Issues in share-based payments
Anonymous. Businessline. Chennai: Nov 20, 2008.
Abstract (Summary)
True. For accounting guidance, companies can draw help from the Institute of Chartered Accountant's (ICAI) guidance note on 'Accounting for Employee Share-based Payments.' However, following the ICAI's guidelines will entail violation of some clauses of the SEBI's guidelines.
Any examples? The guidance note prescribes accounting depending on whether the liability would be 'equity settled' or 'cash settled', whereas SEBI's guideline does not differentiate between these two. In fact, the accounting prescribed by SEBI only presumes 'equity settled' plans.
While one would tend to think that such an arrangement being in the nature of a reimbursement is best treated as a reimbursement of tax for the entity, there is an ongoing debate on the accounting treatment under the IFRS: Whether the IFRS will treat this arrangement more as a modification to the terms of the options, whereby the exercise price is increased to include the FBT element and then accounted for as a modification to the terms and conditions? The ICAI's guidance note prescribes accounting depending on whether the liability would be 'equity settled' or 'cash settled', whereas SEBI's guideline does not differentiate between these two.
rom BUSINESS LINE, November 20, 2008 India soon needs a more detailed and comprehensive literature on share-based payment transactions, urges Mr Kamal Agarwal, a Senior Professional in a member firm of Ernst & Young Global.
He emphasises that a single standard which could apply to all forms of entities is imperative. "Hopefully, convergence with IFRS by 2011 would provide this," adds Mr Agarwal, during the course of a recent email interaction with Business Line.
Share-based payment arrangements, either with employees or suppliers of goods and services have a vested business interest in them - to promote a sense of ownership towards the entity leading to common efforts towards growth of the organisation and individual growth, he explains.
"Such plans and arrangements succeed if they seek to address growth objectives of both the issuing entity as well as the other party." Excerpts from the interview, in which Mr Agarwal touches upon conflicts in the accounting norms for share-based payments.
Why is the topic of importance now? The recent change of fortunes in the global and Indian stock markets would have rendered the employee stock option plans (ESOPs) of various companies unattractive and un-remunerative, thereby forcing companies to consider modifications to their plans or previous grants under such plans.
This would be truer for companies which introduced share-based payment plans when the markets were in a growth phase.
In India, such modification and its accounting would be guided by the requirements of the Securities and Exchange Board of India (SEBI) on ESOPs.
Are there issues that arise when following the SEBI guidelines? While making any modifications to the share-based payment plans, listed companies would need to be mindful of the SEBI's guideline stating that the modified terms should be no less beneficial for the employees than the original terms.
This guideline in turn will make a company build in enough cushions for any further downslide in the markets, something which cannot be ruled out today. This could mean additional charge to the income statement.
Strangely, though these guidelines specify the above condition on modifications, they do not provide any guidance on the accounting treatment for such modifications.
We have the ICAI's accounting guidance on the subject.
True. For accounting guidance, companies can draw help from the Institute of Chartered Accountant's (ICAI) guidance note on 'Accounting for Employee Share-based Payments.' However, following the ICAI's guidelines will entail violation of some clauses of the SEBI's guidelines.
Any examples? The guidance note prescribes accounting depending on whether the liability would be 'equity settled' or 'cash settled', whereas SEBI's guideline does not differentiate between these two. In fact, the accounting prescribed by SEBI only presumes 'equity settled' plans.
Thus, these two accounting pronouncements available in India, of which one applies solely to listed companies or companies in the course of getting listed, provide different accounting guidance to a common issue. This leads to difference in treatments and effects based on the listing status of the entity concerned.
Which is better? There are significant differences between the two pronouncements. However, the ICAI's guidance note could be considered more comprehensive, as unlike the SEBI guidelines it addresses the questions of modifications, cancellations and forfeitures of options in addition to differentiating between the 'equity' and 'cash' settled plans.
Interestingly, the SEBI guidelines mandate disclosures in the director's report, rather than the more common practice of mandating disclosures in the financial statements.
