CA NITIN GOEL EMPLOYEE STOCK OPTION PLAN

CH
EMPLOYEE STOCK OPTION PLAN
7
“Success is the sum of small efforts repeated day in and day out.”

WEIGHTAGE IN PAST YEAR EXAMS

10 10
5 5 5 5 5 5
MAY 18 NOV 18 MAY19 NOV 19 NOV 20 JAN 21 JULY 21 DEC 21

1A INTRODUCTION TO CHAPTER
Employee Share based payments
[Sec. 62 of Company’s Act 2013, Guidance Note on Accounting for Share based Payments]

Equity Settled Share Cash Settled Share Based Share Based payment
Based payment payment transactions transactions with cash
transactions E.g. Stock Appreciation alternatives
E.g. ESOP Rights
Whenever employees are allowed compensation in form of shares or based on shares
then benefits arising from such shares are called share based payment.
Employee share-based payment plans can be classified into the following three categories:
❖ Equity-settled share-based payment transactions: Under these plans, the employees
receive shares, e.g. ESOP
❖ Cash-settled share-based payment transactions: Under these plans, the employees
receive cash based on the price (or value) of the enterprise’s shares, e.g. Stock
Appreciation Rights (SAR)
❖ Share-based payment transactions with cash alternatives: Where an entity has a choice
of issuing shares or paying cash.

TOPIC 2 EQUITY SETTLED SHARE BASED PAYMENT TRANSACTIONS (ESOP)

A. Employee Stock Option Plan

It is a plan under which the enterprise grants employee stock option. Employee stock option
is contract that gives the employees of an enterprise the right but not the obligation for a
specified period of time to purchase or subscribe the shares of the company at a fixed or
determinable price which is generally lower than the prevailing market price of its share.

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❖ Importance of such Plans

a) Stock options provide opportunities to employees to participate & contribute in growth of
Company
b) Stock options create long term wealth in the hands of the employees
c) They are important means to attract, retain & motivate the best available talent for the
company.
d) It creates a common sense of ownership between the company & its employees.

Why ESOP’s
• Link personal wealth creation to organizational creation
• Attract, reward, motivate and retain talent at the start-up/growth stage
• Deferred compensation strategy
• Good retirement benefit plan
• Reduction in cash costs – market pays not the Company
• Can be especially important for start-up Companies that are cash starved
• Promote employee ownership culture
• Helpful tool in cash crunch
• In case of economic slow-down where companies are low at cash, they can motivate
employee by offering ESOPs
Unlisted companies, in particular, start up companies, often give share based compensation
since they cannot afford to pay high salaries to their employees but are willing to share the
future prosperity of the company. It is hence important that the cost relating to these stock
options get recognised in the financial statements.

What Company sees while granting ESOPs to employees

• Loyalty, Performance and Designation
• Present and Potential Contribution
• Opportunity Cost

❖ Important Terms
Grant Date It is the date at which the enterprise and an employee agree to a
employee stock option plan, being when the enterprise and the
counterparty have a shared understanding of the terms and conditions
of the arrangement. At grant date, the enterprise confers on the
counterparty the right to cash, other assets, or equity instruments of the
enterprise, provided the specified vesting conditions, if any, are met. If
that agreement is subject to an approval process (for example, by
shareholders), grant date is the date when that approval is obtained.
Vesting It is the period during which all the specified vesting conditions of an
period employee stock option plan are to be satisfied.

Exercise is the time period after vesting within which the counterparty should
period exercise his/her/its right to apply for equity instruments (including
shares or share options) against the option vested in him in pursuance
of the employee stock option plan.
Exercise Price is the price payable by the counterparty for exercising the option
Price granted to him/her/it in pursuance of the employee stock option plan

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Journal Entries
➢ AT THE END OF EACH ACCOUNTING PERIOD DURING VESTING PERIOD
1) Employee Compensation Expense A/c Dr.
To Employee Stock Option Outstanding A/c
2) Profit & Loss A/c Dr.
To Employee Compensation Expense A/c

Calculation of Expense:
(No. of Options expected to vest X Fair value of option) X Expired Period XX
Vesting Period
Less: Expense Recorded till last year (XX)
Expense for the Current Year XX

Note: Methods
1) Intrinsic Value Method:
Expense per Option = Relevant Market Price – Exercise Price

2) Fair Value Method:

Expense per Option is Fair value of option which is already given.

