General
Companies often award key employees by issuing them it's stocks, stock options, or equity instruments for promoting the interests of the business and providing employees with an opportunity to participate in the value creation and ownership of the business.
Equity-based compensation can take various forms from the commonly granted stock options to others such as Restricted Stocks, Restricted Stock Units (RSUs), Stock Appreciation Rights (SARs), Employee Stock Purchase Plans (ESPPs) and other long-term incentive plans with awards tied partly or fully to the company's stock or other equity instruments
Stock awards and compensation are offered to attract, reward, motivate and retain key employees who demonstrate high levels of individual performance. In addition, it acts as a mechanism to incentivise them for their extraordinary efforts in improving the performance of the company.
Stock option is a contract that gives the holder the right, but not the obligation, either to purchase (to call) or to sell (to put) a certain number of shares at a predetermined price for a specified period of time. Most employee stock options are call options which provide employees with the right to purchase shares of the company at a specific price once vested.
Restricted stock is a share of stock granted to an employee for which sale is prohibited for a
specified period of time. These grants of restricted shares to employees can be better termed as “nonvested shares” because the employees must satisfy certain vesting conditions to earn the rights to the shares, which are, in general, otherwise unrestricted for other holders.
Restricted stock units (RSUs) represent a promise to deliver shares to the employee at a future date if certain vesting conditions are met.
The difference between RSUs and restricted stock is primarily the timing of the delivery of the underlying shares. A company that grants RSUs does not deliver the shares to the employee until the vesting conditions are met.
SAR is a contract that gives the employee the right to receive an amount of stock or cash, the value of which equals the appreciation in a company’s stock price between the award’s grant date and its vesting/exercise date.
SARs generally do not involve payment of an exercise price.
ESPPs are designed to promote employee stock ownership by providing employees with a convenient means (usually through a payroll/salary deduction) to acquire a company’s shares.
Understanding commonly used terms in award plans
The date at which the entity and employee agree to a share-based payment arrangement. This is usually the point when the enterprise and the employee have a shared understanding of the terms and conditions of the arrangement.
The period during which all the specified vesting conditions of a share-based payment arrangement are to be satisfied.
Compensation and award plans are usually designed in a way that the vesting of stocks happens when service conditions and/or performance conditions are fulfilled by the employee.
These conditions can be continuity of employment, achievement of performance targets concerning revenue, growth, margin, market price and others.
Application by participants of the award plan for the issue/transfer of shares against vested options.
This is the time period after the vesting of the option within which the employee should exercise his right to apply for allotment/ transfer of shares against the options vested.
Financial reporting of share-based payments
Yes, for entities reporting under Ind AS 102, Share Based Payments, the liability incurred is required to be fair valued.
Only in the case of cash-settled share-based payment transactions, the entity shall remeasure the liability at each reporting date, with any changes in fair value recognised in profit or loss for the period.
Yes, accounting standard Ind AS 102 requires the impact of market conditions to be taken into account in estimating the option charge.
Market conditions, such as a target share price upon which vesting (or exercisability) is conditioned, as well as non-vesting conditions, are taken into account when estimating the fair value.
Vesting conditions, other than market conditions, are taken into account by adjusting the number of awards included in the measurement of the liability arising from the transaction.
Since the trust administers the plan on behalf of the enterprise, ICAI Guidance Note on Accounting for Share-based Payments recommends that irrespective of the arrangement for issuance of the shares under the employee share-based payment plan, the enterprise should recognise in its separate financial statements the expense on account of services received from the employees.