ESOPs - Service Condition Ind AS 102

Slide 4: November 2012

Goodluck Ltd. grants 180 Share Options to each of its 690 employees. Each grant containing condition on the employees working for Goodluck
Ltd. over the next 4 years. Goodluck Ltd. has estimated that the Fair Value of the option is ₹ 15. Goodluck Ltd. also estimated that 30% of the
employees will leave during the four year period and hence forfeit their rights to the Share Options. If the above expectations are correct, what
amount of Expenses to be recognized during vesting period?

Solution:

1. Total No. of Options Granted (690 Employees x 180 Options per Employee) = 124,200 options
2. Total No. of Options expected to vest [1,24,200 options x 70%] (i.e. 30% employees leaving) 86,940 shares
3. Fair Value per Option (given) ₹ 15
4. Fair Value of Options expected to vest at the end of the vesting period = 86,940 shares x ₹ 15 ₹ 1,304,100
5. Amount expected to vest in Year 1 = Total Value of Options i.e. ₹ 13,04,100 ₹ 326,025
Total Vesting Period of 4 years

Slide 5: Page 5.29

Illustration 1
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 up to
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:

Details 20X0-20X1 20X1-20X2 20X2-20X3

(a) Percentage of Employees expected to satisfy the service condition 91% 89% 82%
(b) Total Value of Options Expected to Vest = FV of Option ₹ 5,00,000 x (a) ₹ 455,000 ₹ 445,000 ₹ 410,000
(c) Proportion of Expenditure 1/3 2/3 3/3
(d) Proportionate Cost of Options for the year = (b) x (c) ₹ 151,667 ₹ 296,667 ₹ 410,000
(e) Less: Cost already recognized in the Previous Years ₹ 151,667 ₹ 296,667
Amount to be expensed in the Current Year ₹ 151,667 ₹ 145,000 ₹ 113,333

Journal Entries
Particulars Debit (₹) Credit (₹)
31 March, 20X1
Employee Benefits Expenses A/c. Dr. 151,667
To Share-based Payment Reserve (Equity) 151,667
(Being Compensation Expenses amounting to 1/3 of the expected
Equity Instrument value recognized in respect of ESOP)

31 March, 20X2
Employee Benefits Expenses A/c. Dr. 145,000
To Share-based Payment Reserve (Equity) 145,000
(Being Compensation Expenses amounting to 2/3 of the expected
Equity Instrument value recognized in respect of ESOP)

31 March, 20X3
Employee Benefits Expenses A/c. Dr. 113,333
To Share-based Payment Reserve (Equity) 113,333
(Being Compensation Expenses amounting to final Equity Instrument Value
recognized in respect of ESOP)

Share-based Payment Reserve (Equity) Dr. 410,000

To Equity Share Capital A/c. 410,000
(Being shares issued in pursuance of the Employee Stock Option Plan and
allotted vide Board Resolution No. ____ dated 31 March, 20X3)

Slide 6: Page 5.58

Question 1
An entity issued 100 shares each to its 1,000 employees subject to service condition of next 2 years. Grant date fair value of the share is ₹
195 each. There is an expectation 97% of the employees will remain in service at the end of 1st year. However, at the end of 2nd year the
expected employees to remain in service would be 91% of the total employees. Calculate expense for the year 1 & 2.
 ESOPs - Service Condition Ind AS 102

Slide 6: Page 5.58

Question 1
An entity issued 100 shares each to its 1,000 employees subject to service condition of next 2 years. Grant date fair value of the share is ₹
195 each. There is an expectation 97% of the employees will remain in service at the end of 1st year. However, at the end of 2nd year the
expected employees to remain in service would be 91% of the total employees. Calculate expense for the year 1 & 2.

Solution:

Details Year 1 Year 2

(a) Total No. of Options Granted = 1,000 employees x 100 shares per employee 100,000 100,000
(b) Percentage of Employees expected to satisfy the service condition 97% 91%
(c) Fair Value per Option ₹ 195 ₹ 195
(d) Fair Value of Options expected to Vest at the end of the vesting period: (a) x (b) x (c) ₹ 18,915,000 ₹ 17,745,000
(e) Proportion of Expenditure 1/2 2/2
(f ) Proportionate Cost of Options for the year = (b) x (c) ₹ 9,457,500 ₹ 17,745,000
(g) Less: Cost already recognized in the Previous Years ₹ 9,457,500
Amount to be expensed in the Current Year ₹ 9,457,500 ₹ 8,287,500

Slide 7: Old Syllabus Module Page 7.8

Illustration 3
The following particulars in respect of stock options granted by a company are available:
No. of Employees covered 525 Vesting period 3 years
No. of options per Employee 100 Exercise Period 1 year
Vesting Conditions: continuous Employment for 3 years Fair value of options per share on Grant date ₹ 30
Nominal Value per share ₹ 100 Exercise price per share ₹ 125

Position at the end of Year 1 - Estimate annual rate of departure = 2%

- No. of Employees left = 15
Position at the end of Year 2 - Estimate annual rate of departure = 3%
- No. of Employees left = 10
Position at the end of Year 3 - No. of Employees left = 8
- No. of Employees entitled to exercise the option = 492
Position at the end of Year 4 - No. of Employees exercising the option = 480
- No. of Employees not exercising the option = 12
Compute expenses to be recognized in each year, and also show the journal entries / ledger accounts.

Solution:

Details Year 1 end Year 2 end Year 3 end

(a) No. of Employees at the year end 525 - 15 = 510 510 - 10 = 500 500 - 8 = 492
(b) Annual Forfeiture expected 2% 3% N.A.
(c) Total No. of Options (a) x 100 shares x 98% x 98% (a) x 100 shares x 97% (a) x 100 shares
(Refer Note) 48,980 48,500 49,200
(d) Total Value = (c) x ₹ 30 ₹ 1,469,400 ₹ 1,455,000 ₹ 1,476,000
(e) Proportion of Expenditure 1/3 2/3 3/3
(f ) Prop. Cost of Options = (d) x (e) ₹ 489,800 ₹ 970,000 ₹ 1,476,000
(g) Less: Cost recognized previously ₹ 489,800 ₹ 970,000
Expenses in the Current Year ₹ 489,800 ₹ 480,200 ₹ 506,000

Note:
Alternatively, no. of Options can also be computed by rounding off No. of Employees as under:
510 Employees x 98% x 98% = 489.80 Employees, i.e. 490 Employees x 100 shares = 49,000 Shares

Employees Compensation Expenses A/c.

Year 1
To Share-based Payment Reserve A/c. 489,800 By Profit and Loss A/c. 489,800
489,800 489,800
 ESOPs - Service Condition Ind AS 102

Year 2
To Share-based Payment Reserve A/c. 480,200 By Profit and Loss A/c. 480,200
480,200 480,200

Year 3
To Share-based Payment Reserve A/c. 506,000 By Profit and Loss A/c. 506,000
506,000 506,000

Share-based Payment Reserve A/c.

Year 1
To balance c/d. 489,800 By Employees Compensation Expenses A/c. 489,800
489,800 489,800

Year 2
By balance b/d. 489,800
To balance c/d. 970,000 By Employees Compensation Expenses A/c. 480,200
970,000 970,000

Year 3
By balance b/d. 970,000
To balance c/d. 1,476,000 By Employees Compensation Expenses A/c. 506,000
1,476,000 1,476,000

Year 4
To Share Capital (48,000 shares x ₹100) 4,800,000 By balance b/d. (49,200 options x ₹ 30) 1,476,000
To Securities Premium (48,000 x ₹ 55) 2,640,000 By Bank A/c. (48,000 shares x ₹ 125) 6,000,000
To Retained Earnings (1,200 x ₹ 30) 36,000
7,476,000 7,476,000

Bank A/c. (48,000 shares x ₹ 125 per share) Dr. 6,000,000

To Share-based Payment Reserve A/c. 6,000,000
(Being amount received in respect of 48,000 shares exercised by employees
at ₹ 125 per share)

Share-based Payment Reserve A/c. (48,000 shares x ₹ 155 per share) Dr. 7,440,000
To Equity Share Capital A/c. (48,000 shares x ₹ 100 per share) 4,800,000
To Securities Premium A/c. (48,000 shares x ₹ 55 per share) 2,640,000
(Being shares issued in pursuance of the Employee Stock Option Plan and
allotted vide Board Resolution No. ____ dated 31 March, 20X3)

Share-based Payment Reserve A/c. (1,200 shares x ₹ 30 per share) Dr. 36,000
To Retained Earnings A/c. 36,000
(Being unexercised options forfeited and balances transferred to Retained
Earnings A/c.)