➢ AT THE TIME OF EXERCISE

Bank A/c Dr.

Employee Stock Option Outstanding A/c Dr.
To Equity Share Capital A/c
To Securities Premium A/c

➢ AT THE TIME OF CANCELLATION

Employee Stock Option Outstanding A/c Dr.

To General Reserve A/c

CONCEPT OF GRADED VESTING UNDER ESOP:

In case the options/shares granted under an employee stock option plan do not vest on one
date but have graded vesting schedule, total plan should be segregated into different groups,
depending upon the vesting dates. Each of such groups would be having different vesting
period and expected life and, therefore, each vesting date should be considered as a separate
option grant and evaluated and accounted for accordingly.
For example, suppose an employee is granted 100 options which will vest @ 25 options per
year at the end of the third, fourth, fifth and sixth years. In such a case, each lot of 25 options
would be evaluated and accounted for separately.

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TOPIC 3 CASH SETTLED SHARE BASED PAYMENT TRANSACTIONS (SAR)

B. Stock Appreciation Rights

Under this scheme employees are not offered any shares but they are given option to claim
in cash any appreciation in agreed price.
➢ AT THE TIME OF RECOGNIZING EXPENSES

➢ AT THE TIME OF PAYMENT

Note: Expense is calculated in same manner as in case of employee stock option plan.

TOPIC 4 SHARE BASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVE

SS C. Share-based payment transactions with cash alternatives :

Where an entity has a choice of issuing shares or paying cash then the entity shall recognise
a liability if it determines that it has an obligation to settle the liability in cash. If on settlement
the entity issues shares rather than paying cash then the value of the liability should be
transferred to equity

These plans consist of two components viz.,

(i) liability, i.e., the employer’s obligation to pay price differential in cash and
(ii) equity, i.e., the employer’s obligation to issue shares at exercise price.
The company should first measure, on the grant date, fair value of the plan on the assumption
that all employees will exercise their options in favour of (i) cash settlement (ii) equity
settlement. The fair value of plan for cash settlement is the fair value of the liability
component. The excess, if any, of fair value of plan for equity settlement over the liability
component is the fair value of equity component. The accounting procedure for equity
component is same as that for ESOP. The accounting procedure for liability component is
same as that for SAR.
On the date of settlement, the company should re-measure the liability to its fair value. If the
employees opt for shares, the amount of liability should be treated as the consideration for
the shares issued. If the employees opt for cash settlement, the balance in ESOP Outstanding
A/c should be transferred to general reserve.

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ASSIGNMENT QUESTIONS

TOPIC 2 EMPLOYEE STOCK OPTION PLAN

Question 1 (ICAI Study Material) Pg no._____

S Ltd. grants 1,000 options to its employees on 1.4.2017 at ₹ 60. The vesting period is two and
a half years. The maximum exercise period is one year. Market price on that date is ₹ 90.
Fair value per option is ₹ 30. All the options were exercised on 31.7.2020. Journalize, if the
face value of equity share is ₹ 10 per share.

Question 2 (ICAI Study Material) Pg no._____

ABC Ltd. grants 1,000 employees stock options on 1.4.2018 at ₹ 40, when the market price is
₹ 160. The fair value of option calculated using an option pricing model is ₹ 120 per option.
The vesting period is 2½ years and the maximum exercise period is one year. 300 unvested
options lapse on 1.5.2020. 600 options are exercised on 30.6.2021. 100 vested options lapse
at the end of the exercise period. Pass Journal Entries giving suitable narrations.

Question 3 (ICAI Study Material) Pg no._____

A company has its share capital divided into shares of ₹ 10 each. On 1-4-2020, it granted
5,000 employees stock option at ₹ 50, when the market price was ₹ 140. Fair value per option
is ₹ 90. The options were to be exercised between 1-03-2021 to 31-03-2021. The employees
exercised their options for 4,800 shares only; remaining options lapsed. Pass the necessary
journal entries for the year ended 31-3-2021, with regard to employees’ stock option

Question 4 (ICAI Study Material) Pg no._____

On 1st April, 2021, a company offered 100 shares to each of its 500 employees at ₹ 50 per
share. The employees are given a month to accept the offer. The shares issued under the
plan shall be subject to lock-in on transfer for three years from the grant date. The market
price of shares of the company on the grant date is ₹ 60 per share. Due to post-vesting
restrictions on transfer, the fair value of shares issued under the plan is estimated at ₹ 56
per share & Fair value per option worked out to be ₹ 6. On 31st March, 2022, 400 employees
accepted the offer and paid ₹ 50 per share purchased. Nominal value of each share is ₹ 10.
Record the issue of shares in the books of the company under the aforesaid plan.

