Commerce

Lecture No.- 01
- For CA Intermediate

Subject Name
Advanced Accounts

• Employee Stock Option Plan

(ESOP)
Nitin Goel
 EMPLOYEE STOCK OPTION PLAN
Employee Share based payments
[Sec. 62 of Company’s Act 2013,
Guidance Note on Accounting for Share based Payments]

Equity Settled Share Based Cash Settled Share Based Share Based payment
payment transactions payment transactions transactions with cash
E.g. ESOP E.g. Stock Appreciation alternatives
Rights
Whenever employees are allowed compensation in form of shares or based on shares then benefits arising
from such shares are called share based payment.
Employee share-based payment plans can be classified into the following three categories:
❖ Equity-settled share-based payment transactions: Under these plans, the employees receive shares,
e.g. ESOP
❖ Cash-settled share-based payment transactions: Under these plans, the employees receive cash
based on the price (or value) of the enterprise’s shares, e.g. Stock Appreciation Rights (SAR)
❖ Share-based payment transactions with cash alternatives: Where an entity has a choice of issuing
shares or paying cash.

Equity Settled Share Based Payment Transactions (ESOP)

A. Employee Stock Option Plan
It is a plan under which the enterprise grants employee stock option. Employee stock option is contract
that gives the employees of an enterprise the right but not the obligation for a specified period of time to
purchase or subscribe the shares of the company at a fixed or determinable price which is generally lower
than the prevailing market price of its share.
➢ Journal Entries
➢ AT THE END OF EACH ACCOUNTING PERIOD DURING VESTING PERIOD

1) Employee Compensation Expense A/c Dr.

To Employee Stock Option Outstanding A/c
2) Profit & Loss A/c Dr.
To Employee Compensation Expense A/c

Calculation of Expense:

(No. of Options expected to vest X Fair value of option) X Expired Period XX

Vesting Period
Less: Expense Recorded till last year (XX)
Expense for the Current Year XX

Note: Methods
1) Intrinsic Value Method: Expense per Option = Relevant Market Price – Exercise Price
2) Fair Value Method: Expense per Option is Fair value of option which is already given.
➢ AT THE TIME OF EXERCISE

Bank A/c Dr.

Employee Stock Option Outstanding A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c

➢ AT THE TIME OF CANCELLATION

Employee Stock Option Outstanding A/c Dr.

To General Reserve A/c
Question Inter Nov 2020 (10 Marks)
Sun Ltd. grants 100 stock options to each of its 1200 employees on 01.04.2018 for ₹ 30, 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 ₹ 60 each. These options will vest at the end of the year 1 if the earning
of Sun Ltd. is 16% or it will vest at the end of 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 is 10%. 6000 unvested options
lapsed on 31.3.2019, 5000 unvested options lapsed on 31.03.2020 and finally 4000 unvested options
lapsed on 31.03.2021.
The earnings of Sun Ltd. for the three financial years ended on 31st March, 2019, 2020 and 2021 are
15%, 10% and 6%, respectively. 1000 employees exercised their vested options within a year and
remaining options were unexercised at the end of the contractual life.
You are requested to give the necessary journal entries for the above and prepare the statement showing
compensation expenses to be recognized at the end of each year.

