SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999
SCHEDULE I : Accounting Policies for ESOS
(Clause 13.1)
(a) In respect of options granted during any accounting period, the accounting value of the options shall be treated as another form of employee compensation in the financial statements of the company.
(b) The accounting value of options shall be equal to the aggregate, over all employee stock options granted during the accounting period, of the fair value of the option.
For this purpose:
1. Fair value means the option discount, or, if the company so chooses, the value of the option using the Black Schools formula or other similar valuation method.
2. Option discount means the excess of the market price of the share at the date of grant of option under ESOS over the exercise price of the option (including up-front payment, if any)
(c) Where the accounting value is accounted for as employee compensation in accordance with ‘b’, the amount shall be amortized on a straight-line basis over the vesting period.
(d) When an unvested option lapses by virtue of the employee not conforming to the vesting conditions after the accounting value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expense equal to the amortized portion of the accounting value of the lapsed options and a credit to deferred employee compensation expense equal to the unamortized portion.
(e) When a vested option lapses on expiry of the exercise period, after the fair value of the option has already been accounted for as employee compensation, this accounting treatment shall be reversed by a credit to employee compensation expense.
(f) The accounting treatment specified above can be illustrated by the following numerical example:-
Suppose of a company grants 500 options on 1-4-1999 at Rs . 40 when the market price is Rs . 160, the vesting period is two and a half years, the maximum exercise period is one year. Also suppose that 150 unvested options lapse on 1-5-2001, 300 options are exercised on 30-6-2002 and 50 vested options lapse at the end of the exercise period. The accounting value of the option being:
500 * (160 - 40) = 500 * 120= 60,000
The accounting entries would be as follows:
|
1-4-1999 |
Deferred Employee Compensation Expense Employee Stock Options Outstanding (Grant of 500 options at a discount of Rs . 120 each) |
60,000 |
60,000 |
|
31-3-2000 |
Employee Compensation Expense |
24,000 |
|
|
|
Deferred Employee Compensation Expense (Amortization of the deferred compensation over two and a half years on straight-line basis) |
|
24,000 |
|
31-3-2001 |
Employee Compensation Expense |
24,000 |
|
|
|
Deferred Employee Compensation Expense (Amortization of the deferred compensation over two and a half years on straight-line basis) |
|
24,000 |
|
1-5-2001 |
Employee Stock Options Outstanding |
18,000 |
|
|
|
Employee Compensation Expense |
|
14,000 |
|
|
Deferred Employee Compensation Expense |
|
3,600 |
|
|
(Reversal of compensation accounting on lapse of 150 unvested option) |
|
|
|
31-3-2002 |
Employee Compensation Expense |
8,400 |
|
|
|
Deferred Employee Compensation Expense |
|
8,400 |
|
|
(Amortization of the deferred compensation over two and half years on straight-line basis) |
|
|
|
30-6-2002 |
Cash |
12,000 |
|
|
|
Employee Stock Options Outstanding |
36,000 |
|
|
|
Paid up Equity Capital |
|
3,000 |
|
|
Share Premium Account |
|
45,000 |
|
|
(Exercise of 300 options at an exercise price of Rs . 40 each and an accounting value of Rs . 120 each ) |
|
|
|
1-10-2002 |
Employee Stock Options Outstanding |
6,000 |
|
|
|
Employee Compensation Expense |
|
6,000 |
|
|
(Reversal of compensation accounting on lapse of 50 vested option at the end of exercise period) |
|
|
The T-Accounts for Employee Stock Options Outstanding and Deferred Employee Compensation Expense would be as follows:
EMPLOYEE STOCK OPTIONS OUTSTANDING ACCOUNT
|
1-5-2001 |
Employee |
18,000 |
1-4-1999 |
Deferred Compensation |
60,000 |
|
|
Compensation/ Deferred Compensation |
36,000 |
|
|
|
|
30-6-2002 |
Paid Up Capital/ Share Premium |
6,000 |
|
|
|
|
1-10-2002 |
Employee Compensation |
60,000 |
|
|
60,000 |
DEFERRED EMPLOYEE COMPENSATION EXPENSE ACCOUNT
|
1-4-1999 |
ESOS Outstanding |
60,000 |
31-3-2000 |
Employee Compensation |
24,000 |
|
|
|
60,000 |
1-5-2001 31-3-2002 |
ESOS Outstanding Employee compensation |
3,600 8,400 60,000 |
Employee Stock Options Outstanding will appear in the Balance Sheet as part of Net worth or shareholder’s Equity Deferred Employee Compensation will appear in the Balance Sheet as a negative item as part of Net Worth or Shareholders’ Equity.
