Financial Reporting · Ind AS 102 Share Based Payment

Share-Based Payments with Cash Alternatives under Ind AS 102

Updated 5 October 2026 · Fact-checked

A share-based payment with a cash alternative lets either the counterparty or the entity choose between cash and equity settlement. If the counterparty chooses, you account for a compound instrument: a liability component plus an equity component. If the entity chooses, you treat it as cash-settled only if it has a present obligation to pay cash; otherwise equity-settled.

Understand Share-Based Payments with Cash Alternatives

Most share-based payments are either fully equity-settled or fully cash-settled. Some awards leave the settlement open: the holder may take cash or shares. Ind AS 102 asks one question first: who holds the choice? The answer decides the whole accounting.

Counterparty has the choice. The entity has granted a compound financial instrument. It has given the counterparty a right to cash (a debt component) and a right to shares (an equity component). You account for the two parts separately. The liability part is remeasured to fair value at every reporting date and at settlement, with changes going to profit or loss. The equity part is measured once, at grant date, and is not remeasured.

Entity has the choice. Now the entity decides, so you first test whether it has a present obligation to settle in cash. That is the case if the choice of equity has no commercial substance (for example, the entity is legally barred from issuing shares), or if it has a past practice or stated policy of settling in cash, or it generally settles in cash whenever the counterparty asks. If there is such an obligation, treat the award as cash-settled. If there is none, treat it as equity-settled.

Settlement then needs care. For a compound instrument, if shares are issued, the liability is moved to equity. If cash is paid, the cash settles the liability in full and the equity component already recognised stays in equity.

For an entity-choice award treated as equity-settled, cash paid is accounted for as a repurchase of equity, so it is deducted from equity. An additional expense arises only if the cash paid exceeds the fair value, at settlement date, of the equity instruments that would otherwise have been issued. If shares are issued, there is only a transfer within equity, but if the fair value of the equity alternative at settlement exceeds the cash that would otherwise have been paid, the excess is an additional expense.

Key rules to remember

Equity component (counterparty choice): Equity component = Fair value of compound instrument − Fair value of debt (cash) component; Both measured at grant date. As a rule of thumb, take the fair value of the compound instrument as the fair value of the equity alternative. The equity component is then the excess of the equity alternative over the cash alternative. Adjust for the counterparty's forgone right to cash only if the facts call for it.
Liability component at each reporting date: Liability = Fair value of cash alternative at that date × (Service period elapsed ÷ Total vesting period); Remeasured at every reporting date and at settlement. The change in liability goes to profit or loss. Adjust for expected forfeitures where relevant.
Equity component expense: Annual expense = Equity component ÷ Vesting period; Fixed at grant date and never remeasured. Spread over the service period.
Settlement by shares (counterparty choice): Dr Liability (at settlement-date fair value); Cr Equity; Liability is remeasured to fair value first, then transferred to equity as consideration for the shares. No further profit or loss.
Settlement by cash (counterparty choice): Dr Liability; Cr Bank; The payment settles the liability in full. The equity component already recognised remains in equity, although a transfer within equity is allowed.
Entity choice: obligation test: Present obligation to settle in cash → cash-settled; no such obligation → equity-settled; Obligation exists if equity settlement lacks commercial substance, or there is a past practice or policy of cash settlement, or the entity generally settles in cash on request.
Entity choice, equity-settled: settlement: Cash paid: Dr Equity (cash paid); Cr Bank. Additional expense = cash paid − FV of the equity instruments that would otherwise have been issued, at settlement, if positive. Shares issued: transfer within equity; additional expense = FV of equity alternative − cash that would otherwise have been paid, if positive; Cash paid is a repurchase of equity, so it is debited to equity. Test the cash paid against the fair value of the equity alternative at settlement date, not against the amount recognised in equity. For share settlement, the extra expense is also measured at the settlement date.

How to solve Share-Based Payments with Cash Alternatives questions

Use this sequence for any question on awards with a choice of settlement. Decide the holder of the choice before you touch any numbers.

1Identify who holds the choice of settlement: the counterparty or the entity.
2If the counterparty chooses, measure the fair value of the cash alternative and of the equity alternative at grant date. Taking the compound instrument at the fair value of the equity alternative, the equity component is the excess over the cash alternative.
3Recognise the liability component over the vesting period at its fair value at each reporting date, with the cumulative change taken to profit or loss. Recognise the equity component on a straight-line basis over the vesting period.
4Add both expenses for each year. Check that total expense equals final liability plus the equity component.
5If the entity chooses, apply the present obligation test. Past cash practice, a stated policy, or an equity option with no commercial substance means cash-settled treatment.
6If there is no obligation, treat the award as equity-settled at grant-date fair value over the vesting period, with no remeasurement.
7Account for settlement. For compound instruments, remeasure the liability, then transfer it to equity on share issue or pay it off in cash and leave the equity component. For entity choice, if cash is paid, debit equity with the cash paid as a repurchase, and expense only the excess of the cash over the fair value of the equity alternative at settlement. If shares are issued, transfer within equity and expense any excess of the equity alternative's fair value over the cash alternative's.
8Write the journal entries with narration and state your assumptions on forfeitures and vesting.

