My issue is that during CSS transition border-radius temporarily stops clipping elements inside if transition of overlapping element involves transform
After some more experiments I've finally found the solution. Sometimes simple ones are the hardest to find. In this case #above {z-index: 1;} (like in http://jsfiddle.net/UhAVG/1/) solves the issue. Wild guess is that z-index prevents some optimization that combines operations from single layer and doing so mistakenly optimizes out applying border-radius on element. With layers separated this is no longer the case.