Share-based payment has become one of the most significant aspects of employee compensation and corporate finance. Companies across industries, from start-ups to large corporations, use equity instruments or share-based arrangements to attract, retain, and motivate employees. Ind AS 102, Share-based Payment, provides the framework for recognition and measurement of these transactions in financial statements.
This standard ensures transparency and comparability by mandating how expenses and corresponding equity or liabilities should be reflected. We explored the fundamental concepts of share-based payment, the scope of Ind AS 102, and critical definitions that serve as the foundation for its application.
The Concept of Share-based Payment
A share-based payment is an arrangement in which a company acquires goods or services by issuing equity instruments or by incurring obligations that are based on the price of its shares. The instruments may include ordinary shares, share options, or other equity-linked contracts.
The essence of share-based payment lies in the recognition that goods or services received should be accounted for at their cost, which is represented either by equity instruments issued or by a liability created. From the company’s perspective, this cost affects profit or loss and its balance sheet.
For instance, when a company grants stock options to employees as part of their remuneration, the value of the options is recognized as an expense over the vesting period. Simultaneously, equity is increased to reflect the issuance of potential shares. Alternatively, if the company promises a cash bonus that is linked to the share price, a liability is recorded and re-measured at each reporting date to reflect changes in fair value.
Scope of Ind AS 102
Ind AS 102 applies to a wide range of share-based payment transactions. These include:
Equity-settled transactions
These occur when an entity issues equity instruments in exchange for goods or services. A common example is employee stock options that eventually convert into shares. Once granted, the company has no further obligation to transfer cash or other assets.
Cash-settled transactions
In this type of arrangement, the company incurs an obligation to deliver cash or other assets, where the amount is based on the entity’s share price or performance of equity instruments. Examples include share appreciation rights or cash bonuses linked to share performance.
Choice of settlement
Some agreements allow either the entity or the counterparty to choose whether the transaction will be settled in equity instruments or cash. Such flexibility requires careful analysis to determine how the arrangement should be classified and accounted for.
Transactions involving group entities
The standard also applies to situations where one entity within a group receives goods or services while another entity settles the obligation. This ensures consistency across consolidated financial statements.
There are, however, notable exclusions. The standard does not apply to rights issues provided to shareholders in their capacity as shareholders, since these are capital-raising activities rather than payments for goods or services. Similarly, it does not apply to acquisitions of businesses under Ind AS 103, nor to financial instruments contracts covered under Ind AS 32.
Key Definitions
Understanding the terminology used in Ind AS 102 is essential for its application.
Equity-settled transactions
These are transactions in which an entity issues its own equity instruments, such as shares or options, in exchange for goods or services. There is no obligation to deliver cash or other assets.
Cash-settled transactions
In these transactions, the company incurs a liability to transfer cash or other assets, where the value of that obligation depends on the share price. For example, a share appreciation right requires the company to pay the difference between the share price on a specified date and the exercise price.
Fair value
Fair value under Ind AS 102 carries a special meaning. Unlike the general framework of Ind AS 113, the measurement here incorporates vesting conditions and market-based performance conditions. This ensures that the fair value reflects the economic cost of granting equity instruments at the time of grant. Valuation models such as the Black-Scholes or Binomial models are often used.
Recognition Principles
The recognition principle is central to understanding how share-based payments are recorded in financial statements.
When goods or services are acquired through a share-based arrangement:
- The company records a debit for the goods or services received, either as an asset or as an expense, depending on whether they provide future economic benefits.
- A corresponding credit is recorded either in equity (for equity-settled transactions) or in liabilities (for cash-settled transactions).
For employees, services are generally expensed in profit or loss, while for non-employees, goods may be capitalized if they qualify as assets.
Equity-settled Transactions
Equity-settled transactions are measured based on fair value. The hierarchy prescribed by Ind AS 102 is as follows:
- The fair value of goods or services received, if this can be measured reliably.
- If the fair value of goods or services cannot be measured reliably, then the fair value of the equity instruments issued is used.