Quickest way: Two-question shortcut

When to use it: Use this when a case-scenario MCQ or a short written answer gives limited time and you need the classification and the main entry quickly.

Ask: who chooses? Counterparty means split into liability and equity. Entity means do the obligation test.
Counterparty choice: equity part = equity alternative value − cash alternative value at grant date (compound instrument taken at the equity alternative's value). Never remeasure it. Remeasure only the liability.
Entity choice: look for words such as 'usually settles in cash' or 'policy'. If found, it is cash-settled. If not, it is equity-settled.
At settlement, remember: cash paid on a compound instrument leaves the equity component in equity. Entity-choice award settled in cash: debit equity with the cash paid and expense only any excess of the cash over the fair value of the equity alternative at settlement. Settled in shares: expense any excess of the equity alternative's fair value over the cash alternative's.

Common mistakes in Share-Based Payments with Cash Alternatives

Remeasuring the equity component each year along with the liability.
Students treat the whole award like a cash-settled SAR.
Fix: Only the liability component is remeasured. The equity component is fixed at grant date.
Treating every award with a cash alternative as cash-settled.
The words 'cash alternative' are taken as proof of a liability.
Fix: When the entity holds the choice, apply the present obligation test first. Without an obligation, the award is equity-settled.
Reversing the equity component when the counterparty takes cash.
Students think a forfeited right should be unwound.
Fix: The cash payment settles the liability in full and the equity component stays within equity. A transfer between equity components is permitted but no profit or loss arises.
Measuring the equity component as the full fair value of the equity alternative.
The debt component is forgotten, leading to double counting.
Fix: Deduct the fair value of the debt (cash) component from the fair value of the compound instrument, which as a rule of thumb is the equity alternative's value. Debt plus equity must equal the compound instrument value.
Not remeasuring the liability to settlement-date fair value before transferring it to equity.
Students move the last reporting-date balance straight to equity.
Fix: Update the liability to fair value on the settlement date, take the change to profit or loss, and then transfer.
Expensing cash paid on an entity-choice award because it exceeds the equity amount recognised.
Students compare the cash paid with the amount already booked in equity, instead of with the fair value of the equity alternative at settlement.
Fix: If cash is paid, debit equity as a repurchase. Expense only the excess of cash over the fair value of the equity alternative at settlement. If shares are issued, expense only the excess of the equity alternative's fair value over the cash alternative's.

Worked examples

Example 1

On 1 April 2024, Zenith Ltd (Ind AS) grants its CFO a choice, to be exercised at the end of three years of service, between (a) cash equal to the value of 1,000 shares or (b) 1,600 shares. Grant-date share price is ₹50. Share prices at the end of year 1, 2 and 3 are ₹51, ₹54 and ₹60. Ignore forfeitures and post-vesting restrictions. Compute the yearly expense and show the entry if the CFO elects cash at the end of year 3.

Show the solution

The CFO has the choice, so this is a compound instrument.
Fair value of cash alternative at grant = 1,000 × ₹50 = ₹50,000. Fair value of equity alternative = 1,600 × ₹50 = ₹80,000. Take the compound instrument at ₹80,000.
Equity component = ₹80,000 − ₹50,000 = ₹30,000, spread at ₹10,000 a year.
Liability at end of year 1 = 1,000 × ₹51 × 1/3 = ₹17,000. Year 1 expense = ₹17,000 + ₹10,000 = ₹27,000.
Liability at end of year 2 = 1,000 × ₹54 × 2/3 = ₹36,000. Increase = ₹19,000. Year 2 expense = ₹19,000 + ₹10,000 = ₹29,000.
Liability at end of year 3 = 1,000 × ₹60 = ₹60,000. Increase = ₹24,000. Year 3 expense = ₹24,000 + ₹10,000 = ₹34,000.
Total expense = ₹27,000 + ₹29,000 + ₹34,000 = ₹90,000, which equals liability ₹60,000 plus equity component ₹30,000.
Settlement in cash: Dr Liability ₹60,000; Cr Bank ₹60,000. The ₹30,000 equity component remains in equity.

