Ind AS 102 | Share Based Payments – The Basics!

Table of Contents

1. Introduction
2. Scope
3. Definitions
4. Recognition

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CA-Final | Nov. 2023 Exam

1. Introduction

As the name itself describes, share-based payments refer to “payments made by a company based on its share price” (read carefully). Share-based payment occurs when an entity buys goods (or) avails services from a ‘counterparty’ and the counterparty could be any supplier or even an employee;

This standard deals with the effects of share-based payment transactions in P&L and Balance sheet including expenses associated with share options granted to employees.

1.1 Share-based payment

The standard has given TWO step definition i.e. it has defined

(1) Share-based payment arrangement; and

(2) Share-based payment transaction separately.

Share-based payment arrangement is an agreement between:

(a) the entity/another group entity/any shareholder of any group entity; and

(b) another party (including an employee)

This arrangement entitles the other party to receive

• shares/share options of the entity or another group entity; or
• cash/other assets based on share price (share option price) of the entity or another group entity;

(subject to satisfaction of vesting conditions mentioned in the agreement)

The distinction between employee and other than the employee is important as the measurement of share-based payments differs accordingly.

A ‘share-based payment transaction’ is a transaction in which the entity:

• receives goods or services from the supplier of those goods or services (including an employee) in a share-based payment arrangement; or (in this case – the entity (A Ltd.) receives goods/services and A Ltd. settles the obligation either by paying cash based on its share price or issuing equity shares)
• incurs an obligation to settle the transaction with the supplier in a share-based payment arrangement when another group entity receives those goods or services. (Read it carefully, another group entity receives the goods/services from any supplier/employee and this entity is going to settle the obligation – Like, Subsidiary receives the services from its employees but Holding Co. issues its shares to subsidiary employees)

1.2 Group Entity

The group includes parent, subsidiaries (include sub-subsidiary also), fellow subsidiaries. It does not include Associates & Joint Ventures.

1.3 Goods

Goods include inventories, consumables, property, plant and equipment, intangible assets and other non-financial assets.

2. Scope

This standard is applicable to all share-based payment transactions in relation to goods or services received irrespective of its specific identification. (That is, the standard is applicable to goods/services whether identified or unidentified). This is including:

(a) Equity-settled share-based payment transactions – It settles by issuing equity instruments or share option of the entity;

(b) Cash-settled share-based payment transactions – It settles by giving either cash or other assets of the entity but based on share price of the entity;

(c) Choice of settlement – It can be settled either by giving cash/other assets or issuing equity instruments. This choice can be either with the entity or the counterparty;

(d) Unidentified Goods/Services that are being received; and

(e) In some cases, one entity (Subsidiary) is receiving the goods or services but other group entity (Say parent entity) has to settle the obligation and vice versa i.e. other group entity (Parent) received goods or services and the entity (Subsidiary) needs to settle the obligation. This standard is applicable to both the entities receiving Goods or Services as well who settles the payment.

2.1 Non-applicability

(a) A transaction with employees (or other parties) in his/her capacity as a holder of equity instruments of the entity is not a share-based payment transaction.

For example, Rights issue – if an entity grants rights to purchase additional shares to all holders of a particular class of its equity instruments at a price that is less than the fair value, and an employee receives such a right because he is a holder of equity instruments, the granting or exercise of that right is not covered by this Standard.

(b) Transactions in which the entity acquires goods as part of the net assets acquired in a business combination. However, equity instruments granted to employees of the acquiree in their capacity as employees (e.g. in return for continued service) are within the scope of this Standard. Ind AS 103 guides whether the equity instruments are issued for control acquisition or continued services.

(c) The transaction under a contract is within the scope of Financial Instruments Ind AS 32.

3. Definitions

3.1 “Equity-settled” share-based payment transaction

A share-based payment transaction in which the entity:

(a) receives goods or services as consideration for its own equity instruments (including shares or share options), or

(b) receives goods or services but has no obligation to settle the transaction with the supplier (because it will be settled by group entity).