For employees, the fair value of services cannot usually be measured directly. Hence, the fair value of equity instruments is determined at the grant date. For non-employees, if the value of goods or services is determinable, that value is used. Otherwise, the value of the equity instruments at the date they are received becomes the basis.
Vesting Conditions
Vesting conditions are crucial in determining how expenses are recognized over time. These conditions define the requirements that must be satisfied before the counterparty becomes entitled to the equity instruments or cash payments.
Service conditions
These require the counterparty, often employees, to complete a specified period of service before becoming entitled to the instruments.
Performance conditions
These involve both a service requirement and the achievement of a specified performance target. Performance conditions can be divided into:
- Market-related conditions, such as share price targets or total shareholder return.
- Non-market conditions, such as profit levels, EBITA, or completion of a project.
Non-vesting conditions
These are conditions that are not linked to the right to receive instruments. For example, a non-compete clause is considered a non-vesting condition.
Impact of Conditions on Accounting
The impact of conditions varies depending on their nature:
- Service conditions do not affect the fair value of the instruments at the grant date. However, the number of instruments expected to vest is adjusted over the service period.
- Non-market performance conditions are treated similarly. The fair value is not affected, but vesting estimates are revised as conditions are assessed.
- Market conditions, by contrast, affect the fair value at the grant date. Once incorporated into the valuation, no adjustments are made for actual outcomes.
- Non-vesting conditions are incorporated into the fair value at grant date, and no adjustments are made subsequently.
This approach ensures that expenses are recognized consistently with the likelihood of instruments vesting, while maintaining integrity in valuation at the grant date.
Grant Date and Its Importance
The grant date is defined as the date on which the entity and the counterparty reach a shared understanding of the terms of the arrangement, and all necessary approvals are obtained.
At the grant date, the fair value of equity instruments is measured for equity-settled transactions. This value remains fixed and does not change with subsequent fluctuations in share price.
If the instruments vest immediately, the full expense is recognized at the grant date. If vesting occurs over a service period, the expense is recognized on a systematic basis over that period, adjusted for the number of instruments expected to vest.
This treatment aligns with the accrual principle by matching expenses with the periods in which related services are provided.
Practical Relevance of Share-based Payments
The accounting for share-based payments has real-world consequences for companies, employees, and investors. For employees, these arrangements often form a significant part of compensation, creating alignment between their interests and those of shareholders. For companies, share-based arrangements may reduce immediate cash outflows but introduce complexity in accounting and potential dilution of equity.
For investors, transparent disclosure of share-based payments ensures they understand the impact on earnings, equity dilution, and future obligations. Accurate recognition under Ind AS 102 enhances comparability across firms, which is particularly important in sectors where such payments are prevalent, such as technology and start-ups.
Accounting for Equity-settled Share-based Payment under Ind AS 102
Equity-settled share-based payment arrangements are the most common form of employee and counterparty compensation in modern corporate structures. These arrangements create a strong linkage between company performance, shareholder value, and employee rewards. Ind AS 102 prescribes a clear methodology for recognizing, measuring, and presenting such transactions in financial statements.
We examine the accounting treatment of equity-settled share-based payments in detail, with a focus on measurement principles, vesting conditions, allocation of expenses, and journal entries.
Nature of Equity-settled Share-based Payments
An equity-settled share-based payment arises when a company issues its own equity instruments, such as shares or stock options, to settle transactions for goods or services. Unlike cash-settled transactions, the company has no obligation to deliver cash or assets once equity instruments are granted.
The underlying principle is that the entity should recognize the value of the goods or services received and reflect it as an increase in equity. For employees, this is generally an expense in profit or loss over the service period, with a credit to equity. For goods or services acquired from non-employees, the debit may be to an asset account if the item qualifies for capitalization.
Measurement of Equity Instruments
The measurement of equity instruments under Ind AS 102 follows a structured approach:
For employees
The fair value of services rendered by employees cannot usually be measured directly. Therefore, the fair value of equity instruments granted is used as the measure. This fair value is determined at the grant date and remains fixed.
