Accounting of employee stock options in india

Experts from Taxmantra shed some light As a founder, you would always want to hire the best of resources for your startup, but the problem is that the best has cost attached to it, which a startup may not be able to afford initially. Thus, Employee Stock Option Plan ESOPs gives a solution to the […].

Experts from Taxmantra shed some light. As a founder, you would always want to hire the best of resources for your startup, but the problem is that the best has cost attached to it, which a startup may not be able to afford initially.

From long term perspective, Employee Stock Option Plan is considered as a good management tool for retention of human talent. The personnel can exercise the options only after the vesting period elapses. Employers use share-based payments as a part of remuneration package for their employees.

Hence the employers engaged in such arrangements with employees recognize the cost of services received over the requisite service period. The accounting value is determined by finding either fair value of the option or intrinsic value of the option. Intrinsic value means the excess of the fair value of the share at the date of grant of the option over the exercise price of the option.

Fair value of an option means the market price of the option, had it been traded in the market. The total compensation cost is the fair value of the instruments issued multiplied by the number of instruments that actually vest.

This cost is recognized over the requisite service period with a corresponding credit to Employee Stock Options Outstanding account.

Accounting for Leveraged Employee Stock Ownership Plans (ESOPs)

The number of instruments expected to vest is estimated at the service inception date, and is revised during the requisite service period to reflect subsequent information. Total compensation cost is also revised accordingly.

Employees earn the right to exercise the option after the completion of the vesting period, which is generally the service condition. The requirement that an individual remain an employee for that period is a service condition.

An explicit service condition is explicitly stated in the terms of share-based arrangements e. The objective of accounting for transactions under share-based arrangements with employees is to recognize compensation costs related to employee services received in exchange for equity instruments issued. For tax purposes, ESOP benefits received by the employee will be taxable as perquisite. It will be the difference between the fair market value FMV of the shares on the date of exercise of the options less the exercise price.

However it shall be taxable only when shares are allotted under ESOPs. Where shares in the company are listed on a single recognised stock exchange then FMV shall be the average of opening and closing price of shares on the date of exercise of option. However, if on the date of exercise of option there is no trading in shares, the FMV shall be the closing price of the share on any recognised stock exchange on a date closest to the date of exercise of option and immediately preceding such date of exercise of option.

Where shares in the company are not listed on a recognised stock exchange then FMV shall be such value of the share in the company as determined by a category I merchant banker registered with SEBI on the specified date. Specified date means the date of exercise of option or any date earlier than the date of exercise of option, not being a date which is more than days earlier than the date of exercise of option.

Hence the deduction is allowable in the year in which the option is exercised by the employees i. Startups and other businesses feel free to visit Taxmantra.

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Alok Patnia founded Taxmantra. He is an expert in handling taxation issues, has great insights on the business startup issues such as choosing right business entity and also has vast experience in the field of business maintenance services such as accounting, auditing, company law compliances, service tax and other related fields. He is a qualified Chartered Accountant and a commerce bachelor from St. Non-binary transfeminine poet Alok Vaid-Menon celebrates the colour of pride. What does John Lennon, Bob Dylan, Pete Seeger and Indian Ocean have in common?

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