Accounting for Employee Stock Option Plans: Notes | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 
LEARNING OUTCOMES 
  
 
ACCOUNTING FOR 
EMPLOYEE STOCK 
OPTION PLANS 
 
  
 
 
After studying this chapter, you will be able to: 
? Learn the provisions of the Companies Act 2013 regarding 
employees’ stock option. 
? Understand the accounting policies of employees’ stock 
option plan. 
? Learn the accounting treatment of employees’ stock options.   
? Learn the provisions of Guidance Note on Employee Share-
Based Payments. 
  
CHAPTER 
3 
Page 2


 
LEARNING OUTCOMES 
  
 
ACCOUNTING FOR 
EMPLOYEE STOCK 
OPTION PLANS 
 
  
 
 
After studying this chapter, you will be able to: 
? Learn the provisions of the Companies Act 2013 regarding 
employees’ stock option. 
? Understand the accounting policies of employees’ stock 
option plan. 
? Learn the accounting treatment of employees’ stock options.   
? Learn the provisions of Guidance Note on Employee Share-
Based Payments. 
  
CHAPTER 
3 
 
 
3.2 
 
ADVANCED ACCOUNTING 
 
 
? Employee Stock Option Plan (ESOP) is an option given to directors, 
officers or permanent employees of a company or of its subsidiary, in 
India or outside India, or of a holding company or associate company of 
the company to purchase or subscribe the securities offered by the 
company at a future date, at a concessional price generally. 
? Employee Stock Option Plans are one of the most important tools to 
attract, encourage and retain employees. It is the mechanism by which 
employees are compensated with increasing equity interests over time. 
? ESOPs can be implemented by direct route or trust route. 
? The company granting options to its employees pursuant to ESOPs will 
have the freedom to determine the exercise price in conformity with the 
applicable accounting policies, if any. 
? There shall be a minimum period of one year between the date of grant 
of option and the date of vesting of the option. 
? As per Accounting Standard AS 20, stock options granted pursuant to an 
employee share-based payment plan, should not be included in the 
shares outstanding till the time employees have exercised their right to 
obtain shares or stock options.  
? ESOPs granted to directors become part of managerial remuneration. 
? Under the Companies Act 2013, there shall be a minimum period of one 
year between grant of options and vesting of options, hence the exercise 
period cannot be less than one year from the date of grant of option. 
? There are two methods of accounting for Employee Share Based 
Payments viz, intrinsic value method or fair value method. 
? For accounting purposes, employee share-based payment plans are 
classified as equity settled, cash settled and plans with cash alternatives. 
 1. EMPLOYEES STOCK OPTION PLAN (ESOP) 
ESOP is a plan under which the Company grants employees stock option. Employee 
Stock Option is a contract that gives the employees of the Company the right, but 
 
Page 3


 
LEARNING OUTCOMES 
  
 
ACCOUNTING FOR 
EMPLOYEE STOCK 
OPTION PLANS 
 
  
 
 
After studying this chapter, you will be able to: 
? Learn the provisions of the Companies Act 2013 regarding 
employees’ stock option. 
? Understand the accounting policies of employees’ stock 
option plan. 
? Learn the accounting treatment of employees’ stock options.   
? Learn the provisions of Guidance Note on Employee Share-
Based Payments. 
  
CHAPTER 
3 
 
 
3.2 
 
ADVANCED ACCOUNTING 
 
 
? Employee Stock Option Plan (ESOP) is an option given to directors, 
officers or permanent employees of a company or of its subsidiary, in 
India or outside India, or of a holding company or associate company of 
the company to purchase or subscribe the securities offered by the 
company at a future date, at a concessional price generally. 
? Employee Stock Option Plans are one of the most important tools to 
attract, encourage and retain employees. It is the mechanism by which 
employees are compensated with increasing equity interests over time. 
? ESOPs can be implemented by direct route or trust route. 
? The company granting options to its employees pursuant to ESOPs will 
have the freedom to determine the exercise price in conformity with the 
applicable accounting policies, if any. 
? There shall be a minimum period of one year between the date of grant 
of option and the date of vesting of the option. 
? As per Accounting Standard AS 20, stock options granted pursuant to an 
employee share-based payment plan, should not be included in the 
shares outstanding till the time employees have exercised their right to 
obtain shares or stock options.  
? ESOPs granted to directors become part of managerial remuneration. 
? Under the Companies Act 2013, there shall be a minimum period of one 
year between grant of options and vesting of options, hence the exercise 
period cannot be less than one year from the date of grant of option. 
? There are two methods of accounting for Employee Share Based 
Payments viz, intrinsic value method or fair value method. 
? For accounting purposes, employee share-based payment plans are 
classified as equity settled, cash settled and plans with cash alternatives. 
 1. EMPLOYEES STOCK OPTION PLAN (ESOP) 
ESOP is a plan under which the Company grants employees stock option. Employee 
Stock Option is a contract that gives the employees of the Company the right, but 
 