For non-employees
If the fair value of goods or services received can be measured reliably, that value is used. If not, the fair value of equity instruments issued at the date of receipt is applied.
The valuation must incorporate vesting conditions, particularly market conditions and non-vesting conditions. Fair value is generally determined using models such as the Black-Scholes model, binomial option pricing, or other sophisticated financial models that take into account expected volatility, risk-free interest rates, and dividend yields.
Recognition of Expenses
Once fair value is determined, the expense must be recognized systematically.
- If the instruments vest immediately, the full expense is recognized at the grant date.
- If vesting requires a service period, the expense is allocated over the vesting period on a straight-line or another systematic basis.
This recognition reflects the accrual principle, matching expenses to the periods in which related services are received.
Illustration: Employee Stock Options
Consider a company that grants 1,000 stock options to employees on 1 April 2025. The options vest after three years of continuous service. The fair value of each option at the grant date is Rs. 50.
Total fair value of options granted = 1,000 × Rs. 50 = Rs. 50,000.
Since vesting requires three years of service, the expense is spread over the vesting period.
- Expense per year = Rs. 50,000 ÷ 3 = Rs. 16,667.
The accounting entries would be:
Year 1:
Debit Employee Benefit Expense 16,667
Credit Equity (Share Options Outstanding) 16,667
Year 2:
Debit Employee Benefit Expense 16,667
Credit Equity (Share Options Outstanding) 16,667
Year 3:
Debit Employee Benefit Expense 16,666
Credit Equity (Share Options Outstanding) 16,666
At the end of Year 3, equity reflects the total Rs. 50,000 under share options outstanding.
Adjustments for Expected Vesting
The recognition process requires adjustment for the number of options expected to vest, based on service and non-market performance conditions.
For example, if it is initially expected that only 900 out of 1,000 options will vest because some employees may leave, the expense recognized per year would be based on 900 options. If actual forfeitures differ, adjustments are made prospectively. This ensures that expenses recognized in profit or loss correspond to the ultimate number of instruments expected to vest.
Market vs Non-market Conditions
Ind AS 102 distinguishes between market and non-market vesting conditions, and their impact on accounting is different.
- Market conditions, such as share price targets, are incorporated into the fair value of options at the grant date. No subsequent adjustment is made if the condition is not met.
- Non-market conditions, such as achieving profit targets, are not included in the grant-date fair value. Instead, they affect the number of instruments expected to vest.
For instance, if options vest only if the company achieves a certain EBITA target, the number of options expected to vest is reassessed each period, and expenses are adjusted accordingly.
Immediate Vesting
In some cases, equity instruments may vest immediately upon grant. For example, a company grants shares to a consultant for services already rendered. Since no future service is required, the entire fair value is expensed at the grant date.
Journal entry:
Debit Professional Fees Expense
Credit Equity (Share Capital/Share Premium)
This treatment reflects that the company has already received the benefit at the time of grant.
Modification of Terms
Sometimes, the terms of share-based payments are modified after the grant date. For example, exercise prices may be reduced, or vesting conditions may be altered.
Ind AS 102 requires that the fair value of the modified award is compared with the fair value of the original award at the modification date. Any incremental fair value is recognized as additional expense over the remaining vesting period.
If the modification reduces the fair value of the award or is not beneficial to employees, the accounting continues as if the modification had not occurred.
Cancellations and Settlements
If a grant is cancelled during the vesting period, the remaining expense that would have been recognized is recognized immediately. This accelerates recognition because the company no longer expects to receive future services in exchange for the award.
For example, if an employee leaves the company and forfeits unvested options, the company recognizes the cumulative expense up to the date of cancellation but makes no further recognition thereafter. If the company settles the award by paying cash, equity previously recognized is reclassified, and any excess payment is expensed immediately.
Group Share-based Payment Transactions
Complexity arises when one group entity grants share-based payments on behalf of another entity. For instance, a parent company may issue shares to employees of a subsidiary.
