Employee Stock Option

3
Scheme/Plan
(Employees Stock Option Scheme(ESOS) )
According to Section 2(37)of the Companies Act, 2013, "employees' stock option" means the option given
to the directors, officers or employeesof a company or of its holding company or subsidiary company
or
or employees, the benefit or right to purchase, or to
companies, if any,which gives such directors, officers

subscribe for, the shares of the company at a future date at a pre-determined price.

software companies and construction engi

Nowadays, under this scheme many companies (particularly
employees at a concessional price. The main aim of
this
neering companies)are offering equity shares to their
in the affairs of the company.
scheme is to retain good employees in the organisation and involve them
Option Scheme) the employee's gain is the difference betweenmarket
Under an ESOS (Employee Stock
the market price of share of X Ltd. is 1,000 but under
price of theshares and exercise price. For example,
400 (R 1,000 - 600).
ESOS an employee can get it at 600 (the exercise price). The gain option. Let us assume that the number
per option is

will lose 400 for each

It should be pointed out that the enterprise

of employees are 1,000. Therefore, the total loss

will be400 x 1,000=4,00,000.

one 4,00,000 be recognised as expenses in that year. If the

(
year, the entire will
If the vesting period is

2 years, the amount to be recognised in each year is

2,00,000 4,00,000 +2)assuming that
vesting period is
during these two years.
no employee left the enterprise companies
It should be noted that the regulation relatedto ESOS for listed companiesand other than listed

are separate.
to a company, other
Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 is applicable
than a listed company.
is applicable to listed companies in India.
The SEBI Regulations (Share Based Employee Benefits), 2014
3.2 Employee Stock Option Scheme / Plan

The Companies (Share Capital and Debentures) Rules, 2014

Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 states that :
A company, other than a listed company,which is not required to comply with Securities and Exchan
Board of ndia Employee Stock Option Scheme Guidelines shall not offer shares to its employees under

scheme of employees' stock option (hereinafterreferred to as "EmployeesStock Option Scheme'"), unlesS

complies with the following requirements, namely:

() the issue of EmployeesStock Option Scheme has been approved by the shareholders ofthe compan
by passing a special resolution.
For the purpose of this rule "Employee" means:
(a) apermanent employeeof the company who has been working in India or outside India; or
(b) a director of the company,whether a whole time director or not but excluding an independent
director;or
(c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a

holding company ofthe company or of an associate company but does not include
) an employee who is a promoter or a person belonging to the promoter group; or
(i)a director who either himself or through his relative or through any body corporate, directy
or indirectly, holds more than ten percent of the outstanding equity shares of thecompany.
(2) The company shall make the following disclosures in the explanatory statement annexed to the notice
for passing of the resolution
(a) the total number ofstock options to be granted;
(6) identification of classes of employees entitled to participate in the Employees Stock Option
Scheme;
() the appraisal process for determining the eligibility of employees to the Employees Stock Option
Scheme;
() the requirements of vesting and period of vesting;
(e) the maximum period within which the options shall be vested;

)
() the exercise price or the formula

)
the
the method which
for arriving at the
(g) the exercise period and process of exercise;
(h) the Lock-in period, if

maximum number of options

the
any;

company
to

shall
same; noig0 oote coavolama

be granted per employee and in aggregate;

use to value its options;

)
(k) the conditions under which option vested in employees
employment for misconduct;
the specified time period within which the employeeshall
ofa proposed of employmentor resignation of employee; and
termination
may lapse e.g. in case

exercise the vested options

(m) a statement to the effect that the company shall complywith the applicable accounting standards.
of termination of

in the event

(3) The companies granting option to its employees pursuant to Employes Stock Option Scheme will
have the freedom to determine the exercise price in conformity with the applicable accounting
policies, if any

(4) The approval ofshareholders by way ofseparate resolution shall be obtained by the company in case
of

(a) grant ofoption to employees of subsidiary or holding company; or

(9) )
(b) grant ofoption
of the issued
of grant of option.
to

capital
identified employees, during any one year, equal to or exceeding one percent
(excluding outstanding warrants and conversions) of the company at the time

The company may by special resolution,vary the terms of EmployeesStockOption Schemenot

yet exercised
option holders.
by the employeesprovided such variation is not prejudicial to the interests of the
 3.7
Corporate Accounting

Rights of the Option Holder

The employee shall not have right to receive any dividend or to vote or in any manner enjoy the benefits of a
shareholder in respect of option granted to him, till shares are issued upon exercise of option.

