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Share-based Payment

Date recorded:

During the October joint meetings the Board considered the following:

  • Whether, in the context of situations in which the measurement date for tax purposes is later than the measurement date for accounting purposes, the tax effects relate to an income statement item only, or to both an income statement item and an equity item, or to an equity item.
  • If it is accepted that the tax effects relate to both an income statement and an equity item, how the tax effects should be allocated between the income statement and equity.

On the first issue, the Board agreed that the tax effects relate to both an income statement item and an equity item. This conclusion is based on what is often described as the 'two transaction view', i.e.. the tax deduction relates to two transactions or events, being:

a. a transaction in which the employees render services as consideration for options or shares, which gives rise to remuneration expense (an income statement item), and

b. an equity transaction/event.

The Board considered various allocation methods proposed by FAS 123, the FASB staff and the IASB staff. It was noted that the differences between the methods are:

a. The interpretation of tax legislation that bases the tax deduction on the difference between the share price and the exercise price at exercise date, i.e. whether this represents an intrinsic value or a fair value measurement basis for tax purposes. In addition a method that allocates tax benefits received, up to the tax benefits on the recognised expense (at a particular point in time), are recognised in the income statement and any excess tax benefits are recognised in equity.

b. The treatment of tax effects where the application of a later measurement date for tax purposes results in a lower tax deduction than would have occurred had that tax deduction been measured at grant date.

c. The recognition of the deferred tax asset between the date when the expense is recognised and the date when the tax deduction is received, including whether the current share price should be considered in measuring that deferred tax asset (for either recognition or impairment purposes)and whether a deferred tax asset should be recognised for the expected future tax benefits relating to the equity item.

The Board agreed as follows:

  • The allocation is based on the tax benefit method.
  • The write-down is charged to the income statement (9-4).
  • The current share price should be used to determine the deferred tax asset and the deferred tax asset is recognised for the expected future tax benefits relating to both the income statement item and equity item.

The Board agreed that in the cash flow statement, the tax cash flows should be classified in a manner that is consistent with the recognition of the tax effects in the income statement and equity. This results in any tax income recognised in the income statement being classified in the cash flow statement as operating cash inflows and tax effects recognised directly in equity should be classified as cash inflows or outflows from financing activities.

The Board agreed that for the purposes of EPS calculations, the tax effects that would be credited or debited to equity should be included in the calculation of the assumed issue proceeds.

No Board member indicated they would be dissenting based on decisions to date.

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