 
 
3.3 
 
 ACCOUNTING FOR EMPLOYEE STOCK OPTION 
PLAN 
 
not the obligation, for a specified period of time to purchase or subscribe to the 
shares of the Company at a fixed determinable price. 
Under Section 62 (1) (b) of the Companies Act 2013, where at any time a company 
having a share capital proposes to increase its subscribed capital by the issue of 
further shares, such shares may be offered to employees under a scheme of 
employees’ stock option, subject to a special resolution passed by the company 
and subject to such conditions as may be prescribed.  
Earlier Securities and Exchange Board of India (SEBI) issued Employees Stock Option 
Scheme and Employee Stock Purchase Scheme Guidelines (applicable for listed 
companies) in 1999 under section 11 of the Securities and Exchange Board of India 
Act, 1992. This guideline has now been replaced by the SEBI (Share Based Employee 
Benefits) Regulations, 2014 (applicable for listed companies). It covers the 
provisions regarding accounting policies, pricing, disclosures, administration and 
implementation process of various schemes and other issues relating to Employee 
Stock Option Scheme (ESOS), Employee Stock Purchase Scheme (ESPS), Stock 
Appreciation Rights Scheme (SRS), General Employee Benefits Scheme (GEBS) and 
Retirement Benefit Scheme (RBS).  The Regulation stipulate to follow the 
requirements of the ‘Guidance Note on Accounting for Employee Share Based 
Payments or Accounting Standards as may be prescribed by the ICAI from time to 
time including the disclosure requirements prescribed therein. 
Important terms to be remembered: 
1. Grant: Grant means issue of option to the employees under ESOS.  
2. Vest: Vest is to become entitled to receive cash or shares on satisfaction of 
any specified vesting conditions under an employee share-based payment 
plan. 
3. Vesting Conditions: These are the conditions that must be satisfied for the 
employee to become entitled to receive cash or shares pursuant to an 
employee share-based payment plan.  
4. Vesting: It is the process by which the employee is given the right to apply 
for shares of the company against the option granted to him in pursuance of 
employee stock option scheme. 
ESOPs:
Grant of 
options
Vesting of 
options
Exercise 
of options
Allotment 
of shares
Page 4


 
LEARNING OUTCOMES 
  
 
ACCOUNTING FOR 
EMPLOYEE STOCK 
OPTION PLANS 
 
  
 
 
After studying this chapter, you will be able to: 
? Learn the provisions of the Companies Act 2013 regarding 
employees’ stock option. 
? Understand the accounting policies of employees’ stock 
option plan. 
? Learn the accounting treatment of employees’ stock options.   
? Learn the provisions of Guidance Note on Employee Share-
Based Payments. 
  