Question 5 Pg no._____
The following particulars in respect of stock options granted by a company are available:
Grant date April 1, 2018
Number of employees covered 300
Vesting condition: Continuous employment upto 31/03/21
Nominal value per share (₹) 10
Exercise price per share (₹) 40
Fair value of option per share on grant date (₹) 20
Exercise date July 31, 2021
The number of options to vest per employee shall depend on company’s average annual
earning after tax during vesting period as per the table below:
Average annual earning after tax Number of options per
employee
Less than ₹ 100 crores Nil
₹ 100 crores to less than ₹ 120 crores 30

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₹ 120 crores to less than ₹ 150 crores 45

Above ₹ 150 crores 60

Position on 31/03/19
(a) The company expects to earn ₹ 115 crores after tax on an average per year during vesting
period.
(b) Number of employees expected to be entitled to option = 280
Position on 31/03/20
(a) The company expects to earn ₹ 130 crores after tax on an average per year during vesting
period.
(b) Number of employees expected to be entitled to option = 270
Position on 31/03/21
(a) The company earned ₹ 128 crores after tax on an average per year during vesting period.
(b) Number of employees entitled to option = 275
Position on July 31, 2021
Number of employees exercising option = 265
Compute expenses to be recognised in each year and value of options forfeited.

Question 6 (ICAI Study Material) Pg no._____

At the beginning of year 1, an enterprise grants 10,000 stock options to a senior executive,
conditional upon the executive remaining in the employment of the enterprise until the end of
year 3. The exercise price is ₹ 40. However, the exercise price drops to ₹ 30 if the earnings
of the enterprise increase by at least an average of 10 per cent per year over the three-year
period.
On the grant date, the enterprise estimates that the fair value of the stock options, with an
exercise price of ₹ 30, is ₹ 16 per option. If the exercise price is ₹ 40, the enterprise estimates
that the stock options have a fair value of ₹ 12 per option.
During year 1, the earnings of the enterprise is 12 per cent, and the enterprise expects that
earnings will continue to increase at this rate over the next two years. The enterprise,
therefore, expects that the earnings target will be achieved, and hence the stock options will
have an exercise price of ₹ 30.
During year 2, the earnings of the enterprise is 13 per cent, and the enterprise continues to
expect that the earnings target will be achieved.
During year 3, the earnings of the enterprise is only 3 per cent, and therefore the earnings
target was not achieved. The executive completes three years’ service, and therefore satisfies
the service condition. Because the earnings target was not achieved, 10,000 vested stock
options have an exercise price of ₹ 40.
Calculate the amount to be charged to Profit and Loss Account every year on account of
compensation expenses.

Question 7 (ICAI Study Material) Pg no._____

Choice Ltd. grants 100 stock options to each of its 1,000 employees on 1.4.2018 for ₹ 20,
depending upon the employees at the time of vesting of options. Options would be exercisable
within a year it is vested. The market price of the share is ₹ 50 each.
These options will vest at the end of year 1 if the earning of Choice Ltd. is 16%, or it will vest
at the end of the year 2 if the average earning of two years is 13%, or lastly it will vest at the
end of the third year if the average earning of 3 years will be 10%. 5,000 unvested options
lapsed on 31.3.2019. 4,000 unvested options lapsed on 31.3.2020 and finally 3,500 unvested
options lapsed on 31.3.2021. Fair value per option is ₹ 30.
Following is the earning of Choice Ltd.:

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Year ended on Earning (in %)

31.03.2019 14%
31.03.2020 10%
31.03.2021 7%
850 employees exercised their vested options within a year and remaining options were
unexercised at the end of the contractual life. Pass Journal entries for the above

Question 8 Pg no._____
Siya Ltd. provides you the following information:
No. of employees 2,500
No. of option to be granted to each employee 500
Vesting period 4 years
No. of employees not expected to fulfill the vesting
conditions other than market conditions
1st Year 20%
2nd Year 15%
3rd Year 10%
4th Year 10%
Fair value of the option per share ₹5
Exercise Price ₹ 50
Exercise Period 3 years
Face value of each share ₹ 10
At the end of third year it has been re-estimated that all vesting conditions have been fulfilled
and no other further conditions are required for options to vest and 600 employees exercise
their option at the end of 4th year, 800 employees exercise their option at the end of 5th year
and 100 employees exercise their option at the end of 6th year. Rights of 30 employees expire
unexercised at the end of the 6th year. Pass necessary journal entries for all the years.

