What Is Ind AS 102: Share-Based Payments Breakdown

Ind AS 102 is the Indian Accounting Standard for share-based payments. It covers how companies account for transactions where employees or other parties receive equity instruments, like stock options, in exchange for services or goods.

The standard requires recognizing the fair value of equity instruments as an expense, with specific timing rules for employees and non-employees. For employee transactions, fair value is measured at the grant date, while for non-employee transactions, it's measured when goods are received or services rendered.

According to ICAI, 

The objective of Ind AS 102 is to specify the financial reporting by an entity when it undertakes a share-based payment transaction. In particular, it requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees.

In this guide, you’ll find all things Ind AS 102: key terms, applicability, types of transactions, valuation methods, and a quick take from an SME on tackling the tricky parts.

Note: Ind AS 102 closely mirrors IFRS 2 but addresses India-specific accounting needs. There are multiple share-based remuneration schemes, but the most widely used ones are ESOPs (Employee Stock Option Plans) and SARs (Stock Appreciation Rights).

Key terms under Ind AS 102

Here is a list of some essential terms you'll encounter during the process. 

Fair value: The amount an asset could be exchanged for, a liability settled for, or an equity instrument granted for between knowledgeable, willing parties in an arm's length transaction. 

Grant date: When both parties agree to the share-based payment arrangement. If approval (like shareholder approval) is needed, the grant date occurs when that approval is obtained.

Vesting period: The timeframe during which all specified vesting conditions must be satisfied before the counterparty becomes entitled to receive cash, assets, or equity instruments.

Service condition: A vesting condition requiring the counterparty to complete a specified service period. No performance targets are required, just staying employed for the specified time.

Performance condition: A vesting condition requiring both service completion and meeting specific performance targets (sales goals, profit targets, share price milestones) related to the entity or other group entities.

Applicability of Ind AS 102

The Ministry of Corporate Affairs implemented Ind AS 102 along with the entire Ind AS framework in phases from 2016 to 17. It applies mandatorily to: 

• Listed companies and unlisted companies with a net worth ≥₹500 crore (Phase I)
• Listed companies with net worth ≥₹250 crore (Phase II) 
• Financial institutions like banks, NBFCs, and insurance companies with a net worth ≥ 500 crore (Phase III) 
• NBFCs with net worth between 250 - 500 crore (Phase IV)

Once applicable to a company, it automatically extends to all subsidiaries, holding companies, and joint ventures regardless of their individual qualification. 

Where Ind AS 102 does not apply

The applicability does not extend to shares considered in business combinations (these fall under Ind AS 103), and certain financial instrument contracts that fall under Ind AS 32 or Ind AS 109.

The three types of share-based payments

Ind AS 102 covers three distinct types of share-based payment transactions, each with specific accounting requirements.  

Equity-settled share-based payments

In equity-settled transactions, companies provide their own equity instruments (shares or options) as compensation for goods or services. 

Key considerations here include:

• For employee transactions, companies measure the fair value of equity instruments at the grant date since the service value of the work the employee will do in the future can't be reliably estimated. This value is then recognized as an expense over the vesting period.
• For non-employee transactions, companies typically measure the fair value of the goods or services received at the time they are received or rendered. There is a rebuttable presumption that the fair value of the services can be reliably estimated. Only if this is not possible do companies default to measuring the fair value of the equity instruments issued.
• When equity instruments vest immediately with no conditions, companies recognize services in full at the grant date with a corresponding equity increase.

Accounting treatment under Ind AS 102: equity-settled share-based payments 

A software company grants 200 share options in India to each of its 150 employees, contingent on completing two years of service. The fair value of each option at the grant date is ₹15.

Year 1:

• Cumulative expense (200 × 150 × ₹15 × 1/2) = ₹225,000
• Expense recognized: ₹225,000
• Journal entry: Debit Expense ₹225,000, Credit Equity ₹225,000

Year 2:

• Cumulative expense (200 × 150 × ₹15 × 2/2) = ₹450,000
• Expense for Year 2: ₹450,000 – ₹225,000 = ₹225,000 
• Journal entry: Debit Expense ₹225,000, Credit Equity ₹225,000

The full ₹450,000 is recognized as an expense over the two-year vesting period, with a corresponding increase in equity.

Cash-settled share-based payments

Cash-settled share-based payments occur when companies acquire goods or services in exchange for cash or other liabilities, with the amount payable linked to the value of their equity instruments.

Unlike equity-settled transactions, companies must measure these at the liability's fair value and update it at each reporting period until settlement. All fair value changes go directly to profit or loss.