Consequence of Failure to Exercise Option

The amount payable by the employee,if any,at the time ofgrant ofoption, -
may be forfeited by the company if the option is not exercised by the employee
within the exercise
(a)
period; or
the employee if the options are not vested due to non-fulfilment of conditions
(b) may be refunded to

relating to vesting of option as per the ESOS.

Accounting Treatment of Employee Stock Option

chapter, the accounting treatments
now, no accounting standard has been issued in this respect. In this
all
Till

Account forEmployee Share-based payments' issued by the Institute of

are based upon 'GuidanceNote on
the guidance note in full for better understanding of
Chartered Accountants of India. The students
should read
Therefore, only fundamental matters/ concepts have
the topic. The scope for discussion in details are
limited.

been discussed here.

of option as expense over vesting period. The value of option
is
An enterprise should recognise the value
based upon intrinsic value/fair value per share on the grant date. price.
price of the share under ESOS over the exercise
The intrinsic value means the excess of the market 100. The intrinsic value
250 and exercise price is
For example, the market price of each share of A Ltd.
is

upon the number of options granted by the

of option is 150 per share. The total value of option will depend
ofA Ltd. is 500 and all are eligible for Employee
enterprise. Let us assume that the number of employees
of the total value
of options x 500 =*75,000.The recognition
=150
Stock Option'. Therefore, the total value termination of
period and other facts like resignation
by employees,
of options depending upon the vesting
the vesting period.
service ofthe employees, etc., during
offered for purchase could be
The fair value is the amount for which stock option granted or a share
length transaction.
willing parties in an arm's
exchanged between knowledgeable,

Illustration 1
lst April, 2013
Date of grant ofoption
(i)
3 years
(ii)Vesting period 1.250 shares
(ii)Number ofoptions granted 200 per share
(iv)Market price of
the share
ot 80 per share
(v) Exercise price 7 10
(v) Nominal value 1 year
(v) Exercise period
number of employees
the during the vesting period.
Assume that there was no change in
as expense in each year.
You are required to calculate the amount to be recognised

Solution
(i) Intrinsic value of each option : 200
Market price
80
Less: Exercise price
120

(ii) Total value of options = 120 x 1,250 = 1,50,000.

be as an expense 1,50,000 +3 =50,000.

Each year (2013-14; 2014-15; 2015-16) amount
to recognised
(iii)

Allernatively,
an accounting period can be calculated as follows:
The value of options to be recognised as an expense in

F.Y. 2013-14
D0SS
() Total value of option = 1,50,000 CHDHAN VAISHN
AV

MLE
OsSo0
LIBRARY
 /Plan
Bmployee Stock Option Scheme

) Vested period =3years.

5i)Unamortised amount =1,50,000.
Number of years expired =1year iovo) batzbhOod9Svsi
0 on lle ootolgrno a

as expense
1,50,000
3 x 1-50.000SanAOgoo bagennoblodaovsde
V)Amount recognised

F.Y.2014-15
period=3 years.
(i) Vesting
years expired
=2years
)Number of
=1 year
Number of year remaining
(iii))
after the expiry of 2 years = 1,50,000
x 2= 1,00,000.
(v) Cumulative expenses 3
to be recognised in 2014-15 = 1,00,000 -50,000 = 50,000.
(V) Expenses

anF.Y. 2015-16Sd
period =3years.
S-i) Vesting
(6)Number of years expired =3 years
1,50,000
(ii) Cumulative expenses after the expiry of 3 years x 3=1,50,000.bt
3
(v) Expenses
to be recognised in 2015-16 =* 1,50,000 -* 1,00,000 = 50,000.

ial Note: The alternative

method caleulation is suitable when there is
a chance ofleaving of employees
of
he vesting period. Rememberthat during
f cumulative expense asper latest
the value ofoptions recognised
estimates upto current accounting
as expense in an accounting
period is the excess
period over total expense recognised
previous accounting period. upto the

llustration 2
HCL grants 45,000 options to employeesfree
HCL Over3 years. The company of cost. Each grant is based on the condition that the employees working
estimated that the fair value for
of each
that 1/3rd of the share option is 15 on the date of grant.
employees will leave the
organisation during
HCL estimates
the three year period

)
options. Everything and so
happened as expected. forfeit their rights to the share
You are requíred to calculate the amounts to be recognised as an expense
Solution during the three years of vesting
period.
Vesting period =3 years.
(iú) Fair value

(i)Total
of each option = 15.
value of options
=15x 45,000 =
(iv) Number of
employeeswill leave
6,75,000
the organisation
bonsg etahon
Calculation of the
during 3years = 1/3rd.

