As the name suggests, it is a payment based on the price or value of shares. Entities often grant shares or share options to employees or other parties. Share plans and share option plans are a common feature of employee remuneration for directors, senior executives and many other employees: some entities issue shares or share options to pay suppliers, such as suppliers of professional services in Indian ass.
In India, accounting of share-based payment transactions is done following SEBI guidelines and Guidance Note on Accounting for Employee Share-Based Payments or based on Ind AS 102. The corporate entities following Ind AS would not account for share-based payment based on Guidance Note. The Companies Act, 2013 also discusses it under section 62.
Under Sec 62 (1) (b) of the Companies Act 2013, where at any time a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares may be offered to employees under a scheme of employees stock option, subject to a special intention which is passed by the company and subject to such conditions as may be prescribed.
Some of the terms used in Ind AS 102 are as follows:
- Cash-settled share-based payment transaction- A share-based payment transaction in which the entity acquires goods or services by incurring liability for transferring cash or other assets to the supplier of those goods or services for amounts which are based on the price of equity instruments which also includes shares or share options) of the entity or another group entity.
- Employees and others providing similar services- Individuals who are able to render personal services to the entity and either (a) the individuals are considered as employees for various purposes of legal or tax, (b) the individuals who are working for the entity under its direction in the same way as those individuals who are regarded as employees for various legal or tax purposes, or (c) the services which are rendered are similar to those which are rendered by employees.
For example, the term is encompassing all management personnel, i.e. those persons having authority and responsibility for planning, directing and controlling the entity’s activities, including non-executive directors.
- Equity instrument- A contract that evidences a residual interest in an entity’s assets after deducting all of its liabilities in Indian ass.
- Equity instrument granted- The right (conditional or unconditional) to an equity instrument of the entity conferred by the entity on another party under a share-based payment arrangement.
- Equity-settled share-based payment transaction- A share-based payment transaction in which the entity is=
(a) Receiving goods or services which are taken in consideration for equity instruments (including shares or share options).
(b) Receiving goods or services but having no obligation for settling the transaction with the supplier.
- Fair value- The amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm‘s length transaction.
- Grant date- The date at which the entity and another party (including an employee) agree to a share-based payment arrangement when the counterparty and the entity have a shared understanding of the terms and state of the arrangement.
- At the date of grant, the entity can be confered on the counterparty that the right to cash, other assets, or instruments of equity of the entity, which provides the specified vesting conditions. If that agreement is subjected for an approval process, the grant date is when that approval is obtained in Indian ass.
- Intrinsic value- The difference between the shares fair value of to which the counterparty have the (conditional or unconditional) right to subscribe or which it is having the right to receive, and the price the counterparty is required paying for those shares. For example, an option of share with an exercise price of 15 on a share with a fair value of 20 has an intrinsic value of 5 in Ind AS 102 Share Based Payments.
- Market condition- A condition upon which the price have been exercised, exercisability or vesting of an equity instrument which depends on a condition which is related to the market price of the equity instruments of an entity, such as attaining a specified share price or a specified value of intrinsic amount of a share option, or achieving a specified target that is based on the market price of the entity‘s equity instruments relative to an index of market prices of equity instruments of other entities.
- Measurement date- The date at which the fair value of the equity instruments granted is measured for this Ind AS. For making transactions with employees and others are providing similar services, the measurement date can be the grant date. For making transactions with parties other than employees (and those who are providing similar services), the measurement date is when the entity obtains the goods, or the counterparty renders service.
- Performance condition-
A condition which are vested requires Ind AS 102 Share Based Payments
(a) The counterparty for completing a specified period of service (i.e. a service condition); the service requirement can be implicit or explicit; and
(b) Specified performance targets are to be met while the counterparty is rendering the service which is required in
The period of achieving the target performance
(a) It should not extend beyond the end of the service period.
(b) It may start before the period of service on the condition that the date of commencement of the performance target is substantially not before the commencement of the service period.
A performance target can be defined by reference to Ind AS 102 Share Based Payments.
(a) The entity‘s operations (or activities) or the operations or activities of another entity in the same group (i.e. a non-market condition).
(b) The price of the entity‘s equity instruments or the equity instruments of another entity in the same group (including shares and share options) (i.e. a market condition).
