Share based payments:

Employees or other stakeholders may receive shares or the right to acquire shares in a company as part of or in lieu of cash payments as part of share-based remuneration. To recruit, retain, and inspire workers, directors, or other service providers, businesses frequently use this kind of payment.

Types of Share-Based Payments

1. Stock Options:
   • These grant the holder the right, during a given time, to buy a specific number of shares at a fixed price (the strike price). Employees are frequently rewarded with stock options, which match their interests with those of shareholders and encourage them to contribute to raising the value of the company’s stock.
2. Restricted Stock Units (RSUs):
   • RSUs are commitments to give an employee a specific number of shares in the future, subject to specific requirements (typically performance targets or vesting periods).With RSUs, the employee obtains the shares outright after the requirements are met, unlike stock options, which require the employee to pay an exercise price.
3. Employee Stock Purchase Plans (ESPPs):
   • Through payroll deductions, ESPPs enable employees to buy company stock at a reduced price. In addition to offering an extra source of income, these programs can provide workers a feeling of ownership.
4. Stock Appreciation Rights (SARs):
   • The difference between the value of a certain number of shares at the time of grant and their         value at the time of exercise is paid to the holder as SARs, a type of compensation. Although cash is typically used for this payment, shares may also be used.

Accounting for Share-Based Payments

The cost of sharebased payments is recognized over the vesting period, which is the time frame during which an employee must meet specific requirements (such as working for a specific number of years) in order to exercise their options or obtain their shares. Usually, the cost is calculated using the fair value of the liability incurred or the equity instruments provided, and it is then expensed during the vesting term.

Accounting as per IFRS-2

IFRS 2, “Share-based Payment,” mandates how companies account for transactions where they acquire goods or services by issuing equity instruments or settling in cash based on equity value, requiring recognition of expenses and liabilities or equity increases in financial statements.

• Initial Recognition:
  • The fair value of the awarded share options (or shares) is recorded as a cost over the vesting period (the time frame during which the employee must meet specific requirements, such as remaining with the company) for equity-settled payments.
  • The expense for cashsettled payments is recorded using the liability’s fair value, which is modified at every reporting date until the settlement.
• Measurement:
  • The fair value (for equity-settled payments) and each reporting date (for cash-settled payments) are usually when the fair value of the share-based payment is established.
  • Models like as the BlackScholes or Binomial model for options are frequently used to assess fair value, considering variables including stock price volatility, the option’s   projected life, and the risk-free interest rate.

Impact on Financial Statements

• Income Statement: The expense is recognized in the income statement, typically over the vesting period
• Balance Sheet: Equity-settled payments will affect shareholders’ equity, while cash-settled payments result in a liability on the balance sheet.
• Disclosure: Businesses must include comprehensive information about share-based payments in the financial statements’ notes. Vesting criteria, the quantity of options given, and the techniques for determining fair value are a few examples of this.

Vesting and Forfeiture

• Vesting conditions: These can be either service conditions (e.g., length of employment) or performance conditions (e.g., meeting certain company targets).
• Forfeiture: If the employee leaves or fails to meet the vesting conditions, the options are forfeited. The company must adjust the expense recognized if forfeitures occur.

Deferred Tax Implications

• Since the accounting value of share based payment is zero (it is expensed), any future tax deductions (e.g if there is no tax deduction until the share based payment vests) will generate a deferred tax asset

Accounting as per IND-AS 102

Ind AS 102 applies to all share-based payment transactions, including:

• Equity-settled share-based payments (e.g., stock options, restricted stock units)
• Cash-settled share-based payments (e.g., stock appreciation rights)
• Transactions with employees or other parties.

Recognition and Measurement

1. Equity-Settled Share-Based Payments:
   • Recognize the cost of equity-settled share-based payments over the vesting period.
   • Measure the cost at the fair value of the equity instruments granted.
   • Use an option pricing model (e.g., Black-Scholes-Merton) to estimate the fair value.
2. Cash-Settled Share-Based Payments:
   • Recognize the cost of cash-settled share-based payments over the vesting period.
   • Measure the cost at the fair value of the liability incurred.
   • Re-measure the liability at each reporting date until settlement.

