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In this month’s column, PwC authors answer technical questions on employee incentive plans in a business combination, and on agent versus principal

This article was first published in the October 2012 UK edition of Accounting and Business magazine.


Group A acquired entity B during the year; entity B was previously wholly owned by its employees. At the time of the acquisition, Group A also put an ‘employee incentive plan’ in place to encourage entity B’s workforce to stay with the new group. The plan will pay cash to employees in three years’ time. Should the cost of the incentive plan be treated as compensation for post-combination employee services or contingent consideration for payment of shares under IFRS 3, Business Combinations?


It depends! You will need to consider the facts and specific indicators in paragraph B55 of IFRS 3 to determine the appropriate accounting treatment.

The first condition that needs to be assessed is whether the future payments are automatically forfeited if the employment terminates. The standard states that an arrangement in which payments are automatically forfeited if employment ceases is remuneration for post-combination services. In contrast, if payments are not affected by whether the person is employed or not, this may indicate that the arrangement is contingent consideration.

Let’s assume that under the plan, ‘good leavers’ (retirements, death, redundancy) retain their entitlements, while ‘bad leavers’ (resignation, termination for cause) are entitled to only a payment that is in proportion to their time spent with Group A. While this might sound as if the payments are more akin to consideration, the amounts payable would differ between good and bad leavers (both previously owning the same percentage shares); it therefore indicates a post-combination expense.

In an extreme case, were a previous employee/shareholder to leave directly after the acquisition as a bad leaver, the incentive payment would be substantially different from another previous employee/shareholder remaining in the service for a period of time. This indicates that continuing employment is a requirement for the payment to be made and that the payment should be considered as compensation.


ABC Ltd organises events and activities. ABC offers its customers a choice of activities, accommodation and transport, including a number of standard package deals, which can be booked through its website. ABC collects all payments from customers and arranges bookings with a number of third parties. Is ABC acting as principal or agent? Should it recognise income on a net or gross basis?


IAS 18, Revenue, states an entity is acting as principal in a transaction when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. IAS 18 paragraph IE21 provides a number of indicators to consider; these are analysed below.

ABC is not primarily responsible for providing the services to the customers; this is the responsibility of the third-party service providers. The customer is also aware that a third party is providing a service to them that was booked through ABC. It is made clear at the time of booking that any concerns about the quality of service provided by the third parties should be raised with them and not ABC.

ABC has some ability to establish prices with the customer and does not necessarily earn a fixed fee or percentage. However, ABC is not significantly exposed to the cost of the services, which is ultimately passed on to the end customer, with ABC adding a mark-up for their services. ABC does not bear any significant credit risk, as customers are required to pay upfront.

You need to exercise judgment. The substance of this transaction is that ABC is providing a booking service for customers and collecting money on behalf of the service providers. It therefore recognises only the net commission as revenue and not the full amount received from customers.

IFRS disclosure checklist 2012

PwC’s IFRS disclosure checklist has been updated to take into account standards and interpretations effective for December 2012 year ends.


Last updated: 3 Apr 2014