UAE Financial Audit Explanation of Determination of Grant Date Based on IFRS 2

It’s crucial for financial audit specialists in the UAE to correctly determine the grant date, since it’s the date at which fair value is calculated for equity instruments under IFRS 2. The grant date is usually the date recognition of employee costs begins, though this isn’t always true, the service commencement date and the grant date can differ, and this distinction affects how the vesting period itself is determined.

The “grant date” is the date on which a UAE entity and an employee agree to a share-based payment arrangement. It requires both the entity and the employee to have a genuine mutual understanding of the arrangement’s terms. Both an offer and its acceptance must occur between employer and employee for the parties to “agree” to a share-based payment transaction, consistent with IFRS 2.IG2.

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Communication by the Employer and Approval

Where an agreement is subject to approval, the grant date can’t be earlier than the date approval was obtained. For a grant subject to approval, for example by a board of directors, the grant date is generally the date that approval was obtained. To actually reach grant date status, the arrangement must also be communicated to employees.

A broad-based, unilateral grant for a share-based payment isn’t always separately approved by the board. Often, employees in the UAE are informed of an award’s terms and conditions only after board approval, sometimes communicated by direct supervisors rather than centrally. Given differing schedules across employers and employees, different individuals can end up informed of their awards at genuinely different times.

Communication can sometimes span several days or even weeks, particularly where employees are geographically dispersed or numerous. As a result, an award approved at a single board meeting could technically be subject to multiple distinct grant dates for different employees.

A single, blanket grant date generally isn’t sufficient for valuing share-based payment transactions granted on roughly the same date but communicated at different times. Treating them as sharing one grant date could lead to a material deviation from the aggregate fair value that would otherwise have been properly determined using each individual award’s actual grant date.

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Understanding “Shared Understanding”

Finalizing every single term isn’t necessarily required for a shared understanding to exist. An offer might not specify the exercise price directly, but could instead state the formula for determining it.

Where the outcome depends on objective factors, and different knowledgeable persons, working independently, would arrive at consistent calculations, a shared understanding exists even though the specific grant terms haven’t been fully finalized in numerical form.

For example, if the exercise price will be determined based on a market price at a later date, but all other relevant factors are already known and fixed, a genuine mutual understanding exists at the time of the agreement regarding how the price will ultimately be determined, even though the actual number isn’t yet known.

Worked Example: Applying the Shared Understanding Test

A UAE company grants share options to a group of employees, with the agreement stating the exercise price will be set as the average closing share price over the 5 trading days following the grant, rather than a fixed number specified upfront. Every other term of the award, the number of options, the vesting period, and the eligible employee group, is already fixed at the time of the agreement. Applying the shared understanding test: any knowledgeable person calculating the exercise price using the stated formula and the actual market data from those 5 trading days would arrive at the same figure, an objective, verifiable outcome. Because of this, a shared understanding exists at the point the agreement is made, and that date, not the later date the actual exercise price becomes numerically known, is treated as the grant date for IFRS 2 purposes.

Discretion Clauses

Some share-based arrangements allow a remuneration committee, or an equivalent body, to modify award terms with varying degrees of discretion. It’s important for auditors and financial statement preparers to evaluate the effect any discretion clause has on determining the grant date for a share-based payment.

Where discretion is exercised after the grant date has otherwise been established, the question of whether modification accounting should apply becomes relevant. Where a share-based payment arrangement allows a remuneration board to modify an award’s terms at its discretion, whether a shared understanding genuinely exists should be assessed based on the degree of subjectivity involved, specifically, the extent of the discretion the committee actually holds and the factors it can control.

Frequently Asked Questions (FAQs)

How Farahat & Co. Can Help

Farahat & Co., a trusted Audit & Accounting Firm, provides audit and financial reporting support for businesses navigating IFRS 2 share-based payment arrangements, including grant date determination and fair value assessment.

Contact Farahat & Co. today to discuss your IFRS 2 compliance requirements.