3.2 “Cash-settled” share-based payment transaction

A share-based payment transaction in which the entity acquires goods or services by incurring liability to transfer cash or other assets to the supplier of those goods or services for amounts that are based on the price (or value) of equity instruments (including shares or share options) of the entity or another group entity.

3.3 Fair value

The amount for which an asset could be exchanged, a liability could be settled, or an equity instrument granted could be exchanged, between knowledgeable and willing parties in an arm’s length transaction (The definition of “fair value” as per this standard is too different from fair value as per Ind AS 113 – You should not refer to Ind AS 113 for the purpose of this Standard).

Fair value which is required to be used is not just a quoted price of any security. There are some market related conditions and/or non-vesting conditions that should be considered in the determination of fair value. Hence to determine such fair value, one has to use valuation techniques. However, there is no specific provision in the Standard to this extent. Black Scholes pricing model and Binomial pricing model are generally accepted and widely used.

Standard specifies the following minimum inputs to be used while calculating the fair value.

(a) Exercise price of the option;

(b) Life of the option;

(c) Current price of the underlying shares;

(d) Expected volatility of the share price;

(e) Dividend expected on the shares (if appropriate); and

(f) Risk-free interest rate for the life of the option.

4. Recognition

An entity shall recognise the goods or services (i.e. enter in the books by debiting the goods/services) in a share-based payment transaction only when it receives them. Accounting is based on the method of settlement of the liability.

4.1 Whether goods/services will be recorded as asset or expense?

Well, this is not under the scope of this Standard. One should refer to the basic definition of asset and conditions to be fulfilled to recognise an asset. If the underlying goods or services satisfy the definition and conditions of an asset – it can recognise as an asset, otherwise it should be charged to P&L as an expense.

For example

Usually, when any counterparty provides services – it will be expensed in the same year. If the entity receives goods – it should be initially recognised as inventory and later it should be charged to the statement of P&L when inventory is consumed. If these items used for development phase of intangible asset – it will be capitalised along with Intangible asset as per Ind AS 38.

Let us learn this standard in FOUR PARTS

Part I – Equity-settled Share based payment transactions;

Part II – Cash-settled Share based payment transactions;

Part III – Share based payment transactions with cash alternatives;

Part IV – Share-based payment transactions among group entities.

Part I – Equity-settled Share Based payment transactions

As we learnt above, in case of accounting for equity-settled share based payment transactions – Goods/services received will be debited and corresponding credit be given to Equity.

At what value?

Important points on fair value:

• If employee provides services to the entity : Actually it is not possible to estimate the fair value of the services. Hence one should consider fair value of equity instruments issued; (This same rule is applicable – even others providing similar services); (Explained below). In case of Employees, Fair value of the equity instruments should be measured on the grant date;
• In case of transactions with the parties other than employees, Standard’s rebuttable assumption is that fair value of goods/services can be measured reliably. In rare cases, it may not be possible to measure the fair value of goods/services received, in that case, as an alternative, consider fair value of equity instruments issued; Even in this case, fair value of equity instruments should be measured on the date when the entity receives the goods/services (Not on the date of issue of equity instruments).

4.2 “Employees and others providing similar services”

Individuals who render personal services to the entity are either

(a) the individuals are regarded as employees for legal or tax purposes;

(b) the individuals work for the entity under its direction in the same way as individuals who are regarded as employees for legal or tax purposes, or

(c) the services rendered are similar to those rendered by employees.

For example, the term includes all management personnel, i.e., those persons having authority and responsibility for planning, directing and controlling the activities of the entity, including non-executive directors.

In this standard, Employees include “Others providing similar services”

The following diagram summarises the above discussion

4.3 Vesting

Vesting means becoming entitled. That is, the counterparty (employees/any other party) is entitled to receive cash, other assets or equity instruments of the entity. Usually, vesting is subject to certain conditions which are discussed below at length.