Question 9 (RTP Nov 2019) Pg no._____

The following particulars in respect of stock options granted by a company are available:
Grant date April 1, 2018
Number of employees covered 50
Number options granted per employee 1,000
Fair value of option per share on grant date (₹) 9
The options will vest to employees serving continuously for 3 years from vesting date,
provided the share price is ₹ 65 or above at the end of 2020-21. The estimates of number of
employees satisfying the condition of continuous employment were 48 on 31/03/19, 47 on
31/03/20. The number of employees actually satisfying the condition of continuous
employment was 45. The share price at the end of 2020-21 was ₹ 68. Compute expenses to
recognise in each year & show important accounts in books of company.

Question 10 Pg no._____
The following particulars in respect of stock options granted by a company are available:
Grant date April 1, 2017
No. of employees covered 525
No. of option to be granted to each employee 100
Vesting condition: Continuous employment for 3 years
Nominal value per share (₹) 100
Exercise price per share (₹) 125
Market price per share on grant date (₹) 149

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Vesting date March 31, 2020

Exercise Date March 31, 2021
Fair value of option on grant date (₹) 30
Position on 31/03/18
(a) Estimated annual rate of departure 2%
(b) Number of employees left = 15
Position on 31/03/19
(a) Estimated annual rate of departure 3%
(b) Number of employees left = 10
Position on 31/03/20
(a) Number of employees left = 8
(b) Number of employees entitled to exercise option = 492
Position on 31/03/21
(a) Number of employees exercising the option = 480
(b) Number of employees not exercising the option = 12
Compute expenses to recognise in each year by Fair value method (ii) Intrinsic value method

Question 11 Pg no._____
At the beginning of year 1, an enterprise grants 300 options to each of its 1,000 employees.
The contractual life (comprising the vesting period and the exercise period) of options granted
is 6 years. The other relevant terms of the grant are as below:
Vesting Period 3 years
Exercise Period 3 years
Exercise Price ₹ 50
Market Price ₹ 50
Expected forfeitures per year 3%
The fair value of options, calculated using an option pricing model, is ₹ 15 per option.
Actual forfeitures, during year 1, are 5% and at the end of year 1, the enterprise still expects
that actual forfeitures would average 3% per year over the 3 year vesting period.
During the year 2, however, the management decides that the rate of forfeitures is likely to
continue to increase, and the expected average forfeiture rate for the entire period is changed
to 6% per year.
It is also assumed that 840 employees have actually completed 3 years vesting period.
200 employees exercise their right to obtain shares vested in them in pursuance of the ESOP
at the end of year 5 and 600 employees exercise their right at the end of year 6.
Rights of 40 employees expire unexercised at the end of the contractual life of the option, i.e.,
at the end of year 6. Face value of one share of the enterprise is ₹ 10.
Compute expense for each year & pass journal entries for the years 5 & 6.

Question 12 Pg no._____
The following particulars in respect of stock options granted by a company are available:
Grant date April 1, 2018
No. of employees covered 400
No. of option to be granted to each employee 60
Nominal value per share ( ₹ ) 100
Exercise price per share ( ₹ ) 125
Shares offered were put in three groups. Group 1 was for 20% of shares offered with vesting
period one-year. Group II was for 40% of shares offered with vesting period two-years. Group
III was for 40% of shares offered with vesting period three-years. Fair value of option per
share on grant date was ₹ 10 for Group I, ₹ 12.50 for Group II and ₹ 14 for Group III.