In such cases, the subsidiary recognizes an expense for the services received and a corresponding equity contribution from the parent. The parent reflects an increase in investment in the subsidiary. This ensures consistency in consolidated financial statements and avoids understatement of employee costs at the subsidiary level.
Disclosure Requirements
Transparency is a key element of Ind AS 102. Entities must disclose:
- The nature and extent of share-based payment arrangements.
- How the fair value of options or shares has been determined, including assumptions used in valuation models.
- The impact on profit or loss and equity.
- A reconciliation of outstanding options at the beginning and end of the period, including weighted average exercise prices.
Such disclosures enable stakeholders to assess the effect of share-based payments on earnings per share, dilution of equity, and alignment of incentives.
Extended Illustration with Forfeitures
Consider again the earlier example of 1,000 options granted on 1 April 2025 with a three-year vesting requirement. Suppose by the end of the first year, it is estimated that 100 employees will leave and only 900 options will vest.
Revised total expense = 900 × Rs. 50 = Rs. 45,000.
Expense for Year 1 = Rs. 15,000 (45,000 ÷ 3).
At the end of Year 2, suppose the estimate changes, and it is now expected that 950 options will vest. Revised total expense = 950 × Rs. 50 = Rs. 47,500.
Cumulative expense required up to Year 2 = Rs. 31,667 (47,500 × 2 ÷ 3).
Since Rs. 15,000 was already recognized in Year 1, the expense for Year 2 will be Rs. 16,667.
At the end of Year 3, assume actual options vested are 940. Final expense = 940 × Rs. 50 = Rs. 47,000.
Cumulative expense required = Rs. 47,000. Since Rs. 31,667 has already been recognized in prior years, the Year 3 expense will be Rs. 15,333.
This example demonstrates how estimates are revised prospectively, ensuring accurate matching of costs with actual outcomes.
Importance of Proper Accounting
Accurate accounting of equity-settled share-based payments is vital for several reasons:
- It ensures fair representation of employee costs, preventing understatement of expenses.
- It reflects the true impact of dilution on shareholders, as potential shares affect earnings per share.
- It enhances comparability among companies using similar arrangements.
- It provides investors with insights into how companies are structuring compensation and retaining key talent.
Equity-settled share-based payments can significantly influence reported profits, especially for companies that rely heavily on stock-based compensation. Proper application of Ind AS 102 maintains integrity in financial reporting.
Accounting for Cash-settled and Hybrid Share-based Payments under Ind AS 102
While equity-settled share-based payments are widely used, companies often design compensation plans that either require settlement in cash or provide employees and counterparties with a choice between cash and equity. These arrangements require a different accounting treatment because they create an obligation to deliver cash or assets.
We explored the accounting treatment for cash-settled share-based payments, hybrid and choice-of-settlement arrangements, and group transactions. It also discusses remeasurement, presentation, and disclosure requirements.
Nature of Cash-settled Share-based Payments
Cash-settled share-based payments occur when an entity acquires goods or services by incurring a liability, the amount of which is based on the price or value of its equity instruments. The most common example is a share appreciation right, where employees are entitled to receive cash equal to the increase in the company’s share price over a specified period.
Unlike equity-settled transactions, the liability must be re-measured at each reporting date to reflect changes in fair value until settlement. This results in fluctuations in profit or loss that mirror changes in the company’s share price.
Recognition of Cash-settled Transactions
When goods or services are received, the entity recognizes both an expense (or asset if capitalized) and a liability. The liability is measured at fair value at the grant date and subsequently remeasured at each reporting date and at the date of settlement.
Changes in the liability are recognized in profit or loss. This ensures that the financial statements reflect the true economic obligation arising from these arrangements.
Illustration: Share Appreciation Rights
Consider a company that grants 1,000 cash-settled share appreciation rights to employees on 1 April 2025. The rights vest after three years of service. At the grant date, the fair value of each right is Rs. 40.
