What should be done if a reserve has a credit balance specifically due to employee share-based payments?

It should be shown as a part of Shareholders' Funds under head reserves and surplus

The correct answer is option 3- It should be shown as a part of Shareholders' Funds under head reserves and surplus.

Reserves and Surplus are essential components that require careful classification. The following categories help organize these items effectively:
i) Capital Reserve: This category includes reserves set aside for specific capital-related purposes.
ii) Capital Redemption Reserve: Here, reserves are accumulated to facilitate the redemption of capital.
iii) Securities Premium Reserve: This category comprises the premium received from the issuance of securities.
iv) Debenture Redemption Reserve: Reserves are earmarked to ensure the timely redemption of debentures.
v) Revaluation Reserve: In this category, the reserves reflect the revaluation of assets or liabilities.
vi) Share Options Outstanding Account: This is a separate item that records the credit balance related to employee share-based payments.
vii) Other Reserves (Specifying nature and purpose): Any additional reserves with specific purposes are grouped under this category, clearly specifying their nature and intended use.
viii) Surplus: The balance from the statement of profit and loss is disclosed here, indicating allocations and appropriations, such as dividends, bonus shares, and transfers to/from reserves.

Significant additions/modifications regarding disclosure of reserve and surplus are as follows:

a) A reserve specifically represented by earmarked investments shall be termed as “Fund”.

b) ‘Debit’ balance of statement of profit and loss shall be shown as a negative figure under ‘Surplus’ head.

c) The balance of “Reserve and Surplus” after adjusting negative balance of Surplus, if any, shall be shown under “Reserve and Surplus” read even if the resulting figure is ‘negative’.

d) Share options outstanding account has been recognised as a separate item under ‘Reserve and Surplus’. ICAI’s Guidance Note on Accounting for Employee share based payments requires a credit balance in the ‘Stock option outstanding Account’ to be disclosed in balance sheet under separate heading’ between share capital and reserves and surplus as a part of shareholders fund.