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Corporate Financial Reporting · Share based Payment (Ind AS 102)

Equity-Settled Share-Based Payment Under Ind AS 102

Updated 11 October 2026 · Fact-checked

In an equity-settled share-based payment, the entity receives services and issues equity instruments. You measure the cost at grant date fair value, spread it over the vesting period, and true up the number of instruments expected to vest each year. The credit goes to equity, not to a liability.

Understand Recognition and Measurement of Equity-Settled Transactions

A company often pays employees with shares or options instead of cash. Ind AS 102 asks one question: what did the company receive, and what did it give? It received employee services. It gave equity instruments. So it records an expense for the services and a matching credit in equity (usually a reserve such as Employee Stock Options Outstanding).

The amount is fixed once, at grant date, using the fair value of the option or share. You do not revalue it later. This is the key difference from cash-settled transactions, where the liability is remeasured every year.

The expense is spread over the vesting period, because the employee earns the award by serving. What changes each year is your estimate of how many instruments will vest. Under paragraph 19, vesting conditions other than market conditions are not built into the fair value. Instead, you adjust the number of instruments, so that the final amount recognised is based on the number that actually vest. If the awards do not vest because a service or non-market performance condition fails, the cumulative expense is nil.

Market conditions (such as a target share price) and non-vesting conditions are different. They are built into the fair value at grant date. Under paragraph 21A, for non-vesting conditions the entity still recognises the services from an employee who meets all non-market vesting conditions, even if the non-vesting condition is not met.

With cliff vesting, all options vest at the end of one period. With graded vesting, different portions vest in different years. Treat each tranche as a separate grant with its own vesting period and its own fair value, and compute the expense tranche by tranche.

Key rules to remember

Cumulative expense at year end
Cumulative expense = Options expected to vest × Grant date fair value per option × (Years elapsed ÷ Total vesting period)
For cliff vesting. Options expected to vest = employees × options each × estimated vesting percentage.
Expense for the year
Expense for the year = Cumulative expense at year end − Cumulative expense at previous year end
This is a catch-up method. A change in estimate is absorbed in the current year, with no restatement of earlier years.
Final year trueing up
Total expense = Options actually vested × Grant date fair value per option
On a cumulative basis the expense is based on options that eventually vest (paragraph 19).
Graded vesting tranche
Tranche cumulative expense = Tranche options expected to vest × Tranche fair value × (Years elapsed ÷ Tranche vesting period)
Each tranche has its own vesting period, measured from grant date to its own vesting date. Add the tranches.
Journal entry
Employee benefit expense Dr; To Employee Stock Options Outstanding (equity) Cr
On exercise: Bank Dr (exercise price); ESOP Outstanding Dr; To Share capital and Securities premium.

How to solve Recognition and Measurement of Equity-Settled Transactions questions

Use this sequence for any equity-settled question, whether it has cliff or graded vesting.

  1. 1Identify the grant date, the vesting period and the fair value per option at grant date. Ignore later fair values unless a modification occurs.
  2. 2Check each condition. Service and non-market performance conditions change the number of options. Market conditions and non-vesting conditions sit inside the fair value.
  3. 3Work out options expected to vest at each year end: employees expected to remain × options per employee.
  4. 4For cliff vesting, compute cumulative expense = options expected × fair value × years elapsed ÷ vesting period.
  5. 5For graded vesting, split the grant into tranches. Compute each tranche's cumulative expense over its own vesting period, then add.
  6. 6Subtract the previous year's cumulative expense to get the year's charge. Do not restate earlier years.
  7. 7Pass the entry: Employee benefit expense Dr, ESOP Outstanding Cr. In the vesting year, true up to actual vested options.
  8. 8If asked about exercise or lapse, record exercise through share capital and premium. Lapse after vesting is a transfer within equity, with no reversal to profit or loss.

Quickest way: Cumulative table method

When to use it: Use it for multi-year numerical questions with changing employee estimates.

  1. Draw columns: Year, Options expected to vest, Fair value, Cumulative expense, Previous cumulative, Charge for the year.
  2. Fill the cumulative figure first, then take the difference. Never compute the yearly charge directly.
  3. For graded vesting, add one row block per tranche, using vesting periods of 1, 2, 3 years and so on, then total each year.
  4. Check that the final cumulative figure equals actual vested options × fair value.

Common mistakes in Recognition and Measurement of Equity-Settled Transactions

  • Remeasuring the option fair value every year.

    Students mix this up with cash-settled transactions, where the liability is remeasured.

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

  • Charging the full expense in the year of grant.

    Students forget that the services are received over the vesting period.

    Fix: Spread the cost over the vesting period unless the grant vests immediately.

  • Restating prior years when the estimate of leavers changes.

    It feels like an error correction.

