INDIAN ACCOUNTING STANDARD 102 5.

41

similar value of the contract will be used as fair value of this share based payment transaction
unless there is no reliable fair value is available.
Measurement principle for equity—settled awards:

Counterparty Measurement basis Measurement date Recognition date

Employee Fair value of equity Grant date Date goods or

instruments awarded services received

Non- Fair value of goods or Date goods or services Date goods or

employee services received received services received

Illustration 1-Equity Settled Shared Based Payment- Service conditions

ABC Limited granted to its employees, share options with a fair value of ` 5,00,000 on
1st April, 20X0, if they remain in the organization upto 31st March, 20X3. On 31st March, 20X1,
ABC Limited expects only 91% of the employees to remain in the employment. On
31st March, 20X2, company expects only 89% of the employees to remain in the employment.
However, only 82% of the employees remained in the organisation at the end of March, 20X3 and
all of them exercised their options. Pass the Journal entries?
Solution

Period Proportion Fair value To be Cumulative Expenses

vested expenses

a b c d= b x c x a e = d-previous period d

Period 1 1/3 5,00,000 91% 1,51,667 1,51,667

Period 2 2/3 5,00,000 89% 2,96,667 1,45,000

Period 3 3/3 5,00,000 82% 4,10,000 1,13,333

4,10,000

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 5.52 FINANCIAL REPORTING

31/12/20X2
Employee benefits expenses Dr. 40,91,333
To Share based payment reserve (equity) 1,20,000
(3,60,000/3)
To Share based payment liability 39,71,333
(147 x 74,000) 3/3 - (34,04,000 + 35,02,667)
(Recognition of equity option and cash settlement option)
Upon cash alternative chosen
Share based payment liability (147 x 74,000) Dr. 1,08,78,000
To Bank/ Cash 1,08,78,000
(Being settlement made in cash)
Share based payment reserve (equity) Dr. 3,60,000
To Retained Earnings 3,60,000
(Being transfer of equity from one account to another one)
Upon equity alternative chosen
Share based payment liability Dr. 1,08,78,000
To Share Capital 90,00,000
To Share Premium 18,78,000
(Being settlement made in equity)
Share based payment reserve (equity) Dr. 3,60,000
To Retained Earnings 3,60,000
(Being transfer of equity from one account to another one)

*****
Example 26-Share-based payment arrangements with cash alternatives
An entity grants to an employee the right to choose either 2,000 shares, ie, a right to a cash
payment equal to the value of 2,000 shares, or 2,400 shares. The grant is conditional upon the
completion of three years' service. If the employee chooses the share alternative, the shares
must be held for three years after vesting date.
At grant date, the entity‘s share price is ` 50 per share. At the end of years 1, 2 and 3, the share
price is ` 52, ` 55 and ` 60 respectively. The entity does not expect to pay dividends in the next
three years. After taking into account the effects of the post-vesting transfer restrictions, the entity
estimates that the grant date fair value of the share alternative is ` 48 per share.

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 INDIAN ACCOUNTING STANDARD 102 5.53

At the end of year 3, the employee chooses:

Scenario 1: The cash alternative
Scenario 2: The equity alternative
Application of requirements
The fair value of the equity alternative is ` 1,15,200 (2,400 shares x ` 48). The fair value of the
cash alternative is ` 1,00,000 (2,000 shares x ` 50). Therefore, the fair value of the equity
component of the compound instrument is ` 15,200 (` 1,15,200 - ` 1,00,000).
The entity recognises the following amounts:
Year Computation Expense (`) Equity (`) Liability (`)
1 Liability component: (2,000 x ` 52 x 1/3) 34,667 34,667
Equity component: (` 15,200 x 1/3) 5,067 5,067
2 Liability component: (2,000 x ` 55 x 2/3) 38,666 38,666
— ` 34,666
Equity component: (` 15,200 x 1/3) 5,067 5,067
3 Liability component: (2,000 x ` 60) — ` 46,667 46,667
73,333
Equity component: (` 15,200 x 1/3) 5,066 5,066
End Scenario 1: cash of ` 1,20,000 paid (1,20,000)
Year 3
Scenario 1 totals 1,35,200 15,200 0
Scenario 2: 2,400 shares issued 1,20,000 (1,20,000)
Scenario 2 totals 1,35,200 1,35,200