CHAPTER 
3 
 
 
3.2 
 
ADVANCED ACCOUNTING 
 
 
? Employee Stock Option Plan (ESOP) is an option given to directors, 
officers or permanent employees of a company or of its subsidiary, in 
India or outside India, or of a holding company or associate company of 
the company to purchase or subscribe the securities offered by the 
company at a future date, at a concessional price generally. 
? Employee Stock Option Plans are one of the most important tools to 
attract, encourage and retain employees. It is the mechanism by which 
employees are compensated with increasing equity interests over time. 
? ESOPs can be implemented by direct route or trust route. 
? The company granting options to its employees pursuant to ESOPs will 
have the freedom to determine the exercise price in conformity with the 
applicable accounting policies, if any. 
? There shall be a minimum period of one year between the date of grant 
of option and the date of vesting of the option. 
? As per Accounting Standard AS 20, stock options granted pursuant to an 
employee share-based payment plan, should not be included in the 
shares outstanding till the time employees have exercised their right to 
obtain shares or stock options.  
? ESOPs granted to directors become part of managerial remuneration. 
? Under the Companies Act 2013, there shall be a minimum period of one 
year between grant of options and vesting of options, hence the exercise 
period cannot be less than one year from the date of grant of option. 
? There are two methods of accounting for Employee Share Based 
Payments viz, intrinsic value method or fair value method. 
? For accounting purposes, employee share-based payment plans are 
classified as equity settled, cash settled and plans with cash alternatives. 
 1. EMPLOYEES STOCK OPTION PLAN (ESOP) 
ESOP is a plan under which the Company grants employees stock option. Employee 
Stock Option is a contract that gives the employees of the Company the right, but 
 
 
 
3.3 
 
 ACCOUNTING FOR EMPLOYEE STOCK OPTION 
PLAN 
 
not the obligation, for a specified period of time to purchase or subscribe to the 
shares of the Company at a fixed determinable price. 
Under Section 62 (1) (b) of the Companies Act 2013, where at any time a company 
having a share capital proposes to increase its subscribed capital by the issue of 
further shares, such shares may be offered to employees under a scheme of 
employees’ stock option, subject to a special resolution passed by the company 
and subject to such conditions as may be prescribed.  
Earlier Securities and Exchange Board of India (SEBI) issued Employees Stock Option 
Scheme and Employee Stock Purchase Scheme Guidelines (applicable for listed 
companies) in 1999 under section 11 of the Securities and Exchange Board of India 
Act, 1992. This guideline has now been replaced by the SEBI (Share Based Employee 
Benefits) Regulations, 2014 (applicable for listed companies). It covers the 
provisions regarding accounting policies, pricing, disclosures, administration and 
implementation process of various schemes and other issues relating to Employee 
Stock Option Scheme (ESOS), Employee Stock Purchase Scheme (ESPS), Stock 
Appreciation Rights Scheme (SRS), General Employee Benefits Scheme (GEBS) and 
Retirement Benefit Scheme (RBS).  The Regulation stipulate to follow the 
requirements of the ‘Guidance Note on Accounting for Employee Share Based 
Payments or Accounting Standards as may be prescribed by the ICAI from time to 
time including the disclosure requirements prescribed therein. 
Important terms to be remembered: 
1. Grant: Grant means issue of option to the employees under ESOS.  
2. Vest: Vest is to become entitled to receive cash or shares on satisfaction of 
any specified vesting conditions under an employee share-based payment 
plan. 
3. Vesting Conditions: These are the conditions that must be satisfied for the 
employee to become entitled to receive cash or shares pursuant to an 
employee share-based payment plan.  
4. Vesting: It is the process by which the employee is given the right to apply 
for shares of the company against the option granted to him in pursuance of 
employee stock option scheme. 
ESOPs:
Grant of 
options
Vesting of 
options
Exercise 
of options
Allotment 
of shares
 
 
3.4 
 
ADVANCED ACCOUNTING 
 
5. Vesting Period: It is the time period between grant date and the date on 
which all the specified vesting conditions of an employee share-based 
payment plan is to be satisfied. 
6. Option: Option means a right but not an obligation granted to an employee 
for a specified period of time in pursuance of ESOS to purchase or subscribe 
to the shares of the company at a pre-determined price. 
7. Exercise: It means making of an application by the employee to the 
enterprise for issue of shares against the option vested in him/her in 
pursuance of the Employee Stock Option Plan. 
8. Exercise Period: It is the time period after vesting within which the employee 
should exercise his right to apply for shares against the option vested in him 
in pursuance of the ESOS. 
9. Exercise Price: It is the price payable by the employee for exercising the 
option granted to him in pursuance of ESOS.   
10. Expected Life of an Option: It is the period of time from grant date to the 
date on which an option is expected to be exercised. 
11. Grant Date: It is the date at which the enterprise and its employees agree to 
the terms of an employee share-based payment plan. At grant date, the 
enterprise confers on the employees the right to cash or shares of the 
enterprise, provided the specified vesting conditions, if any, are met. If that 
agreement is subject to an approval process, (for example, by shareholders), 
grant date is the date when that approval is obtained. 
12. Intrinsic Value: It is the excess of the market price of the share under ESOS 
over the exercise price of the option (including up-front payment, if any). 
13. Fair Value: It is the amount for which stock option granted or a share offered 
for purchase could be exchanged between knowledgeable, willing parties in 
an arm’s length transaction. 
14. Reload Feature: It is a feature that provides for an automatic grant of 
additional stock options whenever the option holder exercises previously 
granted options using the shares of the enterprise, rather than cash, to satisfy 
the exercise price. 
15. Reload Option: It is a new stock option granted when a share of the 
enterprise is used to satisfy the exercise price of a previous stock option. 
Page 5


