IFRS 2 paras 33E-33F, net settlement feature relating to tax payable treated as equity settled

Stora Enso Oyj – Annual report – 31 December 2018

Industry: forestry

Notes to the Consolidated financial statements (extract)
Note 1 Accounting principles (extract)
New and amended standards and interpretations adopted in 2018 (extract)
• Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions effective from 1 January 2018 were adopted prospectively without restatement of comparative periods. Tax laws or regulations may require the Group to withhold an amount for an employee’s tax obligation associated with a share-based payment and transfer that amount, normally in cash, to the tax authority on the employee’s behalf. To fulfil this obligation, the Group withholds the number of equity instruments equal to the monetary value of the employee’s tax obligation from the total number of equity instruments that otherwise would have been issued to the employee upon vesting of the share-based payment. According to the IFRS 2 amendments, such transactions are to be classified in their entirety as equity-settled share-based payment transactions, even though the tax obligation is paid in cash on behalf of the employee. Resulting from the application of the amendments, the Group recognised EUR 9 million positive transition adjustment to the opening balance of retained earnings for 2018.

Note 21 Employee variable compensation and equity incentive schemes (extract)
Accounting principles
Share awards
The costs of all employee-related share-based payments are charged to the Consolidated Income Statement as personnel expenses over the vesting period. The share programmes may be hedged using Total Return Swaps (TRS) which are settled with cash payments, allowing the company to receive cash compensation to partially offset any change in the share price between the grant and settlement dates. Group TRS instruments do not qualify for hedge accounting and therefore periodic changes to their fair value are recorded in the Income statement in operative costs alongside the share-based programme costs to which they relate.

As a result of IFRS 2 amendment: Classification and Measurement of Share-based Payment Transactions, effective from 1 January 2018, all share-based payment transactions are classified as equity-settled share awards. Please refer to the Note 1 Accounting principles for further details. The equity-settled share awards (net of tax), are measured at the fair value of the equity instruments on the grant date, and are adjusted for the present value of expected dividends. The fair value of the equity-settled share-based payments determined on the grant date is expensed on a straight-line basis
over the vesting period, based on the estimate of equity instruments that will eventually vest, with a corresponding increase in equity.

In 2017, prior the above mentioned change, the fair value of employee services received in exchange for share awards were accounted for in a manner that was consistent with the method of settlement. The group withheld an amount from an employee’s compensation to satisfy the employee’s tax liability incurred as a result of the transaction. This was done by reducing the number of shares issued to the employee. This tax-related amount was accounted for as a cash-settled share-based compensation. The number of shares delivered to the employee was accounted for as an equity-settled transaction. The resulting cash-settled liability related to the expected tax to be paid was remeasured at each reporting date at its fair value using estimates of the number of share awards that were expected to be issued and the latest fair valuations by using the Stora Enso R share year-end closing price, adjusted for the present value of expected dividends, with all changes recognised immediately in the Income Statement.