4.4 Vesting conditions

These are the conditions mentioned in the share-based payment arrangement which need to be satisfied by the counterparty to become entitled. A vesting condition is either a service condition or a performance condition.

Vesting period: Refers to the period during which all the specified vesting conditions of a share-based payment arrangement are to be satisfied.

4.5 Service condition & Performance condition

Service condition

It is a vesting condition that requires the counterparty to complete a specified period of service. If the counterparty ceases to provide service during the vesting period (regardless of the reason), it has failed to satisfy the condition. A service condition does not require to meet a performance target.

Example

An entity issued shares options to its existing employees who remain in service for next 3 years and the benefit will be settled in cash of an equivalent amount of share price.

Performance condition:

A vesting condition that requires

(a) the counterparty to complete a specified period of service (i.e., a service condition); the service requirement can be explicit (precisely communicated) or implicit (Implied); and

(b) specified performance target should be met while the counterparty is rendering the services as per point (a) above. Examples include – Achieving sales target, Profit target, Market price target, etc. These targets may be pertaining to the entity or any other entity in the same group or partly related to entity and remaining related to another entity in the group.

4.6 Grant date

The date on which both the parties (the entity & counterparty) agreed to SBP arrangement.

At grant date the entity grants the counterparty the right to cash, other assets, or equity instruments of the entity subject to satisfaction of specified vesting conditions mentioned in the agreement. If that agreement is subject to an approval process (for example, by shareholders), grant date is the date when that approval is obtained.

Situation 1

Equity instruments which are granted vest immediately

This means, no vesting conditions are to be satisfied for entitlement. In other words, the counterparty need not fulfil either service or performance conditions. It is assumed that services have been received.

The entity shall recognise the services received in full, with a corresponding increase in equity on the grant date.

Situation 2

Equity instruments which are granted upon completion of specific period of service by counterparty

In this case,

Services to be rendered during the vesting period by the counterparty = Consideration for Equity instruments to be issued.

The entity shall account for (Debit) those services as they are rendered by the counterparty during the vesting period, with a corresponding increase in equity (Credit).

For example

(a)  If an employee is granted share options conditional upon service conditions (E.g., complete three years’ service) – the specified service period itself becomes the vesting period. In this case, consideration for share options granted by the entity is services to be rendered by the employees during the vesting period and hence, expense for the service received will be recognised over the vesting period. (In fact, vesting shall take place only upon completion of specified 3 years in this case, however, we cannot postpone recognition of service expense until then and moreover, it is prudent and also in line with generally accepted accounting principles to accrue the expense based on management’s best estimate of how many of the staff are going to fulfil the vesting period condition.)

4.7 Vesting conditions

Before learning the point (b) – You need to understand the types of vesting conditions. Timing and measurement (amount) of expense varies based on the type of vesting conditions. Based on the type of conditions, the entity may reverse previously recognised expense – if the conditions are not met.

Let us focus on classification of conditions.

4.8 Service conditions

It is a vesting condition that requires the counterparty (employee) to complete a specified period of service to be eligible for employee share based payment. Irrespective of the reasons, if the employee fails to provide services during the specified period – they are not eligible for share based payments. Here, employee only needs to provide services and not achieve any specific performance targets pertaining to his field of work like level of production, PAT, etc.

For example

As per the agreement an entity issues 100 shares each to its 1,000 employees if they remain in service with the entity for next 3 years. This would be considered to be a service condition; 3 years being the period over which employee would be required to be in service as a vesting condition.

4.9 Performance conditions

A vesting condition that requires:

(a) the counterparty to complete a specified period of service (i.e. a service condition); the service requirement can be explicit or implicit; and

(b) specified performance target(s) to be met while the counterparty is rendering the above service.

Note that every performance condition is attached with a service condition.