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Position on 31/03/19
(a) Number of employees left = 40
(b) Estimate of number of employees to leave in 2019-20 = 36
(c) Estimate of number of employees to leave in 2020-21 = 34
(d) Number of employees exercising options in Group I = 350
Position on 31/03/20
(a) Number of employees left = 35
(b) Estimate of number of employees to leave in 2020-21 = 30
(c) Number of employees exercising options in Group II = 319
Position on 31/03/21
(a) Number of employees left = 28
(b) Number of employees at the end of last vesting period = 297
(c) Number of employees exercising options in Group III = 295
Options not exercised immediately on vesting, were forfeited.
Compute expenses to recognise in each year by fair value method.

TOPIC 3 STOCK APPRECIATION RIGHTS

Question 13 Pg no._____
A company announced a Stock Appreciation Right on 01/04/18 for each of its 525 employees.
The scheme gives the employees the right to claim cash payment equivalent to excess on
market price of company’s shares on exercise date over the exercise price ₹ 125 per share in
respect of 100 shares, subject to condition of continuous employment for 3 years. The SAR is
exercisable after 31/03/21 but before 30/06/21. The fair value of SAR was ₹ 21 in 2018-19, ₹ 23
in 2019-20 and ₹ 24 in 2020-21. In 2018-19 the company estimates that 2% of the employees
shall leave the company annually. This was revised to 3% in 2019-20. Actually, 15 employees
left the company in 2018-19, 10 left in 2019-20 and 8 left in 2020-21.
The SAR therefore actually vested to 492 employees. On 30/06/21, when the SAR was
exercised, the value was ₹ 25 per share.
Show Provision for SAR A/c by fair value method.

TOPIC 4 SHARE BASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVES

Question 14 Pg no._____
A company announced a share-based payment plan for its employees on 01/04/18, subject to
a vesting period of 3 years. Face value of share is ₹ 10 per share. By the plan, the employees
can (i) either claim difference between exercise price ₹ 150 per share and market price of
those shares on vesting date in respect of 10,000 shares or (ii) can subscribe to 12,000 shares
at exercise price ₹ 150 per share, subject to lock in period of 5 years.
On 01/04/18, fair value of the option, without considering restrictions on transfers was ₹ 30
and that after considering restrictions on transfer was ₹ 27. The fair value estimates, without
considering transfer restrictions were ₹ 31.50, ₹ 32.70 and ₹ 34 respectively, at the end of
2018-19, 2019-20 and 2020-21
Show important accounts if employees opt for (i) cash settlement (ii) equity settlement.

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PRACTICE QUESTIONS

TOPIC 2 EMPLOYEE STOCK OPTION PLAN

Question 1 (ICAI Study Material) Pg no._____

X Ltd. granted 500 stock options to its employees on 1.4.2018 at ₹ 50 per share. The vesting
period is 2½ years and the maximum exercise period is one year. Market price on that date is
₹ 140 per share. All the options were exercised on 30.06.2021.
Pass journal entries giving suitable narrations, if the face value of equity share is ₹ 10 per
share.
(Ans: Employee Compensation Expense 45,000)
Question 2 (Inter Dec 2021) (5 Marks) Pg no._____
A Company grants 2000 employees stock options on 1st April, 2018 at ₹ 60 when the market
price is ₹ 170. The vesting period is 2.5 years and the maximum exercise period is 1 year. 600
unvested options lapse on 01.05.2020. 1200 options are exercised on 30.06.2021. 200 vested
options lapse at the end of the exercise period.
You are required to pass the necessary Journal Entries with narrations.
(Ans: Employee Compensation Expense 88,000; 88,000 & (22,000))
Question 3 (RTP May 2022) / (RTP May 2019 (Similar) Pg no._____
Noor Ltd. has its share capital divided into equity shares of ₹ 10 each. On 1.1.2021 it granted
4,000 employee stock options at ₹ 40 per share, when the market price was ₹ 60 per share.
Fair value per option was ₹ 20. The options were to be exercised between 15th March, 2021
and 31st March, 2021. The employees exercised their options for 2,500 shares only and the
remaining options lapsed. The company closes its books on 31st March every year.
You are required to give Journal entries (with narration) as would appear in the books of the
company for the year ended 31st March, 2021
(Ans: Employee Compensation Expense 50,000)
Question 4 (ICAI Study Material) Pg no._____
A) A Company has its share capital divided into shares of ₹ 10 each. On 1st April 2020, it
granted 10,000 employees’ stock options at ₹ 40, when the market price was ₹ 130. The
fair value of option calculated using an option pricing model is ₹ 90 per option. The options
were to be exercised between 15th March 2021 to 31st March 2021. The employees exercised
their options for 9,500 shares only; the remaining options lapsed. The company closes its
books on 31st March every year. Pass entries with regard to employees’ stock options.
(Ans: Employee Compensation Expense 8,55,000)
B) Arihant Limited has its share capital divided into equity shares of ₹ 10 each. On 1-10-2020,
it granted 20,000 employees’ stock options at ₹ 50 per share, when the market price was
₹ 120 per share. The fair value of option calculated using an option pricing model is ₹ 70
per option. The options were to be exercised between 10th December, 2020 and 31st March,
2021. The employees exercised their options for 16,000 shares only and the remaining
options lapsed. The company closes its books on 31st March every year.
Show Journal Entries (with narration) as would appear in the books of the company upto
31st March, 2021.
(Ans: Employee Compensation Expense 11,20,000)

