19 Accounting for Employee Stock Option Plans.PDF

Chapter Accounting for Employee Stock Option Plans INTRODUCTION 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...

Chapter Accounting for Employee Stock Option Plans INTRODUCTION 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. Employee Stock Option Plan (ESOP) is an option given to directors, officers or permanent employees of a company to purchase or subscribe the securities offered by the company at a future date, at a concessional price generally. Illustration 1 A Company has its share capital divided into shares of 10 each. On 1st April, 2020 it granted 10,000 employee’s stock options at 40, when the market price was 130. The options were to be exercised between 15th March, 2021 and 31st March, 2021. The employees exercised their options for 9,500 shares only; the remaining options lapsed. The company closes its books on 31st March every year. Show Journal Entries. Date Particulars Dr. Cr. ` ` 31st March Bank A/c (9,500 x 40) Dr. 3,80,000 2021 Employee compensation expense A/c [9,500 x (130-40) Dr. 8,55,000 95,000 To Equity share capital A/c (9,500 x 10) 11,40,000 To Securities premium A/c [9,500 x (130-10)] (Being allotment to employees of 9,500 equity shares of 10 each at a premium of 120 per share in exercise of stock options by employees) 31st Profit and Loss A/c Dr. 8,55,000 March To Employee compensation expense A/c 8,55,000 2021 (Being transfer of employee compensation expense to profit and loss account) Prepared by: Raman Luthra Chartered Accountant Important terms to be remembered 1. Grant: Grant means issue of option to the employees under ESOS. 2. 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. 3. 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 are to be satisfied. 4. 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. 5. 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. 6. Exercise Price: It is the price payable by the employee for exercising the option granted to him in pursuance of ESOS. 7. 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). 8. 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. Note: (i) There shall be a minimum period of one year between the date of grant of option and the date of vesting of the option. [SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021] & [Companies Act 2013] Methods of accounting for Employee Share Based Payments Methods of accounting for Employee Share Based Payments Intrinsic value method Fair value method Prepared by: Raman Luthra Chartered Accountant Employee share-based payment plans are classified into the following categories Employee share-based payment plans Employee share-based payment Equity-settled Cash-settled plans with cash alternatives Equity-settled: Under these plans, the employees receive shares. Cash-settled: Under these plans, the employees receive cash based on the price (or value) of the enterprise's shares. Employee share-based payment plans with cash alternatives: Under these plans, either the enterprise or the employee has a choice of whether the enterprise settles the payment in cash or by issue of shares. Vesting Conditions. A grant of shares or share options to an employee is typically conditional on the employee remaining in the entity’s employment for a specified period of time. There might be performance conditions that must be satisfied, such as the entity achieving a specified growth in profit or a specified increase in the entity’s share price. Illustration 2 P Ltd. granted option for 8,000 equity shares of nominal value of 10 on 1st April, 2017 at 80 when the market price was 170. The vesting period is 3 years, 3,000 unvested options lapsed on 1st December, 2018, 4,000 options were exercised on 30th September, 2020 and 1,000 vested options lapsed at the end of the exercise period 31.03.2021 Answer: Fair value = 170 – 80 = 90 Expense for Cumulative Year Calculation Period expense ` ` 2017-18 8000 options x 90 x 1/3 years 2,40,000 2,40,000 2018-19 5000 options x 90 x 2/3 years 60,000 3,00,000 2019-20 5000 options x 90 x 3/3 years 1,50,000 4,50,000 Prepared by: Raman Luthra Chartered Accountant Expenses charged on lapsed vested options transferred to general reserve FY 20-21 = 1,000 x 90 = 90,000 Illustration 3 Choice Ltd. grants 100 stock options to each of its 1,000 employees on 1.4.2017 for 20, depending upon the employees at the time of vesting of options. Options would be exercisable within a year it is vested. The market price of the share is 50 each. These options will vest at the end of year 1 if the earning of Choice Ltd. is 16%, or it will vest at the end of the year 2 if the average earning of two years is 13%, or lastly it will vest at the end of the third year if the average earning of 3 years will be 10%. 5,000 unvested options lapsed on 31.3.2018. 4,000 unvested options lapsed on 31.3.2019 and finally 3,500 unvested options lapsed on 31.3.2020. Following is the earning of Choice Ltd: Year ended on Earning (in %) 31.3.20X2 14% 31.3.20X3 10% 31.3.20X4 7% 850 employees exercised their vested options within a year and remaining optionswere unexercised at the end of the contractual life. Calculate the expense to be recognized in FY 2017-18, 2018-19, 2019-20 and 2020-21 Answer: Year 1 Year 2 Year 3 Year 4 Particulars (31.3.2018) (31.3.2019) (31.3.2020) (31.3.2021) Number of options expected to 95,000 options 91,000 options 87,500 options 85,000 options vest Total compensation expense 28,50,000 27,30,000 26,25,000 25,50,000 Compensation expense of the 28,50,000 x 1/2 27,30,000 x 2/3 26,25,000 25,50,000 year =14,25,000 =18,20,000 Compensation expense Nil 14,25,000 18,20,000 26,25,000 recognized previously (75,000) Compensation expenses to be 14,25,000 3,95,000 8,05,000 Transfer to recognized for the year General Reserve Prepared by: Raman Luthra Chartered Accountant