    Fix: Use the cumulative catch-up. The difference goes through the current year's charge.

  • Treating graded vesting as one lot over the longest period.

    It is quicker, so students use a single period.

    Fix: Treat each tranche as a separate grant with its own vesting period and expense.

  • Building a service or non-market performance condition into the fair value.

    Students think any condition lowers the option value.

    Fix: Only market conditions and non-vesting conditions go into the fair value. Others adjust the number of instruments.

  • Reversing the expense when vested options lapse unexercised.

    Students assume the cost was wasted.

    Fix: Once vested, the expense stays. The balance in ESOP Outstanding is transferred within equity, for example to general reserve.

Worked examples

Example 1

On 1 April 2025, Kaveri Industries Ltd granted 100 options each to 500 employees. The options vest after 3 years of service. Grant date fair value is ₹60 per option. Expected leavers: on 31 March 2026, 10% over the whole period; on 31 March 2027, 12% over the whole period; actual vesting on 31 March 2028: 430 employees remained. Compute the expense for each year.

Show the solution
  1. Total options granted = 500 × 100 = 50,000.
  2. Year 1: expected to vest = 50,000 × 90% = 45,000. Cumulative = 45,000 × ₹60 × 1/3 = ₹9,00,000. Charge = ₹9,00,000.
  3. Year 2: expected to vest = 50,000 × 88% = 44,000. Cumulative = 44,000 × ₹60 × 2/3 = ₹17,60,000. Charge = 17,60,000 − 9,00,000 = ₹8,60,000.
  4. Year 3: actual vested = 430 × 100 = 43,000. Cumulative = 43,000 × ₹60 = ₹25,80,000. Charge = 25,80,000 − 17,60,000 = ₹8,20,000.

Answer: Expense: 2025-26 ₹9,00,000; 2026-27 ₹8,60,000; 2027-28 ₹8,20,000. Total ₹25,80,000, credited to ESOP Outstanding.

Example 2

On 1 April 2025, Meera Tech Ltd granted 1,000 options to each of 100 employees. 50% vest on 31 March 2026 and the other 50% on 31 March 2027, subject to continued service. Fair value at grant date is ₹20 per option for the first tranche and ₹26 for the second. All employees are expected to stay and none leave. Compute the expense for 2025-26 and 2026-27.

Show the solution
  1. Total options = 100 × 1,000 = 1,00,000. Tranche 1 = 50,000 options, tranche 2 = 50,000 options.
  2. Tranche 1 vests in 1 year. Total cost = 50,000 × ₹20 = ₹10,00,000, all in 2025-26.
  3. Tranche 2 vests in 2 years. Total cost = 50,000 × ₹26 = ₹13,00,000, spread equally: ₹6,50,000 each year.
  4. 2025-26 expense = 10,00,000 + 6,50,000 = ₹16,50,000.
  5. 2026-27 expense = ₹6,50,000 (tranche 2 only).
  6. Check: 16,50,000 + 6,50,000 = ₹23,00,000 = 10,00,000 + 13,00,000.

Answer: Expense: 2025-26 ₹16,50,000; 2026-27 ₹6,50,000. Total ₹23,00,000. Graded vesting front-loads the cost.

Exam tips

  • In MCQs, first decide whether the question wants a yearly charge or a cumulative figure. Many wrong options are the cumulative number.
  • Underline the vesting condition. If it is a share price target, it is a market condition and is already in the fair value, so do not adjust the count for it.
  • For graded vesting, write the tranche table before computing anything. Marks are given for the tranche-wise working.
  • State the entry and the equity account name in the answer. Examiners award marks for Employee Stock Options Outstanding as the credit.
  • Write a one-line reason for the treatment, such as fair value fixed at grant date, as it helps in case-based questions.

Practice questions from Share based Payment (Ind AS 102)

Recognition and Measurement of Equity-Settled Transactions in other exams

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

Recognition and Measurement of Equity-Settled Transactions: frequently asked questions

Why is fair value measured at grant date for equity-settled awards?

The company gives equity instruments, so the transaction is measured at the value of what was granted when it was granted. Later share price movements do not change the cost. Only the number of options expected to vest is updated.

What is the difference between graded vesting and cliff vesting?

With cliff vesting, all options vest at the end of one period. With graded vesting, portions vest in different years. For graded vesting you compute each tranche separately over its own vesting period.

What happens to the expense if employees leave before vesting?

The number of options expected to vest falls, so the cumulative expense is reduced through a catch-up adjustment in the current year. If an award does not vest because a non-market vesting condition fails, the cumulative expense is nil.

Is the ESOP expense reversed if vested options expire unexercised?

No. Once the options have vested, the expense stays in profit or loss. You only make a transfer within equity, from ESOP Outstanding to another equity component.