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Question 5 (Inter May 2019) (5 Marks) Pg no._____

Bee Ltd. has its share capital divided into Equity Shares of ₹ 10 each. On 1st April, 2020, the
company offered 250 shares to each of its 520 employees at ₹ 60 per share, when the market
price was ₹ 150 per share. The options were to be exercised between 01-03-2021 to 31-03-
2021. 410 employees accepted the offer and paid ₹ 60 per share on purchased shares and the
remaining options lapsed. The company closes its books on 31st March every year.
You are required to show Journal Entries (with narrations) as would appear in the books of
Bee Ltd. for the year ended 31st March, 2021 with regard to employees stock options.
(Ans: Employee Compensation Expense 92,25,000)
Question 6 (RTP Nov 2018 / RTP Nov 2020 / ICAI Study Material) Pg no._____
JKS Ltd. has its share capital divided into equity shares of ₹ 10 each. On 1.1.2021 it granted
5,000 employee stock options at ₹ 30 per share, when the market price was ₹ 50 per share.
Fair value per option was ₹ 20. The options were to be exercised between 15th March, 2021
and 31st March, 2021. The employees exercised their options for 3,600 shares only and the
remaining options lapsed. The company closes its books on 31st March every year. You are
required to prepare journal entries (with narration) as would appear in the books of the
company up to 31st March, 2021.
(Ans: Employee Compensation Expense 72,000)
Question 7 (Inter Jan 2021) (5 Marks) Pg no._____
Raja Ltd. has its share capital divided into equity shares of ₹ 10 each. On 01-08-2020, it granted
2,500 employees stock options at ₹ 50 per share, when the market price was ₹ 140 per share.
The options were to be exercised between 1-08-2020 to 31-03-2021. The employees exercised
their options for 2,400 shares only and the remaining options lapsed. Raja Ltd. closes its
books of accounts on 31st March, every year.
You are to required to pass the necessary Journal Entries (including narration) for the year
ended 31-03-2021, with regard to employees' stock options and give working notes also.
(Ans: Employee Compensation Expense 2,16,000)
Question 8 (RTP May 2020) Pg no._____
On 1st April 2020, a company offered 100 shares to each of its 400 employees at ₹ 25 per share.
The employees are given a month to accept the shares. The shares issued under the plan
shall be subject to lock–in to transfer for three years from the grant date i.e. 30th April, 2020.
The market price of shares of the company on the grant date is ₹ 30 per share. Due to post–
vesting restrictions on transfer, the fair value of shares issued under the plan is estimated at
₹ 28 per share. Upto 30th April, 2020, 50% of employees accepted the offer and paid ₹ 25 per
share purchased. Nominal value of each share is ₹ 10.
Record the issue of shares in the books of the company under the aforesaid plan.
(Ans: Employee Compensation Expense 60,000)
Question 9 (Inter May 2018) (5 Marks) Pg no._____
Suvidhi Ltd. offered 50 shares to each of its 1500 employees on 1st April 2020 for ₹ 30. Option
would be exercisable within a year it is vested. The shares issued under the plan shall be
subject to lock-in on transfer for three years from the grant date. The market price of shares
of the company is ₹ 50 per share on grant date. Due to post vesting restrictions on transfer,
the fair value of shares issued under the plan is estimated at ₹ 38 per share. On 31 st March,
2021, 1200 employees accepted the offer and paid ₹ 30 per share purchased. Nominal value
of each share is ₹ 10. Record issue of shares in books of company under the aforesaid plan.
(Ans: Employee Compensation Expense 4,80,000)