2.6 DETERMINING TYPES OF CONDITIONS

Market related condition Non-market related condition

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 5.54 FINANCIAL REPORTING

2.6.1 Vesting conditions

Share based payment awards generally vest upon meeting specified conditions, such as service
conditions (time-based) or performance conditions (eg. achieving a specified EBITDA target).
These conditions affect the timing of when the expense is recognized, and in some cases, the
measurement of expense. 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. Hence classification of a condition is an important step in accounting of share
based payments.
Following are the classification of various conditions and their accounting requirements.
a) Service condition
When share based payment is dependent upon the minimum term to be served in order to
be eligible for employees share based payment, it is called service condition .
Examples 27 & 28
27. An entity has issued 100 shares each to its 1,000 employees under share based
payment if they remain in the organization 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 condition.
28. If an employee remains in service for at least three years from the grant date of the
award, the employee can exercise the options at any time between three and ten years
from the grant date of the award. The fair value of the award at the grant date, ignoring
the effect of vesting condition, is ` 6,00,000.
For this award, the vesting period is three years, the exercise period is seven years, and
the life of the option is ten years. The requirement to remain employed is a (vesting)
service condition. The entity recognizes an expense of ` 2,00,000 per year for three
years, with a corresponding increase in equity.
If the employee leaves at the end of year two, the entity reverses the cumulative
expense previously recognised. However, if the employee does not exercise options
after the vesting period, expense previously recognized cannot be reversed.
Consider an alternate scenario. The employee was given an unconditional right to
exercise the option at any time between the grant date and ten years from the grant date
of the award. For this award, the vesting period is nil, the exercise period and the life of
the option are ten years. The entity recognizes an expense of ` 6,00,000 immediately,
with a corresponding increase in equity. Subsequently, the entity cannot reverse this
expense even if the employee does not exercise its options. This is because they are
vested from day 1.

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 5.56 FINANCIAL REPORTING

2.6.2 Non-vesting conditions

Such conditions which do not have any impact on eligibility to have share based payments. It has
not been specifically defined by the standard. However, one can understand this as conditions
which are other than vesting conditions.
Examples 31 & 32
31. 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 2 nd year there will further be waiting
time till next 1 year within which the entity should achieve revenue of ` 100 million.
However, if an employee leaves the entity after the end of 2 nd year then the employee will
not lose its entitlement to get such share based payments. Hence the condition of
achieving revenue target is non-vesting condition.
32. 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.

2.7 DETERMINING IMPACT OF CONDITIONS ON SHARE

BASED VALUATION
Once we understood the conditions attached with any share based payment, next question arises
that about the implication of the conditions on accounting / measurement of such share-based
payments and why it is crucial to segregate them.
a. A grant of equity instruments might be conditional upon satisfying specified vesting
conditions. For example, a grant of shares or share options to an employee is typically
conditional on the employee remaining in the entity‘s employment for a specified period of
time. There might be performance conditions that must be satisfied, such as the entity
achieving a specified growth in profit or a specified increase in the entity‘s share price.
Vesting conditions, other than market conditions, shall not be taken into account when
estimating the fair value of the shares or share options at the measurement date. Instead,
vesting conditions shall be taken into account by adjusting the number of equity instruments
included in the measurement of the transaction amount so that, ultimately, the amount
recognised for goods or services received as consideration for the equity instruments granted
shall be based on the number of equity instruments that eventually vest. Hence, on a
cumulative basis, no amount is recognised for goods or services received if the equity
instruments granted do not vest because of failure to satisfy a vesting condition, eg the

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 5.72 FINANCIAL REPORTING

2. Subsidiary provides rights to its employees to get equity instruments of its parent
Subsidiary will account for this arrangement as cash-settled share-based payment plan since
it has an obligation to settle the same in other than its own equity shares.
 Parent would consider the payment/ settlement which is being made by its subsidiary as
credit to ―Dividend Income‖ and debit to Expenses (employee related cost).
 Subsidiary would debit its retained earnings as ―Dividend distribution‖ and credit Equity
(being share issued).
3. Parent settles the transaction by paying cash value for share based payment plan
issued by its subsidiary
Irrespective of the cash which is settled either based on Parent‘s equity or Subsidiary ‘s equity,
it will be treated as equity-settled share-based payment plan in case of separate financial
statements of subsidiary because the subsidiary does not have any obligation to settle the
payments.
Illustration 12
A parent grants 200 share options to each of 100 employees of its subsidiary, conditional upon the
completion of two years‘ service with the subsidiary. The fair value of the share options on grant
date is ` 30 each. At grant date, the subsidiary estimates that 80 percent of the employees will
complete the two-year service period. This estimate does not change during the vesting period.
At the end of the vesting period, 81 employees complete the required two years of service. The
parent does not require the subsidiary to pay for the shares needed to settle the grant of share
options.
Pass the necessary journal entries for giving effect to the above arrangement.
Solution
As required by paragraph B53 of the Ind AS 102, over the two-year vesting period, the subsidiary
measures the services received from the employees in accordance, the requirements applicable to
equity-settled share-based payment transactions as given in paragraph 43B. Thus, the subsidiary
measures the services received from the employees on the basis of the fair value of the sh are
options at grant date. An increase in equity is recognised as a contribution from the parent in the
separate or individual financial statements of the subsidiary.
The journal entries recorded by the subsidiary for each of the two years are as follows:

Year 1 Rs. Rs.

Remuneration expense Dr. 2,40,000

(200 x 100 employees x Rs. 30 x 80% x ½)

To Equity (Contribution from the parent) 2,40,000

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 INDIAN ACCOUNTING STANDARD 102 5.73

Year 2

Remuneration expense Dr. 2,46,000

[(200 x 81 employees x Rs. 30) – 2,40,000]
To Equity (Contribution from the parent) 2,46,000

2.13 DISCLOSURE
Standard requires an entity to disclose the following-
 Type and scope of agreement existing during the reporting period.
 Describing general terms & conditions of each type of share-based payment plans.
 The number of weighted average price of share option as outstanding with a movement of
granted, vested, expired, exercised, cancelled and closing balance of share-based payment
plans.
 The average share price of exercised options.
 The range of exercise prices and weighted average remaining contractual life of options
outstanding at the end of reporting period.
 The valuation method used to estimate the fair value of the awards.
 The impact on Statement of Profit and Loss and Balance Sheet for such share-based
payments.

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 5.76 FINANCIAL REPORTING

Fair value of SAR `

31st March, 20X1 132
31st March, 20X2 139
31st March, 20X3 141
Pass the Journal entries?

9. P Ltd. granted 400 stock appreciation rights (SAR) each to 75 employees on 1 st April 20X1
with a fair value ` 200. The terms of the award require the employee to provide service for
four years in order to earn the award. The fair value of each SAR at each reporting date is as
follows:
31st March 20X2 ` 210
31st March 20X3 ` 220
31st March 20X4 ` 215
31st March 20X5 ` 218
What would be the difference if at the end of the second year of service (i.e. at
31st March 20X3), P Ltd. modifies the terms of the award to require only three years of
service?
10. QA Ltd. had on 1st April, 20X1 granted 1,000 share options each to 2,000 employees. The
options are due to vest on 31 st March, 20X4 provided the employee remains in employment
till 31st March, 20X4.
On 1st April, 20X1, the Directors of Company estimated that 1,800 employees would qualify
for the option on 31 st March, 20X4. This estimate was amended to 1,850 employees on
31st March, 20X2 and further amended to 1,840 employees on 31 st March, 20X3.
On 1 st April, 20X1, the fair value of an option was ` 1.20. The fair value increased to
` 1.30 as on 31 st March, 20X2 but due to challenging business conditions, the fair value
declined thereafter. In September, 20X2, when the fair value of an option was ` 0.90, the
Directors repriced the option and this caused the fair value to increase to ` 1.05. Trading
conditions improved in the second half of the year and by 31 st March, 20X3 the fair value of
an option was ` 1.25. QA Ltd. decided that additional cost incurred due to repricing of the
options on 30 th September, 20X2 should be spread over the remaining vesting period from
30th September, 20X2 to 31 st March, 20X4.
The Company has requested you to suggest the suitable accounting treatment for these
transaction as on 31 st March, 20X3.
11. A parent, Company P, grants 30 shares to 100 employees each of its subsidiary, Company
S, on condition that the employees remain employed by Company S for three years.
Assume that at the outset, and at the end of Years 1 and 2, it is expected that all the

