Share based payment transactions
Indian Accounting Standard Ind AS 102 deals with Share based payment trans-actions. This is one of the standards announced by MCA
IFRS 2 is the corresponding Accounting Standard issued by International Ac-counting Standards Board (IASB).
Mandatory requirements – no exceptions:
An entity has to recognise share-based payment transactions in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity. There are no exceptions to Ind AS 102, other than for transactions to which other Ind ASs apply.
There are specific requirements for three types of transactions as given below:
1. Equity-settled share-based payment transactions: Here the entity receives goods or services as consideration for equity instruments of the entity. This includes equity shares and/or share options.
The goods or services received is measured based on the fair value of such goods or services unless the fair value cannot be estimated reliably. The corresponding value should be increased in the equity. If the fair value of the goods or services cannot be estimated reliably, then the value is ascertained based on the fair value of the equity instruments granted. If the transaction is with the employees or others providing similar services, the fair value of the equity instruments granted is measured as it is not possible to estimate the fair value of the services rendered by the employees. The fair value measurement of the equity instrument granted is always done at the grant date. For transactions with non-employees including those providing such similar services, there is a rebuttable presumption that the fair value of the goods or services received can be measured reliably. Such fair value is measured at the date on which the goods are received or the services rendered by the counter party. Where the presumption is rebutted, the fair value is determined based on the fair value of the equity instruments granted as measured at the date the goods are received by the entity or the services are rendered by the counter party.
Where the fair value is measured based on the fair value of the equity instruments granted, Ind AS 102 specifies the methodology by which such fair value should be determined. All non-vesting conditions are taken into account to estimate the fair value of the equity instruments other than the vesting conditions that are not market conditions. Vesting conditions are taken into account by adjusting the number of equity instruments in such a way that the amount recognized for goods or services rendered is based on the number of equity instruments that eventually vest. In other words, if the equity instruments granted do not vest due to the inability to satisfy the vesting conditions, no amount is recognized on a cumulative basis for such goods or services received.
Fair value to be based on market prices:
Ind AS 102 mandates that the fair value of equity instruments granted to be based on market price if available including the terms and conditions upon which those equity instruments were granted. However, where the market prices are not available, even the fair value is estimated using a prescribed valuation technique so as to determine the value of the equity instruments on the measurement date. Where the terms and conditions on an option or share grant are modified, Ind AS 102 requires that the entity should recognize as a minimum, the services received measured at the grant date of fair value of the equity instruments granted. Any modifications, cancellations or settlement of a grant of an equity instruments to modify would be recognized in the books of accounts if and only if it is beneficial to the employee which ultimately results in recognizing the expense of the employer.
- Cash-settled share-based payment transactions: Here the entity acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price or value of the entity’s shares or other equity instruments of the entity.
The goods or services acquired is measured based on the fair value of the liability incurred. Only the liability is settled, the fair value of such liability should be remeasured at the end of each reporting period by recognizing the fair value changes in the profit and loss account. The fair value should also be recognized and accounted for at the date of settlement.
- Choice of settlement: This covers transactions in which the entity receives or acquires goods or services and the terms of the arrangement provide either the entity or the supplier of those goods or services with a choice of whether the entity settles the transaction in cash or by issuing equity instruments.
In this case, the entity is required to account for such transaction as a cash settled share based payment transaction to the extent that the entity has incurred a liability to settle in cash. The same will be accounted for as an equity settled share based payment transaction to the extent that no such liability has been incurred.
Ind AS 102 prescribes various disclosure requirements to enable users of financial statements to understand:
- the nature and extent of share-based payment arrangements that existed during the period;
- how the fair value of the goods or services received, or the fair value of the equity instruments granted, during the period was determined;
the effect of share-based payment transactions on the entity’s profit or loss for the period and on its financial position.