Solution
Journal Entries
Date Particulars ₹ ₹
Employees Compensation Expense A/c Dr. 17,10,000
To Employee Stock Option outstanding A/c 17,10,000
(Being compensation expense recognized in respect of the
31.3.2019
ESOP i.e. 100 options each granted to 1,200 employees at a
discount of ₹ 30 each, amortised on straight line basis over
vesting years (Refer W.N.)
Profit and Loss A/c Dr. 17,10,000
31.3.2019 To Employees compensation expenses A/c 17,10,000
(Being expenses transferred to profit and Loss A/c)
Employees compensation expenses A/c Dr. 4,70,000
To Employee Stock Option outstanding A/c 4,70,000
31.3.2020
(Being compensation expense recognized in respect of the
ESOP- Refer W.N.)
Profit and Loss A/c Dr. 4,70,000
31.3.2020 To Employees compensation expenses A/c 4,70,000
(Being expenses transferred to profit and Loss A/c)
Employees compensation Expenses A/c Dr. 9,70,000
To Employee Stock Option outstanding A/c 9,70,000
31.3.2021
(Being compensation expense recognized in respect of the
ESOP- Refer W.N.)
Profit and Loss A/c 9,70,000
31.3.2021 To Employees compensation expenses A/c 9,70,000
(Being expenses transferred to profit and Loss A/c)
Bank A/c (1,00,000 x 30) Dr. 30,00,000
Employee Stock Option outstanding A/c Dr. 30,00,000
[(31,50,000 x 1,00,000/ 1,05,000]
2021-22 To Equity share capital (1,00,000 x 10) 10,00,000
To Securities premium A/c [ (1,00,000 x (60-10)] 50,00,000
(Being 1,05,000 options exercised at an exercise price of ₹ 30
each)
Employee Stock Option outstanding A/c Dr. 1,50,000
To General Reserve A/c 1,50,000
31.3.2022 (Being Employee Stock Option outstanding A/c on lapse of
5,000 options at the end of exercise of option period
transferred to General Reserve A/c)
Working Note:
Statement showing compensation expense to be recognized at the end of:
Particulars Year 1 Year 2 Year 3
2018-19 2019-20 2020-21
Number of options expected to vest* 1,14,000 options 1,09,000 options 1,05,000 options
Total compensation expense accrued
₹ 34,20,000 ₹ 32,70,000 ₹ 31,50,000
(60-30)
Compensation expense of the year 34,20,000 x 1/2 = ₹ 32,70,000 x 2/3 = ₹
₹ 31,50,000
17,10,000 21,80,000
Compensation expense recognized
Nil ₹ 17,10,000 ₹ 21,80,000
previously
Compensation expenses to be
₹ 17,10,000 ₹ 4,70,000 ₹ 9,70,000
recognized for the year
Question Inter Jan 2021 (5 Marks)
Raja Ltd. has its share capital divided into equity shares of ₹ 10 each. On 01-08-2020, it granted 2,500
employees stock options at ₹ 50 per share, when the market price was ₹ 140 per share. The options were
to be exercised between 1-08-2020 to 31-03-2021. The employees exercised their options for 2,400 shares
only and the remaining options lapsed. Raja Ltd. closes its books of accounts on 31st March, every year.
You are to required to pass the necessary Journal Entries (including narration) for the year ended 31-03-
2021, with regard to employees' stock options and give working notes also.

Solution
Journal Entries
Date Particulars L.F. Dr. Cr.
Bank A/c (2,400*50) Dr. 1,20,000
Employee Compensation Expense A/c (2,400*90) Dr. 2,16,000
01.08.20
To Equity Share Capital A/c (2,400*10) 24,000
to
To Securities Premium A/c (2,400*130) 3,12,000
31.03.21
(Being shares issued to the employees against the options
vested to them in pursuance of ESOP)
31.03.21 Profit & Loss A/c Dr. 2,16,000
To Employee Compensation Expense A/c 2,16,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)

Working Note:
1. No entry is passed when stock options are granted to employees. Hence, no entry will be passed on 1st
August 2020;
2. Market Price = ₹ 140 per share and stock option price = ₹ 50, Hence, the difference ₹ 140 – ₹ 50 = ₹
90 per share is equivalent to employee cost or employee compensation expense and will be charged to
P &L Account as such for the number of options exercised i.e. 2,400 shares.
Question Inter Nov 2019 (5 Marks) / RTP Nov 2021
On 1st April, 2020, XYZ Ltd., offered 150 shares to each of its 750 employees at ₹ 60 per share. The
employees are given a year to accept the offer. The shares issued under the plan shall be subject to lock-in
period on transfer for three years from the grant date. The market price of shares of the company on the
grant date is ₹ 72 per share. Due to postvesting restrictions on transfer, the fair value of shares issued
under the plan is estimated at ₹ 67 per share.
On 31st March, 2021, 600 employees accepted the offer and paid ₹ 60 per share purchased. Nominal
value of each share is ₹ 10.
You are required to record the issue of shares in the books of the XYZ Ltd., under the aforesaid plan.

Solution
Journal Entries
Date Particulars L.F. Dr. Cr.
31.03.21 Bank A/c (90000*60) Dr. 54,00,000
Employee Compensation Expense A/c Dr. 6,30,000
To Equity Share Capital A/c (90000*10) 9,00,000
To Securities Premium A/c (90000*57) 51,30,000
(Being shares issued to the employees against the
options vested to them in pursuance of Employee Stock
Option Plan)
31.03.21 Profit & Loss A/c Dr. 6,30,000
To Employee Compensation Expense A/c 6,30,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)

Working Note:
Fair value of an option = ₹ 67 – ₹ 60 = ₹ 7
Number of shares issued = 600 employees x 150 shares/employee = 90,000 shares
Fair value of ESOP which will be recognized as expenses in year 2020-21= 90,000 shares x 7 = 6,30,000
Vesting period = 1 year
Expenses recognized in 2020-2021 = ₹ 6,30,000