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 INDIAN ACCOUNTING STANDARD 102 5.77

employees will remain employed for all the three years. At the end of Year 3, none of the
employees has left. The fair value of the shares on grant date is ` 5 per share.
Company S agrees to reimburse Company P over the term of the arrangement for
75 percent of the final expense recognised by Company S. What would be the accounting
treatment in the books of Company P and Company S?
12. An entity which follows its financial year as per the calendar year grants 1,000 share
appreciation rights (SARs) to each of its 40 management employees as on 1 st January 20X5.
The SARs provide the employees with the right to receive (at the date when the rights are
exercised) cash equal to the appreciation in the entity‘s share price since the grant date. All
of the rights vest on 31 st December 20X6; and they can be exercised during 20X7 and 20X8.
Management estimates that, at grant date, the fair value of each SAR is ` 11; and it
estimates that overall 10% of the employees will leave during the two-year period. The fair
values of the SARs at each year end are shown below:
Year Fair value at year end
31 December 20X5 12
31 December 20X6 8
31 December 20X7 13
31 December 20X8 12

10% of employees left before the end of 20X6. On 31 st December 20X7 (when the intrinsic
value of each SAR was ` 10), six employees exercised their options; and the remaining 30
employees exercised their options at the end of 20X8 (when the intrinsic value of each SAR
was equal to the fair value of ` 12).
How much expense and liability is to be recognized at the end of each year? Pass Journal
entries.
Answers
1.
Year end % Vest Expense (current period)
FIRST 97% 100 x 1,000 x 195 x 97% x 1/2 = 94,57,500
SECOND 91% 100 x 1,000 x 195 x 91% x 2/2 – 94,57,500= 82,87,500
2.
Year end Vest Expense (current period)
FIRST 1/2 50 x 170 x 80 x 1/2 = 3,40,000
SECOND 2/2 50 x 170 x 90 x 2/2 – 3,40,000 = 4,25,000

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 INDIAN ACCOUNTING STANDARD 102 5.81

Share based payment liability Dr. 13,18,350

To Cash 13,18,350
(Settlement of SAR)

9. Journal entries in the books of P Ltd (without modification of service period of stock
appreciation rights) (` in lakhs)
Date Particulars Debit Credit
31.03.20X2 Profit and Loss account Dr. 15.75
To Liability against SARs 15.75
(Being expenses liability for stock appreciation rights
recognised)
31.03.20X3 Profit and Loss account Dr. 17.25
To Liability for SARs 17.25
(Being expenses liability for stock appreciation rights
recognised)
31.03.20X4 Profit and Loss account Dr. 15.38
To Liability for SARs 15.38
(Being expenses liability for stock appreciation rights
recognised)
31.03.20X5 Profit and Loss account Dr. 17.02
To Liability for SARs 17.02
(Being expenses liability for stock appreciation rights
recognised)

Journal entries in the books of P Ltd (with modification of service period of stock
appreciation rights) (` in lakhs)
Date Particulars Debit Credit
31.03.20X2 Profit and Loss account Dr. 15.75
To Liability for SARs 15.75
(Being expenses liability for stock appreciation
rights recognised)
31.03.20X3 Profit and Loss account Dr. 28.25
To Liability for SARs 28.25
(Being expenses liability for stock appreciation
rights recognised)
31.03.20X4 Profit and Loss account Dr. 20.50
To Liability for SARs 20.50
(Being expenses liability for stock appreciation
rights recognised)

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 5.82 FINANCIAL REPORTING

Working Notes:
Calculation of expenses for issue of stock appreciation rights without modification of service
period
For the year ended 31 st March 20X2
= ` 210 x 400 awards x 75 employees x 1 year /4 years of service
= ` 15,75,000
For the year ended 31 st March 20X3
= ` 220 x 400 awards x 75 employees x 2 years /4 years of service - ` 15,75,000
previous recognised
= ` 33,00,000 - ` 15,75,000 = ` 17,25,000
For the year ended 31 st March 20X4
= ` 215 x 400 awards x 75 employees x 3 years/4 years of service - ` 33,00,000
previously recognised
= ` 48,37,500 - ` 33,00,000 = ` 15,37,500
For the year ended 31 st March, 20X5
= ` 218 x 400 awards x 75 employees x 4 years / 4 years of service – ` 48,37,500
previously recognised
= ` 65,40,000 – ` 48,37,500 = ` 17,02,500
Calculation of expenses for issue of stock appreciation rights with modification of
service period
For the year ended 31 st March 20X2
= ` 210 x 400 awards x 75 employees x 1 year / 4 years of service = ` 15,75,000
For the year ended 31 st March 20X3
= ` 220 x 400 awards x 75 employees x 2 years / 3 years of service - ` 15,75,000
previous recognised
= ` 44,00,000 - ` 15,75,000 = ` 28,25,000
For the year ended 31 st March 20X4
= ` 215 x 400 awards x 75 employees x 3 years/ 3 years of service - ` 44,00,000
previous recognised
= ` 64,50,000 - ` 44,00,000 = ` 20,50,000.

