24 January 2024
A Startup company issued 1000 ESOP @ 10 per share (face value) to its employees. The company went into acquisition and the acquirer bought all the ESOP at market price say 100 per share. The Acquiring company booked it as "Investment in the Startup" with the price paid i.e. 1000 x 100 = 1,00,000, however, in Startup's books the amount is standing as 100 x 10 = 10,000. Now when the company is trying to consolidate the books there is a difference of 90000.
How should the Startup incorporate the transaction between the Acquiring company and Shareholders (employees holding ESOP) to match the investment amount as standing in Acquiring company's books of account.\?
07 July 2024
In this scenario, where the acquiring company has bought out all ESOPs (Employee Stock Ownership Plan) from the startup’s employees at a higher market price than the face value, there are a few considerations for the startup to incorporate this transaction correctly:
1. Recording the ESOP Transaction: • Startup’s Books: Initially recorded the ESOP issuance at the face value (1000 ESOPs at Rs. 10 per share), totaling Rs. 10,000. • Acquirer’s Books: Recorded the acquisition of ESOPs at the market price paid (1000 ESOPs at Rs. 100 per share), totaling Rs. 1,00,000. 2. Consolidating the Books: • To match the investment amount in the acquiring company’s books, the startup should adjust its records to reflect the market value at which the ESOPs were acquired by the acquirer. • The difference of Rs. 90,000 between the face value and market value needs to be accounted for in the startup’s financial statements. 3. Accounting Treatment: • Adjustment Entry: Create an adjustment entry in the startup’s books to reflect the difference in valuation: • Debit: “Investment in Startup” or similar account (increasing the investment amount to Rs. 1,00,000) • Credit: “ESOP Reserve” or “ESOP Expense” account (to reflect the difference of Rs. 90,000) 4. Financial Reporting: • Ensure that the startup’s financial statements reflect the adjusted valuation of the ESOPs based on the acquisition price paid by the acquirer. • This adjustment aligns the startup’s financials with the investment amount reported by the acquiring company.
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