ESOP

Q.1 The following particulars in respect of stock options granted by a company are available:
Grant date April 1, 2019
Number of employees covered 525
Number of options granted per employee 100
Vesting condition: Continuous employment for 3 years
Nominal value per share (`) 100
Exercise price per share (`) 125
Market price per share on grant date (`) 160
Vesting date March 31, 2022
Exercise Date March 31, 2023
Fair value of option on grant date (`) 30
Position on 31/03/20 –
(a) Estimated annual rate of departure 2%
(b) Number of employees left = 15
Position on 31/03/21 –
(a) Estimated annual rate of departure 3%
(b) Number of employees left = 10
Position on 31/03/22 –
(a) Number of employees left = 8
(b) Number of employees entitled to exercise option = 492
Position on 31/03/23 –
(a) Number of employees exercising the option = 480
(b) Number of employees not exercising the option = 12
Compute expenses to recognise in each year.

Solution:
Year 2019-20
Number of shares expected to vest under the scheme
= [(525 -15) x 0.98 × 0.98)] × 100 = 48,980
Total Provision to be created = 48,980× ` 30 = ` 14,69,400
Value of option recognised as expense in 2019-20 = ` 14,69,400/ 3 = ` 4,89,800
Year 2020-21
Number of shares expected to vest under the scheme = [(525 – 15 – 10) × 0.97] × 100 = 48,500
Total Provision to be created = 48,500 × ` 30 = ` 14,55,000
Provision to be created till the end of this year –
= (` 14,55,000/ 3) × 2 = ` 9,70,000
Value of option recognised as expense in 2020-21 = ` 9,70,000– ` 4,89,800= ` 4,80,200
Year 2021-22
Number of shares actually vested under the scheme = 492 × 100 = 49,200
1 CREDENT PROFESSIONAL STUDIES
 Total Provision to be created = 49,200 x ` 30 = ` 14,76,000
Value of option recognised as expense in 2021-22 = ` 14,76,000 – ` 9,70,000 = ` 5,06,000
Year 2022-23
Number of shares not subscribed = (492 – 480) × 100 = 1,200
Value of option forfeited = 1,200 × 30 = ` 36,000

Employees’ Compensation A/c

Year ` Year `
2019-20 To ESOP Outstanding A/c 4,89,800 2019-20 By Profit & Loss A/c 4,89,800
4,89,800 4,89,800
2020-21 To ESOP Outstanding A/c 4,80,200 2020-21 By Profit & Loss A/c 4,80,200
4,80,200 4,82,000
2021-22 To ESOP Outstanding A/c 5,06,000 2021-22 By Profit & Loss A/c 5,06,000
5,06,000 5,06,000

ESOP Outstanding A/c

Year ` Year `
2019-20 To Balance c/d 4,89,800 2019-20 By Employees’ 4,89,800
Compensation A/c
4,89,800 4,89,800
2020-21 To Balance c/d 9,70,000 2020-21 By Balance b/d 4,89,800
By Employees’ 4,80,200
Compensation A/c
9,70,000 9,70,000
2021-22 To Balance c/d 14,76,000 2021-22 By Balance b/d 9,70,000
By Employees’ 5,06,000
Compensation A/c
14,76,000 14,76,000
2022-23 To General Reserve 36,000 2022-23 By Balance b/d (49,200 × 14,76,000
(1,200 × 30) 30)
To Share Capital 48,00,000 By Bank (48,000 × 125) 60,00,000
(48,000 × 100)
To Securities
Premium 26,40,000
(48,000 × 55)
74,76,000 74,76,000

Q.2 Santosh Ltd. granted 500 options to each of its 2,500 employees in 2020 at an exercise price of
` 50 when the market price was the same. The contractual life (vesting and exercise period) of
the options granted is 6 years with the vesting period and exercise period being 3 years each.
The expected annual forfeitures are estimated at 3 per cent. The fair value per option is arrived at
` 15. Actual forfeitures in 2020 were 5 per cent. However at the end of 2020 the management of
Santosh Ltd. still expects that the actual forfeitures would average only 3 per cent over the entire
vesting period. During 2021 the management revises its estimated average forfeiture rate to 10
per cent per annum over the entire vesting period. Of the 2,500 employees 1,900 employees
have completed the 3 year vesting period. 1,000 employees exercise their right to obtain shares
2 CREDENT PROFESSIONAL STUDIES
 vested in them in pursuance of ESOP at the end of 2024 and 500 employees exercise their right
at the end of 2025. The rights of the remaining employees expire unexercised at the end of 2025.
The face value per share is ` 10. Show the necessary journal entries with suitable narrations.
Workings should form part of the answer.