At the end of Year 1, the fair value increases to Rs. 50. At the end of Year 2, it rises to Rs. 55. At the end of Year 3, when settlement occurs, the fair value is Rs. 60.
The accounting entries would be as follows:
Year 1:
Liability = 1,000 × Rs. 50 × 1/3 = Rs. 16,667
Debit Employee Benefit Expense 16,667
Credit Liability for SAR 16,667
Year 2:
Cumulative liability = 1,000 × Rs. 55 × 2/3 = Rs. 36,667
Liability at Year 1 already recognized = Rs. 16,667
Additional expense in Year 2 = Rs. 20,000
Debit Employee Benefit Expense 20,000
Credit Liability for SAR 20,000
Year 3:
Final liability = 1,000 × Rs. 60 × 3/3 = Rs. 60,000
Cumulative recognized till Year 2 = Rs. 36,667
Year 3 expense = Rs. 23,333
Debit Employee Benefit Expense 23,333
Credit Liability for SAR 23,333
At settlement:
Debit Liability for SAR 60,000
Credit Cash 60,000
This example shows how liability is measured annually and adjusted until final settlement.
Impact of Vesting Conditions
Similar to equity-settled awards, vesting conditions affect recognition.
- Service conditions and non-market performance conditions influence the number of rights expected to vest. Adjustments are made each period until vesting.
- Market conditions are included in the fair value measurement and do not affect subsequent adjustments for the number of instruments expected to vest.
Thus, the same principles regarding conditions apply, but the liability must be continuously measured for fair value changes.
Immediate Vesting of Cash-settled Awards
If a cash-settled award vests immediately, the entire liability is recognized at the grant date based on fair value. Subsequent changes in the fair value of the liability are recognized in profit or loss until settlement.
This ensures that obligations are reflected as soon as they arise, without spreading expenses over a service period.
Hybrid Arrangements and Choice of Settlement
Some share-based payment transactions involve arrangements where either the company or the counterparty has a choice of settlement in cash or equity. Ind AS 102 provides clear guidance on how these are to be accounted for.
Company has choice of settlement
If the entity has the choice to settle in equity or cash, it is presumed that equity settlement will occur unless there is a past practice or stated policy of settling in cash. Therefore, the arrangement is usually treated as equity-settled.
Counterparty has choice of settlement
If the employee or supplier has the option to demand cash or equity, the arrangement is treated as a compound financial instrument. This means it has two components:
- A liability component representing the cash settlement option.
- An equity component representing the equity settlement option.
The fair value of the liability component is measured first. The residual is recognized as equity. The liability component is reassured at each reporting date, while the equity component remains fixed at the grant date.
Illustration: Choice of Settlement
Suppose a company grants 1,000 options to an employee, who can either receive shares or demand cash equal to the fair value of the options. At grant date, the fair value of the cash alternative is Rs. 30 per option, while the fair value of the equity alternative is Rs. 50 per option.
Total value = Rs. 50,000.
Liability component = 1,000 × Rs. 30 = Rs. 30,000.
Equity component = Rs. 20,000 (residual).
The liability of Rs. 30,000 is reimbursed each year, while Rs. 20,000 remains in equity.
This approach ensures both the equity and liability aspects of the transaction are recognized appropriately.
Group Share-based Payment Transactions
Group share-based payment transactions arise when one group entity receives goods or services, but another entity settles the obligation. For example, a parent may grant its shares to employees of a subsidiary.
Ind AS 102 requires that:
- The subsidiary recognizes the expense for services received and a corresponding contribution from the parent in equity.
- The parent recognizes an increase in investment in the subsidiary.
This ensures that expenses are reflected in the entity where services are consumed, even if another group entity provides the settlement.
Remeasurement of Liabilities
One of the most important aspects of cash-settled and hybrid arrangements is remeasurement. Liabilities must be measured at fair value at each reporting date and at settlement.
The fair value is determined using option pricing models, taking into account share price, exercise price, volatility, expected dividends, and the risk-free interest rate.
