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Corporate Financial Reporting · Share based Payment (Ind AS 102)

ESOP, ESPS and Disclosures under Ind AS 102

Updated 11 October 2026 · Fact-checked

An ESOP gives employees an option to buy shares at a fixed price after vesting; an ESPS issues shares directly. Under Ind AS 102, you measure fair value at grant date, spread it over the vesting period as an expense with a credit to equity, and true up for expected vesting. Then add EPS, tax and disclosures.

Understand Employee Stock Option Plans, ESPS and Disclosures

An ESOP is a right, not an obligation, to buy shares at a set exercise price after a vesting period. An ESPS (employee stock purchase scheme) offers shares directly, often at a discount, usually with a lock-in. In both cases the employee gives services and the company gives equity. Ind AS 102 says the services must be recognised as an expense.

In India, listed companies follow the SEBI rules on share-based employee benefits. You do not need clause numbers for the exam. Know the idea: the company needs shareholder approval, the plan has vesting and exercise terms, and a trust may buy shares from the market to deliver them to employees. Accounting still follows Ind AS 102.

For an equity-settled plan, the expense is the grant-date fair value of the options, spread over the vesting period. The credit goes to a share-based payment reserve (equity). You revise only the number of options expected to vest, for service and non-market performance conditions. You do not revise the grant-date fair value. Note that Ind AS 102 para 6A says fair value is measured as per Ind AS 102, not Ind AS 113.

When an option is exercised, cash received and the reserve are transferred to share capital and securities premium. If the option lapses after vesting, the reserve normally stays within equity, and you may transfer it within equity. Reversing the expense after vesting is not allowed for a lapse.

For a trust, the entity usually consolidates it when it controls it. Shares the trust holds are treated like treasury shares: deducted from equity and excluded from the EPS denominator until delivered. Vested but unexercised options are potential equity shares in diluted EPS under Ind AS 33, using the treasury stock method with the unrecognised future expense counted as part of assumed proceeds. Deferred tax arises when the tax deduction differs from the cumulative expense. Disclosures cover the nature and extent of plans, how fair value was measured, and the effect on profit or loss.

Key rules to remember

Cumulative expense (equity-settled)
Fair value at grant date × options expected to vest × (years elapsed ÷ total vesting period)
The grant-date fair value is not revised. Only the expected number of options vesting is revised.
Expense for the year
Cumulative expense at year-end − cumulative expense charged earlier
This is a catch-up approach. The entry is Dr Employee benefits expense, Cr Share-based payment reserve.
Net settlement for withholding tax (paras 33E-33F)
Classified entirely as equity-settled if it would have been so in the absence of the net settlement feature
The payment to the tax authority for shares withheld is a deduction from equity (para 33G), except for any excess over fair value at the net settlement date.
Excess shares withheld (para 33H)
Shares withheld beyond the employee's tax obligation are accounted for as cash-settled when paid in cash or other assets
The exception also does not apply if tax law imposes no obligation to withhold.
Diluted EPS for options (Ind AS 33)
Incremental shares = Options × (1 − Exercise price plus unrecognised expense per option ÷ Average market price)
Use only if the result is positive. Options with a market price below the adjusted exercise price are anti-dilutive.
Disclosure of expense (para 51(a))
Total expense for the period, with the equity-settled portion shown separately
For liabilities, disclose carrying amount at year-end and intrinsic value of vested liabilities (para 51(b)).

How to solve Employee Stock Option Plans, ESPS and Disclosures questions

Use this order for any ESOP, ESPS or trust question. It keeps the expense, equity, EPS and disclosure parts separate.

  1. 1Identify the scheme: ESOP (option), ESPS (direct issue, perhaps at a discount) or trust-based. Decide if it is equity-settled or cash-settled.
  2. 2Fix the grant-date fair value per option. If an ESPS has a discount, fair value is the market price less the price paid, adjusted for any lock-in effect given in the question.
  3. 3List the vesting conditions. Service and non-market performance conditions change the number of options expected to vest. Market conditions are built into fair value.
  4. 4Compute the cumulative expense at each year-end using the expected number vesting, then subtract the earlier charge to get the annual expense.
  5. 5Pass the entries: expense and reserve each year. On exercise, Dr Bank and Dr Reserve, Cr Share capital and Cr Securities premium.
  6. 6For a trust, treat shares held as treasury shares: deduct from equity and exclude them from the EPS denominator. Add deferred tax if the question gives a tax deduction.
  7. 7Compute diluted EPS using the treasury stock method if asked, then close with the key disclosures.

Quickest way: Cumulative table for ESOP expense

When to use it: Use it when a numerical gives several years, changing forfeiture estimates and asks for the annual expense.

  1. Draw columns: year, expected options vesting, fair value, cumulative fraction, cumulative expense, expense for the year.
  2. Fill the cumulative expense for each year in one go as options × fair value × fraction.
  3. Take differences between consecutive cumulative figures to get annual charges.
  4. Check that the final cumulative equals actual vested options × grant-date fair value.
  5. Write the journal entry once per year and move on to EPS or tax, if asked.

Common mistakes in Employee Stock Option Plans, ESPS and Disclosures

  • Re-measuring fair value of an equity-settled option at each year-end.