Solution:
Journal Entries
Year 2020 ` `
Employee Compensation Expense A/c Dr. 57,04,205
To Employee Stock Options Outstanding A/c 57,04,205
(Being the compensation expenses recognized in respect of
the ESOP)
Profit and Loss A/c Dr. 57,04,205
To Employee Compensation Expense A/c 57,04,205
(Being Expenses of the year transferred to P & L A/c)
Year 2021
Employee Compensation Expense A/c Dr. 34,08,295
To Employee Stock Options Outstanding A/c 34,08,295
(Being the compensation expenses recognized in respect of
the ESOP)
Profit and Loss A/c Dr. 34,08,295
To Employee Compensation Expense A/c 34,08,295
(Being Expenses of the year transferred to P & L A/c)
Year 2022
Employee Compensation Expense A/c Dr. 51,37,500
To Employee Stock Options Outstanding A/c 51,37,500
(Being the compensation expenses recognized in respect of
the ESOP)
Profit and Loss A/c Dr. 51,37,500
To Employee Compensation Expense A/c 51,37,500
(Being Expenses of the year transferred to P & L A/c)
Year 2024
Bank A/c (1000 x 500 x ` 50) Dr. 250,00,000
Employee Stock Options Outstanding A/c (500,000 x ` 15) Dr. 75,00,000
To Share Capital A/c (5,00,000 x ` 10) 50,00,000
To Securities Premium (5,00,000 x ` 55) 275,00,000
(Being shares issued to employees against options vested in
them in pursuance of the ESOP)
Year 2025
Bank A/c (500 x 500 x ` 50) Dr. 125,00,000
Employee Stock Options Outstanding A/c (2,50,000 x ` 15) Dr. 37,50,000
To Share Capital A/c (2,50,000 x ` 10) 25,00,000
To Securities Premium A/c (2,50,000 x ` 55) 137,50,000
(Being shares issued to employees against options vested in
them in pursuance of the ESOP)
3 CREDENT PROFESSIONAL STUDIES
 Employee Stock Options Outstanding A/c (400 x 500 x ` 15) Dr. 30,00,000
To General Reserve A/c 30,00,000
(Being the balance standing to the credit of stock options
outstanding account, in respect of vested options expired
unexercised, transferred to general reserve account)

Working Notes:
Fair value of options recognized as expense in the year 2020 –
Number of options expected to vest = 500 x 2,500 x 0.97 x 0.97 x 0.97 = 11,40,841 options.
Total Provision to be created = 11,40,841 × ` 15 = ` 171,12,615
One third of fair value recognized as expense = ` 171,12,615 / 3 = ` 57,04,205

Year 2021
Total Prov. to be created = 500 × 2500 × 0.90 × 0.90 × 0.90× ` 15 ` 136,68,750

Revised cumulative expenses in year 2021 = 136,68,750 x ` 91,12,500

Less: Already recognized in year 2020 ` (57,04,205)

Expenses to be recognized in year 2021 ` 34,08,295
Year 2022
Number of options actually vested = 1900 × 500 = 9,50,000
Total Prov. to be created = 9,50,000 x ` 15 ` 1,42,50,000
Less: Expense recognized till year 2021 ` (91,12,500)
Balance amount to be recognized ` 51,37,500

Q.3 Kanika Ltd. provides you the following information:

No. of employees 2,500
No. of option to be granted to each employee 500
Vesting period 4 Years
No. of employees not expected to fulfill the vesting conditions other than market
conditions
1st Year 20%
nd
2 Year 15%
rd
3 Year 10%
th
4 Year 10%
Fair value of the option per share `5
Exercise Price ` 50
Exercise Period 3 Years
Face value of each share ` 10
At the end of third year it has been re-estimated that all vesting conditions have been fulfilled
and no other further conditions are required for options to vest and 600 employees exercise their
option at the end of 4 th year, 800 employees exercise their option at the end of 5th year and 100
employees exercise their option at the end of 6th year. Rights of 30 employees expired
unexercised at the end of the 6th year.
You are required to pass necessary journal entries for first 3 years.