Calculation of Securities Premium

₹
Exercise Price received per share 125
Value of service received per share, being the FV of the Options 30
Total Consideration received per share 155
Less: Nominal Value per share 100
Securities Premium per share 55

Slide 7: Old Syllabus Module Page 7.16

Illustration 6: Modified
The following particulars in respect of stock options granted by a company are available:
No. of Employees covered 400 Nominal Value per share ₹ 100
No. of options per Employee 60 Exercise price per share ₹ 125
Shares offered were put in three groups. Group 1 was for 20% of shares offered with vesting period one-year. Group II was for 40% of shares
offered with vesting period two-years. Group III was for 40% of shares offered with vesting period three-years. Fair value of option per share on
grant date was ₹ 10 for Group I, ₹ 12.50 for Group II and ₹ 14 for Group III.
 Shares offered were put in three groups. Group 1 was for 20%ESOPsof shares
- Serviceoffered with vesting period one-year. Group II was for 40% of Ind
Condition shares
AS 102
offered with vesting period two-years. Group III was for 40% of shares offered with vesting period three-years. Fair value of option per share on
grant date was ₹ 10 for Group I, ₹ 12.50 for Group II and ₹ 14 for Group III.
Position on 1st Year Position on 2nd Year Position on 3rd Year
- No. of employees left = 40 - Employees left = 35 - Employees left = 28
- Estimate of employees to leave - Estimate of employees to leave - Employees at the end of last
in Year 2 = 36 in Year 3 = 30 vesting period = 297
- Estimate of employees to leave - Employees exercising Options in - Employees exercising Options in
in Year 3 = 34 Group II = 319 Group III = 295
- Employees exercising Options in
Group I = 350
Options not exercised immediately on vesting, were forfeited. Compute expenses to recognise in each year and show important accounts in the
books of the company.

Solution:
Total Shares under ESOP = 60 shares
Group 1 - 20% vesting in Year 1 Group 2 - 40% vesting in Year 2 Group 3 - 40% vesting in Yr. 3
= 12 shares, Vesting period = 1 Yr. = 24 shares, Vesting period = 2 Yrs. = 24 shares, Vesting pd. = 3 Yrs.

Computation of Expenses for all the years

Group = No. of Shares Group 1 = 12 Group 2 = 24 Shares Group 3 = 24 Shares
Year 1 Year 1 Year 2 Year 1 Year 2 Year 3
(a) Employees at yr-end = [Opening 400 - 40 = 400 - 40 = 360 - 35 = 400 - 40 = 360 - 35 = 325 - 28 =
No. of Employees - Forfeiture] 360 360 325 360 325 297
(b) Expected to leave in future NA 36 NA 36 + 34 = 70 30 NA
(c) No. of employees eligible (a - b) 360 324 325 290 295 297
(d) Options expected to Vest = (360 x 12 sh.) (324 x 24 sh.) (325 x 24 sh.) (290 x 24 sh.) (295 x 24 sh.) (297 x 24 sh.)
[(c) x No. of Shares] 4,320 7,776 7,800 6,960 7,080 7,128
(e) FV per option = ₹ 10 ₹ 12.50 ₹ 12.50 ₹ 14 ₹ 14 ₹ 14
(f ) Value of Total Options = [d x e] ₹ 43,200 ₹ 97,200 ₹ 97,500 ₹ 97,440 ₹ 99,120 ₹ 99,792
(g) Total Cumulative Cost of Options [(f) x 1/2] [(f) x 2/2] [(f) x 1/3] [(f) x 2/3] [(f) x 3/3]
= [(f) x Completed Yrs/ Total Yrs) ₹ 43,200 ₹ 48,600 ₹ 97,500 ₹ 32,480 ₹ 66,080 ₹ 99,792
(h) Less: Recognized in last years 0 0 ₹ 48,600 0 ₹ 32,480 ₹ 66,080
(i ) Expenses to be recognized ₹ 43,200 ₹ 48,600 ₹ 48,900 ₹ 32,480 ₹ 33,600 ₹ 33,712
(j) Employees not exercising ESOP 10 Employees 325 - 319 = 6 Employees 297 - 295 = 2 Employees
(k) Total Expenses for - Year 1 ₹ 43,200 (Gr. 1) + ₹ 48,600 (Gr. 2) + ₹ 32,480 (Gr. 3) = ₹ 1,24,280
Year 2 ₹ 48,900 (Gr. 2) + ₹ 33,600 (Gr. 3) = ₹ 82,500
Year 3 ₹ 33,712 (Gr. 3 only)

Employees Compensation Expenses A/c.

Year 1
To Share-based Payment Reserve A/c. 124,280 By Profit and Loss A/c. 124,280
124,280 124,280

Year 2
To Share-based Payment Reserve A/c. 82,500 By Profit and Loss A/c. 82,500
82,500 82,500

Year 3
To Share-based Payment Reserve A/c. 33,712 By Profit and Loss A/c. 33,712
33,712 33,712

Share-based Payment Reserve A/c.

Year 1
To Retained Earnings 1,200 By Employees Compensation Expenses A/c. 124,280
[(360 - 350) Emp x 12 Options x ₹ 10] By Bank A/c. (350 Emp x 12 Options x ₹ 125) 525,000
To Share Capital (350 Emp x 12 Options x ₹ 100) 420,000
To Securites Premium (350 Emp x 12 Options x ₹ 35) 147,000
To balance c/d. 81,080
649,280 649,280
 ESOPs - Service Condition Ind AS 102

Year 2
To Retained Earnings 1,800 By balance b/d. 81,080
[(325 - 319) Emp x 24 Options x ₹ 12.50] By Employees Compensation Expenses A/c. 82,500
To Share Capital (319 Emp x 24 Options x ₹ 100) 765,600 By Bank A/c. (319 Emp x 24 Options x ₹ 125) 957,000
To Securites Premium 287,100
(319 Emp x 24 Options x ₹ 37.50)
To balance c/d. 66,080
1,120,580 1,120,580

Year 3
To Retained Earnings 672 By balance b/d. 66,080
[(297 - 295) Emp x 24 Options x ₹ 14] By Employees Compensation Expenses A/c. 33,712
To Share Capital (295 Emp x 24 Options x ₹ 100) 708,000 By Bank A/c. (295 Emp x 24 Options x ₹ 125) 885,000
To Securites Premium (295 Emp x 24 Options x ₹ 39) 276,120
984,792 984,792

Calculation of Securities Premium

Group I Group II Group III
Year 1 Year 2 Year 3
Exercise Price received per share 125.00 125.00 125.00
Value of service received per share, being the FV of the Options 10.00 12.50 14.00
Total Consideration received per share 135.00 137.50 139.00
Less: Nominal Value per share 100.00 100.00 100.00
Securities Premium per share 35.00 37.50 39.00
 ESOPs - Performance Condition Ind AS 102

Slide 9: Page 5.45-46

Illustration 7
Ankita Holding Inc. grants 100 shares to each of its 500 employees on 1st January, 20X1. The employees should remain in service during the
vesting period. The shares will vest at the end of the
First year: if the company’s earnings increase by 12%;
Second year: if the company’s earnings increase by more than 20% over the two-year period;
Third year: if the entity’s earnings increase by more than 22% over the three-year period.
The fair value per share at the grant date is ₹ 122. In 20X1, earnings increased by 10%, and 29 employees left the organisation. The company
expects that the shares will vest at the end of the year 20X2. The company also expects that additional 31 employees will leave the
organisation in the year 20X2 and that 440 employees will receive their shares at the end of the year 20X2. At the end of 20X2, company's
earnings increased by 18%. Therefore, the shares did not vest. Only 29 employees left the organization during 20X2. Company believes that
additional 23 employees will leave in 20X3 and earnings will further increase so that the performance target will be achieved in 20X3. At the end
of the year 20X3, only 21 employees have left the organization. Assume that the company’s earnings increased to desired level and the
performance target has been met.
Determine the expense for each year and pass appropriate journal entries.

