Share Based Payment Transactions Among Group Entities

Peace Ltd has a subsidiary company, Serene Ltd. However, the performance of Serene Ltd did not match the expectations of Peace Ltd. Mr. Arth, a very dynamic Vice-President, Operations, of Peace Ltd took upon himself the challenge of turning around an underperforming Serene Ltd.

Peace Ltd gave Mr. Arth powers and responsibility to handle the functioning of Serene Ltd. Mr. Arth took charge of Serene Ltd on full-time basis. Peace Ltd continued to have Mr. Arth on its own pay-roll, and recognised the cost in its own books.

However, auditors of Peace Ltd and Serene Ltd objected to this accounting treatment. Auditor of Peace Ltd contended that Mr. Arth, no longer rendered his services to Peace Ltd. He had taken charge of Serene Ltd on full-time basis and he should therefore be considered an employee of Serene Ltd. Similarly, auditor of Serene Ltd also believed that Mr. Arth was an employee of Serene Ltd, and his salary should be recognised as an expense to Serene Ltd, and not Peace Ltd. It was also found that the salary of Mr. Arth was in fact a share-based payment transaction.

The management of Peace Ltd and Serene Ltd was aware that it would have to follow Ind AS 102 to account, report and disclose share-based payment transactions. But they needed advice on how to account for such a complicated situation.

Ind AS 102 deals with financial reporting for an entity when it undertakes share-based payment transactions. Share based transactions are of three types:

  • Equity-settled
  • Cash-settled
  • Choice to settle transactions in cash (or other assets) or by issuing equity instruments

Often, share-based payment transactions take place among group entities for variety of reasons, and their nature may change depending on the facts and circumstances of each case. In this discussion, we have assumed that when an entity, that receives goods and services, has no obligation to settle the transaction, such transaction is a parent’s equity contribution to the subsidiary, regardless of any intragroup repayment arrangements.

Four issues are commonly encountered in share-based payment transactions among group entities. For convenience, the examples below discuss the issues in terms of a parent and its subsidiary.

1. Share-based payment arrangements involving an entity’s own equity instruments

The first issue is whether the following transactions involving an entity’s own equity instruments should be accounted for as equity-settled or as cash-settled in accordance with the requirements of this Standard:

  • An entity grants to its employees rights to equity instruments of the entity (example: share options), and either chooses or is required to buy equity instruments (i.e. treasury shares) from another party, to satisfy its obligations to its employees; and
  • An entity’s employees are granted rights to equity instruments of the entity (example: share options), either by the entity itself or by its shareholders, and the shareholders of the entity provide the equity instruments needed.

The entity shall account for share-based payment transactions in which it receives services as consideration for its own equity instruments as equity-settled. This applies regardless of whether the entity chooses or is required to buy those equity instruments from another party to satisfy its obligations to its employees under the share-based payment arrangement.

It also applies regardless of whether:

  • The employee’s rights to the entity’s equity instruments were granted by the entity itself or by its shareholder(s); or
  • The share-based payment arrangement was settled by the entity itself or by its shareholder(s).

If the shareholder has an obligation to settle the transaction with its investee’s employees, it provides equity instruments of its investee rather than its own. Therefore, if its investee is in the same group as the shareholder, the shareholder shall measure its obligation in accordance with the requirements applicable to cash-settled share-based payment transactions in the shareholder’s separate financial statements and those applicable to equity-settled share-based payment transactions in the shareholder’s consolidated financial statements.

2. Share-based payment arrangements involving equity instruments of the parent

The second issue concerns share-based payment transactions between two or more entities within the same group involving an equity instrument of another group entity. For example, employees of a subsidiary are granted rights to equity instruments of its parent as consideration for the services provided to the subsidiary.

Therefore, the second issue concerns the following share-based payment arrangements:

  • A parent grants rights to its equity instruments directly to the employees of its subsidiary: the parent (not the subsidiary) has the obligation to provide the employees of the subsidiary with the equity instruments; and
  • A subsidiary grants rights to equity instruments of its parent to its employees: the subsidiary has the obligation to provide its employees with the equity instruments.

