IFRS 2 Share-Based Payment requires entities that grant equity-settled share-based payment awards to employees with vesting conditions to recognize the related expense as services are provided during the vesting period when it is probable that vesting conditions other than market conditions (non-market performance vesting conditions) will be satisfied. The uncertainty related to the pandemic has resulted in a significant decline in business activity and share prices. Accordingly, the share-based payment expense for awards that contain a non-market performance condition is based on the best available estimate of the number of awards that are expected to vest, and an entity is required to revise that estimate, if necessary if subsequent information indicates that the number of awards expected to vest differs from previous estimates. Entities must consider updated forecasts to assess whether non-market performance vesting conditions based on metrics affected by the coronavirus pandemic (e.g., sales, EBITDA) will be satisfied. Suppose the non-market performance vesting condition is no longer probable to be achieved. In that case, the entity reverses the previously recognized share-based payment expense in the period in which the assessment changes. However, the likelihood of meeting market performance and non-vesting conditions is factored into the grant date fair value of the share-based payment transaction. The related expense continues to be recognized as long as the employee satisfies other vesting conditions (e.g., service conditions), irrespective of whether the market performance and non-vesting condition are met, as specified in paragraphs 21 and 21A of IFRS 2.

During the coronavirus pandemic, entities may issue new share-based payment awards that require a grant-date fair value to be determined or may modify an award (as mentioned above) that requires the fair value to be determined at the modification date. IFRS 2 requires the fair value of services to be received to be measured by reference to the fair value of the equity instruments granted. One of the inputs into option pricing models to arrive at the fair value is the expected share price volatility. Expected volatility measures the amount by which a share price is expected to fluctuate during the option’s expected term. Paragraph B25 of IFRS 2 provides some guidance on factors to consider in estimating expected volatility; these include: using implied volatility (if available); historical volatility; the length of time the entity’s shares have been publicly listed; the tendency of volatility to revert to its mean; and appropriate and regular intervals for price observations. If an entity is unlisted, that entity may consider using the historical volatility for similar listed entities without any internal market that may exist in estimating expected volatility. If an entity is newly listed, it should compute historical volatility for the most extended period for which trading activity is available. It could also consider the historical volatility of similar listed entities following a comparable period in their lives.

Entities will typically start their assessment of expected volatility using historical volatility. During the coronavirus pandemic, share prices have been volatile. A question may arise as to whether historical volatility should be adjusted for the coronavirus pandemic by excluding recent share price activity. Factors to consider include the tendency of volatility to revert to its mean (i.e., its long-term average level) and whether other factors indicate that the expected future volatility might differ from past volatility. IFRS 2 provides an example where if an entity’s share price was extraordinarily volatile for some identifiable period because of a failed takeover bid or a significant restructuring, that period could be disregarded in computing historical average annual volatility. These examples are entity-specific, however, and an entity should not exclude general economic factors such as the effect of an economic downturn on share price volatility. Therefore, we would not generally expect an adjustment to be made to recent historical volatility due to the current pandemic that reflects a general economic downturn. The pandemic might result in a need for additional disclosures for users of financial statements to understand the effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position, including information on how fair value was determined and the nature of a modification if an equity-settled share-based payment transaction was modified.