4 CREDENT PROFESSIONAL STUDIES

Solution:
Journal Entries in the books of Kanika Ltd.
Particulars Dr. (`) Cr. (`)
At the end of 1 year
Employees Compensation Expense A/c Dr. 8,60,625
To Employee Stock Options Outstanding A/c 8,60,625
(Being the compensation expenses recognized in respect of the
ESOP)
Profit and Loss A/c Dr. 8,60,625
To Employee Compensation Expense A/c 8,60,625
(Being Expenses of the year transferred to P & L A/c)
At the end of Year 2
Employees Compensation Expense A/c Dr. 8,60,625
To Employee Stock Options Outstanding A/c 8,60,625
(Being expense in respect of ESOP recognized for the year 2)
Profit and Loss A/c Dr. 8,60,625
To Employee Compensation Expense A/c 8,60,625
(Being Expenses of the year transferred to P & L A/c)
At the end of Year 3
Employees Compensation Expense A/c Dr. 21,03,750
To Employee Stock Options Outstanding A/c 21,03,750
(Being expense in respect of ESOP recognized for the year 3)
Profit and Loss A/c Dr. 21,03,750
To Employee Compensation Expense A/c 21,03,750
(Being Expenses of the year transferred to P & L A/c)

Working Notes:
(a) No. of Employees expected to take options = 2,500 x 0.80 x 0.85 x 0.90 x 0.90 = 1377
(b) No. of Options to be granted to each employee = 500
(c) Fair Value of each option = ` 5
(d) Total Fair Value of Options expected to vest (A x B x C) = ` 34,42,500
(e) Amount of Fair Value of Options to be recognized as an expense
1st year (34,42,500/4) = ` 8,60,625
2nd Year [34,42,500 x (2/4) - 8,60,625] = ` 8,60,625
3rd Year [(1530 employees x 500 options x ` 5) - (8,60,625+8,60,625)] = ` 21,03,750
Since vesting period has been revised in 3rd year all the remaining liabilities in respect of
employees stock option plan has been recognized at the end of 3rd year and data for the 4 th year
has been ignored.

Q.4 PQ Ltd. grants 100 stock options to each of its 1,000 employees on 01-04-2020, conditional
upon the employee remaining in the company for 2 years. The fair value of the option is ` 18 on
the grant date and the exercise price is ` 55 per share. The other information is given as under:
(i) Number of employees expected to satisfy service condition is 930 in the 1st year and 850
in the 2nd year.
(ii) 40 employees left the company in the 1 st year of service and 880 employees have actually
completed 2 year vesting period.
5 CREDENT PROFESSIONAL STUDIES
 You are required to compute ESOP cost to be amortized by PQ Ltd. in the years 2020-2021 and
2021-2022.

Solution:
Calculation of ESOP cost to be amortized
2020-2021 2021-2022
Fair value of options per share ` 18 ` 18
No. of options expected
to vest under the scheme 93,000 (930 x 100) 88,000 (880 x 100)
Fair value of options 16,74,000 ` 15,84,000
Value of options (` 16,74,000 / 2) (` 15,84,000 – ` 8,37,000)
recognized as expenses 8,37,000 7,47,000

Q.5 The following particulars in respect of stock options granted by a company are available:
Grant date April 1, 2020
Number of employees covered 500
Number of options granted per employee 100
Fair value of option per share on grant date (`) 25
The vesting period shall be determined as below:
(a) If the company earns ` 120 crore or above after taxes in 2020-21, the options will vest on
31/03/21.
(b) If condition (a) is not satisfied but the company earns ` 250 crores or above after taxes in
aggregate in 2020-21 and 2021-22, the options will vest on 31/03/22.
(c) If conditions (a) and (b) are not satisfied but the company earns ` 400 crores or above after
taxes in aggregate in 2020-21, 2021-22 and 2022-23, the options will vest on 31/03/23.
Position on 31/03/21 –
(a) The company earned ` 115 crore after taxes in 2020-21
(b) The company expects to earn ` 140 crores in 2021-22 after taxes
(c) Expected vesting date: March 31, 2022
(d) Number of employees expected to be entitled to option = 474
Position on 31/03/22 –
(a) The company earned ` 130 crore after taxes in 2021-22
(b) The company expects to earn ` 160 crores in 2022-23 after taxes
(c) Expected vesting date: March 31, 2023
(d) Number of employees expected to be entitled to option = 465
Position on 31/03/23 –
(a) The company earned ` 165 crore after taxes in 2022-23
(b) Number of employees on whom the option actually vested = 450
Compute expenses to recognise in each year.