This continuous remeasurement leads to profit or loss volatility, which can significantly affect reported results in periods of high share price fluctuations.
Presentation in Financial Statements
For equity-settled transactions, expenses are recognized in profit or loss with a corresponding increase in equity. For cash-settled transactions, expenses are recognized in profit or loss with a corresponding liability.
Hybrid arrangements involve both equity and liability components. Disclosures must clearly explain the nature of the arrangements and the impact on both profit or loss and the balance sheet.
Disclosure Requirements
Entities must provide detailed disclosures for cash-settled and hybrid arrangements, including:
- A description of the arrangements, including settlement alternatives.
- The number and terms of rights granted.
- The fair value of rights and the assumptions used in valuation models.
- The movement in liabilities during the period.
- The total expense recognized in profit or loss.
Such disclosures help users of financial statements understand the extent of obligations and potential dilution of equity.
Extended Illustration with Remeasurement
Consider a company that grants 500 cash-settled rights on 1 April 2025, vesting after two years. At the grant date, the fair value is Rs. 20 per right. At the end of Year 1, the fair value rises to Rs. 25. At the end of Year 2, the fair value is Rs. 30.
At Year 1:
Cumulative liability = 500 × Rs. 25 × 1/2 = Rs. 6,250
Expense = Rs. 6,250
At Year 2:
Cumulative liability = 500 × Rs. 30 × 2/2 = Rs. 15,000
Expense in Year 2 = Rs. 15,000 – Rs. 6,250 = Rs. 8,750
At settlement:
Debit Liability 15,000
Credit Cash 15,000
This illustrates how liabilities are measured annually and adjusted until settlement.
Importance of Proper Application
Cash-settled and hybrid share-based payments can materially affect a company’s financial statements. Proper accounting ensures:
- Liabilities are not understated, protecting creditors and shareholders.
- Expenses reflect true economic costs of compensation.
- Users of financial statements can assess the impact of share-based compensation on profitability and cash flows.
- Group transactions are presented consistently, preventing misallocation of expenses.
The principles of Ind AS 102 are designed to capture the unique features of these arrangements and align reported results with the underlying economic reality.
Conclusion
Share-based payment arrangements have become one of the most significant components of employee remuneration and business transactions in modern corporate practice. Ind AS 102 provides a comprehensive framework that ensures such arrangements are recognized, measured, and disclosed in a manner that reflects their economic substance rather than their legal form.
Highlighted the fundamental principles, scope, and definitions underlying the standard. It established the foundation by explaining how equity-settled and cash-settled arrangements differ and how vesting and non-vesting conditions influence recognition. This conceptual clarity is essential because misinterpretation at this stage can lead to significant errors in financial reporting.
Expanded on equity-settled arrangements, showing how fair value is determined at the grant date and how expenses are recognized over the vesting period. Through detailed illustrations, it demonstrated the effect of service and performance conditions and how companies should estimate the number of instruments expected to vest. This part emphasized the fixed nature of equity classification and the importance of grant date fair value in ensuring consistency.
We turned to cash-settled and hybrid arrangements, where liabilities are recognized and reassured until settlement. It explained the volatility that arises in profit or loss due to changes in fair value and the complexities when either the entity or counterparty has a choice of settlement. Group share-based payment transactions were also addressed, emphasizing the need to allocate expenses where services are received, even if another entity in the group provides settlement.
Taken together, the highlight that the accounting for share-based payments is far more than a mechanical exercise. It requires careful judgment, robust valuation models, and continuous monitoring of conditions. Entities must ensure that disclosures provide transparency to stakeholders, allowing them to understand the costs of compensation, the potential for equity dilution, and the impact on profitability and cash flows.
In today’s environment, where employee incentives are increasingly tied to long-term performance and shareholder value, share-based payment arrangements will continue to play a central role. By applying the principles of Ind AS 102 with diligence and accuracy, entities can ensure their financial statements present a true and fair view while also providing meaningful insight into how human capital is rewarded and aligned with organizational growth.