ICAI release Guidance Note on Accounting for Share-based Payments

The Institute of Chartered Accountants of India

(The following is the text of the Guidance Note on Accounting for Sharebased Payments, issued by the Institute of Chartered Accountants of India. This Guidance Note is applicable for enterprises that are not required to follow Indian Accounting Standards. Pursuant to the issuance of this, “Guidance Note on Accounting for Employee Share-based Payments” stands withdrawn)

Introduction

1. In a number of countries, shares and share options comprise a significant element of the total remuneration package of senior personnel; a trend encouraged by the current consensus that it is a matter of good corporate governance to promote significant long-term shareholdings by senior management, so as to align their economic interests with those of shareholders. Such plans generally take the forms of Employee Stock Option Plans (ESOPs), Employee Stock Purchase Plans (ESPPs) and Stock Appreciation Rights (SARs). ESOPs are plans under which an enterprise grants options for a specified period to its employees to purchase its shares at a fixed or determinable price. ESPPs are plans under which the enterprise grants rights to its employees to purchase its shares at a stated fair value at the time of public issue or otherwise (such ESPPs are outside the scope of share-based payment plan under this Guidance Note). One advantage of ESOPs and ESPPs as remuneration is that they need not entail any cash cost to the enterprise. SARs is a form of employee share-based payments whereby the employees become entitled to a future cash payment or shares based on the increase in the price of the shares from a specified level over a specified period. Apart from using share-based payments to compensate employees for their services, such payments are also used by an employer as an incentive to the employees to remain in its employment and to reward them for their efforts in improving its performance. Unlisted companies, in particular, start-up companies, often give share-based compensation since they cannot afford to pay high salaries to their employees but are willing to share the future prosperity of the company. Several companies also offer share-based payments to non-employees, including various vendors. It is hence important that cost relating to these recognised in the financial statements.

2. Recognising the need for establishing uniform accounting principles and practices for all types of share-based payments, the Institute has issued a Guidance note on Accounting for Employee Share-based Payments in 2005. Considering that share based payments to vendors is on the rise, the Guidance note on Accounting for Employee Share-based Payments has been replaced by this Guidance Note. Once the Accounting Standard dealing with Share- based Payments comes into force, this Guidance Note will automatically stand withdrawn.

This Guidance Note is applicable to companies following Accounting Standards under Companies (Accounting Standards) Rules, 2006, as amended under Section 133 of Companies Act, 2013. Companies following Companies (Indian Accounting Standards) Rules, 2015, as amended, shall continue to follow Ind AS 102 – Accounting for Share Based Payments.

Scope

3. This Guidance Note establishes financial accounting and reporting principles for share-based payment plans, including., ESOPs, ESPPs and SARs as well as share-based payment arrangement with non-employees. For the purposes of this Guidance Note, the term ‘employee’ includes a director of the enterprise, whether whole time or not.

4. Although this Guidance Note was primarily a response to concerns over share-based remuneration, its scope is not restricted to transactions with employees. For example, if an external supplier of goods or services, including another group enterprise, is paid in shares or share options, or cash (or other assets) of equivalent value, this Guidance Note shall be applied. Goods include:

• Inventories;
• Consumables;
• Property, plant and equipment;
• Intangible assets; and
• Other non-financial assets.

Similarly, services include all types of services, including consulting services, engineering services, website development and other services.

5. The Guidance Note must be applied to all share-based payment transactions, including:

(a) equity-settled share-based payment transactions;

(b) cash-settled share-based payment transactions; and

(c) transactions where either the enterprise or the supplier of goods or services can choose whether the transaction is to be equity- settled or cash-settled.

6. However, an enterprise shall not apply this Guidance Note to transactions in which the enterprise acquires goods as part of the net assets acquired in a merger or amalgamation as defined by AS 14, Accounting for Amalgamations, enterprises or the contribution of a business on the formation of a joint venture as defined by AS 27, Financial Reporting of Interests in Joint Ventures. Hence, equity instruments issued in an amalgamation or merger in exchange for control of the acquiree are not within the scope of this Guidance Note.

7. However, equity instruments granted to employees or vendors of the acquiree in their capacity as employees or vendors (e.g. in return for continued service) are within the scope of this Guidance Note. Similarly, the cancellation, replacement or other modification of share-based payment arrangements because of an amalgamation or merger or other equity restructuring shall be accounted for in accordance with this Guidance Note.

8. The scope of this Guidance extends to:

• group share-based payment schemes and certain transactions with shareholders;
• transactions with employee benefit/employee stock option trusts and similar vehicles;
• transactions where the identifiable consideration received appears to be less than the consideration given in the form of shares;
• ‘all employee’ share-based plans; and
• vested share-based payment transactions.

9. Within a group of companies it is common for one member of the group (typically the parent) to have the obligation to settle a share-based payment transaction in which services are provided to another member of the group (typically a subsidiary). This transaction is within the scope of this Guidance Note for the enterprise receiving the services (even though it is not a direct party to the arrangement between its parent and its employee), the enterprise settling the transaction and the group as a whole. Accordingly, this Guidance Note requires an enterprise to account for a transaction in which it either:

• receives goods or services when another enterprise in the same group (or a shareholder of any group enterprise) has the obligation to settle the share-based payment transaction, or
• has an obligation to settle a share-based payment transaction when another enterprise in the same group receives the goods or services unless the transaction purpose other than payment for goods or services supplied to the enterprise receiving them.

Appendix X illustrates the accounting for group-wide share-based payment transactions.

10. This also applies to transfers of shares or stock options of the parent of the enterprise, or shares or stock options of another enterprise in the same group as the enterprise, to the employees of the enterprise.

11. For the purposes of this Guidance Note, a transaction with an employee (or any other party) in his/her capacity as a holder of shares of the enterprise is not a share-based payment. For example, if an enterprise grants all holders of a particular class of its shares, the right to acquire additional shares or stock options of the enterprise at a price that is less than the fair value of those shares or stock options, and an receives such a right because he/she is a holder of shares or stock options of that particular class, the granting or exercise of that right is not subject to the requirements of this Guidance Note.

12 For the purposes of this Guidance Note, a grant of shares to the employees at the time of public issue is not an share-based payment if the price and other terms at which the shares are offered to employees are the same or similar to those at which the shares have been offered to general investors, for example, in a public issue an enterprise grants shares to its employees as a preferential allotment while the price and other terms remain the same as those to other investors.

A share-based payment transaction as defined involves the receipt of goods or services by the reporting enterprise or by another group enterprise. Nevertheless, this Guidance Note also applies to share-based payment transactions where no specifically identifiable goods or services have been (or will be) received. If the identifiable consideration received (if any) appears to be less than the fair value of consideration given, the implication is that, in addition to the identifiable goods and services acquired, the enterprise must also have received some unidentifiable consideration equal to the difference between the fair value of the share-based payment and the fair value of any identifiable consideration received.

Accordingly, the cost of the unidentified consideration must be accounted for in accordance with this Guidance Note. For example, if an enterprise agrees to pay a supplier of services with a clearly identifiable market value of ` 1,000 by issuing shares with a value of ` 1,500, this Guidance Note would require the enterprise to recognise an expense of ` 1,500. This is notwithstanding the normal requirement of this Guidance Note that an equitysettled share-based payment transaction with a non-employee be recognised at the fair value of the goods or services received.

Appendix IX provides illustrations of share-based payment transaction with counter parties other than employees.