Vesting Period and Forfeitures

1. Vesting Period: The period during which the employee must fulfill certain conditions (e.g., working for a certain number of years) before they can exercise their options or receive their shares.
2. Forfeitures: Estimate the number of equity instruments expected to vest and adjust the cost accordingly.

Disclosure Requirements

1. Nature and extent of share-based payment arrangements: Describe the types of share-based payment arrangements, including the terms and conditions of the grants.
2. Assumptions used in estimating fair value: Disclose the assumptions used in estimating the fair value of equity instruments granted, such as volatility, expected life, and risk-free interest rate.
3. Effect on profit or loss: Disclose the effect of share-based payments on profit or loss for the period.

Accounting Treatment

1. Equity-Settled Share-Based Payments:
   • Debit: Employee benefits expense (over the vesting period)
   • Credit: Equity (share-based payment reserve)
2. Cash-Settled Share-Based Payments:
   • Debit: Employee benefits expense (over the vesting period)
   • Credit: Liability (provision for share-based payments)

Similarities between IFRS 2 and IndAS 102

1. Recognition and Measurement: Ind AS 102 as well as IFRS 2 mandate the recognition of share-based payment transactions at fair value, with cost being recognized during the vesting period.
2. Equity-Settled and Cash-Settled Transactions: Both the standards make the distinction between equity-settled and cash-settled transactions, with almost identical accounting treatments.

Differences between IFRS 2 and IndAS 102

1. Scope:
   • Ind AS 102: Applies to all share-based payment transactions, including those with employees and other parties.
   • IFRS 2: Applies to share-based payment transactions with employees and others providing similar services.
2. Definition of “Employee”:
   • Ind AS 102: Defines an employee as an individual who provides services to the entity, including employees, directors, and other personnel.
   • IFRS 2: Defines an employee as an individual who provides services to the entity, but excludes non-employees who provide services similar to those provided by employees.
3. Vesting Conditions:
   • Ind AS 102: Allows entities to choose between two methods for accounting for vesting conditions: the “modified grant date method” or the “vesting period method.”
   • IFRS 2: Requires the use of the “vesting period method” for accounting for vesting conditions.
4. Reload Options:
   • Ind AS 102: Does not provide specific guidance on reload options.
   • IFRS 2: Provides guidance on reload options, which are options granted to replace existing options that have been exercised.
5. Taxation:
   • Ind AS 102: Requires entities to account for the tax effects of share-based payment transactions in accordance with Ind AS 12, “Income Taxes.”
   • IFRS 2: Requires entities to account for the tax effects of share-based payment transactions in accordance with IAS 12, “Income Taxes,” which may differ from Ind AS 12.
6. Disclosure Requirements:
   • Ind AS 102: Requires entities to disclose information about the nature and extent of share-based payment arrangements, including the terms and conditions of grants.
   • IFRS 2: Requires entities to disclose similar information, but with some differences in the specific requirements.

Indian GAAP – Share-Based Payments

Scope

• Equity-settled share-based payments (e.g., Employee Stock Option Plans or ESOPs)
• Cash-settled share-based payments (e.g., Stock Appreciation Rights or SARs)
• Employee Stock Purchase Plans (ESPPs)

It applies to employees, and may also extend to others (consultants, advisors, etc.), depending on the scheme.

Accounting Treatment for different payments:

Employee Stock Purchase Plans (ESPPs)

Disclosures Required

Companies must disclose the following in financial statements:

• Nature and terms of the scheme
• Number of options granted, exercised, lapsed, and outstanding
• Exercise price and fair market value on the grant date
• Method of accounting used (Intrinsic/Fair value)
• Employee compensation cost recognized
• Impact on net profit and EPS
• Where fair value method is used voluntarily, disclose assumptions (volatility, risk-free rate, etc.)

Voluntary Use of Fair Value

• Companies may choose to use the fair value method instead of intrinsic value.
• Must disclose the effect of the change on profits and earnings per share.

