Share Based Employee Compensation Plans have become increasingly common and form an important feature of remuneration packages for Directors, Senior Executives and other Employees all over the world. With the advent of globalization and establishment of MNCs in India, the Employee Stock Option Plans (“ESOPs”) trend has taken the employee compensation practices by wave.

The term ESOP is well established & widely known and hence, needs no explanation. However, there are some practical aspects which may not be popularly known but every company carrying on ESOP implementation has to deal with. Such few queries and issues are discussed herewith.

Are ESOPs cost to the company?

Yes, as the shares under an Employee Stock Option Plan, are often issued to the employees at a price lower than market price in consideration of the services provided by them. However, this cost is notional and there will not be any cash outflow against this cost.

How to recognize ESOPs in Books of Accounts?

The Companies Act, 2013 requires every company (listed or unlisted) to prepare its Books of Accounts as per the Accounting Standards as recommended by the Institute of Chartered Accountants of India (ICAI) from time to time as prescribed in accordance with Section 133 and Rule 12 of the Companies (Share Capital & Debentures) Rules, 2014, also requires compliance with the applicable accounting standards.

Listed Companies have to ensure compliance with the SEBI Regulations. The SEBI (SBEB) Regulations 2014 under regulation 15 also require companies implementing any of the share based schemes to follow the requirements of the ‘Guidance Note on Accounting for employee Share-Based Payments’ (Guidance Note) or Accounting Standards as may be prescribed by the Institute of Chartered Accountants of India (ICAI) from time to time.

Accounting of share based payment transactions is done in accordance with the reporting framework established by:

  • Guidance Note on Accounting for Employee Share Based Payments or
  • Ind AS 102 on Share Based Payment

The corporate entities which are required to follow Ind AS or which have voluntarily adopted Ind AS cannot account for the share based payment based on Guidance Note.

How to determine the Compensation Cost under ESOP?

Method of Valuation:

  • The company has the option to choose either Fair Value Method or Intrinsic Value Method for determining the Compensation Cost. There is no difference in accounting procedure of the expense under both the methods.
  • The Guidance Note on Accounting for Share Based Payments issued by the ICAI, as applicable on the company, recommends that accounting for ESOP should be based on the fair value approach. However, intrinsic value method is also permitted under the guidance note.
  • As per Ind AS Services provided by employees are always measured by reference to the fair value of the equity instruments granted. Intrinsic Value has to be opted only if the fair value cannot be determined reliably.

Measurement Date:

The Intrinsic Value/Fair Value has to be determined on the date of grant of options.

Period of Booking:

The compensation cost is recorded in the books of accounts from the date of grant of the options up to the date of vesting of the options i.e. proportionately over the vesting period.

Recognition of ESOP (Share Based Payments):

An entity shall recognize the compensation cost measured at the grant date fair value unless vesting conditions are not fulfilled. The compensation cost is accounted as an expense over the vesting period of the options during which the employee provides service to the company.

Modifications, Cancellations and Forfeitures:

An entity might modify the terms and conditions on which the equity instruments were granted. Entities may make changes to their existing ESOP under following circumstances:

  • where the share price falls, an entity might modify the terms and conditions on which equity instruments were granted to maintain an incentive to the employee,
  • where entities or employees cancel and settle a grant of equity instruments during a vesting period (e.g. an entity cancels an award and settles in cash on a pro rata basis),
  • where employees leave their employment with an entity and forfeit their rights

If an entity modifies as award, it must recognize, cost of the original award as if the award was not modified. If modification increases fair value of the award, the entity must recognize that additional cost over the period from the modification date until the vesting of modified options.

If a grant of equity instruments is cancelled or settled during the vesting period (other than a grant cancelled by forfeiture when the vesting conditions are not satisfied) the entity shall account for the cancellation or settlement as an acceleration of vesting, and shall therefore recognize immediately the amount that otherwise would have been recognized for services received over the remainder of the vesting period.

Is Compensation Cost under ESOP allowed under Income Tax?

The companies allotting ESOPs can claim expense of the compensation cost in calculating profits & gains arising from business u/s 37 of the Income Tax act, 1961. Various orders passed at ITAT and High Court level have upheld the allowance of expense related to shares issue under ESOP, with the landmark case of M/s Biocon Limited Vs. Dy.CIT (ITAT Bang) being a precedent for many cases including the case of DCIT Vs M/s Kotak Mahindra Bank (ITAT Mum). Recently the Delhi High Court upheld the decision of the ITAT in the case of Pr-CIT Vs NDTV (Del HC) regarding treatment of ESOP Expenses as ascertained liability and its allowance in P&L account.


With an aim of engaging and retaining an employee for achievement of long term goals, Stock Options are the next big thing in India. The benefits to be passed on to a blue collar is ultimately to be borne by the Company in Compliance with relevant accounting standards (IND AS 102) / Guidance note (18), which specifically deals with the recognition of costs, valuation methodology to be followed, period of booking and various other complexities involved therein. The Cost, although being notional in nature, is an allowable expense under the Income Tax Act, 1961and supported by various case settled in different tribunals.

With the intention of creating satisfaction among the most important asset of the Company “Human Resource”, ESOPs not only helps you to predict it, rather create it.

Ms. Mohini Varshenya

Ms. Mohini Varshenya

Partner & Head-ESOP Services

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