Answer: Expense: year 1 ₹27,000, year 2 ₹29,000, year 3 ₹34,000 (total ₹90,000). On cash election, Dr Liability ₹60,000, Cr Bank ₹60,000; equity component of ₹30,000 stays in equity. If the CFO had chosen shares, the ₹60,000 liability would be transferred to equity with no further profit or loss.

Example 2

Orbit Ltd (Ind AS) grants an employee, on 1 April 2024, the right to receive at the end of two years of service either cash equal to the value of 2,000 shares or 2,200 shares. The entity decides the form of settlement. It has no past practice or policy of paying cash and is free to issue shares. Grant-date share price is ₹40. At settlement, the share price is ₹55. Ignore forfeitures. Show the accounting if (a) the entity issues 2,200 shares, and (b) the entity pays cash instead.

Show the solution

The entity holds the choice. Check the obligation test: no cash practice or policy, and share issue is permitted with commercial substance. So there is no present obligation to pay cash.
Treat the award as equity-settled at grant-date fair value of the equity alternative: 2,200 × ₹40 = ₹88,000.
Spread over two years: ₹44,000 a year. Dr Employee benefits expense ₹44,000; Cr Equity (share-based payment reserve) ₹44,000 each year. No remeasurement.
At settlement, compare the fair values: cash alternative = 2,000 × ₹55 = ₹1,10,000. Equity alternative = 2,200 × ₹55 = ₹1,21,000.
(a) Shares issued: the equity alternative exceeds the cash alternative by ₹1,21,000 − ₹1,10,000 = ₹11,000. Dr Employee benefits expense ₹11,000; Cr Equity ₹11,000. Then transfer the reserve of ₹88,000 plus ₹11,000 (₹99,000) to share capital and securities premium as applicable. No further profit or loss.
(b) Cash paid: account for it as a repurchase of equity, so debit equity with the cash paid. An additional expense arises only if the cash paid exceeds the fair value of the equity alternative at settlement. That fair value is 2,200 × ₹55 = ₹1,21,000, which is more than the ₹1,10,000 cash, so no additional expense arises. Dr Equity ₹1,10,000; Cr Bank ₹1,10,000.
Total expense in (b) stays at ₹88,000 (₹44,000 × 2).

Answer: Equity-settled, with ₹44,000 expensed in each of the two years. (a) If shares are issued, an additional ₹11,000 is expensed at settlement (total expense ₹99,000, all credited to equity and then transferred to share capital and securities premium). (b) If cash of ₹1,10,000 is paid, Dr Equity ₹1,10,000, Cr Bank ₹1,10,000. No additional expense arises, because the cash paid is below the ₹1,21,000 fair value of the equity alternative. Total expense stays at ₹88,000.

Exam tips

Begin every answer by stating who holds the choice. This earns the classification mark immediately.
For counterparty choice, show the split in a small working: cash alternative, equity alternative, equity component. Examiners follow this step by step.
For entity choice, quote the facts that decide the obligation test, such as past practice or a stated policy, before concluding.
Do the proof check: total expense equals closing liability plus equity component. A mismatch shows an error before you submit.
In MCQs, watch the settlement wording. Cash on a compound instrument leaves the equity component in equity. For an entity-choice award, if cash is paid, debit equity as a repurchase and expense only the excess of cash over the fair value of the equity alternative at settlement. If shares are issued, expense only the excess of the equity alternative's fair value over the cash alternative's.

Practice questions from Ind AS 102 Share Based Payment

Share-Based Payments with Cash Alternatives in other exams

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

Share-Based Payments with Cash Alternatives: frequently asked questions

What is the difference between counterparty choice and entity choice in Ind AS 102?

With counterparty choice, the entity has issued a compound instrument, so you recognise a liability component and an equity component. With entity choice, you test whether the entity has a present obligation to settle in cash. If it does, the award is cash-settled; if not, it is equity-settled.

Is the equity component of a compound share-based payment remeasured?

No. The equity component is measured at grant date and spread over the vesting period. Only the liability component is remeasured to fair value at each reporting date and at settlement.

What happens to the equity component if the employee chooses cash?

The cash payment settles the liability in full. The equity component recognised earlier stays in equity because the employee gave up the right to shares. The entity may transfer it from one component of equity to another, but it does not reverse it through profit or loss.

When does the entity book an additional expense on settlement of an entity-choice award?

If cash is paid, it is accounted for as a repurchase of equity and debited to equity. An expense arises only if the cash paid exceeds the fair value of the equity alternative at settlement. If shares are issued, there is only a transfer within equity, unless the fair value of the equity alternative at settlement exceeds the cash alternative's. That excess is an additional expense.