Provision for Performance Incentive Based on EBITDA | Ind AS

1. Facts

Zenith Manufacturing Limited, hereinafter referred to as “the company”, is engaged in the manufacture of industrial equipment and prepares its financial statements in accordance with Ind AS.

As per its approved Remuneration Policy, the company pays a performance incentive to its senior management team, including the CEO and CFO. The incentive is computed as 4% of annual EBITDA, subject to the condition that EBITDA exceeds Rs. 40 crore.

The policy, however, states only that:

“Incentive shall be calculated at 4% of annual EBITDA.”

The policy does not clarify whether EBITDA is to be computed before or after charging the performance incentive expense.

For the financial year ended 31 March 2026:

• EBITDA before charging performance incentive (as per draft financials) is Rs. 50 crore.
• Estimated incentive at 4% amounts to Rs. 2 crore (if calculated before charging incentive).
• Statutory audit is completed in May 2026.
• Post-audit adjustments reduce EBITDA (before incentive) to Rs. 47 crore.
• The Board formally approves the incentive payout in June 2026.

While finalising financial statements for the year ended 31 March 2026, management faced the following issues:

(a) Whether a constructive obligation exists as at 31 March 2026 despite board approval being pending?

(b) Whether EBITDA for incentive computation should be considered before or after charging the incentive expense, given the policy is silent?

(c) Whether EBITDA can be reliably estimated before completion of audit adjustments?

2. Relevant Provisions

Ind AS 19 – Employee Benefits

Para 11

An entity shall recognise a liability when an employee has provided service in exchange for employee benefits to be paid in the future.

When an employee has rendered service to an entity during an accounting period, the entity shall recognise the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service:

(a) as a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds the undiscounted amount of the benefits, an entity shall recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund.

(b) as an expense, unless another Ind AS requires or permits the inclusion of the benefits in the cost of an asset (see, for example, Ind AS 2, Inventories, and Ind AS 16, Property, Plant and Equipment).

Para 19

An entity shall recognise the expected cost of profit-sharing and bonus payments under paragraph 11 when, and only when:

(a) the entity has a present legal or constructive obligation to make such payments as a result of past events; and

(b) a reliable estimate of the obligation can be made. A present obligation exists when, and only when, the entity has no realistic alternative but to make the payments.

Ind AS 37 – Provisions, Contingent Liabilities and Contingent Assets

Para 14

A provision shall be recognised when:

(a) an entity has a present obligation (legal or constructive) as a result of a past event;

(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

(c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision shall be recognised.

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