Accounting for Employee Stock Options under Ind AS 102 and IFRS 2

Classify the award in the reporting entity’s accounts

Ind AS 102 and IFRS 2 govern entities applying those standards. Recognise services as received, with an expense unless they qualify for recognition as an asset. The credit depends on settlement classification. A grant with an exercise price equal to the current share price can have significant fair value because the option has time value.

Use an option model appropriate to the award

Black–Scholes–Merton is one model; a lattice can accommodate varying inputs and early exercise behaviour, and simulation may be useful for certain market conditions. In the constant-input model with continuous dividend yield q, C = S × exp(−qT) × N(d1) − K × exp(−rT) × N(d2). Here d1 = [ln(S/K) + (r − q + σ²/2) × T] / (σ × √T); d2 = d1 − σ × √T. S is underlying share value, K strike, T expected term for this simplified employee-option application, r risk-free rate, σ volatility, and N the standard normal cumulative distribution.

Support underlying share value and its class rights, expected term and employee exercise patterns, volatility, expected dividends and a currency and term consistent risk-free rate. For an unlisted company, valuation approaches and relevant comparable-company evidence depend on the facts. A funding round for different rights, a single peer group method or a contractual term midpoint is not automatically appropriate. Paragraphs B4–B41 give application guidance.

Vesting, forfeiture and modifications

For graded awards with different vesting periods, attribute expense separately to each tranche over its service period using its relevant fair value. If four equal-value tranches vest annually over one to four years and no forfeitures are assumed, year one is 52.08% of the total. A single cliff vesting award can have straight-line attribution over its service period. Estimate awards expected to vest for service and non-market performance conditions and true up to the actual outcome. Do not reverse equity-settled compensation solely because vested options expire unexercised. Account for beneficial modifications in addition to the original grant amount under the standard.

Seven worked examples

1. Four vesting tranches: calculate value and annual expense

Assume a grant on 1 April 2023 of 100,000 options, 25,000 per tranche, vesting at the ends of successive service years. Use ₹250 share value, ₹100 strike, 7.20% continuous risk-free rate, 45% volatility, zero dividend yield, and expected terms of 1.5, 2.5, 3.5 and 4.5 years. Model 5% annual service forfeitures with cumulative survival of 0.95 raised to each tranche’s vesting years. The schedule assumes realised vesting follows those estimates; at each reporting date replace estimates with updated information and actual vesting where applicable. Amounts are in rupees; use full precision before rounding the tranche totals and allocating them.

On these assumptions, year one debits compensation expense and credits equity by ₹79,29,227, about 52.32% of the expected total. The recognised charge and the gross grant value are different denominators.

2. Executive leaves before three-year cliff vesting

At ₹300 per option, 40,000 options have ₹1.20 crore grant value. Assuming all were initially expected to vest, ₹40 lakh is recognised in each of the first two years. If the executive leaves in month 28 and all awards fail the service condition, cumulative expense becomes nil. The full third-year net credit is ₹80 lakh on the assumed opening balance, regardless of any interim charges reversed within that same year.

3. Overseas parent grants RSUs and recharges its subsidiary

Assume 150 employees receive parent awards, with USD 1.20 million aggregate vesting-date share value. At an illustrative ₹83 per dollar that is ₹9.96 crore. This is neither automatically the subsidiary’s grant-date expense nor a cash-settled employee liability. If the parent delivers its equity and the subsidiary has no obligation to settle the awards with employees, the subsidiary applies equity-settled accounting for the services; the separate recharge depends on its agreement.

For an illustration only, if the taxable salary benefit were ₹9.96 crore and a simplified effective withholding percentage of 34.2% were applied, the product is ₹3,40,63,200. It is not the statutory rate for the group. Under the historical sections 17(2)(vi) and 192 and Rule 3, determine the actual allotment or transfer, relevant exercise-date valuation, employee payment, salary estimate and withholding separately. Do not reduce the amount due to the parent by employee withholding without a contractual or legal basis. Cross-border tax, remittance reporting and deductibility require separate analysis.