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Question 10 (Inter Nov 2019) (5 Marks) / (RTP Nov 2021) Pg no._____

On 1st April, 2020, XYZ Ltd., offered 150 shares to each of its 750 employees at ₹ 60 per share.
The employees are given a year to accept the offer. The shares issued under the plan shall be
subject to lock-in period on transfer for three years from the grant date. The market price of
shares of the company on the grant date is ₹ 72 per share. Due to post vesting restrictions
on transfer, the fair value of shares issued under the plan is estimated at ₹ 67 per share.
On 31st March, 2021, 600 employees accepted the offer and paid ₹ 60 per share purchased.
Nominal value of each share is ₹ 10. You are required to record the issue of shares in the
books of the XYZ Ltd., under the aforesaid plan.
(Ans: Employee Compensation Expense 6,30,000)
Question 11 (ICAI Study Material) Pg no._____
Ajanta grants 120 share options to each of its 460 employees. Each grant is conditional on the
employee working for Ajanta over the next 3 years. Ajanta has estimated that the fair value
of each share option is ₹ 12. Ajanta estimates that 25% of employees will leave during the 3
year period & so forfeit their rights to the share options. Everything turns out exactly as
expected. Calculate the amount to be recognized as expense during the vesting period.
(Ans: Employee Compensation Expense 1,65,600 for each year)
Question 12 (RTP May 2018) / (RTP May 2021) Pg no._____
PQ Ltd. grants 100 stock options to each of its 1,000 employees on 1-4-2019, conditional upon
the employee remaining in the company for 2 years. The fair value of the option is ₹ 18 on the
grant date and the exercise price is ₹ 55 per share. The other information is given as under:
(i) Number of employees expected to satisfy service conditions are 930 in the 1st year and
850 in the 2nd year.
(ii) 40 employees left the company in the 1st year of service and 880 employees have actually
completed 2 years vesting period.
You are required to calculate ESOP cost to be amortized by PQ Ltd. in the years 2019-2020
and 2020-2021
(Ans: Employee Compensation Expense 8,37,000 & 7,47,000)
Question 13 (ICAI Study Material) Pg no._____
P Ltd. granted option for 8000 equity shares of ₹ 10 each on 1st October; 2016 at ₹ 80 when
the market price was ₹ 170. Fair value per option is ₹ 90. The vesting period is 4 and half year,
4000 unvested options lapsed on 1st December; 2018; 3000 options are exercised on 30th
September, 2021 and 1000 vested options lapsed at the end of the exercise period. Pass
Journal Entries for the above transactions
(Ans: Employee Compensation Expense 80,000;1,60,000;(40,000);80,000;80,000)
Question 14 (Inter Nov 2018) (10 Marks) Pg no._____
Lucky Ltd. grants 100 stock options to each of its 1,500 employees on 1-4-2018 for ₹ 40,
depending upon the employees at the time of vesting of options. Options would be exercisable
within a year it is vested. The market price of the share is ₹ 70 each. These options will vest
at the end of year 1 if the earning of Lucky Ltd. is 15%, or it will vest at the end of the year 2 if
the average earning of two years is 13% or lastly it will vest at the end of the third year if the
average earning of 3 years will be 10% 8,000, unvested options lapsed on 31-3-2019. 6,000
unvested options lapsed on 31-3-2020 and finally 4,000 unvested options lapsed on 31-3-2021.
The earnings of Lucky Ltd. for the three financial years ended on 31st March, 2019; 2020 and
2021 are 14%, 10% and 8% respectively.

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1,250 employees exercised their vested options within a year and remaining options were
unexercised at the end of the contractual life.
You are required to give the necessary journal entries for the above and also prepare the
statement showing compensation expense to be recognized at the end of each year.
(Ans: Employee Compensation Expense 21,30,000;5,90,000;12,40,000)
Question 15 (Inter Nov 2020) (10 Marks) Pg no._____

