A Share Based Payment is an arrangement between the entity and another party that entitles the other party to receive:
Below are few of the services we offer under this segment:
- Cash or other assets of the entity for amounts that are based on the price or value of equity instruments of the entity, Or
- Equity instruments of the entity,
Provided the specified *Vesting conditions, if any, are met.
*Vesting Conditions: A condition that determine whether the entity receives the services that entitles the Counterparty to receive cash, other assets or equity instruments of the entity, under a Share Based Payment arrangement. A vesting condition is either a Service condition or a Performance condition.
Types of Share Based Payments:
From Entity’s Perspective:There are three types of Share Based Payment -
- Equity Settled Share Based Payment:
An equity-settled share-based payment is a share-based payment transaction in which the enterprise
a) receives goods or services as consideration for its own equity instruments, Or
b) receives goods or services but has no obligation to settle the transaction with the supplier. - Cash Settled Share Based Payment:
A cash-settled share-based payment is a share-based payment transaction in which the enterprise acquires goods or services by incurring a liability to transfer cash or other assets to the supplier of those goods or services for amounts that are based on the price (or value) of equity instruments of the enterprise.
- Share Based Payments with Cash Alternatives:
For share-based payment transactions in which the terms of the arrangement provide the enterprise the choice of whether the enterprise settles the transaction in cash (or other assets) or by issuing equity instruments.
From Employee’s Perspective: There are three types of Share Based Payment -
- Employee Stock Option Plan:
ESOPs are in form of contracts which give employees a right, but not an obligation, to purchase shares at exercise price after fulfilling the vesting conditions, if any.
- Employee Stock Purchase Plan:
ESPP is a scheme under which employees are granted rights to get shares at a concessional price. Such shares are allotted instantly. These shares may have some lock in period too.
- Stock Appreciation Rights:
Stock Appreciation Rights are the rights that entitle the employees to receive cash or shares for an amount equivalent to any excess of the market value of a stated number of enterprise’s shares over a stated price.
Tax Treatment of Share Based Payment:
From Entity’s Perspective:
- The share option expense is not realized until the year in which the options are exercised.
- Therefore, a Timing Difference exists between the reported profit and taxable profit.
- The expense is added back in the tax computation during the vesting period.
- A Deferred Tax asset is recognized as the difference between the share price at each balance sheet date and the exercise price, calculated at the tax rate applicable to the company.
- The deferred tax assets builds-up in the balance sheet during the vesting period to match the final corporation tax charge in year of exercise.
- On exercise, the full deferred tax asset is derecognized.
- On exercise, the corporation tax charge is calculated based on actual expense (Market Value of shares at the date of exercise less Exercise Price).
From Employee’s perspective:
The Taxation of ESOPs/ ESPP can be split into two components:
- Taxable as Perquisite (FMV less Exercise Price) under the head income from Salary at the time of exercising the option in the hands of Employee.
- Tax on Income from Capital Gain at the time of sale of shares by Employee (STCG or LTCG).
What can RAAAS do for you:
- Drafting ESOP charters/ agreements
- Creating ESOP pool
- Taxation and accounting treatment
- Valuation of entity
- Vesting formalities
- Compliance to meet Companies Act provisions
