Ind AS 102 answers a question that used to be quietly ignored: when a company pays people with its own shares or share options instead of cash, what does that cost, and how should the cost appear in the accounts? For years, many Indian companies granted employee stock options (ESOPs) and recorded little or no expense, because the older approach often measured the cost as "intrinsic value" — frequently nil at the grant date. Ind AS 102 changed that decisively. It requires share-based payments to be recognised as an expense, measured by reference to fair value, and spread over the period employees earn them. For any company that uses ESOPs, restricted shares, or share appreciation rights as part of how it rewards people, this standard governs the numbers.
This guide explains the standard in plain language, sets out the different vesting conditions and how each is treated, and works through graded vesting in detail — including how it differs from the old AS approach — with numerical examples laid out in tables.
The core idea in one paragraph
If you give an employee equity (say, share options) in exchange for their work, you have received something of value (their services) and paid for it with equity. Ind AS 102 says: measure the value of what you granted at its grant-date fair value, and recognise that amount as an expense over the vesting period — the time the employee must keep working (and any performance targets must be met) before the award is truly theirs. For equity-settled awards, that grant-date fair value is fixed and never revised for later share-price movements. For cash-settled awards (where the payout is in cash based on the share price), you instead recognise a liability and re-measure it to fair value every reporting date.
Objective and scope
The objective is to specify the financial reporting by an entity when it undertakes a share-based payment transaction — in particular, to require the entity to reflect in profit or loss and its financial position the effects of such transactions, including the expense associated with granting share options to employees. The standard applies to all share-based payment transactions, whether the entity can identify specifically the goods or services received or not, with limited exclusions (for example, transactions in which the entity acquires goods as part of a business combination, and certain transactions within the scope of the financial-instruments standards).
The three types of share-based payment
Everything in Ind AS 102 flows from which of three categories a transaction falls into. The table below summarises them.
| Type | What the entity gives | Example | Credit entry |
|---|---|---|---|
| Equity-settled | Its own equity instruments (shares or share options) | Employee share options (ESOPs); restricted shares | Equity — measured at grant-date fair value, not re-measured |
| Cash-settled | Cash (or other assets) for an amount based on its share price | Cash-settled share appreciation rights (SARs); phantom shares | Liability — re-measured to fair value each reporting date |
| Choice of settlement | Terms give the entity or the counterparty a choice of cash or equity | An award the employee may elect to take in cash or shares | Split/compound accounting depending on who holds the choice |
The distinction between equity-settled and cash-settled is the single most important classification in the standard, because it drives whether the credit entry is to equity (fixed at grant) or to a liability (re-measured each period).
Equity-settled awards — recognition and measurement
For equity-settled share-based payments, the entity recognises the goods or services received, and a corresponding increase in equity, as the goods or services are received. For transactions with employees, the value of the services is measured indirectly by reference to the fair value of the equity instruments granted at the grant date — because the fair value of employee services usually cannot be measured reliably, but the fair value of the options or shares granted can (using an option-pricing model such as Black-Scholes or a binomial model).
Two features are essential and often misunderstood:
The grant-date fair value is fixed at the grant date and is not subsequently re-measured for changes in the share price. If the share price triples after grant, the expense does not change; if it collapses, the expense still does not change.
The total grant-date fair value is recognised as an expense over the vesting period, with a corresponding credit to equity. The vesting period is the period during which all the specified vesting conditions must be satisfied.
Vesting conditions — the heart of the mechanics
A vesting condition is a condition that determines whether the entity receives the services that entitle the counterparty to the award. How each type of condition is treated is central to getting the accounting right, and it is where most errors happen. The table below sets out the four categories.
| Condition type | What it is | Example | Effect on the accounting |
|---|---|---|---|
| Service condition | Requires the employee to complete a specified period of service | Stay employed for 3 years | Affects the number of awards expensed → true up to what actually vests |
| Non-market performance condition | A performance target not based on the share price | Achieve a revenue or profit target; complete an IPO | Affects the number of awards expensed → true up to what actually vests |
| Market condition | A performance target based on the share price (or total shareholder return) | Share price reaches ₹500; TSR beats an index | Built into the grant-date fair value → never trued up; expense stands if service is given |
| Non-vesting condition | A condition that is neither a service nor a performance condition | Employee must make monthly savings contributions; a non-compete | Built into the grant-date fair value → never trued up |
The practical rule of thumb: service and non-market performance conditions affect the number of awards you expense (you true up to what actually vests); market and non-vesting conditions affect the grant-date fair value (baked into the valuation, never trued up). Get this split wrong and the expense will be wrong.
