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Ind AS 102, Share-based Payment, is an accounting standard that provides guidance on the recognition, measurement, and presentation of share-based payment transactions. The share-based payment arrangement is the best and proven way used by companies to attract, motivate, and retain employees, also this can be helpful in raising capital from investors. In this article, we will delve into the key aspects of Ind AS 102 and its implications for financial reporting.
Scope and Objective:-
Ind AS 102 applies to all share-based payment transactions, including equity-settled and cash-settled transactions, with employees, directors, or other parties providing goods or services to the entity. It also covers transactions where equity instruments are granted to acquire goods or services from suppliers. You can read over the detailed discussion on equity instruments under Ind As 109.
Recognition and Measurement:-
Under Ind AS 102, share-based payment transactions are recognized as an expense in the financial statements based on their fair value. The fair value of equity instruments granted is determined at the grant date, while the fair value of liability instruments is re-measured at each reporting period until settlement.
Equity-settled Transactions:-
In equity-settled transactions, the entity grants equity instruments to employees or other parties as remuneration for services rendered. The fair value of the equity instruments granted is recognized as an expense over the vesting period, with a corresponding increase in equity.
Cash-settled Transactions:-
In cash-settled transactions, the entity has an obligation to settle the share-based payment transaction in cash or other assets. The fair value of the liability is measured at each reporting period, with changes in fair value recognized in the income statement until settlement.
calculation of Share-based Payments:-
Calculating share-based payments requires a systematic approach to ensure accurate recognition and disclosure. let’s see the step-wise guide to computing share-based payments.
While Ind AS 102 provides detailed guidance on share-based payment transactions, it’s worth noting that certain transactions may have additional considerations under other accounting standards. If you’re looking for insights into the broader context of employee benefits and the accounting treatment for sweat equity shares, I recommend checking out my blog post on Ind AS 19. Ind AS 19 covers various aspects of employee benefits, including the recognition and measurement of sweat equity shares as a form of employee compensation
Step 1: Determine the Grant Date:-
First of all, in calculating share-based payment is to identify the grant date. This is the date when the company and the recipient agree on the key terms and conditions of the arrangement. All subsequent calculations start from this date.
Step 2: Measure the Fair Value:-
After determining the grant date now we need to compute the fair value of share-based payments. Fair value represents the amount that the company would have to pay to settle the arrangement on the grant date. this may be determined by option pricing models or discounted cash flow models.
Step 3: Define the Vesting Period:-
The vesting period is the time frame during which the recipient becomes entitled to receive the shares or cash equivalent. It is typically the period over which the recipient must satisfy specific conditions of the agreement, LIke- providing services or achieving performance targets, to be eligible for the share-based payment.
Step 4: Allocate Fair Value over the Vesting Period:-
After determining the vesting period and fair value of SBP we have to recognize these expenses over the time of the vesting period. For this purpose, the Straight-line method is commonly used, where an equal expense is recognized as an expense in each period of the vesting period. However, alternative methods, Like- graded vesting or performance-based vesting, may be used for specific terms of the arrangement. All allocated expenses for each vesting period are recorded in the income statement, reflecting the cost of the share-based payment arrangement.
Step 6: Adjust for Forfeitures:-
It is essential to account for the possibility that some share-based payments may not vest due to recipients failing to meet the specified conditions. In such cases, an estimate of the number of awards expected to vest should be made based on historical experience or other relevant factors. The expense is adjusted to reflect the number of awards anticipated to ultimately vest.
Implications for Financial Reporting:-
By applying Ind AS 102, entities can provide more transparent and comprehensive information about their share-based payment transactions in the financial statements. This helps stakeholders to understand the impact of these transactions on the company’s financial position, performance, and cash flows.
Disclosure Requirements:-
Ind AS 102 requires entities to disclose information about their share-based payment transactions. This includes disclosing the nature and extent of these types of arrangements, the measurement basis used, the amount recognized as an expense, and the impact on key financial metrics.
Conclusion:-
Ind AS 102, Share-based Payment, plays a crucial role in the accounting and reporting of share-based payment transactions. By following the guidance provided in this standard, entities can ensure consistent and accurate recognition, measurement, and disclosure of these transactions. Ind AS 102 enhances transparency and enables stakeholders to make informed decisions based on a comprehensive understanding of a company’s share-based payment arrangements.