Date:20/01/2005 URL: http://www.thehindubusinessline.com/2005/01/20/stories/2005012002121500.htm

Back ICAI issues guidance note on employee share-based payments

K.R. Srivats

New Delhi , Jan. 19

WITH employee share-based payments gaining currency in India, regulators are now being called upon to give guidance on various aspects of such compensation plans.

A case in point is accounting for employee share-based payments that are administered through trusts.

The Institute of Chartered Accountants of India (ICAI), which is the regulator of accounting profession, has now held that companies need not consider the trust created for the purpose of administering employee share-based compensation plans in the preparation of consolidated financial statements (CFS).

This is because under Accounting Standard 21, "Consolidated Financial Statements" require consolidation of only those controlled enterprises that provide economic benefits to the enterprise and, therefore, consolidation of trusts such as gratuity trust, provident fund trust etc is not required.

The guidance note on "Accounting For Employee Share Based Payments", issued by ICAI recently, has highlighted that the nature of a trust established for administering employee share-based compensation plan is similar to that of a gratuity trust or provident fund trust as it does not provide any economic benefit to the enterprise in the form of, say, any return on investment.

Informed sources pointed out that the existing guidelines on employee stock option plans (ESOPs) and employee share purchase plan (ESPP) issued by the Securities and Exchange Board of India (SEBI) do not cover situations in which an enterprise decides to administer employee share-based payments through trusts.

With the issuance of the ICAI's guidance note on `Accounting for Employee Share based Payments, indications are that the SEBI may withdraw its existing guidelines on accounting for ESOPs and ESPPs.