settle in cash or other assets, and as equity-settled to the extent that no such liability has been incurred.
• IFRS 2 §41If the entity has the choice of settlement, it determines whether it has a present obligation to settle in cash and accounts for the transaction accordingly. Such an obligation exists if settlement in equity instruments has no commercial substance (for example because the entity is legally prohibited from issuing shares), if the entity has a past practice or a stated policy of settling in cash, or if it generally settles in cash whenever the counterparty asks for cash settlement.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• In a transaction with a settlement alternative, how does the entity account for it?L2
• Zéphyr SA's plan provides that the company chooses, at vesting, to deliver shares or to pay an equivalent amount in cash, with no link to a target price. Over the last three years, Zéphyr has settled each plan in cash and has told its employees it will continue to do so (case facts). Write an assessment note on whether a present obligation to settle in cash exists and on the classification of the award.L3