Understanding Scope Exclusions Under Ind AS 102 Share-Based Payments

1. Introduction

Ind AS 102 establishes the accounting framework for transactions in which an entity receives goods or services in exchange for equity instruments or amounts linked to the value of equity instruments. While the standard has a broad scope and extends beyond traditional employee stock option plans, not every transaction involving shares or equity-linked consideration falls within its ambit.

In practice, preparers often encounter situations where equity instruments are issued, yet the transaction is governed by another accounting standard. Misidentifying the applicable standard can lead to incorrect measurement, inappropriate recognition of expenses and misleading financial reporting outcomes.

Understanding the boundaries of Ind AS 102 is therefore just as important as understanding its core principles. This second part of the write-up discusses key transactions that are specifically excluded from the scope of Ind AS 102 and explains the rationale behind such exclusions through practical illustrations.

2. Transactions with Shareholders acting as Shareholders

One of the fundamental principles of Ind AS 102 is that the standard applies when an entity receives goods or services in exchange for equity instruments or equity-linked consideration.

Consequently, where a transaction occurs solely because a person is a shareholder and not because that person is providing goods or services, the transaction does not constitute a share-based payment arrangement.

A common misconception arises when employees are also shareholders of the entity. The mere involvement of employees does not automatically bring a transaction within the scope of Ind AS 102. The critical question is the capacity in which the individual is participating.

If the benefit is received because the individual is an employee, Ind AS 102 may apply. However, if the benefit is received because the individual is a shareholder, the transaction falls outside the standard.

Illustration 1 – Rights Issue to Employee-Shareholders

Assume that Delta Limited has 1,000 shareholders, of whom 50 are also employees. The company undertakes a rights issue, offering additional shares at ₹80 per share, while the fair value is ₹120 per share.

The employees who are shareholders receive the same rights as all other shareholders. At first glance, one may argue that employees have received shares at a concessional price and therefore a share-based payment exists. However, the benefit arises because they hold shares and not because they render services to the company.

Accordingly, the transaction is undertaken with shareholders in their capacity as shareholders and does not fall within the scope of Ind AS 102.

Key Principle

The presence of an employment relationship is not sufficient. The benefit must be linked to services rendered rather than ownership interests.

3. Business Combinations – When Equity Instruments Form Part of Acquisition Consideration

Another significant exclusion relates to business combinations. In many acquisitions, the acquirer issues its own shares as part of the purchase consideration. Since equity instruments are involved, it may appear that Ind AS 102 should apply. However, such transactions are governed by Ind AS 103, Business Combinations.

Under Ind AS 103, both the identifiable assets acquired and consideration transferred are measured at fair value. The issuance of shares in exchange for control of another business represents acquisition consideration rather than compensation for goods or services.

Accordingly, the transaction falls outside the scope of Ind AS 102.

However, the distinction is not always straightforward. In many acquisitions, former owners of the acquiree continue to work for the combined entity and may become entitled to additional shares after the acquisition. Determining whether those shares represent additional purchase consideration or remuneration for future services often requires significant judgement.

3.1 The Critical Distinction – Acquisition Consideration vs Employee Remuneration

A useful question to ask is:

“Would the individual receive the additional shares even if he or she ceased providing services after the acquisition?”

If the answer is yes, the arrangement generally resembles contingent consideration and falls within Ind AS 103.

If the answer is no, and continued employment is essential to receiving the shares, the arrangement is likely compensation for future services and therefore falls within Ind AS 102.

Illustration 2 – Former Shareholders Continuing After Acquisition

Let us consider Company Alpha acquires Company Delta. As part of the acquisition arrangement, Alpha agrees to issue 10,000 additional shares to individuals who previously owned 75% of Delta, provided that the revenue generated by the acquired business exceeds ₹300 million during the next 12 months, and the former owners remain associated with the business during this period.

Assume further that these individuals do not receive regular salaries, are not required to attend the office on a routine basis and are not involved in day-to-day management activities. The accounting treatment in this situation is not immediately obvious.

At first glance, the requirement to remain associated with the business for twelve months may appear to indicate post-acquisition employment, suggesting the application of Ind AS 102. However, a deeper analysis leads to a different conclusion.

The additional shares are fundamentally linked to the future performance of the acquired business rather than the provision of identifiable employee services. The former owners are not functioning as regular employees and their involvement is limited. Thus, the arrangement is therefore more akin to or a non-compete arrangement linked to the acquisition.

Accordingly, the additional shares should generally be accounted for under Ind AS 103 rather than Ind AS 102.

3.2 Why this Distinction Matters?

The accounting consequences can be significant. If the transaction falls within the ambit of Ind AS 103, the measurement and subsequent treatment are governed by business combination principles.

However, if treated as employee remuneration, Ind AS 102 applies. Hence, the compensation expense must be recognised over the service period.

Thus, a wrong conclusion can materially impact post-acquisition profits.

4. Contracts to Buy or Sell Non-financial Items

The interaction between Ind AS 102 and financial instrument standards is another area where confusion frequently arises. Ind AS 32 and Ind AS 109 apply to certain contracts involving non-financial items if those contracts can be settled net in cash or another financial instrument.

Where a contract falls within the scope of Ind AS 32 and Ind AS 109, Ind AS 102 does not apply.

The key consideration is whether the arrangement is genuinely intended for the receipt or delivery of a non-financial item or whether it effectively functions as a financial instrument.

Illustration 3 – Purchase of Steel Using Shares

Company Gamma enters into a forward contract to purchase steel. The purchase price is fixed as the value of 1,000 ordinary shares of Company Gamma. Let us assume that Company Gamma intends to take physical delivery of the steel. The company does not have a practice of net-settling such contracts.

In this situation, the arrangement is not treated as a financial instrument under Ind AS 32 and Ind AS 109. Consequently, Ind AS 102 applies because the entity is effectively acquiring a non-financial item in exchange for equity-linked consideration.

Now consider a modified scenario.

Suppose Company Gamma routinely settles such contracts net and has no intention of taking physical delivery of steel. In substance, the arrangement no longer functions as a purchase contract. Instead, it behaves like a financial instrument whose value fluctuates with market variables. Accordingly, the contract falls within the scope of Ind AS 32 and Ind AS 109 and is excluded from Ind AS 102.

Key Principle

The accounting outcome may change even though the contractual terms remain substantially similar. The decisive factor is often the entity’s intention and settlement practice.

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