(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
31-3-2001
Employee Compensation
Employee Compensation
24,000
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.