We are a Hospital. We have 25 Promoter Directors. We would want to issue shares to some of theses directors in lieu of their Salary. We have appointed a Valuer for the same. How to account for such transaction in the books of the company ? Kindly give the Accounting entry of the same. What Accounting Standard should be followed ? Whether it needs to be expensed according to any Accounting standard ?
11 July 2024
When a hospital issues shares to its promoter directors in lieu of their salary, it involves a specific accounting treatment to ensure compliance with relevant accounting standards. Here’s how you can account for such a transaction and the considerations involved:
### Accounting Treatment:
1. **Determine Fair Value of Shares:** - As you have appointed a valuer, they will determine the fair value of the shares to be issued. This fair value is crucial for accounting purposes.
2. **Recognition in Books:** - The issuance of shares in lieu of salary is a form of compensation expense. Therefore, it should be recognized in the books of the company as an expense equal to the fair value of the shares issued. - According to Accounting Standards (such as Ind AS 102 - Share-based Payment in case of Indian Accounting Standards or IFRS 2 - Share-based Payment in case of International Financial Reporting Standards), share-based payments to employees (including directors) are recognized based on the fair value of the equity instruments granted.
3. **Accounting Entry:** Assuming the fair value of shares issued to a director in lieu of salary is Rs. X:
- **Expense Recognition:** Dr. Compensation Expense (Profit and Loss Account) - Rs. X Cr. Share Capital (Equity Share Capital Account) - Rs. X
(To record the fair value of shares issued to the director as compensation expense)
Cr. Securities Premium (or Share Premium Account) - Rs. Y Cr. Share Capital (Equity Share Capital Account) - Rs. (X - Y)
(To record any excess of fair value over the nominal value of shares issued, if applicable)
- **Note:** The exact entries may vary based on the valuation report and the specific terms of the share issuance.
### Accounting Standards:
- For hospitals in India, typically Ind AS (Indian Accounting Standards) are applicable if the hospital meets the threshold criteria for applicability. Ind AS 102 covers share-based payments and provides guidelines on how to account for equity instruments issued to employees (including directors) as part of their remuneration.
- If your hospital follows IFRS (International Financial Reporting Standards), then IFRS 2 applies, which is similar to Ind AS 102 in terms of accounting for share-based payments.
### Expense Recognition:
- The expense recognized in the profit and loss account (compensation expense) is based on the fair value of the shares issued. This expense is recognized over the vesting period of the shares (if applicable) or immediately if the shares are fully vested.
- There are no specific requirements to expense this under a particular accounting standard other than ensuring compliance with the principles of fair value measurement and recognition of expenses related to share-based payments.
### Compliance and Documentation:
- Ensure all documentation related to the valuation of shares, board approvals, and agreements with directors is properly maintained and adheres to corporate governance norms.
- Consult with your statutory auditors or accounting advisors to ensure compliance with all relevant accounting standards and regulatory requirements.
By following these steps and principles, you can ensure proper accounting treatment for issuing shares to promoter directors in lieu of salary at your hospital.
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