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Financial Reporting · Ind AS 102 Share Based Payment

Equity-Settled Share-Based Payment Transactions (Ind AS 102)

Updated 5 October 2026 · Fact-checked

In an equity-settled share-based payment, you give employees shares or options for services. Measure the award once at grant date fair value. Spread that cost over the vesting period as expense, with a credit to equity. Revise only the number expected to vest, never the fair value.

Understand Equity-Settled Share-Based Payment Transactions

When a company gives employees options or shares instead of cash, it still receives a service. Ind AS 102 says that service is a cost. You record it as an expense, and the other side is a credit to equity (Employee Stock Options Outstanding), because the company does not pay cash.

How much? Measure the award at the grant date fair value of the equity instruments. For employees, you cannot value their services directly, so you use the fair value of the options. This value is fixed on grant date and is not changed later for share price movements.

Over what period? The employee earns the award by serving during the vesting period. So you recognise the cost over that period, not on grant date. Each year, cumulative expense = number of options expected to vest × fair value per option × fraction of vesting period elapsed. The year's expense is this cumulative figure less the amount already charged.

Conditions. Service conditions and non-market performance conditions (for example, a revenue or EPS target) are not put into the fair value. Instead, they change the number of options expected to vest, and you true-up each year. Market conditions (for example, a share price target) and non-vesting conditions are built into the fair value. For a market condition, the expense is still recognised if the employee meets all service and non-market conditions, even if the market target is missed. If a non-vesting condition that the entity or the counterparty can control is not met during the vesting period, the entity treats it as a cancellation and accelerates the expense not yet recognised. If the condition is outside the control of both parties, its failure does not reverse the expense.

Forfeitures and exercise. If employees leave before vesting, the expense for those options is reversed through the true-up. After vesting, if options lapse unexercised, you do not reverse the expense. You may transfer the balance within equity. On exercise, you transfer the options outstanding balance and the cash received to share capital and securities premium.

Key rules to remember

Cumulative expense at the end of a year
Options expected to vest × Fair value per option at grant date × (Years elapsed ÷ Total vesting period)
Use this when the vesting period is straight-line and the award has a single vesting date.
Expense for the year
Cumulative expense at year end − Cumulative expense charged up to the previous year end
This is the true-up (catch-up) method. The result can be negative when estimates fall.
Final cumulative expense
Options actually vested × Grant date fair value per option
Applies when service and non-market conditions are met. Total expense is trued up to actual vesting.
Journal entry for expense
Employee benefit expense A/c Dr. To Employee Stock Options Outstanding A/c
The credit is to equity. The expense may be capitalised if the service is part of an asset's cost.
Journal entry on exercise
Bank (exercise price × options) Dr.; ESOP Outstanding A/c Dr. (balance for those options) To Share capital (face value) To Securities premium (balancing figure)
Total credit equals cash received plus the ESOP outstanding transferred.
Treatment of conditions
Service and non-market conditions: adjust number of options. Market and non-vesting conditions: include in fair value.
Fair value is not revised after grant date, except through a modification, which is a separate topic.

How to solve Equity-Settled Share-Based Payment Transactions questions

Use this sequence for any equity-settled question. It keeps the numbers organised and shows the examiner each step.

  1. 1Identify the grant date, the vesting period and the vesting conditions. Classify each condition as service, non-market, market or non-vesting.
  2. 2Fix the grant date fair value per option. Use the value given. Do not change it later, whatever the share price does.
  3. 3Estimate the number of options expected to vest each year. Adjust only for service and non-market conditions and for leavers. Market conditions do not affect this number.
  4. 4Compute cumulative expense at each year end: expected options × fair value × elapsed fraction of the vesting period.
  5. 5Compute the expense for each year as the cumulative expense less the amount already recognised. Pass the entry: Employee benefit expense Dr. To ESOP Outstanding.
  6. 6In the final vesting year, use the actual number of options that vested. Do not reverse expense for options that vested but were not exercised.
  7. 7If exercise is asked, pass the entry for cash received and the ESOP Outstanding balance, with the credit split between share capital and securities premium.
  8. 8Present the working in a table: year, expected options, cumulative expense, previous charge, current charge.

Quickest way: Cumulative table method

When to use it: Use it when a question gives yearly estimates of leavers over a 2 to 4 year vesting period and asks for yearly expense.

  1. Write the total grant date value: options granted × fair value.
  2. Make columns: Year, Expected to vest, Cumulative expense, Less: earlier years, Expense for year.
  3. Fill cumulative expense using expected vesting × fair value × n ÷ N, where n is years elapsed and N is vesting period.
  4. Subtract the previous cumulative figure to get the year's charge. A negative figure is a credit to P&L.
  5. For exercise, add cash received to the ESOP Outstanding balance on the options exercised. Face value goes to capital and the rest to premium.

Common mistakes in Equity-Settled Share-Based Payment Transactions

  • Revising the fair value each year to the current share price or option value.

    Students link equity-settled awards to cash-settled ones, where the liability is remeasured at each reporting date.

    Fix: For equity-settled awards, fair value is fixed at grant date. Only the number expected to vest changes.

  • Charging the whole fair value in year 1, or charging an equal amount every year regardless of revised estimates.

    Students forget the true-up and treat expense as a simple division of the total value.

    Fix: Use the cumulative method every year. Charge for the year equals cumulative expense now less the amount already charged.

  • Reversing expense when a market condition, such as a share price target, is not met.

    Students treat all performance conditions the same way.

    Fix: A market condition sits in fair value. If the employee satisfies the service and non-market conditions, you keep the expense even if the market target is missed.

  • Including a non-market condition such as an EPS or sales target in the fair value per option.