Solution:
Year 2020-21
Number of shares expected to vest under the scheme = 474 × 100 = 47,400
Total Provision to be created = 47,400 × ` 25 = ` 11,85,000
Value of option recognised as expense in 2020-21 = ` 11,85,000 / 2 = ` 5,92,500

6 CREDENT PROFESSIONAL STUDIES

 Year 2021-22
Number of shares expected to vest under the scheme = 465 × 100 = 46,500
Total Provision to be created = 46,500 × ` 25 = ` 11,62,500
Cumulative value of option to recognise as expense in 2020-21 and 2021-22
= (` 11,62,500/ 3) × 2 = ` 7,75,000
Value of option recognised as expense in 2021-22 = ` 7,75,000 – ` 5,92,500 = ` 1,82,500
Year 2022-23
Number of shares actually vested under the scheme = 450 × 100 = 45,000
Total Provision to be created = 45,000 × ` 25 = ` 11,25,000
Value of option recognised as expense in 2022-23 = ` 11,25,000 – ` 7,75,000 = ` 3,50,000

Q.6 The following particulars in respect of stock options granted by a company are available:
Grant date April 1, 2021
Number of employees covered 400
Number of options granted per employee 60
Nominal value per share (`) 100
Exercise price per share (`) 125

Shares offered were put in three groups. Group I was for 20% of shares offered with vesting
period one-year. Group II was for 40% of shares offered with vesting period two-years. Group
III was for 40% of shares offered with vesting period three-years. Fair value of option per share
on grant date was ` 10 for Group I, ` 12.50 for Group II and ` 14 for Group III. Expected
forfeiture rate is 3% p.a.

You are required to calculate total compensation expenses for the options expected to vest and
cost and cumulative cost to be recognised at the end of all the three years assuming that expected
forfeiture rate does not change during the vesting period.

Solution:
Expected vesting
Group Number of Number of Total number Fair value Fair value
employees shares vested of shares of option of option
expected to to each expected to per share
qualify employee vest
I 388 12 4,656 10.00 46,560
II 376 24 9,024 12.50 1,12,800
III 365 24 8,760 14.00 1,22,640

Expense recognised in year 2021-22

₹
Group I 46,560
Group II 56,400 1,12,800/2
Group III 40,880 1,22,640/3
1,43,840

7 CREDENT PROFESSIONAL STUDIES

 Expense recognised in year 2022-23
₹
Group I 46,560
Group II 1,12,800
Group III 81,760 (1,22,640/3) × 2
Cumulative expense for 2021-22 and 2022-23 2,41,120
Less: Expense recognised in 2021-22 (1,43,840)
Expense recognised in 2022-23 97,280

Expense recognised in year 2023-24

₹
Group I 46,560
Group II 1,12,800
Group III 1,22,640
Cumulative expense for 2021-22 to 2023-24 2,82,000
Less: Expense recognised in 2021-22 and 2022-23 (2,41,120)
Expense recognised in 2023-24 40,880

Q.7 A company announced a Stock Appreciation Right on 01/04/20 for each of its 525 employees.
The scheme gives the employees the right to claim cash payment equivalent to excess on market
price of company’s shares on exercise date over the exercise price ` 125 per share in respect of
100 shares, subject to condition of continuous employment for 3 years. The SAR is exercisable
after 31/03/23 but before 30/06/23. The fair value of SAR was ` 21 in 2020-21, ` 23 in 2021-22
and ` 24 in 2022-23. In 2020-21 the company estimates that 2% of the employees shall leave the
company annually. This was revised to 3% in 2021-22. Actually, 15 employees left the company
in 2020-21, 10 left in 2021-22 and 8 left in 2022-23. The SAR therefore actually vested to 492
employees. On 30/06/23, when the SAR was exercised, the intrinsic value was ` 25 per share.
Show Provision for SAR A/c by fair value method.