Year
amounts to be
Recognisedas Expenses
1st Particulars
Expense for the
R6,75,000 ,2 1 year
Cumulative Expense
1,50,000 1,50,000
2nd
2 2 1,50,000

3rd
76,75,000:
33
-1,50,00 1,50,000

of bo 3,00,000
675,000 2,2
xa x1,50,000 1,50,000

Alternatively, 4,50,000
Ist year :
(i) Vestingperiod 3 years.
(ii) Number of year
expired =1 year.
(i1) Numberofemployees
willleavethe

2 3years =
organisation during
Amount to be 1/3rd.
recognised asan
expense
=t6,75,000
xx=1,50,000
CO

0022

YAAReIJ
 3.9
CorporateAccounting

2nd year :
Vesting period3years.
() Number of yearexpired -2 years.

()Number of employees will leave the organisation during 3years = 1/3rd.

(iv) Remaining year = year.

l

() Curmulative expense after theexpiry of 2 years-6,75,000 xx-3,00,000

Amount to be recognised as an expense = 3,00,000 -* 1,50,000 =* 1,50,000.

) Vesting period 3 years.
(D Number yearexpired 3of years.

D Number of employees willleave the organisation during 3 years =3 1/Brd.

(iv) Cumulative expense after the expiry of 3years =6,75,000 xx4,50,000

Amount to be recognised as an expense=450,000 -3,00,000 = 1,50,000.

Accounting Entries
and exercise period ending on or before the
1. the vesting period is not exceeding one year
When
closing of the accountingperiod
(Exercise Price x Number of options exercised]
(a) Bank Account Dr.
EmployeeCompensationExpenseAccount Dr. [Valueof option]
Number ofoptions exercised x
To Equity ShareCapital Account
Face value ofshares]
Number ofoptions exercised x
To Securities Premium Account
Premium per share]
(Being the issue of...equity shares to employees under ESOS)e
and Loss Dr.
(b)Statement of Profit
Account [Value ofoption]
To Employee CompensationExpense
(Being the amount transferred to Statement of Profit and Loss)

Illustration 3
6 Arihant Limited has its share capital divided into equity
20,000 employees'
shares of? 10 each.On l.10.2012, it granted
between 10th The options were to be exercised
stock option at 50per share,
when the market price was 129 per share.
their options for 16.000 shares only and the remaining
December, 2012 and 31st March, 2013. The employees
exercised
Entries (with narration) as would
every year. Show Journal
lapsed. The company closes its books on 31st March
options [CA (Inter) –May, 2014]
utpo 31st March, 2013.
appear in the books of the company
Solution
()Value of (120 – 50) × 16000=11,20,000. be recognised as expense in the
option
is less than one year. Therefore, the entitre amount will
In this case,vesting period

The journal entries will be as follows :*

same year.
In the books of Arihant Limited
Journal Dr. Cr.

LF.
Particulars
Date
Dr. 8,00,000
10.12 2012 Bank Alc (16,000 x*50) 1120,000
Dr.
to Compensation Expense Alc
Employee 1,60,000
31.32013 ToEquity Share Capital
Alc (16,000 x* 10)
17,60,000
To Securities Premium Ac (16,000 x*110)
equity 'shares to employees under ESOS)
(Being the issue of 16,000

313.2013 Statement Proft and Loss ilo0 X

Dr. 11,70,000
of
11,70,000
Compensatisn Expense Alc
To Employee
to Staterment of Profit and Loss
(Being the amount transferred
3.10 Employee Stock Option Scheme / Plan

Alternative Solution In the books of Arihant Limited

Journal bo Dr. Cr.
Date Particulars LF.

2012 Employee Compensation Expenses Alc Dr 14,00,000

Oct 1
To Employee Stock Option Outstanding Ac 14,00,000

(Being the grant of 20,000 stock options to employee at 50. The market price the share

of
was 120)

Dec. 10 Bank Alc (16,000 x 50) 50e808Dr. 8,00,000

Employee Options Outstanding Alc Dr. ar211,.20,000

To Equity Share Capital Alc

av
1,60,000

ToSecurities Premium Alc evol0h6 17.60.000

(Being allotment of 16,000 shares of 10 each at a premium 110 per share as perseviis

of
Board's Resolution No. ...dated ..)