 
LEARNING OUTCOMES 
  
 
ACCOUNTING FOR 
EMPLOYEE STOCK 
OPTION PLANS 
 
  
 
 
After studying this chapter, you will be able to: 
? Learn the provisions of the Companies Act 2013 regarding 
employees’ stock option. 
? Understand the accounting policies of employees’ stock 
option plan. 
? Learn the accounting treatment of employees’ stock options.   
? Learn the provisions of Guidance Note on Employee Share-
Based Payments. 
  
CHAPTER 
3 
 
 
3.2 
 
ADVANCED ACCOUNTING 
 
 
? Employee Stock Option Plan (ESOP) is an option given to directors, 
officers or permanent employees of a company or of its subsidiary, in 
India or outside India, or of a holding company or associate company of 
the company to purchase or subscribe the securities offered by the 
company at a future date, at a concessional price generally. 
? Employee Stock Option Plans are one of the most important tools to 
attract, encourage and retain employees. It is the mechanism by which 
employees are compensated with increasing equity interests over time. 
? ESOPs can be implemented by direct route or trust route. 
? The company granting options to its employees pursuant to ESOPs will 
have the freedom to determine the exercise price in conformity with the 
applicable accounting policies, if any. 
? There shall be a minimum period of one year between the date of grant 
of option and the date of vesting of the option. 
? As per Accounting Standard AS 20, stock options granted pursuant to an 
employee share-based payment plan, should not be included in the 
shares outstanding till the time employees have exercised their right to 
obtain shares or stock options.  
? ESOPs granted to directors become part of managerial remuneration. 
? Under the Companies Act 2013, there shall be a minimum period of one 
year between grant of options and vesting of options, hence the exercise 
period cannot be less than one year from the date of grant of option. 
? There are two methods of accounting for Employee Share Based 
Payments viz, intrinsic value method or fair value method. 
? For accounting purposes, employee share-based payment plans are 
classified as equity settled, cash settled and plans with cash alternatives. 
 1. EMPLOYEES STOCK OPTION PLAN (ESOP) 
ESOP is a plan under which the Company grants employees stock option. Employee 
Stock Option is a contract that gives the employees of the Company the right, but 
 
 
 
3.3 
 
 ACCOUNTING FOR EMPLOYEE STOCK OPTION 
PLAN 
 
not the obligation, for a specified period of time to purchase or subscribe to the 
shares of the Company at a fixed determinable price. 
Under Section 62 (1) (b) of the Companies Act 2013, where at any time a company 
having a share capital proposes to increase its subscribed capital by the issue of 
further shares, such shares may be offered to employees under a scheme of 
employees’ stock option, subject to a special resolution passed by the company 
and subject to such conditions as may be prescribed.  
Earlier Securities and Exchange Board of India (SEBI) issued Employees Stock Option 
Scheme and Employee Stock Purchase Scheme Guidelines (applicable for listed 
companies) in 1999 under section 11 of the Securities and Exchange Board of India 
Act, 1992. This guideline has now been replaced by the SEBI (Share Based Employee 
Benefits) Regulations, 2014 (applicable for listed companies). It covers the 
provisions regarding accounting policies, pricing, disclosures, administration and 
implementation process of various schemes and other issues relating to Employee 
Stock Option Scheme (ESOS), Employee Stock Purchase Scheme (ESPS), Stock 
Appreciation Rights Scheme (SRS), General Employee Benefits Scheme (GEBS) and 
Retirement Benefit Scheme (RBS).  The Regulation stipulate to follow the 
requirements of the ‘Guidance Note on Accounting for Employee Share Based 
Payments or Accounting Standards as may be prescribed by the ICAI from time to 
time including the disclosure requirements prescribed therein. 
Important terms to be remembered: 
1. Grant: Grant means issue of option to the employees under ESOS.  
2. Vest: Vest is to become entitled to receive cash or shares on satisfaction of 
any specified vesting conditions under an employee share-based payment 
plan. 
3. Vesting Conditions: These are the conditions that must be satisfied for the 
employee to become entitled to receive cash or shares pursuant to an 
employee share-based payment plan.  
4. Vesting: It is the process by which the employee is given the right to apply 
for shares of the company against the option granted to him in pursuance of 
employee stock option scheme. 
ESOPs:
Grant of 
options
Vesting of 
options
Exercise 
of options
Allotment 
of shares
 