Solution:

Since the earnings of the entity is non-market related, hence it will not be considered in fair value calculation of the shares given. However, the
same will be considered while calculating number of shares to be vested.
20X1 20X2 20X3
Total Employees 500 500 500
Less: Actual no. of Employees Left -29 -58 -79
Less: Employees expected to leave in the next year -31 -23 0
No. of Employees at the year-end 440 419 421
Shares per Employee 100 100 100
Fair Value of Shares at the Grant Date - 1 January 20X1 ₹ 122 ₹ 122 ₹ 122
Vesting Period - Proportion of Expense to be allocated 1/2 2/3 3/3
Expenses for 20X1: 440 Employees x 100 Shares per Employee x ₹ 122 (FV) x 1/2 ₹ 2,684,000
Expenses for 20X2
419 Employees x 100 Shares per Employee x ₹ 122 (FV per share) x 2/3 ₹ 3,407,867
Less: Expenses recognised earlier ₹ 2,684,000
Expenses for 20X2 ₹ 723,867
Expenses for 20X3
421 Employees x 100 Shares per Employee x ₹ 122 (FV per share) x 3/3 ₹ 5,136,200
Less: Expenses recognised earlier ₹ 3,407,867
Expenses for 20X3 ₹ 1,728,333

Journal Entries
Particulars Debit (₹) Credit (₹)
31 December, 20X1
Employee Benefits Expenses A/c. Dr. 2,684,000
To Share-based Payment Reserve (Equity) 2,684,000
(Being Compensation Expenses amounting to 1/2 of the expected
Equity Instrument value recognized in respect of ESOP)

31 December, 20X2
Employee Benefits Expenses A/c. Dr. 723,867
To Share-based Payment Reserve (Equity) 723,867
(Being Compensation Expenses amounting to 2/3 of the expected
Equity Instrument value recognized in respect of ESOP)

31 December, 20X3
Employee Benefits Expenses A/c. Dr. 1,728,333
To Share-based Payment Reserve (Equity) 1,728,333
(Being Compensation Expenses amounting to final Equity Instrument Value
recognized in respect of ESOP)

Share-based Payment Reserve (Equity) Dr. 5,136,200

To Equity Share Capital A/c. 5,136,200
(Being shares issued in pursuance of the Employee Stock Option Plan and
allotted vide Board Resolution No. ____ dated 31 March, 20X3)
 ESOPs - Performance Condition Ind AS 102

Slide 10: Page 5.47-48

Illustration 8
ACC limited granted 10,000 share options to one of its managers. In order to get the options, the manager has to work for next 3 years in the
organization and reduce the cost of production by 10% over the next 3 years.
Fair value of the option at grant date was ₹ 95
Cost reduction achieved-
Year 1 12% Achieved
Year 2 8% Not expected to vest in future
Year 3 10% Achieved
How the expenses would be recorded?

Solution:

It is a non-market related condition. Hence the target to achieve cost reduction would be taken while estimating the number of options to be vested.

Year Options Fair Value (₹) Proportion Expenses

Year 1 10,000 95 1/3 ₹ 316,667
Year 2 10,000 95 0 ₹ -316,667
Year 3 10,000 95 3/3 ₹ 950,000

The condition to achieve 10% cost reduction each was not fulfilled in the year 2 and there was no expectation to vest this non-market condition in
future as well and hence earlier expense amount was reversed in year 2. Since in the year 3 the non-market condition was again met, hence all
such expense will be charged to Profit and Loss.

Slide 11: Page 5.59

Question 7
Entity X grants 10 shares each to its 1,000 employees on the conditions as mentioned below -
- To remain in service & entity’s profit after tax (PAT) shall reach to ₹ 100 million.
- It is expected that PAT should reach to ₹ 100 million by the end of 3 years.
- Fair value at grant date is ₹ 100.
- Employees expected for vesting right by 1st year 97%, then it revises to 95% by 2nd year and finally to 93% by 3rd year.
Calculate expenses for next 3 years in respect of share-based payment?

Solution:

Entity’s PAT is one of the non-market related condition and hence would be included while making an expectation of vesting shares and there is
no requirement to make any changes in the non-market condition whether this is fulfilled or not because it has already been considered in the
expectation of vesting rights at the end of each year.

Details Year 1 Year 2 Year 3

(a) Total No. of Options Granted = 1,000 employees x 10 shares per employee 10,000 10,000 10,000
(b) Percentage of Employees expected to satisfy the service condition 97% 95% 93%
(c) Fair Value per Option ₹ 100 ₹ 100 ₹ 100
(d) Fair Value of Options expected to Vest at end of the vesting period: (a) x (b) x (c) ₹ 970,000 ₹ 950,000 ₹ 930,000
(e) Proportion of Expenditure 1/3 2/3 3/3
(f ) Proportionate Cost of Options for the year = (b) x (c) ₹ 323,333 ₹ 633,333 ₹ 930,000
(g) Less: Cost already recognized in the Previous Years ₹ 323,333 ₹ 633,333
Amount to be expensed in the Current Year ₹ 323,333 ₹ 310,000 ₹ 296,667

Slide 12: Additional Question for Practice

Question 1
Compute the expense to be recognized in the following case:
Share Options granted 25,000 Share Options
Vesting Conditions Vesting occurs if Product X’s Market Share exceeds 25% at the end of four years
Estimated and Actual Forfeiture Rate 8% in four years
Probability Assessment at Grant Date Condition is deemed not to be probable based on current projections
Grant Date Fair Value ₹ 8 per Share Option
Change in Probability Assessment During Year 3, Product X’s Market Share is projected to be 30% at the end of four years. Hence,
Performance Condition is now deemed to be probable of achievement.
 ESOPs - Performance Condition Ind AS 102

Solution:

Computation of Expense to be recognized:

(a) No. of Share Options expected to vest 25,000 x 92% = 23,000

(b) Total Estimated Compensation Cost at Grant Date = (a) x ₹ 8 ₹ 184,000
(c) Compensation Cost to be recognized per year = 184,000 ₹ 46,000
4 years
(d) Compensation Cost recognized in Years 1 and 2 Nil, since there is no probability of
achieving the target
(e) Compensation Cost recognized in Year 3:
Compensation Cost upto Year 3 should be recognized since achievement of the
Performance Condition is probable. ₹ 46,000 x 3 yrs = ₹ 138,000
(f ) Compensation Cost to be recognized in Year 4 (assuming Target is achieved) ₹ 46,000

Slide 13: Page 7.48

Illustration 9:
Apple Limited has granted 10,000 share options to one of its directors for which he must work for next 3 years and the price of the share should
increase by 20% over next 3 years.
The share price has moved as per below details -
Year 1 22%
Year 2 19%
Year 3 25%
At the grant date, the fair value of the option was ₹ 120.
How should we recognize the transaction?

Solution:

The share price movement is a market based vesting condition hence its expectations are taken into consideration while calculating the fair value
of the option.
Even if the required market condition as required is not fulfilled, there is no requirement to reverse the expense previously booked.
Irrespective of the outcome of the market prices (as it is already taken care of in the fair value of the option), each period an amount of (120 x
10,000)/3 = ₹ 4,00,000 will be charged to profit and loss.

Slide 14: Page 5.59

Question 6
An entity P issues share-based payment plan to its employees based on the below details:
Number of Employees 100
Fair Value at Grant Date ₹ 25
Market Condition Share price to reach at ₹ 30
Service Condition To remain in service until market condition is fulfilled
Expected Completion of Market Condition 4 years
Define expenses related to such share-based payment plan in each year subject to the below scenarios -
(a) Market condition if fulfilled in year 3, or
(b) Market condition is fulfilled in year 5.

