H Ltd. is a parent company and has a subsidiary S Ltd. H Ltd. and S Ltd. are unlisted entities. Following arrangements with respect to ESOP scheme…

(a) Analysis of new ESOP scheme given on surrendering options under original ESOP scheme as replacement scheme The original ESOP scheme was issued by H Ltd. to its own employees as well as S Ltd.'s employees. S Ltd. has issued new ESOP scheme to its own and H Ltd.'s employees, conditional upon employees of S Ltd. and H Ltd. surrendering the right over original ESOP scheme. Since obtaining the options under new ESOP scheme is conditional on surrendering the employee's entitlement under original ESOP scheme, the new scheme S Ltd. would be designated as replacement scheme for original scheme by S Ltd. Accordingly, in the current fact pattern, the original ESOP scheme of H Ltd. has been replaced with the new ESOP scheme of S Ltd. Hence, according to para 28 (c) of Ind AS 102, modification accounting would apply. Classification of new ESOP scheme (i) Consolidated Financial Statements (CFS): The award is settled in equity shares of the group and therefore treated as an equity-settled share-based payment. (ii) Individual (Stand-alone) Financial Statements (SFS) of H Ltd.: From H Ltd.'s perspective, the award is treated as an equity-settled share-based payment. This is because H Ltd. does not have an obligation to settle the award. (iii) Individual (Stand-alone) Financial Statements (SFS) of S Ltd. ESOP will be settled against issue of S Ltd.'s own shares. Therefore, ESOP are classified as 'Equity settled'. To the extent S Ltd. provides ESOP to H Ltd.'s employees, the same will be treated as dividend distribution to H Ltd. Accounting for change in settlor from H Ltd. (parent) to S Ltd. (subsidiary) (i) Consolidated Financial Statements (CFS) of H Ltd.: (a) As on the date of new ESOP scheme by S Ltd., there is ESOP reserve standing in CFS. This ESOP reserves is classified as 'Equity' in CFS considering that under original scheme, equity shares of H Ltd. are given. (b) ESOP reserve as per (a) above in CFS will continue even after new scheme. Since new scheme is accounted as modification of original scheme, grant date fair value as per original scheme plus incremental fair value as per new scheme is recognised as ESOP cost in CFS. Incremental fair value is accounted prospectively. (c) ESOP reserve as per (a) above in CFS is reclassified from 'Equity' to "Non-controlling interest' (NCI) due to change in settlor from H Ltd. (Parent) to S Ltd. (Subsidiary). This is because the definition of NCI refers to the equity in a subsidiary not attributable, directly or indirectly to a Parent. (ii) Stand-alone financial statements (SFS) of parent H Ltd. and subsidiary S Ltd.: (a) Ind AS 102 doesn't contain any specific guidance on accounting for change in settlor. (b) Under original ESOP scheme, Parent H Ltd. was settlor. Therefore, on the date of new ESOP scheme, in the SFS of Parent H Ltd., there is 'ESOP reserves which would have been utilised in case Parent continued as settlor. (c) However, under the new ESOP scheme, Subsidiary S Ltd. is settlor. 'ESOP reserves' standing in SFS of Parent H Ltd. is no longer required as H Ltd. has passed on its responsibility of settling ESOP scheme to S Ltd. Therefore, 'ESOP reserves' in SFS of Parent H Ltd. is reversed. (d) Subsidiary S Ltd. under new ESOP scheme become settlor for an existing ESOP plan. However, in SFS of S Ltd. there is no 'ESOP reserves' standing. Therefore 'ESOP reserves' relating to period already elapsed under original ESOP scheme is to be recognised in SFS of Subsidiary S Ltd. Journal Entries Years ESOP scheme references Parent (H Ltd.) Standalone Financial Statement (P SFS) Subsidiary (S Ltd.) Standalone Financial Statements (S SFS) Particular Debit Credit Particular Debit Credit Year 1 Original ESOP scheme by Parent H Ltd. Employees expenses* Dr. 5,000 Employees expenses# Dr. 2,500 Investment in Subsidiary**Dr. 2,500 To Equity (Capital Contribution from Parent) 2,500 To Equity (ESOP reserves) 7,500