    The question gives a target, and students feel it must change the price.

    Fix: Non-market conditions only change the number of options expected to vest. Fair value stays unchanged.

  • Reversing the ESOP Outstanding balance to P&L when vested options lapse unexercised.

    Students think a lapse is the same as a forfeiture before vesting.

    Fix: After vesting, no reversal of expense. The amount may be moved within equity, for example to general reserve.

  • Crediting the whole exercise proceeds to share capital on exercise.

    Students ignore face value and the ESOP Outstanding balance.

    Fix: Credit share capital at face value × shares. The balancing figure goes to securities premium.

Worked examples

Example 1

On 1 April 2026, Alpha Ltd grants 1,000 options to each of 100 employees. The options vest on 31 March 2029 if the employee stays in service for 3 years. Fair value of each option on grant date is ₹60. At 31 March 2027, the company expects 10% of employees to leave before vesting. At 31 March 2028, it expects 12% overall to leave. By 31 March 2029, 11 employees have actually left. Compute the expense each year and give the journal entries.

Show the solution
  1. Total options granted: 100 × 1,000 = 1,00,000. Grant date fair value per option is ₹60 and is not changed later.
  2. This is a service condition only, so it affects the number expected to vest.
  3. Year ended 31 March 2027: employees expected to vest = 90, options = 90,000. Cumulative expense = 90,000 × ₹60 × 1/3 = ₹18,00,000. Expense for the year = ₹18,00,000.
  4. Year ended 31 March 2028: employees expected to vest = 88, options = 88,000. Cumulative expense = 88,000 × ₹60 × 2/3 = ₹35,20,000. Expense for the year = ₹35,20,000 − ₹18,00,000 = ₹17,20,000.
  5. Year ended 31 March 2029: actual vested employees = 89, options = 89,000. Cumulative expense = 89,000 × ₹60 = ₹53,40,000. Expense for the year = ₹53,40,000 − ₹35,20,000 = ₹18,20,000.
  6. Entry each year: Employee benefit expense A/c Dr. To Employee Stock Options Outstanding A/c, for ₹18,00,000, ₹17,20,000 and ₹18,20,000 respectively.

Answer: Expense: ₹18,00,000 (2026-27), ₹17,20,000 (2027-28), ₹18,20,000 (2028-29). Total ₹53,40,000, which equals 89,000 vested options × ₹60.

Example 2

Beta Ltd grants 500 options to each of 50 managers on 1 April 2026. Vesting is on 31 March 2028, subject to two conditions: (a) the manager remains in service for 2 years, and (b) the company's share price on 31 March 2028 is at least ₹200. The grant date fair value per option, which already reflects the share price condition, is ₹40. All 50 managers stay for the 2 years. The share price on 31 March 2028 is ₹180. Compute the expense for each year and state the treatment of the missed share price target.

Show the solution
  1. Condition (a) is a service condition. Condition (b) is a market condition. The fair value of ₹40 already includes the probability of the market condition being met.
  2. Because the market condition is in fair value, it does not change the number of options expected to vest. All 50 managers serve, so options vesting for expense purposes = 50 × 500 = 25,000.
  3. Year ended 31 March 2027: cumulative expense = 25,000 × ₹40 × 1/2 = ₹5,00,000. Expense for the year = ₹5,00,000.
  4. Year ended 31 March 2028: cumulative expense = 25,000 × ₹40 = ₹10,00,000. Expense for the year = ₹10,00,000 − ₹5,00,000 = ₹5,00,000.
  5. On 31 March 2028 the share price is ₹180, below ₹200, so the options do not become exercisable. Even so, no expense is reversed, because the employees met the service condition and the market condition was reflected in fair value. The ₹10,00,000 ESOP Outstanding balance stays in equity and may be transferred within equity.

Answer: Expense is ₹5,00,000 in each of 2026-27 and 2027-28, total ₹10,00,000. The missed market condition does not reverse any expense.

Exam tips

  • Begin every answer with the classification of conditions. Marks usually depend on knowing which conditions go into fair value and which change the number of options.
  • Always show a cumulative working table. Even if the final figure is wrong, you can earn method marks for the structure.
  • Read the wording for leavers. 'Expected to leave' changes the estimate in that year. 'Actually left' fixes the final vesting number.
  • Show the exercise entry in full when the question mentions exercise, with face value, premium and ESOP Outstanding transferred. Many students stop at the expense entries.
  • In case-scenario MCQs, check whether the question mentions grant date fair value or a later date. For equity-settled awards, the grant date value is the one you use.

Practice questions from Ind AS 102 Share Based Payment

Equity-Settled Share-Based Payment Transactions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Equity-Settled Share-Based Payment Transactions: frequently asked questions

Why is fair value not remeasured for equity-settled awards?

The company gets services in exchange for its own equity. Ind AS 102 measures that cost once, at grant date, and credits equity. Remeasurement applies only to cash-settled awards, where there is a liability.

What is the difference between a market condition and a non-market performance condition?

A market condition relates to the market price of the entity's equity, such as a target share price. It is included in fair value. A non-market condition, such as an EPS or sales target, is not included in fair value and instead changes the number of options expected to vest.

What happens to the expense if vested options are not exercised?

You do not reverse the expense already recognised, because the employee provided the service. The ESOP Outstanding balance may be transferred to another component of equity, such as general reserve.

How do I handle a non-vesting condition that is not met?

A non-vesting condition is built into the grant date fair value. If the entity or the counterparty can control the condition and it is not met during the vesting period, the entity treats it as a cancellation. The amount not yet recognised for the award is then accelerated and recognised immediately. If the condition is outside the control of both parties, its failure does not reverse the expense.