Employees Stock Option Plan (ESOP)
ESOP (Employees Stock Option Pan) is a plan for issue of shares to directors and employees of a company at a discount (price lower than its Fair/Market value) as per agreement between the company and its employees.
It is an option granted by the company but not an obligation to be fulfilled by the employees by accepting this option or offer.
The Companies Act, 2013 (Section 53) prohibits issue of shares at a discount. But, through Section 54, it permits issue of ESOPs at a discount.
Main conditions of issuing shares under ESOP:
1) Shares are of the same class as already issued.
2) It is authorised by special resolution passed by the company.
3) This resolution must specify all the details of such shares, market price prevailing at that time, employees etc.
4)At least one year has elapsed since the commencement of the business by the company.
5)Listed shares must be issued according to the SEBI guidelines.
Main Terms relating to ESOP
Grant Date
It is the date on which agreement is entered into between the Enterprise and Employees for grant of ESOPs.
Vesting Period
It is the period between the Grant Date and the date on which all the specified conditions of Employees Stock Option Plan (ESOP) should be satisfied.
Vesting Date
It is the date on which conditions of granting ESOPs are met.
Exercise
It means exercising the right to subscribe the options granted to the employees.
Exercise Period
It is the period after vesting date given to an employee to exercise the options given under the Plan.
Exercise Price
It is the price payable by the employee for exercising the right for option granted.
Value of option =No. of shares issued X (Market Price - Exercise Price)
Amount to be amortized each year = Value of option / No. of years in vesting period
Illustration
A company grants 1250 options under stock option scheme on 1st April 2012 at ₹80 when the market price is ₹200, and the face value is ₹10.The vesting period is 3 years. The maximum exercise period is one year.
a) Calculate the value of options.
b) Calculate the amount of Employee Compensation Expense to be amortized each year.
Solution:
a) Value of option =No. of shares issued X (Market Price - Exercise Price)
                =1250 X (₹200 - ₹80) = ₹150000
b) Amount to be amortized each year = ₹150000/3 = ₹50000
Accounting Treatment
The difference between Market Value and Issue Price is borne by the company as It is an expense for the company. Following Journal entry is passed:
Employees Compensation Expense A/c       Dr.
         To Shares Options Outstanding A/c
Employees Compensation Expense A/c is shown under ‘Employees Benefit Expenses’ in the Statement of Profit and Loss.
Shares Options Outstanding Account is shown as Reserves and Surplus under Shareholders’ Funds.
When the Vesting Period has Elapsed
When all Options are Exercised by the Employees
| 1. | Bank A/c                                      Dr. To Share Capital A/c To Securities Premium Reserve A/c (Shares allotted against ESOP) |  (Amount Received) (Nominal Value Per Share X No. of Shares) (Amount of Securities Premium Received) |
| 2. | Shares Options Outstanding A/c   Dr. To Securities Premium Reserve A/c (The amount of Shares Options Outstanding A/c transferred to Securities Premium Reserve) | (Amount credited to Shares Options Outstanding A/c)
|
Alternative Journal Entry (Combining the above two journal entries) :
| 1. | Bank A/c                       Dr. Shares Options Outstanding A/c Dr. To Share Capital A/c To Securities Premium Reserve A/c (Shares allotted against ESOP) | (Amount Received) (Amount Credited to Shares Options Outstanding A/c) (Nominal Value Per Share X No. of Shares) (Amount Received in Excess of Nominal Value + Amount Credited to Shares Options Outstanding A/c) |
Â
When All Options are not Exercised
| 1. | Bank A/c                       Dr. To Share Capital A/c To Securities Premium Reserve A/c (Shares allotted against ESOP) | (Amount Received) (Nominal Value Per Share X No. of Shares) (Amount of premium Received i.e., difference between Issue Price – Nominal Value of shares) |
| 2. | Shares Options Outstanding A/c     Dr. To Securities Premium Reserve A/c To General Reserve A/c (Amount credited to Shares Options Outstanding Account and General Reserve) | (Amount credited to Shares Options Outstanding Account) (Amount credited to Shares Options Outstanding Account and relating to Options Exercised) (Amount credited to Shares Options Outstanding Account and relating to Options not Exercised) |
Alternative Journal Entry (Combining the mentioned two journal entries) :
| 1. | Bank A/c                                          Dr. Shares Options Outstanding A/c     Dr. To Share Capital A/c To Securities Premium Reserve A/c To General Reserve A/c (Shares allotted against ESOP) | (Amount Received) (Amount Credited to Shares Options Outstanding A/c) (Nominal Value Per Share X No. of Shares) (Amount Credited to Shares Options Outstanding A/c relating to Options Exercised + amount received as premium) (Amount Credited to Shares Options Outstanding A/c relating to Options not Exercised) |
Illustration
A company granted option to subscribe 30 shares of ₹ 10 each at a price of ₹ 60 per share to each of its 100 employees on completion of service for 3 years. Fair (Market) price of each share as on the grant date was ₹ 90. The employees were to exercise the option within three years of the Vesting Date. All the employees exercised the option by the exercise date. Pass the necessary journal entries.
Solution:
| 1. | Year1 | Employees Compensation Exp. A/c     Dr.                 30000 To Shares Options Outstanding A/c                    30000 |
| 2. | Year2 | Employees Compensation Exp. A/c     Dr.                  30000 To Shares Options Outstanding A/c                    30000 |
| 3. | Year3 | Employees Compensation Exp. A/c Dr.                      30000 To Shares Options Outstanding A/c                    30000 |
| 4. | Year4 | Bank A/c                                             Dr. 180000(30 X 100 X ₹60) Shares Options Outstanding A/c    Dr.   90000 To Share Capital A/c                 30000 (30 X 100 x ₹10)Nominal Value To Securities Premium Res. A/c            240000 (30 x 100 x ₹ 80) |
Illustration
A company granted option to subscribe 50 shares of ₹ 10 each at a price of ₹ 60 per share to each of its 100 employees on completion of service for 3 years. Fair (Market) price of each share as on the grant date was ₹ 90. The employees were to exercise the option within three years of the Vesting Date. All the employees except 10 employees exercised the option by the exercise date. Pass the necessary journal entries.
Solution:
| 1. | Year1 | Employees Compensation Exp. A/c                    Dr. 50000 To Shares Options Outstanding A/c                 50000 |
| 2. | Year2 | Employees Compensation Exp. A/c                   Dr. 50000 To Shares Options Outstanding A/c                 50000 |
| 3. | Year3 | Employees Compensation Exp. A/c                    Dr. 50000 To Shares Options Outstanding A/c                50000 |
| 4. | Year4 | Bank A/c                                                    Dr. 270000(50 X 90 X ₹ 60) Shares Options Outstanding A/c         Dr.  150000 To Share Capital A/c                 45000(50 X 90 x ₹ 10) To Securities Premium Reserve. A/c   360000(50 x 90 x ₹ 80) To General Reserve A/c          15000(50 x 10 x ₹ 30) |