12.3 Statement of Cash Flows

Any cash paid by a grantee (e.g., the exercise price of a stock option) to the entity for an award is classified as a cash inflow from financing activities.

Any cash paid to settle an equity-classified award that does not exceed the fair-value-based measure of the award on the repurchase date is classified as a cash outflow for financing activities. The amount paid in excess of the fair-value-based measure of the award on the repurchase date is recognized as compensation cost and classified as a cash outflow for operating activities.

Any cash paid to settle a liability-classified award represents compensation and is classified as a cash outflow for operating activities. An entity may enter into an agreement to repurchase (or offer to repurchase) an equity-classified award for cash. Depending on the facts and circumstances, the agreement to repurchase (or offer to repurchase) may be accounted for as either (1) a settlement of the equity-classified award as discussed in the previous bullet point or (2) a modification of the equity-classified award that changes the award’s classification from equity to liability, followed by a settlement of the now liability-classified award.

Regardless of whether an entity meets an employee’s statutory tax withholding requirement through either a net settlement feature or a repurchase of shares, the entity must account for the withholding as, in substance, two transactions in the statement of cash flows. First, the gross issuance of shares is presented as a financing activity (any cash received from the employee is classified as a cash inflow from financing activities, and if no cash is received, the gross issuance of shares is presented as a noncash financing activity). Second, the entity is deemed to have repurchased a portion of the shares. While the employee does not receive cash directly, the entity has, in substance, repurchased shares from the employee and remitted the cash consideration to the tax authority on the employee’s behalf. Because the cash payment is related to a repurchase of stock, it is classified as a cash outflow for financing activities.

Any income tax benefit received for an award is classified as operating activities in the same manner as other cash flows related to income taxes.