Ind AS 102 requires an equity-settled share-based payment to be measured at the fair value of the options at grant date, with that fair value fixed and spread as an expense over the vesting period adjusted for the number of options actually expected to vest — the audit splits into two distinct tests: independently assessing the option-pricing model (typically Black-Scholes or a binomial model) used to arrive at grant-date fair value, and separately testing whether the headcount/forfeiture estimate used to spread that fixed fair value over the vesting period is being updated correctly each period, since errors tend to concentrate in one or the other.
Testing the option-pricing model
- Grant-date share price — should trace to an independent valuation report (for an unlisted company) or the quoted market price on the grant date (for a listed company), not a stale valuation carried forward.
- Expected volatility — should be based on historical volatility of a comparable listed peer group where the entity's own shares are not listed, with the comparator selection documented and reasonable.
- Expected life of the option — should reflect actual historical exercise behaviour, not simply the full contractual term, unless there is no reliable exercise history to draw on.
- Risk-free rate and expected dividend yield — should be consistent with the option's expected life and the entity's actual dividend policy.
Market vs non-market vesting conditions — why the distinction matters
| Condition type | Effect if not met |
|---|---|
| Market condition (e.g., a share price or TSR target) | Already factored into the grant-date fair value by the pricing model — expense is NOT reversed even if the condition is never met, as long as the service condition was satisfied. |
| Non-market vesting condition (e.g., a revenue target, continued employment) | Not factored into grant-date fair value — the expense IS reversed (through a true-up of the vesting estimate) if it becomes probable the condition will not be met. |
Reversing the entire cumulative ESOP expense because a market-based condition (such as a listing or IPO price target) was missed is a common and incorrect treatment — Ind AS 102 does not permit reversal for failed market conditions, only for failed service or non-market performance conditions.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
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