Ind AS 102 Share-Based Payment Modifications – Upward and Downward Accounting Treatment

Accounting for upward and downward changes in equity–settled share-based payments: Ind AS 102

1. Question

Stellar Tech Industries Limited (hereinafter referred to as “the company”) engages in the business of manufacturing automobile parts. On 1st April, 2025, the company granted equity–settled share options to 100 employees. Each employee willbe entitled to 1,000 options, with a total of 100,000 options granted. The options would vest after three years of continuous service, i.e., on 31 March 2028. At the grant date, the fair value of each option was Rs. 30, resulting in a total fair value of Rs. 30,00,000 to be recognized over the vesting period.

After the first year of service, on 1stApril 2026, the company decided to modify the terms of the award. Under the below two scenarios:

• •  Scenario 1- In this scenario due to a significant increase in the company’s share price, the exercise price of the options was reduced from Rs. 100 to Rs. 70. As a result, the fair value of each option increased from Rs. 30 to Rs. 45. This modification enhanced the value of the award to employees, thereby creating a situation of upward modification. The issue that arises here is how the company should treat the incremental fair value resulting from the modification whether it should adjust the original expense or recognize additional cost prospectively over the remaining vesting period.
  • Scenario 2- In this scenario due to weak financial performance, the company reduced the number of options from 1,000 to 800 per employee, effectively cutting the total number of options from 100,000 to 80,000. The fair value per option remained ₹30, making the revised total fair value Rs. 24,00,000. This represents a downward modification. The issue in this case is whether the company can reduce the compensation expense already recognised or whether it must continue to account for the original grant date fair value, despite the reduction in benefits to employees.

2. Relevant Provisions

Ind AS 102 – Share-Based Payment

Para 10– For equity-settled share-based payment transactions, the entity shall measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods or services received, the entity shall measure their value, and the corresponding increase in equity, indirectly, by reference to 1 the fair value of the equity instruments granted.

Para 11- To apply the requirements of paragraph 10 to transactions with employees and others providing similar services, 2 the entity shall measure the fair value of the services received by reference to the fair value of the equity instruments granted, because typically it is not possible to estimate reliably the fair value of the services received, as explained in paragraph 12. The fair value of those equity instruments shall be measured at grant date.

Para 26- An entity might modify the terms and conditions on which the equity instruments were granted. For example, it might reduce the exercise price of options granted to employees (i.e.,reprice the options), which increases the fair value of those options. The requirements in paragraphs 27-29 to account for the effects of modifications are expressed in the context of share-based payment transactions with employees. However, the requirements shall also be applied to share-based payment transactions with parties other than employees that are measured by reference to the fair value of the equity instruments granted. In the latter case, any references in paragraphs 27-29 to grant date shall instead refer to the date the entity obtains the goods or the counterparty renders service.

Para 27– The entity shall recognise, as a minimum, the services received measured at the grant date fair value of the equity instruments granted, unless those equity instruments do not vest because of failure to satisfy a vesting condition (other than a market condition) that was specified at grant date. This applies irrespective of any modifications to the terms and conditions on which the equity instruments were granted, or a cancellation or settlement of that grant of equity instruments. In addition, the entity shall recognise the effects of modifications that increase the total fair value of the share-based payment arrangement or are otherwise beneficial to the employee. Guidance on applying this requirement is given in Appendix B.

Para 28- If a grant of equity instruments is cancelled or settled during the vesting period (other than a grant cancelled by forfeiture when the vesting conditions are not satisfied):

(a) the entity shall account for the cancellation or settlement as an acceleration of vesting, and shall therefore recognise immediately the amount that otherwise would have been recognised for services received over the remainder of the vesting period.

(b) any payment made to the employee on the cancellation or settlement of the grant shall be accounted for as the repurchase of an equity interest, i.e. as a deduction from equity, except to the extent that the payment exceeds the fair value of the equity instruments granted, measured at the repurchase date. Any such excess shall be recognised as an expense. However, if the share-based payment arrangement included liability components, the entity shall re-measure the fair value of the liability at the date of cancellation or settlement. Any payment made to settle the liability component shall be accounted for as an extinguishment of the liability.

(c) if new equity instruments are granted to the employee and, on the date when those new equity instruments are granted, the entity identifies the new equity instruments granted as replacement equity instruments for the cancelled equity instruments, the entity shall account for the granting of replacement equity instruments in the same way as a modification of the original grant of equity instruments, in accordance with paragraph 27 and the guidance in Appendix B. The incremental fair value granted is the difference between the fair value of the replacement equity instruments and the net fair value of the cancelled equity instruments, at the date the replacement equity instruments are granted. The net fair value of the cancelled equity instruments is their fair value, immediately before the cancellation, less the amount of any payment made to the employee on cancellation of the equity instruments that is accounted for as a deduction from equity in accordance with (b) above. If the entity does not identify new equity instruments granted as replacement equity instruments for the cancelled equity instruments, the entity shall account for those new equity instruments as a new grant of equity instruments.

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