Solution:
Provision of SARs A/c (For 2020-21)
` `
To Balance c/d 3,42,860 By Employee Compensation Expense 3,42,860
3,42,860 3,42,860
Provision of SARs A/c (For 2021-22)
To Balance c/d 7,43,667 By Balance b/d 3,42,860
By Employee Compensation Expenses 4,00,807
7,43,667 7,43,667
Provision of SARs A/c (For 2022-23)
To Balance c/d 11,80,800 By Balance b/d 7,43,667
By Employee Compensation Expenses 4,37,133
11,80,800 11,80,800

8 CREDENT PROFESSIONAL STUDIES

 Provision of SARs A/c (For 2023-24)
To Bank (49,200 x 25) 12,30,000 By Balance b/d 11,80,800
By Employee Compensation Expenses 49,200
12,30,000 12,30,000

Working Notes:
Year 2020-21
Number of employees to whom SARs were announced = 525 employees
Total estimated SARs, to be vested at the end of the vesting period, as on 2020-21
= [(525 -15) x 0.98 x 0.98] x 100 SARs = 48,980 SARs
Fair value of SARs = 48,980 SARs x ` 21 = ` 10,28,580
Recognised as expense in 2020-21 = ` 10,28,580 / 3 years = ` 3,42,860
Year 2021-22
Total number of employees after three years, on the basis of the estimation in 2021-22
= [(525 – 15 - 10) x 0.97] x 100 SARs = 48,500 SARs
Fair value of SARs = 48,500 SARs x ` 23 = ` 11,15,500
Cumulative value of SARs to recognize as expense = 11,15,500/3 x 2 = ` 7,43,667
SARs recognize as expense in 2021–22 = ` 7,43,667 – ` 3,42,860 = ` 4,00,807
Year 2022-23
SARs actually vested = 492 employees x 100 = 49,200 SARs
Fair value = 49,200 SARs x ` 24 = ` 11,80,800
Value of SARs to be recognized as an expense = ` 11,80,800 – ` 7,43,667 = ` 4,37,133
Year 2023–24
Cash payment of SARs = 49,200 SARs x ` 25 = ` 12,30,000
Value of SARs to be recognized as an expense = ` 12,30,000 – ` 11,80,800 = ` 49,200.

Q.8 The following particulars in respect of stock options granted by a company are available:
Grant date April 1, 2020
Number of employees covered 50
Number options granted per employee 1,000
Fair value of option per share on grant date (`) 9
The options will vest to employees serving continuously for 3 years from vesting date, provided
the share price is ` 70 or above at the end of 2022-23.
The estimates of number employees satisfying the condition of continuous employment were 48
on 31/03/21, 47 on 31/03/22. The number of employees actually satisfying the condition of
continuous employment was 45.
The share price at the end of 2022-23 was ` 68.
Compute expenses to recognise in each year and show important accounts in books of the
company.

Solution:
The vesting of options is subject to satisfaction of two conditions viz. service condition of
continuous employment for 3 years and market condition that the share price at the end of 2022-
23 is not less than ` 70. Since the share price on 31/03/23 was ` 68, the actual vesting is nil.
Despite this, the company should recognise value of option over 3-year vesting period from
2020-21 to 2022-23.
9 CREDENT PROFESSIONAL STUDIES
 Year 2020-21
Number of shares expected to vest under the scheme = 48 × 1,000 = 48,000
Total Provision to be created = 48,000 × ` 9 = ` 4,32,000
Value of option recognised as expense in 2020-21 = ` 4,32,000 /3 = ` 1,44,000
Year 2021-22
Number of shares expected to vest under the scheme = 47 × 1,000 = 47,000
Total Provision to be created = 47,000 × ` 9 = ` 4,23,000
Cumulative value of option to recognise as expense in 2020-21 and 2021-22
= (` 4,23,000/ 3) × 2 = ` 2,82,000
Value of option recognised as expense in 2021-22 = ` 2,82,000 – ` 1,44,000 = ` 1,38,000
Year 2022-23
Number of shares actually vested under the scheme = 45 × 1,000 = 45,000
Total Provision to be created = 45,000 × ` 9 = ` 4,05,000
Value of option recognised as expense in 2022-23 = ` 4,05,000 – ` 2,82,000 = ` 1,23,000