Solution:

Market conditions are required to be considered while calculating fair value at grant date. However, service conditions will be considered as per
the expected vesting right to be exercised by the employees and would be re-estimated during vesting period. However, if the market related
condition is fulfilled before it is expected then all remaining expenses would immediately be charged off. If market related condition takes longer
than the expected period then original expected period will be followed.

(a) Market Condition is fulfilled in Year 3:

Year 1: 100 Employees x 1 share x ₹ 25 x 1/4 = ₹ 625

Year 2: (100 Employees x 1 share x ₹ 25 x 2/4) - ₹ 625 = ₹ 625
Year 3: (100 Employees x 1 share x ₹ 25) - ₹ 625 - ₹ 625 = ₹ 1,250
Year 4: NIL
 ESOPs - Performance Condition Ind AS 102

(b) Market Condition is fulfilled in Year 5:

Year 1: 100 Employees x 1 share x ₹ 25 x 1/4 = ₹ 625

Year 2: (100 Employees x 1 share x ₹ 25 x 2/4) - ₹ 625 = ₹ 625
Year 3: (100 Employees x 1 share x ₹ 25 x 3/4) - ₹ 625 - ₹ 625 = ₹ 625
Year 4: (100 Employees x 1 share x ₹ 25 x 4/4) - ₹ 625 - ₹ 625 - ₹ 625 = ₹ 625
Year 5: NIL

Slide 15: ICAI COVID-19 FAQs

FAQ 38
An entity has a number of equity settled share-based payment schemes for its employee across different categories. During last financial year
i.e. 2018-19, the entity had granted equity shares to senior management which will vest on April 30, 2021, and one of the conditions for final
eligibility of equity shares is based on target market price of the entity’s share by the end of the financial year 2020-21 i.e. March 31, 2021.
Considering the current scenario affected by global pandemic, the entity expects to experience a severe depressed economic environment in
its business sector and substantial decline in its financial performance and cash flows over next two years and, therefore, consequential decline
in the market price of its equity shares. As of March 31, 2020, the share price of the entity’s equity share is much below the target price required
under the employees’ share-based payment scheme. How should the entity consider this development in the accounting for its equity settled
share-based payments for the current financial year 2019-20?

Solution:

Share-based Payments. The eligibility condition of the scheme mentioned above i.e. condition of the equity shares of the entity reaching a target
price at the fi nancial year March 31, 2021, is part of a vesting condition which is market condition as defined in Appendix A of Ind AS 102.
According to paragraph 21 of Ind AS 102, Market Conditions such as a target share price upon which vesting (or exercisability) is conditioned,
shall be taken into account when estimating the fair value of the equity instruments granted. The standard further states that the entity shall
continue to recognise the services received, provided other vesting conditions are satisfied, irrespective of whether the market condition is
satisfied at each reporting date.
It may also be noted that the fair value of the shares granted is determined at the grant date and it is not revised subsequently. Therefore, neither
increases nor decreases in the fair value of the equity instruments after grant date affect the equity share based payment cost recognised by the
entity (other than in the context of measuring the incremental fair value transferred if a grant of equity instruments is subsequently modified).
The entity shall recognise an amount for services received during the vesting period based on the best available estimate of the number of equity
instruments expected to vest and shall revise that estimate, if necessary, if subsequent information indicates that the number of equity instruments
expected to vest differs from previous estimates, based on the fair value determined at the grant date.
However, companies with share-based payments whose vesting depends on achieving non-market performance conditions – e.g. earnings per
share targets – may need to revise their estimate of the number of instruments expected to vest, which would impact the charge in the profit and
loss account over the remaining vesting period.
 ESOPs - Modification/Cancellation Ind AS 102

Slide 16: Page 5.51

Illustration 10 - Modifications - Equity-settled share-based payment
Marathon Inc. issued 150 share options to each of its 1,000 employees subject to the service condition of 3 years. Fair value of the option given
was calculated at ₹ 129. Below are the details and activities related to the SBP plan-
Year 1: 35 employees left and further 60 employees are expected to leave
Share options re-priced (as MV of shares has fallen) as the FV fell to ₹ 50.
After the re-pricing they are now worth ₹ 80, hence expense is expected to increase by ₹ 30.
Year 2: 30 employees left and further 36 employees are expected to leave
Year 3: 39 employees left
How the modification/ re-pricing will be accounted?

Solution:

The re-pricing has been done at the end of year 1, and hence the increased expense would be spread over next 2 years equally.

Total increased value due to modification is ₹ 30 (1/2 weight each year)

Year 1 Year 2 Year 3

Number of Employees 1000 1000 1000
Less: Actual no. of Employees Left -35 -65 -104
Less: Employees expected to leave in the next year -60 -36 0
No. of Employees at the year-end 905 899 896
Shares per Employee 150 150 150
Fair Value of Shares at the Grant Date - 1 January 20X1 ₹ 129 ₹ 129 ₹ 129
Incremental Fair Value ₹ 30 ₹ 30

Original Plan
Expenses for Year 1: 905 Employees x 150 Shares per Employee x ₹ 129 (FV) x 1/3 ₹ 5,837,250
Expenses for Year 2:
899 Employees x 150 Shares per Employee x ₹ 129 (FV per share) x 2/3 ₹ 11,597,100
Less: Expenses recognised earlier ₹ 5,837,250
Expenses for Year 2 ₹ 5,759,850
Expenses for Year 3:
896 Employees x 150 Shares per Employee x ₹ 129 (FV per share) x 3/3 ₹ 17,337,600
Less: Expenses recognised earlier ₹ 11,597,100
Expenses for Year 3 ₹ 5,740,500

Modification
Expenses for Year 2: 899 Employees x 150 Shares per Employee x ₹ 30 (Inc. FV per share) x 1/2 ₹ 2,022,750
Expenses for Year 3:
896 Employees x 150 Shares per Employee x ₹ 30 (Inc. FV per share) x 3/3 ₹ 4,032,000
Less: Expenses recognised earlier ₹ 2,022,750
Expenses for Year 3 ₹ 2,009,250

Slide 17: Page 5.52-53

Illustration 11 – Cancellation – Equity Settled Share based payment
Anara Fertilisers Limited issued 2,000 share options to its 10 directors for an exercise price of ₹ 100.The directors are required to stay with the
company for next 3 years.
Fair value of the option estimated ₹ 130
Expected number of directors to vest the option 8
During the year 2, there was a crisis in the company and Management decided to cancel the scheme immediately. It was estimated further as
below-
Fair value of option at the time of cancellation was ₹ 90
Market price of the share at the cancellation date was ₹ 99
There was a compensation which was paid to directors and only 9 directors were currently in employment. At the time of cancellation of such
scheme, it was agreed to pay an amount of ₹ 95 per option to each of 9 directors.
How the cancellation would be recorded?

