Market and non-vesting conditions: no true-up

Learning objectives

• Explain that market conditions and non-vesting conditions are reflected in fair value and give rise to no adjustment if they are not satisfied.L2
• Distinguish the effect of failing a market condition from that of failing a service condition.L2, L3

Normative references

• 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.

3 questions

• An option plan is subject to a target share price and to three years of service. The employees stay three years, but the target price is not reached; the entity then reverses the cumulative expense recognised.L2
• Which statements about market conditions and non-vesting conditions are correct? More than one answer is possible.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