2013 Dr. 2,80,000

EA
Employee Stock Options Outstanding Alc
Mar. 31 To Employee Compensation Expenses Ac E pa2,80,000
(Being the adjustment for lapsed options)

Statement Profit and LOSS Dr. 11,20,000

of
To Employee Compensation Expenses Ac 11,20,00

(Being the amount ransferred to Statement of Profit and Loss)

Ilustration4
A company has its share capital divided into shares of? 10 each. On 1st April, 2014, it granted 5,000 shares as employee

stock options at 40
per share, when the market price was ? 130 per share. The options were to be exercised between 16th
December, 2014 and 15th March, 2015. The employee exercised their options for4,500 shares only. The remaining options
lapsed.The companycloses its books on 31st March every year. Show the Journal entries in the books of thecompany.
/CS-December, 2015)

Solution

(1)The value of options ( 130 -*40) x 5,000 =4,50,000.

In this case vesting period is less than one year. Therefore, the entire amount will be recognised as expenses.
In the books of ...

Journal Sses le Dr.

Cr.
Date Particulars LIF.

2014 Employee Compensation Expenses Alc Dr.ooeyeanso 4,50,000

April 1 To Employee Stock Options Outstanding Alc 4,50,000

(Being the grant of 5,000 stock option to employees at a price of T 40 each. At the time of

granting options, the price the shares was 130 each)

of
Dec. 11 Bank Alc (4,500 x 40) Dr. 1,80,000

Employee Stock Opion Outstanding Alc (4,500 x* 90) Dr. 4,05,000

To Equíty Share Capital Ac 45,.000

To Securities Premium Ac 000

5,40

(Being the allotrment of 4,500 equity shares of ?10 each at a premium of 120 per share as

per BoardsResolution No... dated

...)
2015 Employee Stock Option Outstanding Alc (500 x *90) Dr.
n 45,000
45,000
Mar, 16 TO Employee Compensation Expenses A/c

(Being the adjustrnent for lapsed opions 500shares)

of
Mar, 31 Staterment of Profit and Loss Dr. 4,05,000
ToEmployee Compensation Expenses alc 4,05,000

(Being the arnount transferred to Statement of Profit and Loss)

 Corporate Accounting 3.11

2.

)
When the vesyting period is exceeding one year
(a) For recognition of
compensationexpense
Employee CompensationExpenseAccount
To Employee StockOptionOutstanding Account
(Beingthe compensation expense recognised)
Dr. [Amount recognised as expense]

(ii) Statement of Profit and Loss Dr.

To Employee CompensationExpenseAccount
(Beingthe amount transferred to Statement of Profit and Loss.)

Note :'Enployee Stock Option Outstanding will be shown in the Balance Sheet under 'Reserve and Surplus'.

(b) For issuing sharesunder ESOs

Bank Account Dr. [Exercise price x Number of options exercised]

Employee StockOption Outstanding Account Dr. [Accumulated amount]

To Equity ShareCapital Account [Number of options exercised x Face value]
23
To Securities Premium Account Number of options exercised x (
Securities Premium per share]

llustration 5
The vesting period is 2'/2
Gobinda Ltd. granted 1,000 stock options to its employees on lst April, 2013 at 50
per share.

years andthe maximum exercise period is one year. The market price on that date is 150 pershare. All the options were
exercised on 30th June, 2016.
theequit share is 10.
You are required to pass journal entries with suitable narrations. The face value of
Solution
The value of option =Number of Options x (Market Price -Exercise Price)

=1,000 x ( 150 50)

–-
=71,00,000
This employee compensation expense has been
Therefore, the total employees compensation expenses 1,00,000.

written-off during 2'2 years on straight line basis as under :

Ist year =40,000 (Full year)

2nd year=40,000 (Full year)

3rd year =20,000(Half year)

In the books of Gobinda Ltd.

