Issues recommended for narrow scope amendment

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

In the July 2012 meeting, the Interpretations Committee received an update on the issues that have been referred to the IASB but have not yet been addressed. The Interpretations Committee asked the staff to update the analysis and perform further outreach on an issue of the classification of a share-based payment transaction with a net settlement feature in which the entity withholds a specified portion of the equity instruments that would otherwise be issued to the counterparty upon exercise (or vesting) of the share- based payment award. The equity instruments are withheld by the entity in return for settling the counterparty‘s tax obligation that is associated with the share-based payment. The request received by the Interpretations Committee asked whether the portion of the share-based payment that is withheld should be classified as cash-settled or equity-settled, if the entire award would otherwise be classified as equity-settled without the net settlement feature.

In this meeting, the Interpretations Committee observed that this issue is widespread and that there is significant diversity in practice on the basis of the updates on the outreach result provided by the staff. Consequently, the Interpretations Committee tentatively decided to recommend amendments to IFRS 2 to clarify the accounting for this type of share-based payment transaction.

The Interpretations Committee deliberated approaches to amending IFRS 2 to address this issue. In the discussions, the Interpretations Committee noted that divergent interpretations on the relevant requirements of IFRS 2 were expressed in its previous meetings and in the comment letters received on the tentative agenda decision issued in September 2010. Accordingly, the Interpretations Committee observed that it is difficult to reach a consensus on whether the portion withheld by the entity in the share-based payment transaction should be classified as cash-settled or equity-settled in the light of the existing requirements in IFRS 2. In addition, the Interpretations Committee sympathised with concerns that requiring a different classification of the portion that is withheld by the entity from the classification of the other portion could cause an undue burden to the entity when applying the Standard.

As a result of the discussions, the Interpretations Committee decided to recommend to the IASB that to mitigate the diversity in practice on this issue it should amend IFRS 2 in a narrow-scope amendment project by adding specific guidance that addresses limited types of share-based payment transactions with a net settlement feature. The guidance would be to clarify that a share-based payment transaction in which the entity settles the share-based payment arrangement net by withholding a specified portion of the equity instruments to meet its minimum statutory tax withholding requirements would be classified as equity-settled in its entirety, if the entire award would otherwise be classified as equity-settled without the net settlement feature.

The Interpretations Committee directed the staff to bring the Interpretations Committee‘s recommendation to a future meeting of the IASB.

Observer note: Agenda Paper 5B (March 2013)
Meeting audio: Agenda Paper 5B (March 2013)

IFRS 2 Share-based Payment—Modification of a share-based payment from cash-settled to equity- settled

In the July 2012 meeting, the Interpretations Committee received an update on the issues that have been referred to the IASB but have not yet been addressed. The Interpretations Committee asked the staff to update the analysis and perform further outreach on an issue of the accounting for a modification of a share- based payment arrangement with employees that changes its classification from cash-settled to equity- settled. The request received by the Interpretations Committee asked for clarification on how to account for
a share-based payment award in situations in which a cash-settled award is cancelled and is replaced by a new equity-settled award and the replacement award has a higher fair value than the original award.

In this meeting, the Interpretations Committee noted that the results of the outreach confirmed that this issue is widespread and that there is significant diversity in practice. This is primarily because IFRS 2 lacks guidance that addresses a modification of a share-based payment transaction that changes its classification from cash-settled to equity-settled. Accordingly, the Interpretations Committee tentatively decided to recommend amendments to IFRS 2 to address the diversity in practice.

The Interpretations Committee decided to recommend to the IASB that it should amend IFRS 2 in a narrow- scope amendment project in a manner consistent with the following:

a. the cancellation of a share-based award followed by a replacement equity-settled award should be viewed as a modification of the share-based award because the economic substance of cancellation followed by replacement is the same as the modification of the terms of the original share-based award. This is consistent with the requirements in paragraph 28(c) of IFRS 2, which requires replacement of an equity-settled award to be accounted for in the same manner as a modification of the original grant of equity instruments;
b. the new equity-settled award should be measured by reference to the modification-date fair value of the equity-settled award, because the modification-date should be viewed as the grant date of the new award in accordance with the definition of grant date in IFRS 2;
c. the liability recorded in respect of the original cash-settled award should be derecognised upon the modification and the equity-settled replacement award should be recognised to the extent that service has been rendered up to the modification date;
d. the unrecognised portion of the modification-date fair value of the new equity-settled award should be recognised as compensation expense over the remaining vesting period as the services are rendered; and
e. the difference between the carrying amount of the liability and the amount recognised in equity as at the modification date should be recorded in profit or loss immediately in order to show that the liability has been remeasured to its fair value at the settlement date in accordance with paragraph 30 of IFRS 2.

The Interpretations Committee directed the staff to bring the recommendation of the Interpretations Committee to a future meeting of the IASB.

Observer note: Agenda Paper 5C (March 2013)
Meeting audio: Agenda Paper 5C (March 2013)