Commission Regulation (EC) No 211/2005 of 4 February 2005 amending Regulation (EC) No 1725/2003 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards International Financial Reporting Standards (IFRS) 1 and 2 and International Accounting Standards (IASs) No 12, 16, 19, 32, 33, 38 and 39 (Text with EEA relevance)

• Published date: 11 February 2005
• Subject Matter: Free movement of capital,Freedom of establishment,Internal market - Principles
• Official Gazette Publication: Official Journal of the European Union, L 41, 11 February 2005

11.2.2005 EN Official Journal of the European Union L 41/1

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COMMISSION REGULATION (EC) No 211/2005

of 4 February 2005

amending Regulation (EC) No 1725/2003 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards International Financial Reporting Standards (IFRS) 1 and 2 and International Accounting Standards (IASs) No 12, 16, 19, 32, 33, 38 and 39

(Text with EEA relevance)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community.

Having regard to Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards (1), and in particular Article 3(1) thereof,

Whereas:

(1) By Commission Regulation (EC) No 1725/2003 (2), certain international standards and interpretations that were extant at 1 September 2002 were adopted.

(2) On 19 February 2004, the International Accounting Standards Board (IASB) published International Financial Reporting Standard (IFRS) 2 Share-based Payment. IFRS 2 requires for the first time that companies reflect in their income statements the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to management and employees. In the past, transactions in which share options were granted to employees were not recognized in the company’s income statements but were disclosed in the notes not affecting reporting of earnings to capital markets.

(3) The consultation with technical experts in the field confirms that IFRS 2 meet the technical criteria for adoption set out in Article 3 of Regulation (EC) No 1606/2002, and in particular the requirement of being conducive to the European public good.

(4) IFRS 2 does not specify which valuation models should be used. Instead, it only describes the factors that should be at least taken into account when estimating the fair value of share based payments. This was done on purpose in order not to prevent the development of appropriate measurement techniques which hitherto do not exist for all forms of share based payments (e.g. non tradable long term employee stock options). New alternative methods might be developed in the future to accommodate the needs of companies, auditors and investors. In particular, newly listed companies or companies without a sufficient track record might have difficulties to estimate future share prices.

(5) The Commission took note of the criticism about the complexity of IFRS 2 Share-based Payment that were advanced from several concerned parties during the consultation process. The Commission is aware of the remaining technical issues of this standard and the related concerns regarding their economic impact. The Commission recognizes that, in view of the potential impact, such as on employee stock option schemes, and the possible implications for the competitiveness of EU companies, the application should be regularly monitored. However, endorsement is in the interest of European capital markets and European investors. The Commission will therefore monitor the future effects of IFRS 2 on European companies and review the applicability of the standard by July 2007 at the latest.

(6) The Commission recalls that Regulation (EC) No 1606/2002 (the IAS Regulation) of 19 July 2002 requires that for each financial year starting on or after 1 January 2005, companies governed by the law of a Member State shall prepare their consolidated accounts in conformity with the international accounting standards adopted in accordance with the procedure laid down in Article 6(2) if, at their balance sheet date, their securities are admitted to trading on a regulated market of any Member State within the meaning of Article 1(13) of Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field (3).

(7) The adoption of IFRS 2 implies, by way of consequence, amendments to other international accounting standards in order to ensure consistency between international accounting standards. Those consequential amendments are affecting International Financial Reporting Standard (IFRS) No 1, International Accounting Standards (IASs) Nos 12, 16, 19, 32, 33, 38 and 39.

(8) Regulation (EC) No 1725/2003 should therefore be amended accordingly.

(9) The measures provided for in this Regulation are in accordance with the opinion of the Accounting Regulatory Committee,

HAS ADOPTED THIS REGULATION:

Article 1

The Annex to Regulation (EC) No 1725/2003 is amended as follows:

1. International Financial Reporting Standard (IFRS) 2 Share-based Payment is inserted in the Annex to Regulation (EC) No 1725/2003;

2. the adoption of IFRS 2 implies, by way of consequence, amendments to IFRS 1, to International Accounting Standards (IASs) No 12, 16, 19, 32, 33, 38 and 39 in order to ensure consistency between international accounting standards;

3. the text for insertion is set out in the Annex to this Regulation

Article 2

This Regulation shall enter into force on the third day following its publication in the Official Journal of the European Union.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, 4 February 2005.

For the Commission

Charlie McCREEVY

Member of the Commission

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(1) OJ L 243, 11.9.2002, p. 1

(2) OJ L 261, 13.10.2003, p. 1. Regulation as last amended by Regulation (EC) No 2238/2004 (OJ L 394, 31.12.2004, p. 1).

(3) OJ L 141, 11.6.1993, p. 27. Directive as last amended by Directive 2002/87/EC of the European Parliament and of the Council (OJ L 35, 11.2.2003, p. 1).

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ANNEX

INTERNATIONAL FINANCIAL REPORTING STANDARDS

No

Title

IFRS 2 Share-based Payment

Reproduction allowed within the European Economic Area. All existing rights reserved outside the EEA, with the exception of the right to reproduce for the purposes of personal use or other fair dealing. Further information can be obtained from the IASB at www.iasb.org.uk.

IFRS 2
INTERNATIONAL FINANCIAL REPORTING STANDARD 2

Share-based Payment

SUMMARY

Objective

Scope

Recognition

Equity-settled share-based payment transactions

Overview

Transactions in which services are received

Transactions measured by reference to the fair value of the equity instruments granted

Determining the fair value of equity instruments granted

Treatment of vesting conditions

Treatment of a reload feature

After vesting date

If the fair value of the equity instruments cannot be estimated reliably

Modifications to the terms and conditions on which equity instruments were granted, including cancellations and settlements

Cash-settled share-based payment transactions

Share-based payment transactions with cash alternatives

Share-based payment transactions in which the terms of the arrangement provide the counterparty with a choice of settlement

Share-based payment transactions in which the terms of the arrangement provide the entity with a choice of settlement

Disclosures

Transitional provisions

Effective date

OBJECTIVE

1. The objective of this IFRS is to specify the financial reporting by an entity when it undertakes a share-based payment transaction. In particular, it requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees.

IFRS 2
SCOPE

2. An entity shall apply this IFRS in accounting for all share-based payment transactions including: (a) equity-settled share-based payment transactions, in which the entity receives goods or services as consideration for equity instruments of the entity (including shares or share options), (b) cash-settled share-based payment transactions, in which the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price (or value) of the entity’s shares or other equity instruments of the entity, and (c) transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash (or other assets) or by issuing equity instruments, except as noted in paragraphs 5 and 6.

3. For the purposes of this IFRS, transfers of an entity’s equity instruments by its shareholders to parties that have supplied goods or services to the entity (including employees) are share-based payment transactions, unless the transfer is clearly for a purpose other than payment for goods or services supplied to the entity. This also applies to transfers of equity instruments of the entity’s parent, or equity instruments of another entity in the same group as the entity, to parties that have supplied goods or services to the entity.

4. For the purposes of this IFRS, a transaction with an employee (or other party) in his/her capacity as a holder of equity instruments of the entity is not a share-based payment transaction. For example, if an entity grants all holders of a particular class of its equity instruments the right to acquire additional equity instruments of the entity at a price that is less than the fair value of those equity instruments, and an employee receives such a right because he/she is a holder of equity instruments of that particular class, the granting or exercise of that right is not subject to the requirements of this IFRS.

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