Solution:
 ESOPs - Modification/Cancellation Ind AS 102

1. Expenses for the year

Particulars Year 1 Year 2
(a) Expected Number of Directors fulfilling the vesting conditions 8 9
(b) Fair Value of Options ₹ 130 ₹ 130
(c) No. of Options 2,000 2,000
(d) Total Value of Options expected to vest = (a x b x c) ₹ 2,080,000 ₹ 2,340,000
(e) Proportion estimated at the time of Grant 1/3 2/3
(f ) Expense for Year 1 ₹ 693,333
(g) Expense for Year 2
Entire amount recognized on cancellation ₹ 2,340,000
Less: Expenses recognized earlier ₹ 693,333
Expenses for Year 2 ₹ 1,646,667

2. Treatment of Cancellation Compensation

Total Cancellation Compensation = 9 Directors x 2,000 Options per Director x Agreed Compensation ₹ 95 ₹ 1,710,000
Less: Amount to be deducted from Equity i.e. SBP Reserve A/c. ₹ 1,620,000
9 Directors x 2,000 Options per Director x FV of Option (at the Date of Cancellation) ₹ 95

Balance transferred to Profit and Loss ₹ 90,000

Journal Entries
Particulars Debit (₹) Credit (₹)
Year 1
Employee Benefits Expenses A/c. Dr. 693,333
To Share-based Payment Reserve (Equity) 693,333
(Being Compensation Expenses amounting to 1/3 of the expected
Equity Instrument value recognized in respect of ESOP)

Year 2
Employee Benefits Expenses A/c. Dr. 1,646,667
To Share-based Payment Reserve (Equity) 1,646,667
(Being Compensation Expenses amounting to final Equity Instrument Value
recognized in respect of ESOP on cancellation)

Share-based Payment Reserve (Equity) Dr. 1,620,000

Loss on Cancellation A/c. (transferred to P/L) Dr. 90,000
To Bank A/c. 1,710,000
(Being Compensation payable to Employees on Cancellation of ESOP, excess over
FV on date of cancellation transferred to P/L)

Share-based Payment Reserve (Equity) Dr. 720,000

To Retained Earnings A/c. 720,000
(Being balance in Share-based Payment Reserve transferred to Retained Earnings
on cancellation of ESOP and settlement of compensation)

Slide 18: Old Syllabus Module Page 7.20

Illustration 8: Modified
The following particulars in respect of stock options granted by a company are available:
No. of Employees covered 600 Vesting period 3 years
No. of options per Employee 60 Exercise Period 1 year
Vesting Conditions: continuous Employment for 3 years Fair value of options per share on Grant date ₹ 14
Nominal Value per share ₹ 100 Exercise price per share ₹ 125

Position at the end of Year 1 - No. of Employees left = 30

- Estimate of no. of Employees to leave = 70
- Exercise Price was reduced to ₹ 120
- Fair Value of Original Option = ₹ 13
- Fair Value of Option at reduced exercise price = ₹ 15
- Vesting Date for modified Option = Same as Original Option
Position at the end of Year 2 - No. of Employees left = 35
- Estimate of no. of Employees to leave = 30
 ESOPs - Modification/Cancellation Ind AS 102

Position at the end of Year 3 - No. of Employees left = 28

- No. of Employees entitled to exercise the option = 507
Position at the end of Year 4 - No. of Employees exercising the option = 500
- No. of Employees not exercising the option = 7
Compute expenses to be recognized in each year, and also show the journal entries.

Solution:

1. Computation of Expense to be recognized

For Original Plan For Modified Plan
Expense to be recognized based on FV at the Grant Date = ₹ 14FV of Revised Plan ₹ 15
Less: FV of Original Option on Revision Date ₹ 13 = ₹ 2
Period of expense recognition Amortized over 3 years Amortized over 2 years
[Revised on Year 1 end, so amortized in remaining 2 years]
Incremental Fair Value should be recognized as an expense over the remaining useful life in the vesting period, whereas existing
Fair Value should be apportioned based on Total Vesting Period.

Year 1 Year 2 Year 3

Details Original Plan Original Plan Modified Plan Original Plan Modified Plan
(a) No. of Employees at year end 600 - 30 = 570 570 - 35 = 535 570 - 35 = 535 507 (Given) 507 (Given)
(b) Expected to leave in future 70 30 30 NA NA
(c) No. of Employees expected to be Eligible (a - b) 500 505 505 507 507
(d) Total No. of Options expected to Vest on
30,000 30,300 30,300 30,420 30,420
Date = [(c) x 60 shares per employee]
(e) Total Value of Options expected to vest at the 30,000 x ₹ 14 30,300 x ₹ 14 30,300 x ₹ 2 30,420 x ₹ 14 30,420 x ₹ 2
end of the vesting period = [(d) x FV of option] = ₹ 420,000 ₹ 424,200 ₹ 60,600 ₹ 425,880 ₹ 60,840
(f ) Total Cumulative Cost of Options [(e) x 1/3] [(e) x 2/3] [(e) x 1/2] [(e) x 3/3] [(e) x 2/2]
= ₹ 140,000 ₹ 282,800 ₹ 30,300 ₹ 425,880 ₹ 60,840
(g) Less: already recognized in Previous Years 0 ₹ 140,000 0 ₹ 282,800 ₹ 30,300
(h) Amount to be Expensed this Year ₹ 142,800 ₹ 30,300 ₹ 143,080 ₹ 30,540
₹ 140,000
(i) Total Expense for the Year ₹ 140,000 ₹ 173,100 ₹ 173,620

Employees Compensation Expenses A/c.

Year 1
To Share-based Payment Reserve A/c. 140,000 By Profit and Loss A/c. 140,000
140,000 140,000

Year 2
To Share-based Payment Reserve A/c. 173,100 By Profit and Loss A/c. 173,100
173,100 173,100

Year 3
To Share-based Payment Reserve A/c. 173,620 By Profit and Loss A/c. 173,620
173,620 173,620

Share-based Payment Reserve A/c.

Year 1
To balance c/d. 140,000 By Employees Compensation Expenses A/c. 140,000
140,000 140,000

Year 2
By balance b/d. 140,000
To balance c/d. 313,100 By Employees Compensation Expenses A/c. 173,100
313,100 313,100
 ESOPs - Modification/Cancellation Ind AS 102

Year 3
By balance b/d. 313,100
To balance c/d. 486,720 By Employees Compensation Expenses A/c. 173,620
486,720 486,720

Year 4
To Share Capital (30,000 shares x ₹ 100) 3,000,000 By balance b/d. (30,420 options x ₹ 16) 486,720
To Securities Premium (30,000 x ₹ 36) 1,080,000 By Bank A/c. (500 Emp x 60 shares x ₹ 120) 3,600,000
To Retained Earnings (7 Emp x 60 shares x ₹ 16) 6,720
4,086,720 4,086,720

Calculation of Securities Premium

₹
Exercise Price received per share 120
Value of service received per share, being the FV of the Options 16
Total Consideration received per share 136
Less: Nominal Value per share 100
Securities Premium per share 36

Slide 20: Additional Question for Practice

Question 2
Hinduja Ltd. grants 100 non-vested shares to each of its 1,000 employees that vest after 5 years of service. Grant-date Fair Value of each non-
vested share is ₹ 10. Based on historical Employee Turnover Rates, Hinduja Ltd. estimates that 200 employees will terminate service prior to
the completion of the 5th year. At the beginning of Year 3, Hinduja Ltd. accelerates the vesting of all of the awards so that vesting occurs after 4
years of service rather than the original 5-year service period. As a result of the acceleration, Hinduja Ltd. now expects that only 150 employees
will forfeit their awards.
Compute the expense that the company should recognize in each of the years.

Solution:

Year 1 Year 2 Year 3 Year 4

(a) No. of Employees expected to satisfy condition 1,000 - 200 = 1,000 - 200 = 1,000 - 150 = 1,000 - 150 =
800 800 850 850
(b) Total No. of Options per employee 100 100 100 100
(c) Total value of Options expected to vest =
₹ 800,000 ₹ 800,000 ₹ 850,000 ₹ 850,000
[(a) x (b) x FV of Option ₹ 10]
(d) Vesting Period 5 Years 5 Years 4 Years 4 Years
(e) Proportion of Expenditure 1/5 2/5 3/4 4/4
(f ) Proportionate Expense = [(c) x (e)] ₹ 160,000 ₹ 320,000 ₹ 637,500 ₹ 850,000
(g) Less: Already recognized in the previous years ₹ 160,000 ₹ 320,000 ₹ 637,500
(g) Amount to be expensed this year ₹ 160,000 ₹ 160,000 ₹ 317,500 ₹ 212,500

Slide 21: November 2019 RTP

Question 3
QA Ltd. had on 1st April, 20X1, granted 1,000 share options each to 2,000 employees. The options are due to vest on 31st March, 20X4
provided the employee remains in employment till 31st March, 20X4.
On 1st April, 20X1, the Directors of the Company estimated that 1,800 employees would qualify for the option on 31st March 20X4. This
estimate was amended to 1,850 employees on 31st March, 20X2 and further amended to 1,840 employees on 31st March, 20X3.
On 1st April, 20X1, the fair value of an option was ₹ 1.20. The fair value increased to ₹ 1.30 as on 31st 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 the 31st
March, 20X3 the fair value of an option was ₹ 1.25. QA Ltd. decided that the additional cost incurred due to repricing of the options on 30th
September, 20X2 should be spread over the remaining vesting period from 30th September, 20X2 to 31st March, 20X4.
The Company has requested you to suggest the suitable accounting treatment for these transactions as on 31st March, 20X3.
 ESOPs - Modification/Cancellation Ind AS 102

Solution:

1. Computation of Expense to be recognized

For Original Plan For Modified Plan
Expense to be recognized based on FV at the Grant Date = ₹ 1.20FV of Revised Plan ₹ 1.05
Less: FV of Original Option on Revision Date ₹ 0.90 = ₹ 0.15
Period of expense recognition Amortized over 3 years Amortized over 1.5 years
[Revised in middle of Year 2, so amortized over 1.5 years]
Incremental Fair Value should be recognized as an expense over the remaining useful life in the vesting period, whereas existing
Fair Value should be apportioned based on Total Vesting Period.