Similarities between Ind AS 102 & Indian GAAP

• Both apply to equity-settled, cash-settled, and hybrid share-based payments.
• Expense is recognized over the vesting period based on service/performance conditions.
• Treated as employee compensation expense in the profit & loss account.
• Accounting entries are broadly similar (expense during vesting, transfer to equity on exercise).
• Both provide for adjustments on forfeiture or lapse of unvested options.
• Require accounting for modifications to option terms.
• Non-monetary transactions (like ESOPs to consultants) are included in the scope.

Difference between IND AS 102 and Indian GAAP

1. Measurement Basis
   • Indian GAAP uses Intrinsic Value (Market price on grant date – Exercise price), which can often result in little or no expense if options are at market price.
   • Ind AS 102 uses Fair Value (mandatory) at grant date using valuation models like Black-Scholes or Binomial, giving a more accurate picture of cost.
2. Recognition of Expense
   • Indian GAAP recognizes expense over the vesting period using intrinsic value.
   • Ind AS 102 also recognizes over the vesting period, but based on fair value at grant date, making it more reflective of true compensation cost.
3. Forfeitures / Lapses
   • Indian GAAP only accounts for actual forfeitures (if options don’t vest).
   • Ind AS 102 estimates and adjusts for expected and actual forfeitures, giving a more dynamic and accurate expense recognition.
4. Market and Non-market Conditions
   • Indian GAAP doesn’t provide clear guidance on market-based conditions like share price targets.
   • Ind AS 102 includes market conditions in the grant-date fair value and doesn’t reassess them after initial measurement.
5. Modifications, Cancellations & Repricing
   • Indian GAAP provides basic treatment for modifications like repricing.
   • Ind AS 102 has detailed rules requiring recognition of any incremental fair value from modifications or cancellations.
6. Cash-Settled Share-Based Payments
   • Indian GAAP covers cash-settled plans like SARs, measured at intrinsic value.
   • Ind AS 102 treats these as liabilities but remeasured at fair value through profit & loss until settlement.
7. Tax Treatment (Deferred Tax)
   • Indian GAAP does not cover deferred tax on share-based payments.
   • Ind AS 102 recognizes deferred tax assets based on the difference between book expense and future tax deduction, usually at exercise.
8. Disclosure Requirements
   • Indian GAAP requires minimal disclosures (number of options, pricing method, etc.).
   • Ind AS 102 mandates detailed disclosures: assumptions used, reconciliation of options, fair value model inputs, etc.
9. Scope of Application
   • Indian GAAP applies mainly to employees, directors, and in some cases consultants.
   • Ind AS 102 applies to both employees and non-employees, including vendors or contractors receiving equity-based payments.
10. Promoter’s Contribution / Capital Reserve
    • Indian GAAP allows promoter-issued shares to be credited to capital reserve.
    • Ind AS 102 requires all such grants to be recognized as expenses through profit & loss, regardless of the issuer

Conclusion: Share-Based Payments – IFRS vs Ind AS vs Indian GAAP

The accounting for share-based payments has dramatically changed over standards, echoing the increasing sophistication and significance of equity-linked pay

IFRS 2 establishes the world standard requiring fair value-based accounting for share-based payments, so entities and jurisdictions are made comparable and transparent. The guidance is thorough for different types of instruments (equity-settled, cash-settled, hybrid), addresses employees and non-employees, and places emphasis on thorough disclosures.

Ind AS 102, being largely converged with IFRS 2, brings Indian accounting standards in line with global practices. It ensures accurate measurement, recognition, and disclosure of share-based transactions, enhancing reliability and consistency in financial reporting within India.

On the other hand, Indian GAAP (under the ICAI Guidance Note) reflects a more traditional and simplified approach, focusing on intrinsic value measurement and providing only basic guidance on complex scenarios like modifications, market conditions, and deferred tax. While easier to implement, it may understate the true economic cost of such compensation and lacks the robustness required for modern financial environments.

In Summary

• IFRS 2 = Most comprehensive, globally accepted standard
• Ind AS 102 = Fully aligned with IFRS, applicable in India, robust and transparent
• Indian GAAP = Basic and simplified, but limited in scope and accuracy