IND AS 102: A paradigm shift in Accounting

Ind AS has not only propelled India closer to international standards of financial reporting but also has a significant impact on key areas such as taxation, corporate governance and share based payment.

The introduction of Indian Account­ing Standards (Ind AS) has brought a paradigm shift in accounting. This has brought India closer to the international standards of financial reporting; thereby, propelling India to become more compe­tent and internationally acceptable.

The transition to Ind AS has a significant impact not only on the financial statements of a company, but also in other areas such as taxation, corporate governance, stakeholder communication, etc.

One key impact of the transition to Ind AS is in relation to share based pay­ment (SBP). Under the Indian GAAP (IGAAP), only employees related SBP are covered through guidance note. As the guidance note is not a notified accounting standard, the accounting of SBP under the IGAAP is not uniform.However, with the introduction of Ind AS 102 – share based payments, uniformity will result in accounting for SBP.

Under the Ind AS 102, accounting for SBP varies depending on the mode of settlement. Typically, the SBPs could be equity settled or cash settled. Equity settled SBP are transactions where an entity receives goods or services as con­sideration for its own/group entities’ shares. Cash settled SBP are transactions where cash/cash equivalent based on the value of the entity/group entities’ equity instruments is paid.

Equity settled SBPs to employees are measured and accounted at the fair value of the equity instrument. However, for transactions with others, the measure­ment would be based on the fair value of the goods or services obtained. The com­pany would need to recognise the cost related to SBPs as an expense if the SBP arrangement is for revenue expenditure or as an asset, when the arrangement is in relation to procurement of capital goods or related services. Recognition of costs is as on the date of receipt of goods or as the services are received.

Ind AS 102 is likely to have a major impact on the profitability, revenue recognition, taxation, etc...

Cash-settled SBPs are measured based on the price of equity instruments. Many principles for measuring equity-settled transactions also apply to cash-settled transactions, except that the fair value of the liability is re-measured at each report­ing date and at the date of settlement.

In addition, Ind AS 102 also covers accounting for group Employee Stock Option Plans. Such arrangements should be accounted as per principles laid down in the standard, in which the entity receiving the benefit from such an arrangement would account for the relat­ed costs. A comparative analysis of Ind AS 102 with the guidance note as per IGAAP shows the following significant deviations:

• Ind AS 102 has broadened the scope, by covering awards made to non-employ­ees (e.g. directors, vendors and service providers) and awards relating to shares of any group companies.
• Ind AS 102 provides for measure­ment of costs only under the fair value method as against the option of following either the intrinsic value method or fair value method under IGAAP.
• In case of graded vesting, cost is recognised under Ind AS over the grant period to reflect the options granted in each of such grant period, as against straightlining the costs over the grant period. Whilst the SBP accounting under the Ind AS 102 seems a simple concept, the practicalities are not always as easy. There could be challenges in determin­ing the grant date, which is the trigger for the accounting of costs. Further, the determination of fair value may require use of complex valuation models, neces­sitating the need for a valuation expert. Therefore, there is a need to carefully analyse the accounting impact of the SBP under the Ind AS regime.

SBPs also have a significant impact on taxation. Historically, the deductibility of SBP (to employees) has been a sub­ject matter of litigation. The taxpayer’s contention is that employee related SBP are nothing but salaries/remunera­tion paid to employees. Therefore, it is a deductible business expenditure of revenue nature. Further, based on the concept of accrual, such expenses are deductible upon vesting. However, the revenue authorities, typically challenge the deductibility of SBP on two counts:

• Where a company is issuing its own shares to employees, the amount treated as SBP is a notional loss, or at best a capi­tal expenditure. Such notional or capital expenditure are not eligible for
tax deduction.
• During the vesting period, SBP expense is nothing but a contingent liability and hence, not deductible.
Today, even the courts and Tribunals are divided on this issue. Therefore, liti­gation on deductibility of SBP is likely to continue even under the Ind AS regime. However, taxpayers need to consider the following additional aspects from an Ind AS perspective:
• In case of graded vesting, SBP costs are recognised over the grant period to reflect the options granted in each of such grant period as against straightlin­ing of the costs over the grant period. Due to this, the company may end up recording higher costs in the initial peri­od of vesting. The revenue may question the claim of deduction of such higher costs, especially where the expenses were recorded in the past on a straight line basis under the IGAAP.
• As per the Income Computation and Disclosure Standard-1, mark-to-market losses cannot be recognised. Accordingly, there may be challenges in claiming deduction of true up of SBP at the end of each year, based on the fair market value.
• Where group company shares are issued as SBP, typically, the SBP expen­diture is accrued under the IGAAP upon recharge of cost by the group company. However, upon transition to Ind AS, the SBP expenditure should accrue in the books upon vesting. Deferral of recogni­tion of expenditure until the recharge of cost by the group company is not allowed under Ind AS. The revenue may chal­lenge the claim of SBP deduction based on such vesting (not supported by a cross charge), on the premise that the SBP deduction in prior years was always sup­ported by a cross charge.
• The SBP also has a bearing on the revenue to be recognised in accordance with the Transfer Pricing (TP) regula­tion, where such revenue is a conse­quence of operating cost. For example, in case of graded vesting, higher SBP costs may be recognised over the initial grant period as against straightlining of the costs over the grant period under IGAAP. This would increase operating costs in the initial grant period, which would consequentially increase the reve­nue under TP regulations. The increased revenue would result in higher tax out­flow during the initial grant period.
• As per the Minimum Alternate Tax (MAT) provisions, all amounts withdrawn from the Profit and Loss Account (P&L A/c) to reserves should be added back for computing book profits. Typically, SBP liability is recorded as a credit to reserves and debit to P&L a/c. The question to be addressed here is whether such credit to reserves would require adjustment for computing book profits. Based on existing jurisprudence, it is possible to contend SBP is an ascertained liability and the amount retained towards such liability is not a reserve, even though such amounts are credited to reserves in the financial statements. However, litigation cannot be ruled out. From the above, it is clear that from a taxation perspective, it is likely that litigation is only going to intensify in future. Therefore, it is imperative that the government addresses these tax challenges to provide more certainty to taxpayers, which would ultimately reduce litigation.

The adoption of Ind AS 102 is likely to have a major impact on the profitability, revenue recognition, taxation, etc., of companies. Therefore, it is imperative that companies transitioning to Ind AS 102 perform a comprehensive review of SBP arrangements to ensure that these continue to support business strategies and align from an accounting and taxation perspective.

(Views expressed are personal)

Pallavi Singhal is Partner - Cor­porate and International Tax Ser­vices, PwC. Sandesh Kumar, Associate Director, and Yashyank Agarwal, Associate Corporate and Interna­tional Tax Services, PwC also contributed to this article.

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