20X1-20X2 20X2-20X3
Details Original Plan Original Plan Modified Plan
(a) No. of Employees expected to be Eligible (given) 1,850 1,840 1840
(b) Total No. of Options expected to Vest on Date = [(a) x 1,000 shares per employee] 1,850,000 1,840,000 1,840,000
(c) Total Value of Options expected to vest at the end of the vesting period = 18.5 l x ₹ 1.20 18.4 l x ₹ 1.20 18.4 l x ₹ 0.15
[(b) x FV of option] = ₹ 2,220,000 ₹ 2,208,000 ₹ 276,000
(d) Total Cumulative Cost of Options = [(e) x 1/3] [(e) x 2/3] [(e) x 0.5/1.5]
₹ 740,000 ₹ 1,472,000 ₹ 92,000
(e) Less: already recognized in Previous Years 0 ₹ 740,000 0
(f ) Amount to be Expensed this Year ₹ 732,000 ₹ 92,000
₹ 740,000
(g) Total Expense for the Year ₹ 740,000 ₹ 824,000
 SARs Ind AS 102

Slide 22: Page 5.31

Illustration 2
XYZ issued 10,000 Share Appreciation Rights (SARs) that vest immediately to its employees on 1st April, 20X0. The SARs will be settled in cash. Using an
option pricing model, at that date it is estimated that the fair value of a SAR is ₹ 95. SAR can be exercised any time up to 31st March, 20X3. At the end of
period on 31st March, 20X1 it is expected that 95% of total employees will exercise the option, 92% of total employees will exercise the option at the end of
next year and finally 89% will be vested only at the end of the 3rd year. Fair Values at the end of each period have been given below:

Fair Value of SAR ₹

31 March 20X1 112
31 March 20X2 109
31 March 20X3 114
Pass the journal entries.

Solution:

Fair Value at the time of Vesting i.e. Grant Date = 10,000 x ₹ 95 = ₹ 9,50,000.
Details 31 March 20X1 31 March 20X2 31 March 20X3
(a) Percentage of Employees expected to satisfy the conditions 95% 92% 89%
(b) FV of Option ₹ 112 ₹ 109 ₹ 114
(c) Total Value of Options expected to vest= [(a) x 10,000 SARs x (b)] ₹ 1,064,000 ₹ 1,002,800 ₹ 1,014,600
(d) Less: Already recognized in Previous Years ₹ 950,000 ₹ 1,064,000 ₹ 1,002,800
(e) Amount to be expensed this year ₹ 114,000 -₹ 61,200 ₹ 11,800

Journal Entries
Particulars Debit (₹) Credit (₹)
1 April 20X0
Employee Benefits Expenses A/c. Dr. 950,000
To Share-based Payment Liability A/c. 950,000
(Being Compensation Expenses recognized in respect of SARs)

31 March 20X1
Employee Benefits Expenses A/c. Dr. 114,000
To Share-based Payment Liability A/c. 114,000
(Being Compensation Expenses recognized pursuant to remeasurement of SARs)

31 March, 20X2
Share-based Payment Liability A/c. Dr. 61,200
To Employee Benefits Expenses A/c. 61,200
(Being Compensation Expenses recognized reversed pursuant to remeasurement
of SARs)

31 March, 20X3
Employee Benefits Expenses A/c. Dr. 11,800
To Share-based Payment Reserve (Equity) 11,800
(Being Compensation Expenses recognized pursuant to remeasurement of SARs)

Share-based Payment Liability A/c. Dr. 1,014,600

To Bank A/c. 1,014,600
(Being SARs settled)

Slide 23: Page 5.59-60

Question 9
MINDA issued 11,000 share appreciation rights (SARs) that vest immediately to its employees on 1st April, 20X0. The SARs will be settled in
cash. Using an option pricing model, at that date it is estimated that the fair value of a SAR is ₹ 100. SAR can be exercised any time until 31st
March, 20X3. It is expected that out of the total employees, 94% at the end of period on 31st March, 20X1, 91% at the end of next year will
exercise the option. Finally, when these were vested i.e. at the end of the 3rd year, only 85% of the total employees exercised the option.
 March, 20X3. It is expected that out of the total employees, 94% at the end of period on 31st March, 20X1, 91% at the end of next year will
exercise the option. Finally, when these were vested i.e. at the end of the 3rd year, only 85% of the total employees exercised the option.
SARs Ind AS 102

Fair Value of SAR ₹

31 March 20X1 132
31 March 20X2 139
31 March 20X3 141
Pass the journal entries.

Solution:

Fair Value at the time of Vesting i.e. Grant Date = 11,000 x ₹ 100 = ₹ 11,00,000
Details 31 March 20X1 31 March 20X2 31 March 20X3
(a) Percentage of Employees expected to satisfy the conditions 94% 91% 85%
(b) FV of Option ₹ 132 ₹ 139 ₹ 141
(c) Total Value of Options expected to vest= [(a) x 11,000 SARs x (b)] ₹ 1,364,880 ₹ 1,391,390 ₹ 1,318,350
(d) Less: Already recognized Previously -₹ 1,100,000 -₹ 1,364,880 -₹ 1,391,390
(e) Amount to be expensed this year ₹ 264,880 ₹ 26,510 -₹ 73,040

Journal Entries
Particulars Debit (₹) Credit (₹)
1 April 20X0
Employee Benefits Expenses A/c. Dr. 1,100,000
To Share-based Payment Liability A/c. 1,100,000
(Being Compensation Expenses recognized in respect of SARs)

31 March 20X1
Employee Benefits Expenses A/c. Dr. 264,880
To Share-based Payment Liability A/c. 264,880
(Being Compensation Expenses recognized pursuant to remeasurement of SARs)

31 March, 20X2
Employee Benefits Expenses A/c. Dr. 26,510
To Share-based Payment Liability A/c. 26,510
(Being Compensation Expenses recognized pursuant to remeasurement of SARs)

31 March, 20X3
Share-based Payment Liability A/c. Dr. 73,040
To Employee Benefits Expenses A/c. 73,040
(Being Compensation Expenses recognized reversed pursuant to remeasurement
of SARs)

Share-based Payment Liability A/c. Dr. 1,318,350

To Bank A/c. 1,318,350
(Being SARs settled)

Slide 24: May 2020 RTP

Question 19
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 1st 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 31st 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:

Fair Value of SAR ₹

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 31st 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.
 10% of employees left before the end of 20X6. On 31st 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 eachSARs
year? Pass Journal entries. Ind AS 102

Solution:

Vesting Period Exercise Period

Details 31 Dec 20X5 31 Dec 20X6 31 Dec 20X7 31 Dec 20X8
Vesting
(a) No. of Employees expected to satisfy / satisfied the conditions 36 36 30
(b) FV of Option ₹ 12 ₹8 ₹ 13
(c) Total Value of Options expected to vest= [(a) x 1,000 SARs x (b)] ₹ 432,000 ₹ 288,000 ₹ 390,000
(d) Proportion of Expenditure 1/2 2/2
(e) Expenditure to be Recognized ₹ 216,000 ₹ 288,000
(f ) Less: Already recognized in Previous Years -₹ 216,000 -₹ 288,000 -₹ 390,000
₹ 216,000 ₹ 72,000
Exercising
(g) No. of Employees exercising SARs 6 30
(h) FV of Option at the time of exercise ₹ 10 ₹ 12
(i ) Expenditure to be recognized on exercise = (g x h x 1,000 SARs) ₹ 60,000 ₹ 360,000
(j ) Expenditure for Current year = [(c) + (i)] ₹ 450,000 ₹ 360,000
(k) Less: Expedniture recognized previously -₹ 288,000 -₹ 390,000
(e) Amount to be expensed this year ₹ 162,000 -₹ 30,000

Solution:

Journal Entries
Particulars Debit (₹) Credit (₹)
31 December 20X5
Employee Benefits Expenses A/c. Dr. 216,000
To Share-based Payment Liability A/c. 216,000
(Being Compensation Expenses recognized in respect of SARs)

31 December 20X6
Employee Benefits Expenses A/c. Dr. 72,000
To Share-based Payment Liability A/c. 72,000
(Being Compensation Expenses recognized pursuant to remeasurement of SARs)

31 December 20X7
Employee Benefits Expenses A/c. Dr. 162,000
To Share-based Payment Liability A/c. 162,000
(Being Compensation Expenses recognized pursuant to remeasurement of SARs)

Share-based Payment Liability A/c. Dr. 60,000

To Bank A/c. 60,000
(Being SARs settled)

31 December 20X8
Share-based Payment Liability A/c. Dr. 30,000
To Employee Benefits Expenses A/c. 30,000
(Being Compensation Expenses reversed pursuant to remeasurement of SARs)

Share-based Payment Liability A/c. Dr. 360,000

To Bank A/c. 360,000
(Being SARs settled)

Slide 25: November 2019

Question 3(a): 8 Marks (modified)
ABC Ltd. granted 500 Stock Appreciations Rights (SARs) each to 80 employees on 1st April, 20X1 with a Fair Value ₹ 100. The terms of the
award require the employee to provide service for 4 years in order to earn the award. The SARs are expected to be settled in cash and it is
expected that 100% of the employees will exercise the option. The fair value of each SAR at each reporting date is as follows–
(a) 31st March, 20X2 ₹ 110,
(b) 31st March, 20X3 ₹ 120
(c) 31st March, 20X4 ₹ 115
(d) 31st March, 20X5 ₹ 130
Please present the journal entries in the books of ABC Ltd. over the entire life of the grants.

Solution:
 SARs Ind AS 102

Number of SARs = 80 Employees x 500 SARs = 40,000 SARs

Details 1 April 20X1 31 March 20X2 31 March 20X3 31 March 20X4 31 March 20X5
(a) Percentage of SARs to Vest 100% 100% 100% 100% 100%
(b) FV of Option ₹ 100 ₹ 110 ₹ 120 ₹ 115 ₹ 130
(b) Total Value of Options Expected to Vest = ₹ 4,000,000 ₹ 4,400,000 ₹ 4,800,000 ₹ 4,600,000 ₹ 5,200,000
[(a) x (b) x 40,000 SARs]
(c) Proportion of Expenditure 1/4 2/4 3/4 4/4
(d) Proportionate Cost of Options for the year = (b) x (c) ₹ 1,100,000 ₹ 2,400,000 ₹ 3,450,000 ₹ 5,200,000
(e) Less: Cost already recognized in the Previous Years -₹ 1,100,000 -₹ 2,400,000 -₹ 3,450,000
Amount to be expensed in the Current Year ₹ 1,100,000 ₹ 1,300,000 ₹ 1,050,000 ₹ 1,750,000

Journal Entries
Particulars Debit (₹) Credit (₹)
31 March 20X2
Employee Benefits Expenses A/c. Dr. 1,100,000
To Share-based Payment Liability A/c. 1,100,000
(Being Compensation Expenses recognized in respect of SARs)

31 March 20X3
Employee Benefits Expenses A/c. Dr. 1,300,000
To Share-based Payment Liability A/c. 1,300,000
(Being Compensation Expenses recognized pursuant to Fair Valuation of SARs)

31 March 20X4
Employee Benefits Expenses A/c. Dr. 1,050,000
To Share-based Payment Liability A/c. 1,050,000
(Being Compensation Expenses recognized pursuant to Fair Valuation of SARs)

31 March 20X5
Employee Benefits Expenses A/c. Dr. 1,750,000
To Share-based Payment Liability A/c. 1,750,000
(Being Compensation Expenses recognized pursuant to Fair Valuation of SARs)
 SBPs with Cash Alternative Ind AS 102

Slide 26: Page 5.35

Illustration 3: Share-based Payment with Cash Alternative
On 1st January, 20X1, ABC limited gives options to its key management personnel (employees) to take either cash equivalent to 1,000 shares or
1,500 shares. The minimum service requirement is 2 years and shares being taken must be kept for 3 years.

Fair Value of the shares are as follows ₹

Share alternative fair value (with restrictions) 102
Grant date fair value on 1 January, 20X1 113
Fair value on 31 December, 20X1 120
Fair value on 31 December, 20X2 132
The employees exercise their cash option at the end of 20X2. Pass the journal entries.

Solution:

Details 1 January 20X1 31 Dec 20X1 31 Dec 20X2

Equity Alternative (1,500 shares x ₹ 102) ₹ 153,000
Cash Alternative (1,000 shares x ₹ 113) ₹ 113,000
Equity Option (₹ 1,53,000 - ₹ 1,13,000) ₹ 40,000

Cash Option (cumulative) using period end Fair Value

(a) No. of Options 1,000 1,000
(b) Fair Value ₹ 120 ₹ 132
(c) Total Fair Value of Options ₹ 120,000 ₹ 132,000
(d) Proportion of Expenses 1/2 2/2
(e) Proprotionate Expenditure ₹ 60,000 ₹ 132,000
(d) Less: Already recognized in Previous Years -₹ 60,000
(e) Amount to be expensed this year ₹ 60,000 ₹ 72,000
(f ) Equity Option of ₹ 40,000: Spread on straight-line basis over the vesting period. ₹ 20,000 ₹ 20,000
(g) Total Expense for the period = [(e) + (f)] ₹ 80,000 ₹ 92,000

Journal Entries
Particulars Debit (₹) Credit (₹)
31 December 20X1
Employee Benefits Expenses A/c. Dr. 80,000
To Share-based Payment Reseve A/c. 20,000
To Share-based Payment Liability A/c. 60,000
(Being Compensation Expenses recognized in respect of Equity and Cash
settlement option)

31 December 20X2
Employee Benefits Expenses A/c. Dr. 92,000
To Share-based Payment Reseve A/c. 20,000
To Share-based Payment Liability A/c. 72,000
(Being Compensation Expenses recognized in respect of Equity and Cash
settlement option)

Share-based Payment Liability A/c. Dr. 132,000

To Bank A/c. 132,000
(Being settlement of Options in Cash)

Share-based Payment Reserve A/c. Dr. 40,000

To Retained Earnings 40,000
(Being balance in SBP Reserve A/c. transferred to Retained Earnings on exercise)

Slide 27: Page 5.38

Illustration 6: Share-based payment - cash & equity alternatives
Tata Industries issued share-based option to one of its key management personal which can be exercised either in cash or equity and it has
following features:

Option I
No. of cash-settled shares 74,000
Service Condition 3 years
 SBPs with Cash Alternative Ind AS 102

Option II
No. of equity-settled shares 90,000
Conditions:
Service 3 years
Restriction to sell 2 years
Fair Values:
Equity Price with a restriction of sale for 2 years ₹ 115
Fair Value at the Grant Date ₹ 135
Fair Value 20X0 ₹ 138
20X1 ₹ 140
20X2 ₹ 147
Pass the journal entries.

