Modification, Cancellation and Settlement of Grants under Ind AS 102

Understand Modifications, Cancellations and Settlements of Grants

Key rules to remember

Minimum expense

Minimum cost = grant date fair value × instruments that vest

Applies whatever the later modification, unless failure of a non-market vesting condition set at grant date stops vesting.

Incremental fair value (repricing)

Incremental FV = FV of modified option − FV of original option, both at modification date

Positive increment is recognised from the modification date to the vesting date. If it is zero or negative, ignore it.

Additional instruments granted

Added cost = FV of additional instruments at modification date

Recognised from the modification date to the date the additional instruments vest.

Cancellation during vesting period

Immediate expense = total grant date cost − amount already recognised

Treated as acceleration of vesting. Forfeiture for unmet vesting conditions is not covered by this rule.

Payment on cancellation or settlement

Deduction from equity up to FV of instruments at repurchase date; excess = expense

Same treatment for repurchase of vested instruments.

Replacement grant

Incremental FV = FV of replacement − (FV of cancelled immediately before cancellation − payment deducted from equity)

Only if the entity identifies the new grant as a replacement on its grant date. Otherwise it is a new grant.

Unfavourable modifications

Reduced FV, fewer instruments or harder vesting conditions: continue as if no modification

A reduction in the number of instruments is accounted for as a cancellation of that portion. Beneficial changes to vesting conditions are taken into account.

How to solve Modifications, Cancellations and Settlements of Grants questions

1. 1Identify the change: repricing, more options, change in vesting conditions, reduction in number, cancellation, settlement or replacement.
2. 2Classify it as beneficial (increases fair value or number, or eases vesting) or not beneficial.
3. 3Compute the original expense on grant date fair value for the original vesting period. Keep this running in all cases.
4. 4For a beneficial change, compute incremental fair value at the modification date and spread it from the modification date to the new vesting date.
5. 5For a non-beneficial change, ignore it. If the number of instruments falls, treat that portion as a cancellation.
6. 6For a cancellation or settlement in the vesting period, accelerate the balance of the original expense. Then test any payment against fair value at that date: up to fair value goes to equity, the excess to expense.
7. 7Reflect expected forfeitures and revise the estimate of instruments that will vest at each year end.
8. 8Present the cumulative expense and the year-wise charge, with the journal entry: Employee benefits expense Dr, to Share-based payment reserve (equity).

Quickest way: Three-line check for modification questions

Common mistakes in Modifications, Cancellations and Settlements of Grants

• Measuring incremental fair value as modified option value minus original grant date value.

  The grant date value is the number students already have in front of them.

  Fix: Take both the modified and the original option values at the modification date and subtract them.

• Reducing the expense because the repricing lowers the option's value or the vesting period was lengthened.

  Students assume every change should be reflected.

  Fix: Unfavourable changes are ignored. Continue with the grant date fair value and the original conditions.

• Spreading the incremental value over the original vesting period.

  Students merge the two amounts into one.

  Fix: Spread the incremental amount from the modification date to the date the modified options vest. Keep the original amount on its own schedule.

• Reversing the expense already booked when options are cancelled.

  Students confuse cancellation with forfeiture.

  Fix: Cancellation by the entity is an acceleration. Recognise the remaining cost immediately. Only a failed non-market vesting condition leads to reversal.

• Debiting the whole cancellation payment to the profit and loss account.

  Payment feels like a cost.

  Fix: The payment is a repurchase of an equity interest, so debit equity up to the fair value at the repurchase date. Only the excess is an expense.

• Treating new options given after cancellation as replacement automatically.

  Students link the two events by timing.

  Fix: It is a replacement only if the entity identifies it as such on the date the new instruments are granted. Otherwise it is a new grant.

Worked examples