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 INDIAN ACCOUNTING STANDARD 102 5.83

10. Paragraph 27 of Ind AS 102 requires the entity to recognise the effects of repricing that
increase the total fair value of the share-based payment arrangement or are otherwise
beneficial to the employee.
If the repricing increases the fair value of the equity instruments granted paragraph B43(a) of
Appendix B requires the entity to include the incremental fair value granted (ie the difference
between the fair value of the repriced equity instrument and that of the original equity
instrument, both estimated as at the date of the modification) in the measurement of the
amount recognised for services received as consideration for the equity instruments granted.
If the repricing occurs during the vesting period, the incremental fair value granted is included
in the measurement of the amount recognised for services received over the period from the
repricing date until the date when the repriced equity instruments vest, in addition to the
amount based on the grant date fair value of the original equity instruments, which is
recognised over the remainder of the original vesting period.
Accordingly, the amounts recognised in years 1 and 2 are as follows:
Year Calculation Compensation Cumulative
expense for compensation
period expense
` `
1 [1,850 employees x 1,000 options x ` 1.20] x 1/3 7,40,000 7,40,000
2 (1,840 employees x 1,000 options x [(` 1.20 x 8,24,000 15,64,000
2/ ) + {(` 1.05 - 0.90) x 0.5/1.5}] – 7,40,000
3

Note: Year 3 calculations have not been provided as it was not required in the question.
11. Company S expects to recognise an expense totalling ` 15,000 (30 shares x 100
employees x ` 5 per share) and, therefore, expects the total reimbursement to be ` 11,250
(` 15,000 x 75%). Company S therefore reimburses Company P ` 3,750 (` 11,250 x 1/3)
each year.
Accounting by Company S
In each of Years 1 to 3, Company S recognises an expense in profit or loss, the cash paid to
Company P, and the balance of the capital contribution it has received from Company P.

Journal Entry `
Employee benefits expenses Dr. 5,000
To Cash/Bank 3,750
To Equity (Contribution from the parent) 1,250
(To recognise the share-based payment expense and partial
reimbursement to parent)

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 5.84 FINANCIAL REPORTING

Accounting by Company P
In each of Years 1 to 3, Company P recognises an increase in equity for the instruments
being granted, the cash reimbursed by Company S, and the balance as investment for the
capital contribution it has made to Company S.

Journal Entry `
Investment in Company S Dr. 1,250
Cash/Bank Dr. 3,750
To Equity 5,000
(To recognise the grant of equity instruments to employees of
subsidiary less partial reimbursement from subsidiary)

12. The amount recognized as an expense in each year and as a liability at each year end) is as
follows:
Year Expense Liability Calculation of Liability
` `
31 December 20X5 2,16,000 2,16,000 = 36 x 1,000 x 12 x ½
31 December 20X6 72,000 2,88,000 = 36 x 1,000 x 8
31 December 20X7 1,62,000* 3,90,000 = 30 x 1,000 x 13
31 December 20X8 (30,000)** 0 Liability extinguished

* Expense comprises an increase in the liability of ` 102,000 and cash paid to those
exercising their SARs of ` 60,000 (6 x 1,000 x 10).
** Difference of opening liability (` 3,90,000) and actual liability paid [` 3,60,000 (30 x 1,000
x 12)] is recognised to Profit and loss ie ` 30,000.
Journal Entries
31 December 20X5
Employee benefits expenses Dr. 2,16,000
To Share based payment liability 2,16,000
(Fair value of the SAR recognized)
31 December 20X6
Employee benefits expenses Dr. 72,000
To Share based payment liability 72,000
(Fair value of the SAR re-measured)

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 INDIAN ACCOUNTING STANDARD 102 5.85

31 December 20X7
Employee benefits expenses Dr. 1,62,000
To Share based payment liability 1,62,000
(Fair value of the SAR recognized)
Share based payment liability Dr. 60,000
To Cash 60,000
(Settlement of SAR)
31 December 20X8
Share based payment liability Dr. 30,000
To Employee benefits expenses 30,000
(Fair value of the SAR recognized)
Share based payment liability Dr. 3,60,000
To Cash 3,60,000
(Settlement of SAR)

Note: Last two entries can be combined.

© The Institute of Chartered Accountants of India