Solution:

Calculation of Fair Value of Equity Option Component:

Details 31 Dec 20X0 31 Dec 20X1 31 Dec 20X2
Fair Value of a share with restrictive clause ₹ 115
No. of Shares allotted 90,000
FV of Shares allotted = 90,000 shares x ₹ 115 per share (A) ₹ 10,350,000
Fair Value of a share at the Grant Date ₹ 135
No. of Cash-settled Shares 74,000
FV of cash-settled Shares = 74,000 shares x ₹ 135 per share (B) ₹ 9,990,000
Fair Value of Equity Component in Compound Instrument (A - B) ₹ 360,000

Cash Option (cumulative) using period end Fair Value

(a) No. of Options 74,000 74,000 74,000
(b) Fair Value ₹ 138 ₹ 140 ₹ 147
(c) Total Fair Value of Options ₹ 10,212,000 ₹ 10,360,000 ₹ 10,878,000
(d) Proportion of Expenses 1/3 2/3 3/3
(e) Proportionate Expenditure ₹ 3,404,000 ₹ 6,906,667 ₹ 10,878,000
(d) Less: Already recognized in Previous Years -₹ 3,404,000 -₹ 6,906,667
(e) Amount to be expensed this year ₹ 3,404,000 ₹ 3,502,667 ₹ 3,971,333
(f ) Equity Option of ₹ 3,60,000: Spread on straight-line basis over the vesting period. ₹ 120,000 ₹ 120,000 ₹ 120,000
(g) Total Expense for the period = [(e) + (f)] ₹ 3,524,000 ₹ 3,622,667 ₹ 4,091,333

Journal Entries
Particulars Debit (₹) Credit (₹)
31 December 20X0
Employee Benefits Expenses A/c. Dr. 3,524,000
To Share-based Payment Reseve A/c. 120,000
To Share-based Payment Liability A/c. 3,404,000
(Being Compensation Expenses recognized in respect of Equity and Cash
settlement option)

31 December 20X1
Employee Benefits Expenses A/c. Dr. 3,622,667
To Share-based Payment Reseve A/c. 120,000
To Share-based Payment Liability A/c. 3,502,667
(Being Compensation Expenses recognized in respect of Equity and Cash
settlement option)

31 December 20X2
Employee Benefits Expenses A/c. Dr. 4,091,333
To Share-based Payment Reseve A/c. 120,000
To Share-based Payment Liability A/c. 3,971,333
(Being Compensation Expenses recognized in respect of Equity and Cash
settlement option)

Upon Cash-alternative chosen

Share-based Payment Liability A/c. (74,000 shares x ₹ 147 per share) Dr. 10,878,000
To Bank A/c. 10,878,000
(Being settlement of Options in Cash)
 SBPs with Cash Alternative Ind AS 102

Share-based Payment Reserve A/c. Dr. 360,000

To Retained Earnings 360,000
(Being balance in SBP Reserve A/c. transferred to Retained Earnings on exercise)

Upon Equity-alternative chosen

Share-based Payment Liability A/c. (74,000 shares x ₹ 147 per share) Dr. 10,878,000
Share-based Payment Reserve A/c. Dr. 360,000
To Equity Share Capital A/c. 11,238,000
(Being settlement of Options in Equity)

Slide 28: Page 5.59

Question 8
At 1st January, 20X0, Ambani Limited grants its CEO an option to take either cash amount equivalent to 800 shares or 990 shares. The minimum
service requirement is 2 years. There is a condition to keep the shares for 3 years if shares are opted.

Fair Value of the shares are as follows ₹

Share alternative fair value (with restrictions) 212
Grant date fair value on 1 January, 20X0 213
Fair value on 31 December, 20X0 220
Fair value on 31 December, 20X1 232
The key management exercises his cash option at the end of 20X2. Pass journal entries.

Solution:

Details 1 January 20X0 31 Dec 20X0 31 Dec 20X1

Equity Alternative (990 shares x ₹ 212) ₹ 209,880
Cash Alternative (800 shares x ₹ 213) ₹ 170,400
Equity Option (₹ 2,09,880 - ₹ 1,70,400) ₹ 39,480

Cash Option (cumulative) using period end Fair Value

(a) No. of Options 800 800
(b) Fair Value ₹ 220 ₹ 232
(c) Total Fair Value of Options ₹ 176,000 ₹ 185,600
(d) Proportion of Expenses 1/2 2/2
(e) Proprotionate Expenditure ₹ 88,000 ₹ 185,600
(d) Less: Already recognized in Previous Years -₹ 88,000
(e) Amount to be expensed this year ₹ 88,000 ₹ 97,600
(f ) Equity Option of ₹ 39,480: Spread on straight-line basis over the vesting period. ₹ 19,740 ₹ 19,740
(g) Total Expense for the period = [(e) + (f)] ₹ 107,740 ₹ 117,340

Solution:

Journal Entries
Particulars Debit (₹) Credit (₹)
31 December 20X0
Employee Benefits Expenses A/c. Dr. 107,740
To Share-based Payment Reseve A/c. 19,740
To Share-based Payment Liability A/c. 88,000
(Being Compensation Expenses recognized for Equity and Cash settlement option)

31 December 20X1
Employee Benefits Expenses A/c. Dr. 117,340
To Share-based Payment Reseve A/c. 19,740
To Share-based Payment Liability A/c. 97,600
(Being Compensation Expenses recognized for Equity and Cash settlement option)

Share-based Payment Liability A/c. Dr. 185,600

To Bank A/c. 185,600
(Being settlement of Options in Cash)

Share-based Payment Reserve A/c. Dr. 39,480

To Retained Earnings 39,480
(Being balance in SBP Reserve A/c. transferred to Retained Earnings on exercise)
 Group SBPAs Ind AS 102

Slide 6: Page 5.58

Question 3
Company P is a holding company for company B. A group share-based payment is being organized in which Parent issues its own equity-shares
for the employees of company B. The details are as below –

Number of Employees of Company B 100

Grant date fair value of share ₹ 87
Number of shares to each employee granted 25
Vesting conditions Immediately
Pass the journal entry in the books of company P & company B.

Solution:

Books of Company P
Particulars Debit (₹) Credit (₹)
Investment in Company B Dr. 217,500
To Equity Share Capital A/c. (2,500 shares x ₹ 10) 25,000
To Securities Premium A/c. (2,500 shares x ₹ 77) 192,500
(Being allotment of 25 shares each to 100 employees of B at fair value of ₹ 87 per sh.
vide Board Resolution No. ____ dated _____)

Books of Company B
Particulars Debit (₹) Credit (₹)
Employee Benefit Expense A/c. Dr. 217,500
To Capital Contribution from Parent P 217,500
(Being issue of shares by Parent to Employees pursuant to Group Share-based
Payment Plan)

Slide 29: May 2019 RTP

Question 6
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% of the employees will
complete the two-year vesting 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 Ind AS 102, over the two-year vesting period, the subsidiary measures the services period from the employees in accordance with
the requirements applicable to equity-settled share-based payment transactions. Thus, the subsidiary measures the services received from the
employees on the basis of the fair value of the share options at grant date. An increase in equity is recognized 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:
Details Year 1 Year 2
(a) Number of employees 100 100
(b) Percentage of Employees expected to remain till the end of two years 80% 81%
(c) FV of Option ₹ 30 ₹ 30
(d) Total Value of Options expected to vest= [(a) x 200 options x (b) x (c)] ₹ 480,000 ₹ 486,000
(e) Proportion of Expense to be recognized 1/2 2/2
(f ) Expenditure to be recognized ₹ 240,000 ₹ 486,000
(d) Less: Already recognized Previously -₹ 240,000
(e) Amount to be expensed this year ₹ 240,000 ₹ 246,000

Journal Entries
Particulars Debit (₹) Credit (₹)
Year 1
Employee Benefits Expenses A/c. Dr. 240,000
To Capital Contribution from Parent P 240,000
(Being issue of shares by Parent to Employees pursuant to Group SBPA)

Year 2
Employee Benefits Expenses A/c. Dr. 246,000
To Capital Contribution from Parent P 246,000
(Being issue of shares by Parent to Employees pursuant to Group SBPA)