A quick illustration of the "true-up" principle
Suppose a company grants 1,000 options to each of 100 employees (100,000 options), vesting after 3 years of service, with a grant-date fair value of ₹50 per option. The maximum possible expense is 100,000 × ₹50 = ₹50,00,000. But not everyone will stay 3 years. The company estimates forfeitures and revises the estimate each year based on actual and expected leavers, recognising the expense on the number expected to vest, and finally truing up to the number that actually vests. The table below shows how the cumulative expense adjusts as the forfeiture estimate changes.
| Year | Options expected to vest | Cumulative expense to date (₹) | Expense for the year (₹) |
|---|---|---|---|
| 1 | 90,000 (10% expected to leave) | 90,000 × 50 × 1/3 = 15,00,000 | 15,00,000 |
| 2 | 84,000 (estimate of leavers raised) | 84,000 × 50 × 2/3 = 28,00,000 | 13,00,000 |
| 3 | 85,000 (actual number that vested) | 85,000 × 50 × 3/3 = 42,50,000 | 14,50,000 |
| Total | — | 42,50,000 | 42,50,000 |
Notice that the cumulative expense at each year-end is always: (grant-date fair value per option) × (options expected to ultimately vest) × (proportion of the vesting period elapsed). The annual expense is simply the movement in that cumulative figure — which is why year 2's charge is lower here (the estimate of leavers rose), and year 3 trues up to the actual outcome.
Graded vesting — explained in detail
Graded vesting (also called "graduated" or "tranche" vesting) is where an award does not all vest on a single date, but vests in instalments over time. This is extremely common in practice. A typical ESOP grant might vest 25% at the end of each of years 1, 2, 3, and 4 — so an employee granted 4,000 options gets 1,000 vesting each year rather than all 4,000 vesting together at the end of year 4.
The crucial insight of Ind AS 102 is that a graded-vesting award is not one award vesting over four years. It is treated as several separate awards, each with its own vesting period, because each tranche is, in substance, a distinct grant that is earned over a different length of time. The table below shows how a single graded grant is decomposed.
| Tranche | Options | Vests at end of | Vesting period (treated as a separate award) |
|---|---|---|---|
| Tranche 1 | 1,000 | Year 1 | 1 year |
| Tranche 2 | 1,000 | Year 2 | 2 years |
| Tranche 3 | 1,000 | Year 3 | 3 years |
| Tranche 4 | 1,000 | Year 4 | 4 years |
Because each tranche is treated as a separate award, each tranche's grant-date fair value is spread only over that tranche's own vesting period — and this is what produces the characteristic front-loaded expense pattern of graded vesting. The tranche that vests in year 1 is expensed entirely in year 1; the tranche vesting in year 2 is expensed over years 1 and 2; and so on. In the early years, you are simultaneously expensing pieces of several tranches, so the charge is heaviest at the start and tapers off.
Worked example — graded vesting expense pattern
Continue the example above: 4,000 options granted, vesting 25% (1,000 options) at the end of each of years 1–4. Assume for simplicity that each tranche has the same grant-date fair value of ₹60 per option (in reality, later tranches often have a slightly higher fair value because of their longer expected life, but we hold it constant here to isolate the graded-vesting effect). Each tranche's total fair value is therefore 1,000 × ₹60 = ₹60,000.
Each tranche is expensed straight-line over its own vesting period:
| Tranche (total FV ₹60,000 each) | Year 1 (₹) | Year 2 (₹) | Year 3 (₹) | Year 4 (₹) |
|---|---|---|---|---|
| Tranche 1 — over 1 year | 60,000 | — | — | — |
| Tranche 2 — over 2 years | 30,000 | 30,000 | — | — |
| Tranche 3 — over 3 years | 20,000 | 20,000 | 20,000 | — |
| Tranche 4 — over 4 years | 15,000 | 15,000 | 15,000 | 15,000 |
The table below then adds up the columns to show the total expense recognised each year, and — for contrast — what the expense would have been if the whole award were (incorrectly) treated as a single 4-year award expensed straight-line.
| Year | Graded vesting — required (₹) | Single 4-year award — incorrect (₹) |
|---|---|---|
| 1 | 1,25,000 | 60,000 |
| 2 | 65,000 | 60,000 |
| 3 | 35,000 | 60,000 |
| 4 | 15,000 | 60,000 |
| Total | 2,40,000 | 2,40,000 |
Two things stand out. First, the total expense over the four years is the same (₹2,40,000) either way — graded vesting changes the timing, not the total. Second, the graded-vesting method is markedly front-loaded: ₹1,25,000 in year 1 falling to ₹15,000 in year 4, versus a flat ₹60,000 under the (incorrect) single-award approach. Under Ind AS 102, the front-loaded pattern is the required treatment — each tranche must be accounted for as a separate award.
