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IFRS 2 – Share-based payment awards settled net of tax withholding

Date recorded:

The Committee continued its discussions from the November 2010 Committee meeting on the topic of whether amounts paid by entities on employers behalf directly to taxing authorities for withholding on share-based payment awards represents cash-settled or equity-settled shares under IFRS 2 Share-based Payment. During the November meeting, the Committee requested the staff to develop illustrative examples on the classification of share-based payments under these scenarios.

In the agenda request originally received by the Committee, 1) the entity is required to withhold from an employee's compensation an amount to satisfy the employee's tax liability incurred as a result of the share-based payment transaction and pay to the tax authority in cash the amount withheld from the employee's compensation and 2) the employee will receive shares net of the number of shares needed to equal the monetary value of the employee's tax liability rather than the gross number of shares of the share-based payment award.

In the example developed by the staff, the entity has the legal obligation to pay income tax on the employee awards when exercised based on the intrinsic value of the options at the exercise date. The entity has elected to withhold a number of shares equivalent to the value of the tax obligation due and will settle the transaction net by receiving the strike price from the employee for all share awards granted (i.e., 100) and issuing the net number of shares to the employee in order to meet the tax obligation (i.e., 66 shares issued, 34 shares withheld). The entity will pay the amount of the employee's tax obligation from its own cash resources.

The staff analysis for this example is driven by the manner of settlement. The staff believes that the component of the share-based payment award that is settled by the issuance of equity instruments (66 shares) is classified as equity-settled while the component settled in cash to satisfy the tax withholding is separately identified as a cash-settled share-based payment award.

The staff also proposed wording in the Committee agenda decision that included "the Committee noted that IFRS 2 provides sufficient guidance to address this issue and that it does not expect diversity in practice. Consequently, the Committee decided not to add the issue to its agenda."

Several of the Committee members expressed concerns with the staff conclusion on the example and the proposed drafting of the agenda decision. One of the Committee members also raised concerns with the example on how the liability component would be measured as there is an 'implied' strike price based on the number of shares actually received by the employee. Another Committee member her support for the conclusions the staff had reached but was troubled over the accounting implications and the significant difference in compensation expense which results. She stated that perhaps this is the rational for the FASB's providing of an exception for these arrangements. Another Committee member had concern with the agenda decision stating the Committee does not expect diversity in practice when they know there is currently diversity in practice. Another Committee member stated her belief that the tentative agenda decision in reality is an interpretation.

The Committee ultimately decided to refer the matter to the Board and to soften the language in the proposed agenda decision. Rather than stating the references for the staff conclusion on the fact pattern, stating the guidance is sufficiently clear and that diversity in practice is not expected (which may have led to a significant change in practice) the agenda decision was proposed to say the Committee agreed not to take on the agenda item and instead refer it to the Board for consideration.