The types of conditions: service, performance and non-vesting

Learning objectives

• Distinguish service conditions, market performance conditions, non-market performance conditions and non-vesting conditions.L1
• Classify the conditions of a plan from its terms and justify the classification.L2

Normative references

• IFRS 2Appendix A: a right vests when it no longer depends on any vesting condition; a vesting condition is either a service condition (a specified period of service to be completed, whatever the reason for termination) or a performance condition (service plus a specified performance target met while the service is rendered; the target period does not extend beyond the end of the service period and may start before it, provided that its start is not substantially earlier than the start of the service). The target relates to the operations or activities of the entity or group (non-market condition) or to the price or value of its equity instruments (market condition, which also requires service). Non-vesting conditions are not defined in Appendix A; their treatment is set out in para. 21A.
• IFRS 2 §19Vesting conditions other than market conditions are not taken into account when estimating the fair value of the instruments at the measurement date; instead, they are taken into account by adjusting the number of instruments included in the measurement, so that the amount recognised is ultimately based on the number of instruments that eventually vest: on a cumulative basis, no amount is recognised if such a condition is not satisfied (subject to para. 21).
• IFRS 2 §21Market conditions (for example a target share price) are taken into account when estimating the fair value at the grant date: the expense is recognised for the instruments for which all other vesting conditions are satisfied, irrespective of whether the market condition is satisfied, with no subsequent adjustment because of the market condition.
• IFRS 2 §21ANon-vesting conditions are taken into account when estimating the fair value of the equity instruments granted; the entity recognises the goods or services received from a counterparty that satisfies all vesting conditions that are not market conditions, irrespective of whether those non-vesting conditions are satisfied.

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

4 questions

• Which statements about the conditions of an option plan are correct? More than one answer is possible.L1
• Verano SA grants options to its executives under three conditions: (a) remain with the company for three years; (b) reach cumulative operating profit of EUR 12 million; (c) a share price of EUR 30 at the end of the three years. Which classification is correct?L2
• Orion SA grants options under three conditions: (a) remain in post for three years; (b) revenue growth of at least 8% a year; (c) a share price of at least EUR 25 at the end of the period. Write a note classifying each condition and stating how each is reflected in the measurement.L2
• Alba SA granted an executive two tranches of options. Tranche 1: three years of service and a target cumulative operating profit. Tranche 2: three years of service and a target share price. The executive stays three years; at the end of the period, the target profit is not reached (tranche 1) and the target price is not reached (tranche 2). What is the effect on the cumulative expense of each tranche?L3