How graded vesting differs from the old AS approach
This is one of the clearer differences between Ind AS 102 and the framework that preceded it. Before Ind AS, share-based payments in India (outside Ind AS) were generally dealt with under a guidance note and regulatory requirements (notably the SEBI ESOP guidelines and the ICAI Guidance Note on Accounting for Employee Share-based Payments), rather than a full accounting standard. Two differences matter most, and graded vesting sits at the intersection of both.
| Feature | Old AS approach (Guidance Note / SEBI) | Ind AS 102 |
|---|---|---|
| Measurement basis | Often intrinsic value (market price − exercise price at grant) | Fair value from an option-pricing model (includes time value) |
| At-the-money option at grant | Intrinsic value = nil → often no expense | Positive fair value → expense recognised |
| Graded vesting | Often spread more evenly; tranche decomposition not consistently applied | Each tranche = a separate award → front-loaded expense |
| Cash-settled awards | Less consistently re-measured to fair value | Liability re-measured to fair value each reporting date |
| Status | Guidance note + regulatory requirements | Full accounting standard |
The combined effect for graded vesting is significant. Under the older intrinsic-value approach, a plain option granted "at the money" (exercise price equal to market price) had an intrinsic value of nil at grant, so many companies recognised no expense at all for their ESOPs. Even where intrinsic value was positive, the older practice would often spread the cost more evenly and did not consistently apply the "treat each tranche as a separate award" decomposition that Ind AS 102 mandates. Ind AS 102 therefore does two things at once: it forces recognition of a fair-value cost (which is positive even for at-the-money options, because an option has time value), and it requires that cost to be front-loaded across the tranches of a graded award. The table below makes the graded-vesting contrast concrete.
| Year | Old AS — at-the-money intrinsic value (₹) | Ind AS 102 — graded fair value (₹) |
|---|---|---|
| 1 | 0 | 1,25,000 |
| 2 | 0 | 65,000 |
| 3 | 0 | 35,000 |
| 4 | 0 | 15,000 |
| Total | 0 | 2,40,000 |
In short, a company moving from the old approach to Ind AS 102 for a typical at-the-money graded ESOP goes from recognising nothing to recognising a front-loaded fair-value charge — often a material hit to early-year profits that surprised many first-time adopters.
Cash-settled awards — a different mechanic
For cash-settled share-based payments (such as cash-settled share appreciation rights, where the employee receives cash equal to the increase in the share price over a period), the accounting is different in one fundamental way: the entity recognises a liability, not an increase in equity, and re-measures that liability to fair value at every reporting date until it is settled, with all changes going to profit or loss.
The table below contrasts the two mechanics side by side.
| Feature | Equity-settled | Cash-settled |
|---|---|---|
| Credit entry | Equity | Liability |
| Measurement date for fair value | Grant date — fixed | Each reporting date until settled |
| Re-measured for share-price changes? | No (only the number is trued up) | Yes — every period |
| Typical example | Share options / ESOPs | Cash-settled SARs / phantom shares |
| Expense volatility | Stable (based on grant-date FV) | Moves with the share price each period |
Worked example — cash-settled SARs
A company grants 1,000 cash-settled SARs to an employee, vesting after 3 years, settled in cash based on the share appreciation at settlement. Because the award is cash-settled, the liability is re-measured to fair value each year (and, over the vesting period, the expense is based on the proportion of the vesting period elapsed applied to the latest fair value). Assume the fair value per SAR is estimated as follows:
| Year | Fair value per SAR (₹) | Cumulative liability = 1,000 × FV × (yrs/3) (₹) | Expense for the year (₹) |
|---|---|---|---|
| 1 | 30 | 1,000 × 30 × 1/3 = 10,000 | 10,000 |
| 2 | 45 | 1,000 × 45 × 2/3 = 30,000 | 20,000 |
| 3 | 50 | 1,000 × 50 × 3/3 = 50,000 | 20,000 |
| Total | — | 50,000 (paid in cash on settlement) | 50,000 |
Notice how the expense here moves with the fair value — it is not fixed at grant. In year 2 the fair value rose, so the cumulative liability (and the expense) jumped; if the fair value had fallen, the expense could even be negative in a period. This re-measurement is the defining difference from equity-settled awards, where the grant-date fair value is locked in.