In this regard, the ICAI's guidance note can be considered closer to its international counterpart.
Mr Kamal Agarwal, Senior Professional in a member firm of Ernst & Young Global.
How are the Indian norms different from those specified by the IFRS (International Financial Reporting Standards) in IFRS-2 'Share-based Payments'? Though the ICAI's guidance note is largely similar to IFRS-2, there are certain critical aspects of share-based payments which are not touched by the Indian accounting guidance.
A critical difference between the Indian standard and its international counterpart is that the IFRS deals with all kinds of share-based payments, whereas the Indian guidance note applies only to employee share-based payments such as ESOPs and Employee Stock Purchase Plan (ESPP).
At present, there is no guidance available in India for arrangements where share-based considerations are given for purchase of goods and services. The IFRS goes one step further to discuss situations even where the goods or services received in exchange are not identifiable, like in cases where shares are granted to charitable institutions. The Indian framework would again be at a loss to deal with such a situation.
Further, the IFRS also contains guidance on treatment of stock options given to employees of a subsidiary or any other group company, commonly known as 'Group Shares Transactions'. There is no guidance available in India for accounting of such transactions and the SEBI guidelines only require disclosures for these in the financials of both the parent and the subsidiary company.
The IFRS is more or less fait accompli by 2011. Once the IFRS is mandatorily adopted in India, a key matter relating to ESOP plans will emerge as a common issue across entities: the treatment of Fringe Benefit Tax (FBT) on ESOPs in case where a company claims reimbursement of such tax from the concerned employee.
While one would tend to think that such an arrangement being in the nature of a reimbursement is best treated as a reimbursement of tax for the entity, there is an ongoing debate on the accounting treatment under the IFRS: Whether the IFRS will treat this arrangement more as a modification to the terms of the options, whereby the exercise price is increased to include the FBT element and then accounted for as a modification to the terms and conditions? The ICAI's guidance note prescribes accounting depending on whether the liability would be 'equity settled' or 'cash settled', whereas SEBI's guideline does not differentiate between these two.
True. For accounting guidance, companies can draw help from the Institute of Chartered Accountant's (ICAI) guidance note on 'Accounting for Employee Share-based Payments.' However, following the ICAI's guidelines will entail violation of some clauses of the SEBI's guidelines.
Any examples? The guidance note prescribes accounting depending on whether the liability would be 'equity settled' or 'cash settled', whereas SEBI's guideline does not differentiate between these two. In fact, the accounting prescribed by SEBI only presumes 'equity settled' plans.
While one would tend to think that such an arrangement being in the nature of a reimbursement is best treated as a reimbursement of tax for the entity, there is an ongoing debate on the accounting treatment under the IFRS: Whether the IFRS will treat this arrangement more as a modification to the terms of the options, whereby the exercise price is increased to include the FBT element and then accounted for as a modification to the terms and conditions? The ICAI's guidance note prescribes accounting depending on whether the liability would be 'equity settled' or 'cash settled', whereas SEBI's guideline does not differentiate between these two.
rom BUSINESS LINE, November 20, 2008 India soon needs a more detailed and comprehensive literature on share-based payment transactions, urges Mr Kamal Agarwal, a Senior Professional in a member firm of Ernst & Young Global.
He emphasises that a single standard which could apply to all forms of entities is imperative. "Hopefully, convergence with IFRS by 2011 would provide this," adds Mr Agarwal, during the course of a recent email interaction with Business Line.
Share-based payment arrangements, either with employees or suppliers of goods and services have a vested business interest in them - to promote a sense of ownership towards the entity leading to common efforts towards growth of the organisation and individual growth, he explains.
"Such plans and arrangements succeed if they seek to address growth objectives of both the issuing entity as well as the other party." Excerpts from the interview, in which Mr Agarwal touches upon conflicts in the accounting norms for share-based payments.
