Modification, Cancellation and Settlement of Awards under Ind AS 102

Understand Modification, Cancellation and Settlement of Awards

Key rules to remember

Minimum expense

Total expense ≥ grant-date fair value of original award × number of instruments for which service and non-market vesting conditions are met

Applies to equity-settled awards even after repricing. Expense is reversed only if a service or non-market performance condition is not met. If only a market condition is not met, the expense already recognised is not reversed.

Incremental fair value

Incremental FV = FV of modified instrument − FV of original instrument (both at modification date)

Recognised over the period from modification date to the end of the modified vesting period, over and above the original expense.

Replacement award

Incremental FV = Net FV of replacement instrument − Net FV of cancelled instrument at replacement date

Applies only when the entity identifies the new award as a replacement for a cancelled one.

Cancellation or settlement

Immediate expense = Amount not yet recognised for the award

Treated as acceleration of vesting. Payment up to fair value at cancellation date is debited to equity; any excess is an expense.

Non-beneficial modification

Expense continues on original grant-date fair value

Applies to changes such as a higher exercise price or harder vesting conditions, which are ignored. A reduction in the number of options is not ignored: treat it as a cancellation of that portion and accelerate its unrecognised expense.

How to solve Modification, Cancellation and Settlement of Awards questions

1. 1Identify the event: modification, cancellation or settlement, and its date. Check whether a replacement award is identified.
2. 2Compute the original expense on grant-date fair value for the years up to the event, based on the best estimate of awards expected to vest.
3. 3For a modification, decide if it is beneficial: higher fair value, more instruments, or easier vesting conditions.
4. 4If beneficial, compute incremental fair value at the modification date and spread it over the remaining modified vesting period.
5. 5If not beneficial (for example, a higher exercise price or harder vesting conditions), ignore the change and keep the original grant-date fair value expense. Treat any reduction in the number of options as a cancellation of that portion.
6. 6For cancellation or settlement, accelerate the unrecognised expense immediately. Compare any payment with the fair value at cancellation date.
7. 7Build the year-wise expense: original charge plus incremental charge. Pass the entries as Dr Employee benefits expense, Cr Share-based payment reserve (equity).
8. 8Re-estimate the number of employees expected to vest each year and true up the cumulative expense.

Quickest way: Three-line check for modification questions

Common mistakes in Modification, Cancellation and Settlement of Awards

• Revaluing the original option to the new, lower fair value after the share price falls.

  Students think the expense should follow current value.

  Fix: Equity-settled awards stay at grant-date fair value. Only the incremental fair value at modification date is added.

• Treating a downward repricing of the exercise price as ignored, or as a way to reduce the expense.

  Students link the fall in share price to a lower charge and forget that a lower exercise price helps the employee.

  Fix: A lower exercise price raises fair value, so it is a beneficial modification. Keep the original grant-date expense and add the incremental fair value on top. Repricing can never reduce the expense.

• Measuring incremental fair value as modified fair value minus grant-date fair value.

  The grant-date figure is easy to see in the question.

  Fix: Both fair values must be taken at the modification date. Compare the repriced option with the old option on that same date.

• Spreading the incremental fair value over the original total vesting period.

  Students reuse the original period automatically.

  Fix: Spread it from the modification date to the end of the modified vesting period.

• Reducing the expense when options are repriced at a higher exercise price or vesting is made harder.

  Students assume a modification always changes the charge.

  Fix: These non-beneficial changes are ignored. Keep recognising the original expense. The one exception is a reduction in the number of options, which is treated as a cancellation of that portion, so its unrecognised expense is accelerated.

• Charging the whole cancellation payment to profit or loss.

  Cash paid feels like an expense.

  Fix: Payment up to the fair value of the cancelled award at cancellation date goes to equity. Only the excess is an expense.

Worked examples