On 4 November 2020, ICAI issued two Guidance Notes (GN) formulated by the Research Committee. The GN can be accessed at https://www.caclubindia.com/news/icai-releases-guidance-note-on-applicability-of-as-25-and-measurement-of-income-tax-expense-for-interim-financial-reporting-18699.asp
The GN covers two important aspects -
- On share-based payments
- On the applicability of AS 25 for interim financial statements.
The GN is applicable to companies following accounting standards (AS) under the Companies (Accounting Standards) Rules, 2006, as amended under Section 133 of Companies Act, 2013. Entities following Ind AS are required to continue to follow Ind AS 102. The GN is applicable for plans with a grant date on or after 1 April 021. Companies are not required to apply this GN to share-based payment to equity instruments that are not fully vested as of 1 April 2021.
From a scoping standpoint, one significant change that this GN brings out is that unlike the erstwhile GN issued in 2005, this GN also applies to share-based payment arrangements with non-employees.
Another welcome change is the additional guidance with respect to accounting for group share-based payment plans. The erstwhile guidance note did not have adequate guidance on such plans which resulted in diversity in practice.
Although the aim of the guidance note is to align with Ind AS 102, the guidance note only recommends the measurement of the cost of the share-based payment using the fair value method and continues to permit to account for the cost using the intrinsic value of options.
Two important changes in the GN would likely have an impact on the measurement.
- It is no longer permitted to consider zero historical volatility in case of determining the fair value of an instrument involving an unlisted company
- The guidance note now issued also mandates that in case of graded vesting (e.g. 25% shares over 4 years), each grant would be considered to be a separate award such that effectively there will be front-ending of costs in the P&L in earlier years.
The GN on AS 25 clarifies that in situations where interim financial statements are prepared due to the requirements under the banking covenants, under the requirements of the Insolvency and Bankruptcy Code, 2016, due to transfer of business, amalgamation or merger, etc., such entities shall follow the accounting principles of AS 25.
The author is a Chartered Accountant, an alumnus of IIM Bangalore, and Co-founder of World of Financial Reporting, a firm founded after over a decade of experience in audit and financial reporting advisory with a leading accounting firm. He can also be reached at email@example.com
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