Why is the topic of importance now? The recent change of fortunes in the global and Indian stock markets would have rendered the employee stock option plans (ESOPs) of various companies unattractive and un-remunerative, thereby forcing companies to consider modifications to their plans or previous grants under such plans.
This would be truer for companies which introduced share-based payment plans when the markets were in a growth phase.
In India, such modification and its accounting would be guided by the requirements of the Securities and Exchange Board of India (SEBI) on ESOPs.
Are there issues that arise when following the SEBI guidelines? While making any modifications to the share-based payment plans, listed companies would need to be mindful of the SEBI's guideline stating that the modified terms should be no less beneficial for the employees than the original terms.
This guideline in turn will make a company build in enough cushions for any further downslide in the markets, something which cannot be ruled out today. This could mean additional charge to the income statement.
Strangely, though these guidelines specify the above condition on modifications, they do not provide any guidance on the accounting treatment for such modifications.
We have the ICAI's accounting guidance on the subject.
True. For accounting guidance, companies can draw help from the Institute of Chartered Accountant's (ICAI) guidance note on 'Accounting for Employee Share-based Payments.' However, following the ICAI's guidelines will entail violation of some clauses of the SEBI's guidelines.
Any examples? The guidance note prescribes accounting depending on whether the liability would be 'equity settled' or 'cash settled', whereas SEBI's guideline does not differentiate between these two. In fact, the accounting prescribed by SEBI only presumes 'equity settled' plans.
Thus, these two accounting pronouncements available in India, of which one applies solely to listed companies or companies in the course of getting listed, provide different accounting guidance to a common issue. This leads to difference in treatments and effects based on the listing status of the entity concerned.
Which is better? There are significant differences between the two pronouncements. However, the ICAI's guidance note could be considered more comprehensive, as unlike the SEBI guidelines it addresses the questions of modifications, cancellations and forfeitures of options in addition to differentiating between the 'equity' and 'cash' settled plans.
Interestingly, the SEBI guidelines mandate disclosures in the director's report, rather than the more common practice of mandating disclosures in the financial statements.
In this regard, the ICAI's guidance note can be considered closer to its international counterpart.
Mr Kamal Agarwal, Senior Professional in a member firm of Ernst & Young Global.
How are the Indian norms different from those specified by the IFRS (International Financial Reporting Standards) in IFRS-2 'Share-based Payments'? Though the ICAI's guidance note is largely similar to IFRS-2, there are certain critical aspects of share-based payments which are not touched by the Indian accounting guidance.
A critical difference between the Indian standard and its international counterpart is that the IFRS deals with all kinds of share-based payments, whereas the Indian guidance note applies only to employee share-based payments such as ESOPs and Employee Stock Purchase Plan (ESPP).
At present, there is no guidance available in India for arrangements where share-based considerations are given for purchase of goods and services. The IFRS goes one step further to discuss situations even where the goods or services received in exchange are not identifiable, like in cases where shares are granted to charitable institutions. The Indian framework would again be at a loss to deal with such a situation.
Further, the IFRS also contains guidance on treatment of stock options given to employees of a subsidiary or any other group company, commonly known as 'Group Shares Transactions'. There is no guidance available in India for accounting of such transactions and the SEBI guidelines only require disclosures for these in the financials of both the parent and the subsidiary company.
The IFRS is more or less fait accompli by 2011. Once the IFRS is mandatorily adopted in India, a key matter relating to ESOP plans will emerge as a common issue across entities: the treatment of Fringe Benefit Tax (FBT) on ESOPs in case where a company claims reimbursement of such tax from the concerned employee.
While one would tend to think that such an arrangement being in the nature of a reimbursement is best treated as a reimbursement of tax for the entity, there is an ongoing debate on the accounting treatment under the IFRS: Whether the IFRS will treat this arrangement more as a modification to the terms of the options, whereby the exercise price is increased to include the FBT element and then accounted for as a modification to the terms and conditions? The ICAI's guidance note prescribes accounting depending on whether the liability would be 'equity settled' or 'cash settled', whereas SEBI's guideline does not differentiate between these two.
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