Modifications, cancellations, and settlements
Awards are often changed after grant. Ind AS 102 has specific rules:
For a modification (for example, re-pricing options when the share price has fallen below the exercise price), the entity always recognises at least the original grant-date fair value over the remaining vesting period (unless the award does not vest because of a failed vesting condition), and recognises any incremental fair value granted by a beneficial modification over the period from the modification date to vesting. In other words, you cannot reduce the expense by modifying an award, but a favourable modification adds to it.
For a cancellation or settlement of an award during the vesting period, the entity accounts for it as an acceleration of vesting and immediately recognises the amount that would otherwise have been recognised over the remainder of the vesting period. Any payment made on cancellation is treated (up to the fair value of the equity instruments) as a deduction from equity.
Disclosure
Ind AS 102 requires disclosures enabling users to understand the nature and extent of share-based payment arrangements; how the fair value of the goods or services received (or the equity instruments granted) was determined; and the effect of share-based payment transactions on profit or loss and financial position. In practice this includes a description of each type of arrangement (vesting terms, maximum term, settlement method); the number and weighted average exercise prices of options (outstanding at the start and end of the period, granted, forfeited, exercised, expired, and exercisable); for options granted, how fair value was measured, including the option-pricing model and the inputs used (share price, exercise price, expected volatility, option life, expected dividends, and risk-free rate); and the total expense recognised for the period.
A consolidated illustration
Bringing it together: a company grants 4,000 options to an employee, vesting 25% at the end of each of years 1–4 (graded vesting), with an exercise price equal to the current market price. Under Ind AS 102 it treats the grant as four separate awards, values each using an option-pricing model (getting a positive fair value despite the at-the-money exercise price, because of time value), and recognises the cost front-loaded across the years — heaviest in year 1, lightest in year 4 — truing up for any leavers along the way. Had the same grant instead been cash-settled SARs, the company would recognise a liability re-measured to fair value each reporting date. Under the old AS approach, the at-the-money options would likely have carried an intrinsic value of nil at grant and generated no expense at all. The move to Ind AS 102 therefore converts an invisible reward into a recognised, front-loaded, fair-value cost — which is precisely the transparency the standard was designed to achieve.
Common pitfalls
Recurring issues include: recognising no expense for equity-settled ESOPs (treating at-the-money options as costless, as under the old intrinsic-value approach); re-measuring equity-settled awards for share-price changes after grant (only the number of awards is trued up for service and non-market conditions, never the grant-date fair value); truing up for a market condition that was not met (market conditions are baked into fair value and are not trued up); treating a graded-vesting award as a single award and expensing it straight-line rather than decomposing it into separate tranches (which understates early-year expense); failing to re-measure cash-settled awards to fair value at each reporting date; and reducing the expense through a modification (the original grant-date fair value must still be recognised).
Why this is cleaner on a unified system
Accounting for share-based payments is data-intensive: for every grant you need the vesting schedule (including each tranche of a graded award), the grant-date fair value from the option-pricing model, the running estimate of forfeitures, the true-up to actual vesting, and — for cash-settled awards — a fresh fair value at every reporting date. This is far more reliable when the equity/ESOP administration and the general ledger sit in one connected system, so that grant data, vesting progress, leavers, and fair values feed the expense calculation directly rather than being maintained in separate spreadsheets and reconciled back to the accounts. When the tranche-by-tranche schedules, the true-ups, and the resulting expense and equity (or liability) entries all flow from the same underlying grant data, the front-loaded charge and the disclosures tie together by construction — a connection that matters greatly for equity-incentive-heavy companies, as our ESOP and equity guides discuss.
This article is a detailed educational summary of Ind AS 102 in plain language. It is not a substitute for the full text of the standard. Accounting standards are amended from time to time; always verify the current, authoritative text of Ind AS 102 as notified under the Companies Act before relying on it, and consult a qualified chartered accountant for application to your specific circumstances.