4. Repricing reduces a ₹500 strike to ₹250

For 50,000 options initially valued at ₹220 each, the original award value is ₹1.10 crore. Assume a 1 April 2023 beneficial modification with two years of vesting left and independently measured modification-date values of ₹115 after and ₹32 immediately before. The incremental value is ₹83 per option, or ₹41.50 lakh. If allocated evenly over the remaining service period on these facts, that is ₹20.75 lakh per year in addition to the applicable original grant expense. The two modification-date values are inputs; the facts do not supply enough data to recreate them from an option model.

5. Cash-settled SARs: remeasure through settlement

Assume 200,000 rights granted on 1 April 2022, a ₹100 base price, a service period ending 31 March 2025, no forfeitures and immediate settlement at vesting. The illustrative fair values of ₹35 at grant, ₹58 at year one and ₹28 at year two are valuation inputs. At the final ₹180 share price the settlement is ₹80 per right.

The annual amounts reconcile to the change in rounded cumulative liability; settlement clears the closing liability.

6. Revenue target versus quoted share price target

For a ₹100 crore revenue vesting threshold, an updated estimate of ₹85 crore is ₹15 crore short. If management now expects none of that tranche to vest, true up the cumulative equity-settled charge to nil. A separate ₹800 share-price condition is a market condition reflected in grant-date fair value, using an appropriate model. If the stock falls to ₹100, failure of the market target alone does not reverse the charge when other vesting conditions are satisfied.

7. Tax deduction and deferred tax are separate calculations

The Karnataka High Court in CIT v. Biocon Ltd. upheld deductibility of ESOP discount under legacy section 37(1) on the facts and addressed the liability over the vesting period. Do not treat that decision as universal exercise-only timing or as approval of every cross-border recharge. Apply the relevant tax year, facts and binding authority. Ind AS 12 paragraphs 68A–68C address share-based payment tax effects. Where a future tax deduction is available, estimate the tax base under the applicable tax law and recognise deferred tax only to the extent required by the standard, including the recoverability test and equity allocation rules. The tax deduction is not necessarily the book expense.

Maintain the grant and valuation evidence

• Reconcile grant, vesting, departures, exercise, modifications and settlement to the award register and equity or liability ledger.
• Retain valuation methods, inputs, sensitivities and group plan terms. Prepare disclosures under Ind AS 102 or IFRS 2, and reconcile any different group accounting policies separately.

Frequently asked questions

1. Is Black–Scholes mandatory?

No. Select a model consistent with the award terms and market-participant assumptions.

2. Can an at-the-money option have nil cost?

A nil intrinsic value does not mean nil fair value. Ind AS 102 generally requires fair value; paragraph 24 gives a limited intrinsic-value exception when fair value cannot be reliably estimated.

3. How does the subsidiary account for a parent award without recharge?

If it receives employee services but has no obligation to settle the award, it ordinarily recognises the services and a corresponding equity contribution. Verify the award terms.

4. How are exercised options recorded?

Recognise proceeds and the share issue under the applicable law and reporting policy. Apply the nominal amount and relevant premium and account for any related transfer within equity.

5. Is every book charge tax deductible?

No blanket result follows from the accounting. Consider the governing tax statute, judicial authority, terms and actual facts.

6. What should the accounting system reconcile?

Grant inputs, expected and actual vesting, movements in outstanding awards, classification, entries and disclosures.

Sources

• MCA: Ind AS 102, share-based payment
• IFRS Foundation: IFRS 2, share-based payment
• MCA: Ind AS 12, paragraphs 68A–68C
• Income-tax Act, 1961: sections 17, 37 and 192
• Income Tax Department: Rule 3 historical perquisite valuation
• Karnataka High Court: CIT v. Biocon Ltd., ITA No. 653 of 2013, 11 November 2020 (judicial text)
• Delhi High Court: ESOP discount judgment discussing Biocon