A parent grants rights to its equity instruments to the employees of its subsidiary

The subsidiary does not have an obligation to provide its parent’s equity instruments to the subsidiary’s employees. Therefore, the subsidiary shall measure the services received from its employees in accordance with the requirements applicable to equity-settled share-based payment transactions, and recognise a corresponding increase in equity as a contribution from the parent.

The parent has an obligation to settle the transaction with the subsidiary’s employees by providing the parent’s own equity instruments. Therefore, the parent shall measure its obligation in accordance with the requirements applicable to equity-settled share-based payment transactions.

A subsidiary grants rights to equity instruments of its parent to its employees

Because the subsidiary does not meet either of the conditions in paragraph 43B of Ind AS 102, it shall account for the transaction with its employees as cash-settled. This requirement applies irrespective of how the subsidiary obtains the equity instruments to satisfy its obligations to its employees.

3. Share-based payment arrangements involving cash-settled payments to employees

The third issue is how an entity that receives goods or services from its suppliers (including employees) should account for share-based arrangements that are cash-settled when the entity itself does not have any obligation to make the required payments to its suppliers.

For example, consider the following arrangements in which the parent (not the entity itself) has an obligation to make the required cash payments to the employees of the entity:

  • The employees of the entity will receive cash payments that are linked to the price of its equity instruments.
  • The employees of the entity will receive cash payments that are linked to the price of its parent’s equity instruments.

The subsidiary does not have an obligation to settle the transaction with its employees. Therefore, the subsidiary shall account for the transaction with its employees as equity-settled, and recognise a corresponding increase in equity as a contribution from its parent. The subsidiary shall remeasure the cost of the transaction subsequently for any changes resulting from non-market vesting conditions not being met in accordance with Ind AS 102. This differs from the measurement of the transaction as cash-settled in the consolidated financial statements of the group.

Because the parent has an obligation to settle the transaction with the employees, and the consideration is cash, the parent (and the consolidated group) shall measure its obligation in accordance with the requirements applicable to cash-settled share-based payment transactions in paragraph 43C of Ind AS 102.

4. Transfer of employees between group entities

The fourth issue relates to group share-based payment arrangements that involve employees of more than one group entity.

For example, a parent might grant rights to its equity instruments to the employees of its subsidiaries, conditional upon the completion of continuing service with the group for a specified period. An employee of one subsidiary might transfer employment to another subsidiary during the specified vesting period without the employee’s rights to equity instruments of the parent under the original share-based payment arrangement being affected. If the subsidiaries have no obligation to settle the share-based payment transaction with their employees, they account for it as an equity-settled transaction. Each subsidiary shall measure the services received from the employee by reference to the fair value of the equity instruments at the date the rights to those equity instruments were originally granted by the parent, and the proportion of the vesting period the employee served with each subsidiary.

If the subsidiary has an obligation to settle the transaction with its employees in its parent’s equity instruments, it accounts for the transaction as cash-settled. Each subsidiary shall measure the services received on the basis of grant date fair value of the equity instruments for the proportion of the vesting period the employee served with each subsidiary. In addition, each subsidiary shall recognise any change in the fair value of the equity instruments during the employee’s service period with each subsidiary.

Such an employee, after transferring between group entities, may fail to satisfy a vesting condition other than a market condition. For example, the employee leaves the group before completing the service period. In this case, because the vesting condition is service to the group, each subsidiary shall adjust the amount previously recognised in respect of the services received from the employee in accordance with Ind AS 102. Hence, if the rights to the equity instruments granted by the parent do not vest because of an employee’s failure to meet a vesting condition other than a market condition, no amount is recognised on a cumulative basis for the services received from that employee in the financial statements of any group entity.

Although our discussion above focuses on transactions with employees, it also applies to similar share-based payment transactions with suppliers of goods or services other than employees.

 

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