Employees’ Compensation Expense A/c

Year ` Year `
2020-21 To ESOP Outstanding A/c 1,44,000 2020-21 By Profit & Loss A/c 1,44,000
1,44,000 1,44,000
2021-22 To ESOP Outstanding A/c 1,38,000 2021-22 By Profit & Loss A/c 1,38,000

1,38,000 1,38,000
2022-23 To ESOP Outstanding A/c 1,23,000 2022-23 By Profit & Loss A/c 1,23,000
1,23,000 1,23,000

ESOP Outstanding A/c

Year ` Year `
2020-21 To Balance c/d 2020-21 By Employees’
1,44,000 Compensation A/c 1,44,000
1,44,000 1,44,000
2021-22 To Balance c/d 2,82,000 2021-22 By Balance b/d 1,44,000

By Employees’
Compensation A/c 1,38,000
2,82,000 2,82,000
2022-23 To General Reserve 4,05,000 2022-23 By Balance b/d 2,82,000
By Employees’
Compensation A/c 1,23,000
4,05,000 4,05,000

Q.9 At the beginning of year 1, the enterprise grants 1,000 stock options to each member of its sales
team, conditional upon the employees remaining in the employment of the enterprise for three
years, and the team selling more than 50,000 units of a particular product over the three-year
period. The fair value of the stock options is ` 15 per option at the date of grant.

10 CREDENT PROFESSIONAL STUDIES

 During year 2, the enterprise increases the sales target to 1,00,000 units. By the end of year 3,
the enterprise has sold 55,000 units, and the stock options do not vest.
Twelve members of the sales team have remained in service for the three-year period. You are
required to examine and give comment in light of the relevant Guidance Note that whether the
company should recognise the expenses on the base of options granted or not.
Also state will your answer differ if, instead of modifying the performance target, the enterprise
had increased the number of years of service required for the stock options to vest from three
years to ten years.

Solution:
Paragraph 19 of the Guidance Note on Share Based Payments requires, for a performance
condition that is not a market condition, the enterprise to recognize the services received during
the vesting period based on the best available estimate of the number of shares or stock options
expected to vest and to revise that estimate, if necessary, if subsequent information indicates that
the number of shares or stock options expected to vest differs from previous estimates. On
vesting date, the enterprise revises the estimate to equal the number of instruments that
ultimately vested.

However, paragraph 24 of the Guidance Note requires, irrespective of any modifications to the
terms and conditions on which the instruments were granted, or a cancellation or settlement of
that grant of instruments, the enterprise to recognize, as a minimum, the services received,
measured at the grant date fair value of the instruments granted, unless those instruments do not
vest because of failure to satisfy a vesting condition (other than a market condition) that was
specified at grant date.

Furthermore, paragraph 26(c) of the Guidance Note specifies that, if the enterprise modifies the
vesting conditions in a manner that is not beneficial to the employee, the enterprise does not take
the modified vesting conditions into account when applying the requirements for treatment of
vesting conditions as specified in Guidance Note.

Therefore, because the modification to the performance condition made it less likely that the
stock options will vest, which was not beneficial to the employee, the enterprise takes no
account of the modified performance condition when recognizing the services received. Instead,
it continues to recognize the services received over the three-year period based on the original
vesting conditions. Hence, the enterprise ultimately recognizes cumulative remuneration expense
of ` 1,80,000 over the three- year period (12 employees × 1,000 options × ` 15).

The same result would have occurred if, instead of modifying the performance target, the
enterprise had increased the number of years of service required for the stock options to vest
from three years to ten years. Because such a modification would make it less likely that the
options will vest, which would not be beneficial to the employees, the enterprise would take no
account of the modified service condition when recognizing the services received. Instead, it
would recognize the services received from the twelve employees who remained in service over
the original three- year vesting period.

11 CREDENT PROFESSIONAL STUDIES