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Corporates and chartered accountants now have guidance on how to account for share-based payments to non-employees, including vendors. After a gap of 15 years, the Institute of Chartered Accountants of India (ICAI) has come up with a revised Guidance Note on accounting for share-based payments.
While the earlier Guidance Note issued in 2005 was on Accounting share-based payments to employees, the latest one covers share-based payments to both employees and non-employees, including vendors, sources said. Also, the latest version deals extensively with accounting for group-wide share-based payment transactions. The Guidance Note issued by the ICAI is mandatory for its members.
The recent times has witnessed a spurt in number of transactions involving share-based payments. Globally, employers use share based payments as a part of employees’ remuneration package.
Accounting principles
Share-based payments are also used as a tool to retain and reward employees for their efforts in improving the performance of the company. The main objective of coming up with a new Guidance Note is to establish new accounting principles and practices for all types of share-based payments, sources added.
In a number of countries, shares and share options comprise a significant element of the total remuneration package of senior personnel; a trend encouraged by the current consensus that it is a matter of good corporate governance to promote significant long term shareholding’s by senior management, so as to align their economic interests with those of shareholders. Such plans generally take the forms of Employee Stock Option Plans ( ESOPs); Employee Stock Purchase Plans ( ESPPs) and Stock Appreciation Rights ( SAR).
Sharing future prosperity
Unlisted companies, especially start-ups often rely on share-based compensation since they cannot afford to pay high salaries to their employees but are willing to share the future prosperity of the company.
The Revised Guidance Note has recommended that accounting for share-based payment plans should be based on the fair value approach. However, intrinsic value method is also permitted.
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