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ESOP's Taxation and Accounting in India

Mohit Dasarda 
on 19 February 2020


This is my approach to explain the ESOPs Accounting, Taxation & Compliance in simpler terms.

Ind AS (Accounting)

The accounting for ESOP is dealt by Ind AS 102, Share-based Payment. First we need to understand terminology used in ESOP, which are as follow:

Grant: Grant means issue of options to employees under ESOP.

Exercise: It is the act of an application being made by the Employee to the Company to have the Options vested in him issued as Shares upon payment of the Exercise Price. Exercise can take place as specified after Vesting.

Exercise Period: The period from the date of vesting of options till the date the options can be exercised. On the expiry of the Exercise Period, any Options that have not been exercised will lapse and cease to be valid for any purpose.

Exercise Price: The amount to be paid by an employee at the time of Exercise of his option. This price is determined at the time of grant and remains constant over the term of the option.

Market price: Market price of a share on a given date means the closing price of the shares on that date on the stock exchange on which the shares of the company are listed.

Option: Option means a stock option granted pursuant to the Plan, comprising of a right but not an obligation granted to an Employee under the Plan to apply for and be allotted Shares of the Company at the Exercise Price determined earlier, during or within the Exercise Period, subject to the requirements of Vesting.

Vesting: Vesting means the process by which the employee gains full rights to the options granted to him in pursuance of ESOP.

Vesting period: The period during which the vesting of the option granted to the employee in pursuance of ESOP takes place.

Amortization: An accounting procedure that gradually reduces the cost or value of an asset through periodic charges against income.

Let's take the example

    

Grant Date

01-02-2020

Vesting Date

01-03-2023

Vesting Period (in Years)

3.083 Years

Market Price on Grant Date

Rs. 148

Face Value

Rs. 1

Exercise Price

Rs. 60

Option Value-Black Scholes Model

Rs. 95.89

No Of Shares Vested

Rs. 2500

No. of Employees to whom shares option granted

Rs. 100

In first year management will identify approximate No. of Employees will leave the organisation so as to identify the amount to be amortized over vesting period. Each year company will revise the estimation of employee leaving the organisation and amortizing prospectively based on revised assumption.

Year 1

No. of Employees left the Job is 2

Approximate No of employee will leave the organization is 10 each year from 31/03/2020

Approximate No. of employees at the end of 31/03/2023 to whom share will vest =100-2-10-10-10=68

Calculation of Employee Benefit Expenses during the year:

    

Date

Cumulative Expense (Rs.)

Expense to be recognized during year (Rs.)

31-Mar-2020

8,81,151

2500*95.89*68*.167/3.083

8,81,151

No. of Shares* Option price*Approximate No. of employees to whom shares will vest

Journal Entry for Above Example:

    

Date

Particulars

Amount (Rs.)

01-03-2020

Employee compensation expense account Dr.

8,81,151

To Share Based Payment Reserve A/c

8,81,151

(Being grant of 2500 options to employees worth Rs. 95.89 amortized on straight line basis over 3.08 years)

NOTE:

  1. Employee compensation expense account is transferred to Employee Benefit Expenses account.
  2. Share Based Payment Reserve is disclosed in Statement of Change in equity.

Year 2

No. of Employees left the Job till date are 2+9

Approximate No. of employees at the end of 31/03/2023 to whom share will vest =98-9-10-10=69

Calculation of Employee Benefit Expenses during the year:

    

Date

Cumulative Expense (Rs.)

Expense to be recognized during year (Rs.)

31-Mar-20

8,81,151

2500*95.89*68*.167/3.083

8,81,151

31-Mar-21

62,58,766

2500*95.89*69*1.167/3.083

53,77,615

(62,58,766-8,81,151)

Journal Entry

    

Date

Particulars

Amount (Rs.)

31-03-2021

Employee compensation expense account Dr.

53,77,615

To Share Based Payment Reserve A/c

53,77,615

(Being grant of 2500 options to employees worth Rs. 95.89 amortized on straight line basis over 3.08 years)

No. of Employees left the Job till date are 2+9+12

Year 3

Approximate No. of employees at the end of 31/03/2023 to whom share will vest =89-12-10=67

    

Date

Cumulative Expense (Rs.)

Expense to be recognized during year (Rs.)

31-Mar-20

8,81,151

2500*95.89*68*.167/3.083

8,81,151

31-Mar-21

62,58,766

2500*95.89*69*1.167/3.083

53,77,615

31-Mar-22

1,12,86,512

2500*95.89*67*2.167/3.083

50,27,746

(1,12,86,512-62,58,766)

Journal Entry

    

Date

Journal Entry

Particulars

Amount (Rs.)

31-03-2022

Employee compensation expense account Dr.

50,27,746

To Share Based Payment Reserve A/c

50,27,746

(Being grant of 2500 options to employees worth Rs. 95.89 amortized on straight line basis over 3.08 years)

Year 4

No. of Employees left the Job till date are 2+9+12+12

No. of employees at the end of 31/03/2023 to whom share will vest =65

    

Date

Cumulative Expense (Rs.)

Expense to be recognized during year (Rs.)

31-Mar-20

8,81,151

2500*95.89*68*.167/3.083

8,81,151

31-Mar-21

62,58,766

2500*95.89*69*1.167/3.083

53,77,615

31-Mar-22

1,12,86,512

2500*95.89*67*2.167/3.083

50,27,746

01-Mar-23

1,55,82,125

2500*95.89*65*3.083/3.083

42,95,613

(1,55,82,125-1,12,86,512)

    

Date

Particulars

Amount (Rs.)

01-03-2023

Employee compensation expense account Dr.

42,95,613

To Share Based Payment Reserve A/c

42,95,613

(Being grant of 2500 options to employees worth Rs. 95.89 amortized on straight line basis over 3.08 years)

Journal Entry for Allotment of Shares

    

31/08/2023 or Earlier date on which shares exercised

Options exercised 60 Employees

Bank A/c Dr. (2500*60*60)

90,00,000

Share Based Payment Reserve A/c (15582125*60/65)

1,43,83,500

To Share Capital A/c (2500*1*60)

1,50,000

To Share Premium A/c (Bal. Fig.)

2,32,33,500

(Being Allotment of Shares)

Journal Entry for Payment of Tax on Perquisites

Employee Benefit Expenses A/c Dr.

XXX

To Bank A/c

XXX

(Being Tax paid on perquisites on behalf of employee)

Journal Entry for Transferring Balance in Share Based Payment Reserve to General Reserve

    

Options not exercised by 5 Employees

31-08-2023

Share Based Payment Reserve A/c

11,98,625

To General Reserve

11,98,625

Sometimes there is a situation where holding company issue shares to the Employees of subsidiary company the above entries will change every year, where both the holding and subsidiary need to record journal entry as follow:

Journal Entry in books of Holding Company

    

Date

Particulars

Amount (Rs.)

01-03-2020

Investment in Subsidiary Dr.

8,81,151

To Share Based Payment Reserve A/c

8,81,151

(Being grant of 2500 options to employees of Subsidiary company worth Rs. 95.89 amortized on straight line basis over 3.08 years)

Journal Entry in books of Subsidiary Company)

    

Date

Particulars

Amount (Rs.)

01-03-2020

Employee compensation expense account Dr.

8,81,151

To Equity (Statement of Change in Equity) A/c

8,81,151

(Being grant of 2500 options to employees by holding company worth Rs. 95.89 amortized on straight line basis over 3.08 years)


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