    Students mix it up with cash-settled plans, which are remeasured.

    Fix: For equity-settled plans, use grant-date fair value throughout and revise only the expected number vesting.

  • Reversing the expense when vested options lapse unexercised.

    Students think a lapse is the same as a forfeiture before vesting.

    Fix: Reverse only for failure to meet service or non-market conditions before vesting. After vesting, any transfer stays within equity.

  • Showing shares withheld for an employee's tax as a cash-settled liability by default.

    Money goes out to the tax authority, so it looks like cash settlement.

    Fix: Under paras 33E to 33F the whole plan stays equity-settled, if it would have been so without net settlement. The payment is a deduction from equity. Only shares withheld in excess of the tax obligation are treated as cash-settled (para 33H).

  • Including trust-held shares in the EPS denominator.

    Students count all shares issued or bought and forget the treasury concept.

    Fix: Exclude the shares held by the trust until they are delivered to employees. Include vested options only through the diluted EPS calculation.

  • Ignoring unrecognised future expense in the treasury stock method.

    The exercise price alone looks like the proceeds.

    Fix: Add the unrecognised expense per option to the exercise price when computing assumed proceeds, then compare with average market price.

  • Showing only the total expense in disclosure.

    Students stop at the figure in the profit or loss statement.

    Fix: Show the equity-settled portion separately (para 51(a)). For liabilities, give the carrying amount and the intrinsic value of vested ones (para 51(b)).

Worked examples

Example 1

On 1 April 2026, Bharat Tech Ltd grants 1,000 employees 100 options each, vesting after 3 years of service. Grant-date fair value is ₹60 per option. At 31 March 2027 the company expects 90% of options to vest. At 31 March 2028 it expects 85%. Compute the expense for 2026-27 and 2027-28 and give the entry.

Show the solution
  1. Total options granted = 1,000 × 100 = 1,00,000.
  2. Year 1 cumulative expense = 1,00,000 × 90% × ₹60 × 1/3 = 90,000 × 60 × 1/3 = ₹18,00,000.
  3. Expense for 2026-27 = ₹18,00,000.
  4. Year 2 cumulative expense = 1,00,000 × 85% × ₹60 × 2/3 = 85,000 × 60 × 2/3 = ₹34,00,000.
  5. Expense for 2027-28 = 34,00,000 − 18,00,000 = ₹16,00,000.
  6. Entry each year: Dr Employee benefits expense, Cr Share-based payment reserve.

Answer: The expense is ₹18,00,000 for 2026-27 and ₹16,00,000 for 2027-28. The cumulative reserve at 31 March 2028 is ₹34,00,000. The entry debits the expense and credits the share-based payment reserve each year.

Example 2

Kaveri Ltd has 10,00,000 equity shares outstanding, with net profit of ₹50,00,000 for the year. Employees hold 1,00,000 vested options with an exercise price of ₹150. Unrecognised future expense is nil. Average market price is ₹200. Compute basic and diluted EPS.

Show the solution
  1. Basic EPS = 50,00,000 ÷ 10,00,000 = ₹5.00.
  2. Assumed proceeds = 1,00,000 × ₹150 = ₹1,50,00,000.
  3. Shares that would be issued at average market price = 1,50,00,000 ÷ 200 = 75,000.
  4. Incremental shares = 1,00,000 − 75,000 = 25,000. The result is positive, so the options are dilutive.
  5. Diluted shares = 10,00,000 + 25,000 = 10,25,000.
  6. Diluted EPS = 50,00,000 ÷ 10,25,000 = ₹4.878, or about ₹4.88.

Answer: Basic EPS is ₹5.00 and diluted EPS is about ₹4.88, because 25,000 incremental shares are added under the treasury stock method.

Exam tips

  • For numericals, always show the cumulative table. Marks go to the method even if one figure slips.
  • State clearly whether the plan is equity-settled or cash-settled before you start. It decides whether you remeasure fair value.
  • In theory answers on net settlement, quote the logic of paras 33E to 33H: equity-settled in entirety, deduction from equity, and excess shares as cash-settled.
  • Link topics in case studies: ESOP expense, deferred tax on the deduction, and diluted EPS can all appear in one question.

Practice questions from Share based Payment (Ind AS 102)

Employee Stock Option Plans, ESPS and Disclosures: frequently asked questions

What is the difference between ESOP and ESPS?

An ESOP gives employees an option to buy shares later at a fixed price after vesting. An ESPS offers shares directly, often at a discount and with a lock-in. Both are share-based payments under Ind AS 102 and the employee services are expensed.

Is the grant-date fair value revised each year?

Not for equity-settled plans. You fix fair value at grant date and revise only the expected number of options that will vest. For cash-settled plans, you remeasure the liability at each reporting date.

How does a withholding tax net settlement affect classification?

Under para 33F the plan stays classified in its entirety as equity-settled if it would have been so without the net settlement feature. Para 33G deducts the payment from equity. Shares withheld in excess of the tax obligation are treated as cash-settled when paid in cash (para 33H).

How do ESOPs affect EPS?

Basic EPS uses shares outstanding and excludes shares held by a trust until delivered. Vested and unvested dilutive options enter diluted EPS through the treasury stock method of Ind AS 33, only if they reduce EPS.