ESOP's Taxation and Accounting in India

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

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:

Journal Entry for Above Example:

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:

Journal Entry

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

Journal Entry

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

Journal Entry for Allotment of Shares

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

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

Journal Entry in books of Subsidiary Company)