Journal Dr. Cr.
LF.
Particulars
Date
Dr. 40,000
2014 Employee Compensation Expense Ac
40,000
Stock Option Outstanding Alc
March 31 To Employee
respect of 1,000 options granted to employees
expense recognised in
(Being compensation
on straight line basis over 2 2 years)
at a discount of 100 each, amortised
Dr 40,000
Statement of Profit and Loss
40,000
Compensation Expense Alc
To Employee
transferred to Statement of Profit and Loss)
expenses of the year
(Being the compensation
Dr. 40,000
2015 Compensation Expense Alc
Employee
40,000
Stock Option Outstanding Alc
March 31 To Employee
respect of 1,000 options granted to employees
(Being compensation expense recognised in

on straight line basis over 2'2 years)

at a discount of 100 each, amortised

Statement of Profit and Loss

Dr. 40,000CAO
Alc 40,000
Expense
To Employee Compensation
to Statement of Profit and Loss)
(Being the compensation expense of the year transferred
Dr. 20,000
2016 Compensation Expense Alc
Employee
Alc 20,000
March 31 To Employee Stock Option Outstanding

expense recognised in respect of 1,000 options granted to employees

(Being compensation
line basis over 2'/2 years)
at a discount 100 each, amortised on straight
of
3.12 Employee Stock Option Scheme / Plan

Statement of Profit and Loss Dr. 2 booa D 20,000

ToEmployee Compensation Expense Alc 20,000

Being the compensation expense of the year transferred to Statement of Profit and Loss)

June 30 Bank Alc (1,000 x *50) Dr 50,000

Employee Stock Option Outstanding Alc (1.,000 x *100) Dr 1,00,000

To Equity Share Capital Alc (1,000 x *10) 10,000

To Securities Premium Alc (1000 x * 140)

1.40,000
(Being the exercise of 1,000 options at a price of 50 per share)ar o q cl
llustration 6
PWC Limited granted 1,500options on 1st April, 2013 at 80 when the market price was 160.The vesting period was
3 years.The maximum exèrcise periodwas 1 year. All the Lš00 options were exercised bythe employees on 30th October.
2016.
Pass necessary journal entries recording the above transactions.

Solution
() Value optjons =1,500 x ( -* 80)
160 1,20,000. = I600X10
of
(iü) Amount tobe amortised =1,20,000/3=40,000each year.

(ii) In the books of PWC Ltd.

Journal Dr.o Cr.

Date Particulars L.F.

2014 Employee Compensation Expense Alc Dr.og 40,000

March 31 To Employee Stock Option Oufstanding Alc bo 40,00

(Being compensation expenses recognised in respect of 1,500 options granted to employeesa

at adiscount of 80 each, amortised on straight line basis)

Statement of Profit and Loss Dr 40,000

ToEmployee Compensation Expense Ac 40,000

amount transferred
(Being the to Statement of Profit and Loss)
6600.S
2015 Employee Compensation Expense Alc Dr.enso0 2olgoa40,000so 40,000
March 31 To Employee Stock Option Outstanding Alc

(Being compensation expenses recognised in respect of 1,500 options granted to employees)Us80 S

Statement of Profit and Loss Dr s 40,000

40,000
To Employee Compensation Expense Alc

(Being the amount transferred to Statement of Profit and Loss)

2016 Employee Compensation Expense Alc Dr 40,000

31 40,000
March ToEmployee Stock Option Outstanding Alc

(Being compensation expenses recognised in respect of 1,500 options granted to employees)

Satement of Profit and Loss Dr. 20,000

20,000
To Employee Compensation Expense Ac
(Being the amount transferred to Statement of Profit and Loss)

Od 30 Bank Alc (1,500 x 80) Dr 1,20,000

Employee Stock Opion Outstanding Alc Dr t20-000
15000
To Equity Share Capital Alc

To Securities Prenium A 0o XIso 2,25,000

(Being the exercise of 1,500 options at a price 80,per share)

of
Illustration 7
On 1.4.2013 XLtd. granted 2,000 shares to the employees under stock option scheme at 75 (Face Value 10; Mas
Value 165). The company allowed 3 years for vesting the option and 1 year maximum exercise period. Employees

exercisedall the options on 30.9.2016.Show necessaryjournal entries.

Solution
) Value of options 2,000 x (165-75)m60,000
=? 1,80,000
Gi) Amount to be anortised 1,80,000 /3 each year.
 Corporate Accounting 3.13

In the books of X Ltd.