A performance condition is further classified into two categories:

1. Non-market related condition; and
2. Market related condition.

Non-market related condition includes a performance target with reference to the entity’s own operations (or activities); or its group entity; like achieving specific percentage growth in profits/EPS; Completion of Research project, etc.;

For example,

An entity issued some stock options to employees with a condition that they have to remain in the organisation for next 2 years and EBITA of the entity should rise to Rs. 10 Crore. Here, the EBITA target is non-market related condition.

Market related condition includes a performance target with reference to price of equity instruments (share price/share option price) of the entity or its group entity;

For example,

An entity issues stock options to its employees who will serve the organization for next 2 years and till the time the share price reaches to Rs. 100. The target price to reach Rs. 100 is one of the market related condition.

A performance target might relate either to the performance of the entity as a whole or to some part of the entity (or part of the group), such as a division; or an individual employee.

4.10 Non-vesting conditions

This is not defined by the Standard. One can understand that these are other than vesting conditions. It can be understood that these conditions do not have any impact on eligibility to have share based payments. These are neither service nor performance conditions.

For example

1. An entity issued some stock options to its employees wherein they are required to serve minimum period of next 2 years and from the end of 2nd year there will further be waiting time till next 1 year within which the entity should achieve revenue of ` 100 Crore. However, the employee will not lose the entitlement even if he leaves the entity after the end of 2nd year. During the waiting time of 1 year, there isn’t any service condition. Hence, is neither a service condition nor a performance condition. Hence the condition of achieving revenue target is a non-vesting condition.

2. An entity grants share options to a director on the condition that the director does not compete with the reporting entity for a period of at least three years. The fair value of the award at the date of the grant, including the effect of non-compete clause is ` 15 million. The ‘non-compete’ clause is a non-vesting condition because the entity does not receive any services. On the grant date, the entity immediately recognizes a cost of ` 15 million because director is not providing any future services. The entity cannot reverse the expense recognised, even if the director goes to work for a competitor and loses the share options.

In point (a) we learnt – service period

Let us learn the point (b) i.e. related to vesting condition.

(b) If the share options are granted to employees based on a performance condition (Non-Market condition) and employee should remain in employment until that performance condition is satisfied.

The entity should estimate the vesting period on the grant date based on most likely outcome of the performance condition. The vesting period could vary depending on the performance condition. It means, the entity shall revise the vesting period based on the subsequent information. The expense should be recognised over the estimated vesting period.

If the performance condition is a market condition, the entity estimates the length of vesting period on the grant date BUT it does NOT revise the fair value of the options granted subsequently.

Treatment of vesting/non-vesting conditions

Note:

The amount recognised in equity remains same. The entity can choose to transfer this to retained earnings.

Below mentioned table further summarizes the impact of various conditions:-

Note 1:

• Share based payment (SBP) will be measured at fair value on initial recognition which will include the effect of these conditions.
• In case of Equity settled SBP will be measured at fair value on grant date with no subsequent measurement (No revision).
• But in case of cash settled SBP, fair value shall be re-measured at each reporting date till its settlement in full.

Note 2:

• No impact on fair valuation of SBP.
• However, consider while estimating the expected number of equity shares at the end of each period for recognition of the share based payment.

Important Points

• However, service conditions will be considered as per the expected vesting right to be exercised by the employees and would be re-estimated during vesting period. However, if the market related condition is fulfilled before it is expected then all remaining expenses would immediately be charged off. If market related condition takes longer than the expected period then original expected period will be followed.
• The amount recognised for goods or services received during the vesting period shall be based on the number of share options expected to vest.
• The entity shall revise that estimate, if necessary, if subsequent information indicates that the number of share options expected to vest differs from previous estimates.
• On vesting date, the entity shall revise the estimate to equal the number of equity instruments that ultimately vested.
• After vesting date, the entity shall reverse the amount recognised for goods or services received if the share options are later forfeited, or lapse at the end of the share option’s life.