We are nearly through another busy season here in audit land and yet again share-based payments topped the charts in terms of number of accounting issues to work through.
Top of the list of key misunderstandings, is when grant date and measurement date (the date we value a share-based payment) are not the same date for measuring a share-based payment.
Most prevalent, with a lot of corporate activity in the junior listed company space, were asset acquisitions. This is where there is a purchase of an asset, project or a company that doesn’t meet the definition of a business, or the transaction passes the optional fair value concentration test and is outside of the scope of AASB 3.
Issuing performance rights or options to employees and/or directors for services rendered to the company, to conserve cash, is so commonplace in the junior listed market, it is often assumed that grant date, the date that these types of transactions are also measured, is the default position in the standard, which is not the case.
Paragraph 10 of the Standard says: “For equity-settled share-based payment transactions, the entity shall measure the goods received, and the corresponding increase in equity, directly, at the fair value of the goods, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods and services received, the entity shall measure their value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted.”
This means the default position under the standard is to measure the equity instruments at the fair value of the goods received – i.e. the project value.
For further clarity, in Appendix A of the Standard – Defined Terms, the definition of measurement date is as follows: “For transactions with employees and others providing similar services, the measurement date is grant date. For transactions with parties other than employees (and those providing similar services), the measurement date is the date the entity obtains the goods.”
When an agreement is signed between the purchaser and the vendor to acquire an asset this is, in most instances, the grant date, not measurement date. Acquisition agreements usually contain pre- conditions to be satisfied before the acquisition can complete so it is not until the contract is unconditional that the transaction will complete, and the completion date is where the legal right to the assets is transferred to the purchaser (in simple terms) and the equity instruments transferred (or to be transferred) in an asset acquisition are measured at the fair value of the assets being acquired – well at least it would be reasonable to think that based on the paragraphs extracted above!
Let’s analyse a popular type of transaction where the agreement stipulates a deemed price of the equity instruments and the number of equity instruments to be issued to acquire the asset.
At the time an agreement is signed the number of shares to be issued is agreed based on the value of the Company’s shares or other equity instruments, usually at market price at the time (sometimes a VWAP) or at an agreed discount based on volatility or liquidity of the underlying shares. The vendor and acquirer are agreeing, in an arm’s length transaction, to the number of shares to accept at this deemed price, and represents the agreed, shared, market value of the project being transferred at the time. From this point the vendor has agreed to bear the equity price risk, not the issuer.
A bugbear of many of our clients in application of the standard is that post the announcement of the intention to acquire a project (based on a MOU or actual signed contract), the Company’s share price can go on a run either up or down on speculative trading and the consequence can be that by the time the contract is unconditional and complete and the measurement date occurs the share price can be significantly different from the deemed price, but that doesn’t matter right?
Paragraph 13 of AASB 2 says: “To apply the requirements of paragraph 10, to transactions with parties other than employees, there shall be a rebuttable presumption that the fair value of the goods can be estimated reliably.” The project is still worth the deemed price multiplied by the number of shares to be issued.
Unfortunately, paragraph 13A says: “if the identifiable consideration received (if any) by the entity appears to be less than the fair value of the equity instruments granted or liability incurred, typically this situation indicates that other consideration (i.e. unidentifiable goods) has been (or will be) received by the entity. The entity shall measure the identifiable goods received in accordance with this Standard. The entity shall measure the unidentifiable goods or services received (or to be received) as the difference between the fair value of the share-based payment and the fair value of any identifiable goods received (or to be received).”
In simple terms this can be interpreted to mean that where a deemed fair value of the project is now less than the fair value of the equity consideration to acquire the asset on measurement date, the Company must recognise that difference. The standard says that the difference represents other identified goods but, for example, where the deal was to acquire a greenfield exploration project, it is difficult to identify what those other assets may be which leads to the company making a choice to either book the asset at its agreed fair value and the difference is recognised in profit or loss or that there is no unidentified asset and the project is booked at the fair value of the instruments issued. There can be a reasonable argument for both positions.
The difference in agreed value of the acquired asset and the amount to be recognised under paragraph 13A can leave the Company open to scrutiny by shareholders or other external parties.
This has become a complex area, and companies should discuss further with their auditors.
This article first appeared in the Summer 2021/22 issue of Client Alert.