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IFRS 2 — Share-based payment awards settled net of tax withholdings

Date recorded:

At the July 2012 meeting, the staff provided the Committee with updates on issues that have been referred to the IASB but not yet addressed. As a result of the discussions, the Committee decided to revisit certain issues related to IFRS 2. Two of those issues were discussed during this meeting.

The Committee discussed how to classify a share-based payment transaction in which the entity withholds a specified portion of the shares that would otherwise be issued to the counterparty upon exercise (or vesting) of the share-based payment award in order to settle the counterparty’s tax obligation. The shares are withheld by the entity in return for settling the counterparty’s tax withholding obligation associated with the share-based payment. The request received by the Committee asked whether the portion of the share-based payment that is withheld should be classified as cash-settled or equity settled.

On the basis of its analysis, the staff recommended that IFRS 2 should be amended to provide specific guidance for share-based payment transactions with net settlement provisions. This approach would be to provide specific guidance for the share-based payment transactions similar to that in U.S. GAAP to require that the portion that is net settled in cash for the purposes of meeting the employee’s income tax obligations should be classified as equity-settled. The staff noted that the specific guidance could be limited to a situation in which a provision in a law or agreement with the employee requires an entity to withhold a portion of the equity instruments to meet its minimum tax withholding requirements. Accordingly, in other cases such as when an amount is withheld in excess of the statutory minimum requirements, or may at the be withheld employee’s discretion, the classification of that portion of the award would be determined in accordance with classification requirements in IFRS 2 and would therefore be classified as cash-settled in accordance with IFRS 2.

Several Committee members expressed support for the staff’s analysis of the issue but were concerned with amending IFRS 2 to provide an exception (which was inconsistent with IFRS practice) for a very specific fact pattern. As a result, other recommendations were outlined by Committee members to resolve this issue without creating a specific exception to the principles in IFRS 2. However, for each alternative proposed, other Committee members believed the proposal would not meet the objective of addressing this issue.

One Committee member, highlighting his experience in the U.S. (which has specific guidance on this issue), noted the staff’s proposal would not work in the U.S. as drafted. Specifically, he noted that withholding tax in the U.S. is required to be remitted to the Internal Revenue Service (IRS), but the manner of remittance (e.g., net settlement, withheld from payroll, etc.) is not specified. As the staff’s proposal was to include specific guidance in a situation in which a provision in a law or agreement with the employee requires an entity to withhold a portion of the equity instruments to meet its minimum tax withholding requirements, he noted the proposals would not effectively capture the U.S. marketplace since net settlement is not required. The staff noted their intention was to largely conform with U.S. GAAP, and thus, the wording of the proposals would be reconsidered offline.

A couple of Committee members, in contrast to the staff proposals, expressed support for amending IFRS 2 to specify that withholding a portion of the share-based payment transaction to meet the tax obligations is, in substance, a repurchase of the vested equity instruments as described in paragraph 29 of IFRS 2 and therefore the entire award should be accounted for as an equity-settled share-based payment transaction. However, support was limited for this alternative.

After hearing the debate, the Committee Chair asked who would not object to the staff recommendation (subject to amendment for conformity with U.S. GAAP as noted above), with the super majority of the Committee noting they would not object. Therefore, the Committee intends to propose to the IASB that it should amend IFRS 2 in line with the above recommendation in a narrow-scope amendment project.

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