Journal Dr. Cr.
Date
Partculars LF.
2014
Empibyee Campensetion Expense Ac Dr. 60,00
March 31 To Empibyee Sibok Option Outstanding Alc 60,000

campesefe epese recognised in raspect 2000options

Being
granted toemplbyees

of
dadscount of T 90each, amortsed on straight ine basis)
Statementof Proft and Loss Dr. 60,000
To Empiloyee Campensation Expense Ac 60,000
Being the amounttransferred to Statement of Profit and Loss)

2015 EmpioyeeCompensation Expense Ac Dr. 60,000

March 31 To Employee Stbok Opfon Outstandng 60,000
Alc
Being compensation erpense recognised in respect of 2,000 options granted to employees)
Satement of Profit and Loss Dr. 60,000

To Employee Compensafion Expense Alc 60,000

Being the amount transfered to Statement of Proft and Loss)

2016 Employee Compensafion Expense Alc Dr. 60,000

March 31 To Empioyee Stock Opfon Outstanding Alc 60,000

Being compensation expense reognised in respect of 2,000 opions granted to employees)

Satement of Proft and Loss Dr. 60,000

ToEmpioyee Compensaion Expense Ac 60,000

Being the amount transferred to Statement of Profit and Loss)

O 30 Bank Alc (2,000 xT 75) Dr.

Dr.
1,50,000

1,80,000
Emplioyee Stock Option Outstanding Ac
20,000
To Equity Share Capital Alc
To Securities Premium Alc 3,10,000

at a premium of T 155 each as a result

Beling the issue of 000 equity shares of 10 each
2,
of exercising the opions)

llustration 8
by DC Limited are available :
The following particulars in respect of stock options granted
) Grant date :1.4.2014
()Number of Options granted :12,000
(ii) Market on 1.4.2014:7 188 per share
price

(iv) Exercise price : 140per share

(v) Face value : 100
(vi) Vesting Period:2 years
(vii) Exercise period :6 months
(30.9.2016)
The following information is also relevant :
(a) On 1.6.2014: 1,500 options lapsed
(b) On 1.1.2015 :1,500 options lapsed
(c) On 1.1.2016 :2,000 options lapsed
(d) On 30.9.20 16 :6,800 options were exercised
the year ends on 31st March).
You are required to pass necessaryjournal entries (assuming that

Solution
()Intrinsic value of an option :
Market price ? 188 per share

Less: Exercise price

?140 per share
? 48 per share
F.Y. 2014-15
(i) optíons
Vested =12,000 -(1,500 + 1,500) =9,000
(i)Vesting period =2 years
 / Plan
Stock Option Scheme
3.14 Employee
4,32,000
= 1 year
(i)Number of year expired
(9,000 x*48) 2,16,000
Unamortised amount
(iv)
4,32,000 x 1 216.000
Less: Amount
amortised 2

)
E.Y. 2015-16

()
(i)
Vested options
Vesting period
Number
12,000 2,000
2 years
yearexpired =2
years
=
7,000

=
- =
3,36,000
2,16,000
of
(7,000x48)
(iv) Unamortised amount L20,000
Amount amortised
Less:
be recognised
as expenses
Amount to

F.Y. 2016-17
Options forfeited
(7,000 - 6,800) =200
-200x 48 =*9,600.
options forfeited
Value of
to Capital
Reserve.
9,600 willbe transferred of DC
Therefore,
In the books
Limited
olDr. Cr.
Journal
L.F.

Particulars
2,16,000
Date Dr.
Epense Alc 2,16,000
2015 Employee Compensation
Alc
Option Outstanding
March 31 To Employee Stock to employees
of 9,000 options granted
expense recognised in respect
(Beingcompensation
ata discount of
T 48 each)
Dr 2,16,000

at
Statement of Profit and Loss 2,16,00

To Employee Compensation Expense Ac

2016
Being the amount transfered

Expense Alc
to Statement of Profit and Loss)

Dr Soa 1,20,000

Employee Compensation 1,20,000

March 31 To Employee Stock Option Outstanding Alc

to employees
respect of 7,000 options granted
Being compensation expense recognised

Dr.EL
in

ata discount of 48 each)

1,20,000eoila
Statement of Profit and Loss
1,20,000
To Employee Compensation Epense Alc
amount to Statement of Profit and Loss)
(Being the transferred

Segt 30 Bank Alc (6,800x *140) Dr. 9,52,000M

Dr. 3,26,400
Enployee Stbck Option Outstandíng Alc

To Equity Share Capital Alc (6,800 x *100) 6,80,000

To Securities Premium Ac(6,800 x *88) 5,98,400

(Beingthe issue of 6,800 equity shares of 100 each at a premium of 88 each)