A performance target might be related either to the entity’s performance as a whole or to some part of the entity (or part of the group), such as a division or an individual employee.
- Reload feature- A feature that provides an automatic grant of additional share options whenever the option holder exercises previously granted options using the entity‘s shares, rather than cash, to satisfy the exercise price.
- Reload option- A new share option granted when a share is used to satisfy the exercise price of a previous share option.
- Service condition- A vesting condition that needs the counterparty for completing a specified period of service during which services have been provided to the entity. If the counterparty, regardless of the reason, it ceases for providing services during the vesting period, it also fails for satisfying the condition. A service condition is not required for a performance target to be met.
- Share option- A contract that gives the holder the right, but not the obligation, to subscribe to the entity‘s shares at a fixed or determinable price for a specified time.
- Vest- For becoming an entitlement. Under an arrangement of share-based payment, a counterparty‘s right to receive cash, other assets or equity instruments of the entity vests when the counterparty‘s entitlement is no longer conditional on the satisfaction of any vesting conditions in Ind AS 102 Share Based Payments.
- Vesting condition- A condition determines whether the entity receives the services that entitle the counterparty to receive cash, other assets or equity instruments under the arrangement of share-based payment. A vesting condition can be either a service condition or a performance condition in Accounting Standards.
- Vesting period- The period during which all the specified vesting conditions of a share-based payment arrangement are satisfied.
It is an agreement between the entity (or another group entity or any shareholder of any group entity) and another party (including an employee) that entitles the other party to receive –
(a) Other assets or cash of the entity for amounts that are based on the price (or value) of equity instruments (including shares or share options) in Indian ass of the entity or another group entity.
(b) Equity instruments which includes shares or share options of the entity or another group of entity, provided the specified vesting conditions, if any, are met.
Share-Based Payment Transaction:
It is a transaction in which the entity –
(a) Receiving goods or services from the supplier of those goods or services which also includes an employee in a share-based payment arrangement.
(b) Incurring an obligation for settling the transaction with the supplier in a share-based payment arrangement when another group entity receives those goods or services.
What is covered within Ind AS 102?
Based on the analysis of the definitions, the scope of the standard are as follows:
- Covers settlement in equity or cash or alternative settlement option, i.e., issuing shares or paying cash.
- Even if an entity cannot identify all goods/ services that are being received by settling the transaction, either by issuing its own equity/ group‘s equity or by paying a cash value equivalent to the equity prices, it will still be covered under Ind AS 102.
- Un-identified goods/ services that are being received will be covered in the Accounting Standards.
- Share-based payment can be settled by another group of entities or by using equity shares of the group‘s entity.
- Employee of a company, working as a service provider to an entity and receiving share-based payments (e.g. stock options, warrants etc.) will be covered under this standard.
- Goods will include inventories, consumables, property, plant & equipment and other non-financial items.
What have been not covered in Ind AS 102?
Transactions with shareholders as a whole, i.e., when the shareholders act solely in their capacity as shareholders.
- Entity should not apply this standard to transactions in which the entity acquires goods as part of net assets acquired in business combinations defined by Ind AS 103. Business Combinations or contribution for Joint ventures as per Ind AS 111.
- Financial instruments issued to buy/sell non-financial items which can be settled at the net will be outside Ind AS 102.
An entity should recognize the goods or services which are received or acquired in a share-based payment transaction when it obtains the goods or as the services are received.
The entity shall recognize a corresponding increase in equity if the goods or services were received in an equity-settled share-based payment transaction or a liability if the goods or services were acquired in a cash-settled share-based payment transaction.
- All such goods/services received in share-based payment can be recognized while receiving such goods or obtaining services.
- An entity would be recognizing an expense or an asset if the goods and services received to meet the criteria for recognition as an asset.
- A corresponding increase in equity for equity-settled transactions or liabilities for cash-settled transactions can be recognized.
- The recognition would be dependent on vesting conditions if any (in certain cases, there would not be any vesting condition). It means, if there are certain conditions, either service-related or performance-related, which needs to be completed to be eligible for such Share-based payments, then recognition will be based on the best estimate of the expected vesting value of such share-based payments.
TYPES OF SHARE-BASED PAYMENTS
Equity Settled- Share-Based Payments:
For transaction of equity-settled share-based payment, the entity shall measure the goods or services received and the corresponding increase in equity directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably in Indian ass.