Sun Ltd. grants 100 stock options to each of its 1200 employees on 01.04.2018 for ₹ 30,
depending upon the employees at the time of vesting of options. Options would be exercisable
within a year it is vested. The market price of the share is ₹ 60 each.
These options will vest at the end of the year 1 if the earning of Sun Ltd. is 16% or it will vest
at the end of year 2 if the average earning of two years is 13%, or lastly it will vest at the end
of the third year, if the average earning of 3 years is 10%.
6000 unvested options lapsed on 31.3.2019, 5000 unvested options lapsed on 31.03.2020 and
finally 4000 unvested options lapsed on 31.03.2021.
The earnings of Sun Ltd. for the three financial years ended on 31st March, 2019, 2020 and 2021
are 15%, 10% and 6%, respectively. 1000 employees exercised their vested options within a year
and remaining options were unexercised at the end of the contractual life.
You are requested to give the necessary journal entries for the above and prepare the
statement showing compensation expenses to be recognized at the end of each year.
(Ans: Employee Compensation Expense 17,10,000;4,70,000;9,70,000)
Question 16 Pg no._____
The following particulars in respect of stock options granted by a company are available:
Grant date April 1, 2018
No. of employees covered 500
No. of option to be granted to each employee 100
Fair value of option on grant date ( ₹ 25
The vesting period shall be determined as below:
a) If the company earns ₹ 120 crore or above after taxes in 2018-19, the options will vest on
31/03/19.
b) If condition (a) is not satisfied but the company earns ₹ 250 crores or above after taxes in
aggregate in 2018-19 and 2019-20, the options will vest on 31/03/20.
c) If conditions (a) and (b) are not satisfied but the company earns ₹ 400 crores or above after
taxes in aggregate in 2018-19, 2019-20 and 2020-21, the options will vest on 31/03/21.

Position on 31/03/19
(a) The company earned ₹ 115 crore after taxes in 2018-19
(b) The company expects to earn ₹ 140 crores in 2019-20 after taxes
(c) Expected vesting date: March 31, 2020
(d) Number of employees expected to be entitled to option = 474
Position on 31/03/20
(a) The company earned ₹ 130 crore after taxes in 2019-20
(b) The company expects to earn ₹ 160 crores in 2020-21 after taxes
(c) Expected vesting date: March 31, 2021
(d) Number of employees expected to be entitled to option = 465
Position on 31/03/21
(a) The company earned ₹ 165 crore after taxes in 2020-21
(b) Number of employees on whom the option actually vested = 450
Compute expenses to recognise in each year.
(Ans: Employee Compensation Expense 5,92,500;1,82,500;3,50,000)

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Question 17 (Inter July 2021) (5 Marks) Pg no._____

At the beginning of the year 1, Harmony Limited grants 600 options to each of its 1000
employees. The contractual life of option granted is 6 yrs.
Other relevant information is as follows:
Vesting Period 3 years
Exercise period 3 years
Expected Life 5 years
Exercise Price ₹ 100
Market Price ₹ 100
Expected Forfeitures per year 3%
The option granted vest according to a graded schedule of 25% at the end of the year 1, 25% at
the end of the year 2 and the remaining 50% at the end of the year 3.
You are required to calculate total compensation expenses for the options expected to vest
and cost and cumulative cost to be recognized at the end of all the three years assuming that
expected forfeiture rate does not change during the vesting period when the Intrinsic value
of the options at the grant date is ₹ 7 per option.
(Ans: Employee Compensation Expense 21,51,344; 11,32,843; 6,38,872)

TOPIC 4 SHARE BASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVES

Question 18 Pg no._____
An enterprise grants to an employee the right to choose either a cash payment equal to the
value of 1,000 shares, or 1,200 shares. The grant is conditional upon the completion of three
years’ service. If the employee chooses the equity alternative, the shares must be held for
three years after vesting date. The face value of shares is ₹ 10 per share.
At grant date, the fair value of the shares of the enterprise (without considering post-vesting
restrictions) is ₹ 50 per share. At the end of years 1, 2 and 3, the said fair value is ₹ 52, ₹ 55
and ₹ 60 per share respectively. The enterprise does not expect to pay dividends in the next
three years. After taking into account the effects of the post-vesting transfer restrictions, the
enterprise estimates that the grant date fair value of the equity alternative is ₹ 48 per share.
At the end of year 3, the employee chooses:
Scenario 1: The cash alternative
Scenario 2: The equity alternative
Calculate the amount of expenses for each year and pass necessary journal entries for each
year & for settlement under above two scenarios.
(Ans: Employee Compensation Expense Year 1: 17,333 & 2,533 Year 2: 19,334 & 2,533 Year 3:
23,333 & 2,534)

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