Employee Slbck Option Otstanding Alc Dr. 9,600

To General Reserve Alc 9,600

(Being the amount transterred to General Reserve Account in respect of 200 options lapsed)

llustration 9
HCL grants 1,250 options on Ist April, 2014 at 80when the market price is 200 and the face value 10. The ves
period 3ycars. The maximum
is
is
exercise period is one year. 800options are exercised on 31st August, 2017. Pass neces
joumalentries to record the above transactions and also show
Employee Compensation
Stock Options ExpenseAccount and

(
Account and state how these
Outstanding g
accounts will be shown in the
Solution Balance Sheet.
0) Valae options 1,250 x 200 - 80)
of
Amount to be =1,50,000.
amortised - 1,50,000/3 =50,000 each year.
 Corporate Accounting 3.15

(ii) In the books of HCL Ltd.

Journal Dr. Cr.
Date
Particulars LF.
2015 Employee Compensation Expense Alc Dr. 60,000
March 31 To Employee Stock Option Outstanding Alc 60,000
(Being compensation expense recognised in respect of 1,250 options granted to employees
at a discount of 120)
Statement of Profit and Loss Dr. 50,000
To Employee Compensation Expense Alc 50,000
(Being the amount transferred to Statement of Profit and Loss)
2016 Employee Compensation Expense Ac Dr. 50,000
March 31 To Employee Stock Option Outstanding Alc 50,000

(Being compensation expense recognised in respect of 1,250 options granted to employee at

a discount of 120 each)

Statement of and Loss

Profit Dr. 50,000

To Employee Compensation Expense Ac

50,000

(Being the amount transferred to Statement of Profit and Loss)

2017 Employee Compensation Expense Alc Dr. 8s 50,000

March 31 50,000
To Employee Stock Option Outstanding Alc
(Being compensation expense recognised in respect of 1,250 options granted to employees
at a discount of 120 each)
Statement of Profit and Loss Dr 50,000
50,000
To Employee Compensation Expense Alc
(Being the amounttransferred to Statement of Profit and Loss)

Aug 31 Bank Alc (800 x *80) Dr. 064,000

Dr. 96,000
EmployeeStock Option Outstanding Alc
8,000
To Equity Share Capital Alc
To Securities Premium Ac 1,52,000

(Being the issue of 800 equity shares in respect of ESOS)

54,000
Employee Stock Option Outstanding Ac Dr.

To General Reserve Ac 54,000

General Reserve Account in respect of 450 options lapsed)

(Being the amount transferred to

Cr.
Dr. Employee Compensation Expense Account
Date Particulars
Date Particulars
2015
2015
Alc 50,000 Mar 31 By Statement of Profit and Loss 50,000
Mar 31 To Employee Stock Options Outstanding
2016
2016
50,000 Mar 31 By Statement of Profit and Loss 50,000
Mar 31 To Employee Stock Options Outstanding Alc
2017
2017
50,000 Mar 31 By Statement of Profit and Loss 50,000
Mar 31 Employee Stock Options Outstanding Alc
To

Outstanding Account Cr.

Dr. Employee Stock Options
Date Particulars
Particulars
Date
2015
2015 50,000
50,000 Mar 31 By Employee Compensation Expense Alc
Mar 31 To Balance cld
2015
2016
cld 1,00,000 Apr 1 By Balance b/d 50,000
Mar 31 To Balance
2016
Mar 31 By Employee Compensation Expense Ac 50,000

1,00,000 1,00,000

2016
2017
1,50,000 Apr 1 By Balance b/d 1,00,000
Mar 31 To Balance cld
2017
Mar 31 By Employee Compensation Expense Ac 50,000

1,50,000 1,50,000
 3.16 Employee StockOption Scheme / Plan

2017 To Equity Shares Capital A/c 8,000 2017

Aug 31 To Securities Premium Alc 88,000 April 1 By Balance b/d

1,50,00
To General Reserve Ac 54,000

1,50,000
1,50,000

Disclosurein the Balance Sheet

|EmployeeStockOptions Outstanding will be shown in the BalanceSheetunder Reserve and Surplus

Employee Stock Purchase Scheme (ESPS)

Employee Stock Purchase Scheme ESPS) means a scheme under which the company offers shares t

employees aspart ofa public issue or otherwise.