 
3.4 
 
ADVANCED ACCOUNTING 
 
5. Vesting Period: It is the time period between grant date and the date on 
which all the specified vesting conditions of an employee share-based 
payment plan is to be satisfied. 
6. Option: Option means a right but not an obligation granted to an employee 
for a specified period of time in pursuance of ESOS to purchase or subscribe 
to the shares of the company at a pre-determined price. 
7. Exercise: It means making of an application by the employee to the 
enterprise for issue of shares against the option vested in him/her in 
pursuance of the Employee Stock Option Plan. 
8. Exercise Period: It is the time period after vesting within which the employee 
should exercise his right to apply for shares against the option vested in him 
in pursuance of the ESOS. 
9. Exercise Price: It is the price payable by the employee for exercising the 
option granted to him in pursuance of ESOS.   
10. Expected Life of an Option: It is the period of time from grant date to the 
date on which an option is expected to be exercised. 
11. Grant Date: It is the date at which the enterprise and its employees agree to 
the terms of an employee share-based payment plan. At grant date, the 
enterprise confers on the employees the right to cash or shares of the 
enterprise, provided the specified vesting conditions, if any, are met. If that 
agreement is subject to an approval process, (for example, by shareholders), 
grant date is the date when that approval is obtained. 
12. Intrinsic Value: It is the excess of the market price of the share under ESOS 
over the exercise price of the option (including up-front payment, if any). 
13. Fair Value: It is the amount for which stock option granted or a share offered 
for purchase could be exchanged between knowledgeable, willing parties in 
an arm’s length transaction. 
14. Reload Feature: It is a feature that provides for an automatic grant of 
additional stock options whenever the option holder exercises previously 
granted options using the shares of the enterprise, rather than cash, to satisfy 
the exercise price. 
15. Reload Option: It is a new stock option granted when a share of the 
enterprise is used to satisfy the exercise price of a previous stock option. 
 
 
3.5 
 
 ACCOUNTING FOR EMPLOYEE STOCK OPTION 
PLAN 
 
16. Employee Stock Option Plan: It is a plan under which the enterprise grants 
Employee Stock Options. 
17. Employee Stock Option: It is a contract that gives the employees of the 
enterprise the right, but not the obligation, for a specified period of time to 
purchase or subscribe to the shares of the enterprise at a fixed or 
determinable price. 
18. Equity: It is the residual interest in the assets of an enterprise after deducting 
all its liabilities. 
Why ESOPs 
? Link personal wealth creation to organizational creation 
? Attract, reward, motivate and retain talent at the start-up/growth stage 
? Deferred compensation strategy 
? Good retirement benefit plan 
? Reduction in cash costs – market pays not the Company 
? Can be especially important for start-up Companies that are cash starved 
? Promote employee ownership culture 
? Helpful tool in cash crunch – In case of economic slow-down where companies 
are low at cash, they can motivate employee by offering ESOPs. 
What Company sees while granting ESOPs to employees 
? Loyalty, Performance and Designation 
? Present and Potential Contribution 
? Opportunity Cost 
1.1 Provisions of Guidance Note on Employee Share-Based Payments 
The Guidance Note on Accounting for Employee Share-based Payments establishes 
financial accounting and reporting principles for employee share-based payment 
plans, viz., employee stock option plans, employee stock purchase plans and stock 
appreciation rights. For the purposes of this Guidance Note, the term 'employee' 
includes a director of the enterprise, whether whole time or not.