Common examples include:

• Share Appreciation Rights (SARs), where employees receive cash based on share price increases.
• Rights to redeemable shares that entitle employees to future cash payments.

Companies recognize both the services received and the payment liability as employees render service over the vesting period.

Accounting treatment under Ind AS 102: cash-settled share-based payments

A tech company grants 80 SARs to each of its 120 employees with a two-year vesting condition. Settlement occurs in cash based on the SARs' value. The fair values (the appreciation in share price from the grant date) at each year-end are ₹18 and ₹25, respectively. Here’s how the accounting treatment goes:

Year 1:

• Cumulative expense (80 × 120 × ₹18 × 1/2) = ₹86,400
• Expense recognized: ₹86,400
• Journal entry: Debit Expense ₹86,400, Credit Liability ₹86,400

Year 2:

• Cumulative expense (80 × 120 × ₹25 × 2/2) = ₹240,000
• Expense for Year 2: ₹153,600 (₹240,000 - ₹86,400)
• Journal entry: Debit Expense ₹153,600, Credit Liability ₹153,600

The liability gets re-measured with each reporting period, creating a "catch-up" adjustment that factors in both services rendered and fair value changes.

Transactions with a choice of settlement (cash or equity)

Share-based payment arrangements sometimes provide settlement flexibility, allowing either the company or the counterparty to choose between cash or equity settlement. The accounting treatment differs based on who makes this choice.

When the entity makes the choice

If the company controls the settlement method, the accounting is binary - either fully cash-settled or fully equity-settled, depending on whether a present obligation to settle in cash exists.

If the company:

• Has a present obligation to settle in cash → Cash-settled accounting applies.
• Has no obligation to settle in cash → Equity-settled accounting applies.

When the counterparty makes the choice

When employees or suppliers can choose between cash or equity, the company must account for this as a compound financial instrument with:

• A debt component (right to demand cash payment).
• An equity component (right to demand equity settlement).

Accounting treatment for transactions with settlement choice (When the counterparty makes the choice)

To account for this, companies first measure the liability component, then determine the equity component's value by subtracting the cash alternative's fair value from the equity alternative's fair value.

Imagine a company grants employees the right to choose either a cash payment equal to 800 shares or 900 actual shares after completing two years of service. At the grant date:

• Share price: ₹70
• Equity alternative fair value: ₹63,000 (900 shares × ₹70)
• Cash alternative fair value: ₹56,000 (800 shares × ₹70)
• Equity component value: ₹63,000 - ₹56,000 = ₹7,000

This company accounts for the ₹56,000 liability component using cash-settled rules (remeasuring each period) and the ₹7,000 equity component using equity-settled rules (fixed at the grant date).

When parent companies grant equity instruments to subsidiary employees, Ind AS 102 has specific guidelines for accounting treatment. 

• Say a parent directly grants rights to its equity instruments to subsidiary employees. The subsidiary records the services received as an equity-settled transaction with a corresponding increase in equity as a contribution from the parent. Meanwhile, the parent records an obligation to settle the transaction as an equity-settled payment. 
• Conversely, when a subsidiary grants rights to parent equity instruments to its employees, it must account for this as a cash-settled transaction, regardless of how it receives those instruments.

Valuation methods for ESOPs under Ind AS 102

The most popular valuation methods to mandate fair value measurement for share-based payments are: 

• Black-Scholes pricing model
• Binomial lattice option pricing model

Both models are commonly used to determine the fair value of ESOPs at the grant date.

Black-Scholes option pricing model

The Black-Scholes model calculates option values for share-based payments using six essential inputs: current stock price (S₀), exercise price (X), time to maturity (T), volatility (σ), risk-free interest rate (r), and expected dividends. The formula used to value is

C = S₀ · N(d₁) − X · e^(−rT) · N(d₂)

Where:

• d₁ = [ln(S₀/X) + (r + σ²/2)×T] ÷ (σ×√T)
• d₂ = d₁ - σ×√T
• N(d) represents the cumulative distribution function

Remember the Ind AS 102 demands fair value measurement instead of the basic intrinsic value. While intrinsic value only shows the gap between market and exercise price, fair value captures the option's full potential value over time.

Indian companies favor this approach because it's quicker and simpler than other methods. It assumes share prices move in a log-normal pattern with steady volatility throughout the option's life. 

For listed companies offering ESOPs in India, determining these inputs is relatively straightforward using historical data. Unlisted companies issuing ESOPs face challenges with volatility estimates and often use comparable companies from the same industry as benchmarks.

