The IASB recently finalized amendments to IFRS 2 relating to the accounting treatment of share withholding and cash-settled awards.

FASB in the Lead

The IASB issued the exposure draft of the amendments in November 2014—so long ago that I was beginning to think that maybe they had forgotten about the project and would never get around to it. By way of reference, the FASB issued the exposure draft of their amendments to ASC 718 seven months later and still managed to issue their final amendments three months ahead of the IASB.

Share Withholding

The most exciting amendment permits shares to be used to cover tax withholding without triggering liability treatment. Under the original IFRS 2, share withholding triggered liability treatment for the shares that were applied to the tax payment—no exceptions. This resulted in a bifurcated accounting treatment for the award: the portion that would be settled in cash to cover the tax payment was subject to liability treatment while the rest of the award was subject to equity treatment. It was also an area where IFRS 2 diverged from ASC 718, which has always included an exception to liability treatment for share withholding.

Unfortunately, the two standards still don’t converge.  The IASB’s amendment only permits share withholding up to the statutorily required payment, and, as my readers know, the FASB recently expanded the exception in ASC 718 to apply to share withholding up to the maximum individual tax rate in the applicable jurisdiction. It’s ironic: the primary reason the FASB expanded the exception in ASC 718 was to facilitate share withholding for non-US employees but, unfortunately, for companies that have to report under IFRS, the international standard will still pose an obstacle to doing this.

Cash-Settled Awards

The IASB also amended IFRS 2 to clarify the vesting conditions that apply to cash-settled awards should be accounted for in the same manner as for stock-settled awards.  The upshot is that for non-market conditions, the company records expense based on an estimated forfeiture rate and trues up to outcome. Market conditions (and non-vesting conditions) are incorporated into the fair value of the award.  I’m surprised that anyone thought anything different. I guess that’s the problem with a “principles-based standard.” If you don’t spell everything out with a nice clear set of rules, someone is bound to interpret the principle in a way you don’t want them to.

The amendments also clarify how to account for modifications that change the classification of awards from cash-settled to stock-settled.  I’m not going to bother to explain this because 1) it’s a total snore (as compared to the rest of the action-packed amendments) and 2) it happens so rarely that hardly anyone cares about it. And, as with any modification of stock awards, it’s crazy complicated—if this is something your company is doing, you should really be talking to your accounting advisors and not relying on an English major to tell you how to account for the modification.

Thanks to Ken Stoler of PwC for bringing the amendments to my attention and for providing a handy summary of them.

– Barbara