Accounting Treatment of Employee Stock Purchase Scheme (ESPS)

1.
In respect of shares issued under an ESPS during any
accounting period, the accounting value of the
share so issued shall be treated asanother form of employee
compensation in the financial statements
ofthe company.
2. The accounting value of shares issued under ESPS shall be
equal to the aggregate of pricediscount
over all the shares issued under ESPS.
[Price discount means the excess of the market price of the
shares on the date ofissue over the price at which they are issued
under the ESPS.]
Accounting Entries
Cash / Bank Account Dr.
Employee Compensation Expense Account Dr.
To Equity Share Capital Account
To Securities Premnium Account

llustration 10
Y Ltd íssued 1,000 shares on 1st April, 2017 under ESPs at 50 when the market price is 150 and the face
? 10. Pass necessaryjournal value

is
entries to record the above transactions.
Solution In the books of Y Ltd
Journal
Dr. Cr.
Date Particulars
2017 L.F.
Bank Alc (1,000 x 50) Dr.
50,000
April 1
Employee Compensation Expense Ac Dr.
1,00,000
To Equity Share Capital Ac
10.000
To Securities Premium Ac
1,40,000
(Being the issue of 1,000 shares
under ESPS at a price 50each when the market
of
price is
150 each)

Illustration 11
On 1st April, 2012, a company offered 100 shares to each of
its400 employees at R 25 per
a month to accept the shares. The share. The employees are giveu
shares issued under the plan shall be
subject to lock-in to transfer for three years
the grant date, i.e., 30th April, 2012.
The market price of shares ofthecompany on the
to post-vestingrestrictions on transfer, grant date is 30 per share.
the fair value of shares issued under the
Up to 30th April,2012,50% employees accepted the plan is estimatedat 28 per share.
offer and paid 25 per share purchased. Normal value of ea
share is z 10. Record the issue of
of
shares in the books of the
companyunder the aforesaid plan.

[CA.(PCC)–May,
2012)
Solution
Numberof employees accepting the offer :400 x 50% 200. =
Total number shares to be issued =
:200 x 100 20,000,
Fair

Total value of
of

value of the option

options
: 28-725 =*3.
:20,000 x?3 =* 60,000.
 Corporate Accounting 3.17

In the books of ...

Journal Dr. Cr.
Date Particulars LF
2012 Bank Alc (20,000 x *25) Dr. 5,00,000
April 30 Employees' Compensation 60,000
Expense Alc Dr.
To Equity Share Capital Alc (20,000 x 10) 2,00,000

To Securities Premium Alc (20,000 x 18)

3,60,.000

(Being the exercise of option by 200 employees@ 100 shares each)

KEY POINTS
No ESOS can be offered to employees ofa companyunless the shareholders the company approveESOS by passing a special

of
resolution in the general meeting.

ESOS would be open to allpermanent employees of the company working in India or outside India and to the dírectors of the
company.
Thecompany shall not vary the terms of ESOS in any manner,which may be detrimental to the interest of the employee.
According to Section 2(37) of the Companies Act, 2013,"employees' stock option means the option given to the directors, officers
or employees of a company or of its company or subsidiary company or companies,
holding if any, which gives such dinectors,
officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a
pre-determined price.

Employee Stock Purchase Scheme(ESPS) means a scheme under which the company ofers shares to employees aspart ofa
public issue or otherwise.

THEORETICAL QUESTIONS

1. What do you mean by Employee Stock Option Scheme (ESOS)?

2. State SEBI Guidelines for ESOS.

3. What do you mean by Vesting Period ?

4. Whatdo you mean by Employee Stock Purchase Scheme(ESPS) ?

OBJECTIVE QUESTIONS

Multiple Choice
below:
Select the best choice to complete each sentence or answer each question

Option' can be offered to :

1. Employee Stock
A whole time directors of the companyonly
B officerS ofthe companyonly
C employees of the companyonly
D all of the above

by passing
Employee Stock Option can be offered
:
2.
the general meeting
A a special resolution in
B an ordínary resolution in the general meeting
C a resolution in the board meeting

D no resolution in any meeting

3 Value ofoption is equal to :
A number of option exercisedx (market price - exercise price)

B numberof option exercised x (market price - fair price)

C number of option granted x (market price - exercise price)

D numberof option granted x (market price –fair price)