The model works perfectly for standard option grants but becomes less reliable when you add market-based vesting conditions or early exercise possibilities.

Binomial lattice option pricing model

The binomial model creates a decision tree showing all possible paths your stock price might take over an option's lifetime. At each time step, the share price can only move up or down by specific amounts based on volatility. 

The model calculates upward (u) and downward (d) price movement factors using these formulas:

u = e^(σ√Δt)

d = 1/u = e^(−σ√Δt)

Where:

• σ is your stock's volatility
• Δt is the length of each time step

You use this model in five steps:

1. Divide the option's total life into equal time periods
2. Calculate potential up and down price movements at each step
3. Determine the option's payoff value at each endpoint
4. Work backward through the tree, discounting future values
5. Arrive at the current fair value of the option

The model reflects real-world option behavior more accurately by showing all possible price movements rather than using simplified assumptions.

While it delivers better results for complex options, you'll need more computational resources to run it effectively, especially when modeling long time periods with many steps.

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Disclosures required under Ind AS 102

According to the Ind AS 102, companies must provide specific disclosures. It includes: 

• A description of each share-based payment arrangement, including terms, conditions, and settlement methods
• Detailed breakdown of share options showing:
  
  • Options outstanding at period start and end
  • Options granted, forfeited, exercised, and expired during the period
  • Weighted average exercise prices for each category
• For exercised options, the weighted average share price on the exercise date
• For outstanding options, the range of exercise prices and the weighted average remaining contractual life
• The valuation method used (Black-Scholes, or Binomial) and the inputs in the model
• Total expense recognized in the income statement and its impact on the financial position

These disclosures give investors, auditors, and regulators transparency into how you valued and accounted for share-based payments. It helps them assess the impact on your financial performance and position. 

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Common challenges in Ind AS 102 implementation

The key challenges, according to industry experience, are: 

Valuation complexity: Determining the fair value of share-based payments often requires specialized knowledge of option pricing models like Black-Scholes. Many companies struggle with selecting appropriate inputs, such as volatility estimates, especially unlisted companies with no historical trading data.

Tracking vesting conditions: Performance and non-market conditions require regular monitoring and reassessment. It creates administrative burdens for finance teams who must adjust expense recognition throughout the vesting period.

Group arrangements: When parent companies grant equity instruments to subsidiary employees, it can be difficult to determine which entity recognizes the expense and how it affects consolidated financial statements.

Systems limitations: Many existing accounting systems aren't configured to handle the complex calculations and tracking requirements of Ind AS 102. This necessitates manual processes or system upgrades.

Transitioning from intrinsic to fair value method: Many companies struggle with the shift from the simpler intrinsic value method to the more complex fair value measurement. This leads to potentially higher compensation expenses.

Also, Pratiksha Agrawal, IFRS specialist, GM Finance at Mamaearth adds, 

“ One common mistake that startup founders do initially is they don't analyse the future impact of ESOPs, especially while issuing different types of schemes such as SARs- this can result in huge cash outflows along with P&L charge. 

It's essential to get the scheme assessed before issuing. Also, they should be careful while defining vesting conditions based on time and performance.”

On her Ind AS insights on LinkedIn, finance experts said, “managing equity vs liability or ESOP structuring can get tricky when startups are already juggling so much.” 

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FAQs on Ind AS 102

1. What are the key differences when comparing Ind AS vs IFRS for share-based payments?

Ind AS 102 closely mirrors IFRS 2 with minor differences. While IASB issues IFRS and applies globally, Ind AS 102 comes from ICAI and is mandatory for Indian listed companies, unlisted companies with a net worth above ₹500 crore, and qualifying NBFCs. Both follow similar principles with subtle terminology and treatment variations adapted for India's economic context.

2. What is the amendment to Ind AS 102?

The amendment covers three areas. First, it aligns cash-settled award measurement with equity-settled methods. Second, it clarifies accounting for ESOP modifications between settlement types. Third, it addresses tax withholding arrangements with net settlement features.

3. What is Ind AS 102 in simple words?

Ind AS 102 is the accounting rule that governs how companies record share-based payments. When a company grants stock options or shares to its employees or vendors, it must record this as an expense, with a corresponding increase in equity.

Let’s look at an Ind AS 102 example. Say a company grants 800 stock options to employees with a 4-year vesting period. Each option's fair value at the grant date is ₹120, and the total cost would be ₹96,000 (800 × ₹120). Therefore, the company will recognize ₹24,000 annually (₹96,000 ÷ 4) as employee compensation expense over the vesting period.