Suppose the entity cannot estimate the fair value of the goods or services received. In that case, the entity shall measure its value and the corresponding increase in equity indirectly by referencing the fair value of the equity instruments granted in Accounting Standards.
Cash Settled- Share-Based Payments:
For transaction of cash-settled share-based payment, the entity should measure the goods or services acquired and the liability incurred at the liability’s fair value. Until the liability have been settled, the entity should remeasure the fair value of the liability at the end of each reporting period and the settlement date, with any changes in fair value recognized in profit or loss for the period.
Share-Based Payment Transactions with Cash Alternatives:
For transaction of share-based payment in which the terms of the arrangement provides either the counterparty or the entity with the selecting of whether the entity settling the transaction in cash (or other assets) or by issuing equity instruments.
The entity should account for that transaction, or various components of that transaction, as a transaction of cash-settled share-based payment transaction if, and to the extent that, the entity has incurred a liability to settle in cash or other assets, or as an equity-settled share-based payment transaction if, and to the extent that, no such liability has been incurred.
DETERMINING TYPES OF CONDITION Ind AS 102 Share Based Payments
Share-based payment awards generally vest upon meeting specified conditions, such as service conditions (time-based) or performance conditions (e.g. achieving a specified EBITDA target). These conditions affect the timing of when the expense is recognized and the measurement of expense in some cases.
In addition, if a condition is not met, whether or not the entity may reverse previously recognized compensation expense depends on the nature of the condition that was not met in Indian ass. Hence classification of a condition is an important step in the accounting of share-based payments.
Such conditions do not have any impact on eligibility to have share-based payments. The standard has not specifically defined it. However, one can understand this as conditions that are other than vesting conditions.
DETERMINING IMPACT OF CONDITIONS ON Ind AS 102 Share Based Payments
Once we understood the conditions attached with any share-based payment, the next question arises about the implication of the conditions on accounting/measurement of such share-based payments and why it is crucial to segregate them.
- A grant of equity instruments may be conditional upon which it might be satisfying specified vesting conditions. For example, a grant of shares or options of share to an employee is typically conditional on remaining in the entity‘s employment for a specified period.
- There might be performance conditions that might be satisfactory, such as achieving a specified growth in profit by an entity or an increase in specific entity‘s share price. Other than market conditions, vesting conditions should not be considered while estimating the fair value of the shares or share share options of measurement date.
- Instead of this, vesting conditions should be taken into account by the adjustments of the number of equity instruments. This included in the measurement of the transaction amount so that, ultimately, the amount recognized for goods or services which are received as consideration for the equity instruments which are granted should be based on the number of equity instruments that eventually vest.
- Hence, on a cumulative basis, no amount is recognized for goods or services received if the equity instruments granted do not vest because of failure to satisfy a vesting condition, e.g. the counterparty fails to complete a specified service period, or a performance condition is not satisfied, subject to the requirements mentioned below in point c.
- To apply the requirements mentioned in the abovementioned point (a), the entity shall recognize an amount for the goods or services which are received during the vesting period which are based on the best available estimation of the number of equity instruments which are expected for vesting and should be revised that is estimated, if it is necessary.
- If it is having subsequent information which indicates that the number of equity instruments which are expected to vest for differing from previous estimates. On vesting date, the entity should revise the estimation to equal the number of equity instruments that ultimately vested, subject to the requirements mentioned below in point c.
- Market conditions, such as a target share price upon which vesting (or exercisability) is conditioned, shall be considered while estimating the fair value of the equity instruments which are granted.
- Therefore, conditions of market for granting of equity instruments, the entity shall recognize the goods or services received from a counterparty who satisfies all other vesting conditions (e.g. services received from an employee who remains in service for the specified period of service), irrespective of whether that market condition is satisfied.
- Similarly, an entity shall consider all non-vesting conditions when estimating the fair value of the equity instruments granted.
- Therefore, Ind AS 102 Share Based Payments Accounting Standards for grants of equity instruments with non- vesting conditions, the entity shall recognize the goods or services received from a counterparty that satisfies all vesting conditions that are not market conditions (e.g. services which are received from an employee who are remaining in service for the specified period of service), which are irrespective of whether those non-vesting conditions are satisfied. Accounting Standard
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