1. Share Based Payments
Give example of Infosys.. At Infosys, where Narayana Murthy's driver is believed to have become a crorepati by exercising his ESOPs..
Who will work more in my CA firm… partner or just employee.. Lly in Companies , who is the owner – anyone who owns a share of a company ..

2. Framework
As development of Standard is likely to take time, at present the Institute has decided to bring out the Guidance Note on Share Based Payments in 2005
IFRS 2 also deals with Share based payments in a wider term but presently , we shall deal with all the sums as per the Guidance note .
As you know, I always wish to start with building a framework before starting any summation.

3. Who is an employee?
a) a permanent employee of the company working in India or out of India; or
b) a director of the company, whether a whole
time director or not ;or

4. Share based payments includes-
ESOP
Employees Stock Options Plans
ESPP
Employees Stock Purchase Plan
SARs
Stock Appreciation Rights
I would much appreciate if you cud write this down .

5. SBP with Cash Alternatives
But for Accounting purpose , Share based payments are classified into -
Equity settled
Employees receive options or shares in lieu of services eg. ESOP and ESPP
Cash settled
Employees receive cash based on the price of the enterprise’s share eg SARs
SBP with Cash Alternatives
Employee has a choice whether the enterprise settles the payment in cash or by issue of shares
I would much appreciate if you cud write this down .

6. What is Employee Stock Option?
It is the option given to employees of a company which gives them the right to purchase or subscribe to specified number of shares offered by the company at a future date at a pre-determined price ie the exercise price
Clearly, the ESOP is a call option held by the employees , which is settled by actual delivery of shares . The employer is the writer of the option, but he does not charge any option premium. The employer recognises the premium sacrificed , or in other words the value of call , as expense over the vesting period.

7. Employee Stock Purchase Scheme
Employee Stock Purchase Scheme (ESPS)
means a scheme under which the company
offers shares to employees as part of a public
issue or otherwise.
At discounted price .

8. Taxable as Capital Gain
Life Cycle of ESOP
Grant Vesting Exercise Sale
Taxable as perquisite
Taxable as Capital Gain
February 2011

9. Grant – Meaning
Grant means issue of option/units to employees under ESOP
Grant Date – Date on which the employer and employee agree to the terms of an ESOP
Employee is granted the right to an incentive i.e. shares upon fulfillment of certain specified conditions, if any.
February 2011

10. Vest - Meaning
Vest means to become entitled to receive shares upon satisfaction of the specified conditions as agreed under an EIP.
Date of vesting refers to the date on which the employee has unconditional right to receive shares under the EIP i.e. restrictions are lifted
Vesting Period is the period between the grant date and the vesting date
Vesting Conditions are the conditions under the ESOP that must be satisfied for the employee to become entitled to receive shares
Conditions may include service conditions, viz. completion of a specified service period, specified performance targets to be met, etc.
February 2011

11. Exercise - Meaning
Exercise means making of an application by the employee to the employer for issue of shares against the option vested in him.
Exercise Period is the time period after vesting within which the employee should exercise his right to apply for shares against the option vested in him
Exercise Price is the price payable by the employee for exercising the option granted to him
Alternatively – the date on which the employee is eligible to have the shares allotted/transferred to him
February 2011

12. Few dates worth remembering!!
Grant date
The day a share based payment plan is announced and accepted by employees is called grant date
Vesting date
The day when the employees become entitled to such payments is called the vesting date
Exercise Date
Exercise date is the date when an option is exercised by paying the exercise price.
Explain Vesting period -Vesting means the process by which the employee is given the right to apply for shares of the company against the option granted to him in pursuance of ESOS
.. And Contractual life.. To qualify for the incentives, the employees put in their efforts during the vesting period to fulfill specified vesting conditions, e.g. reaching a specified sales/profit targe t
Exercise means making of an application by the employee to the company for issue of shares against option vested in him in pursuance of the ESOS
Exercise Period means the time period after vesting within which the employee should exercise his right to apply for shares against the option vested in him in pursuance of the ESOS

13. Why and how to recognize??
The value of share-based payment depends on the market value of shares on vesting date/exercise date and hence cannot be known with certainty before these dates.
Nevertheless, since the share-based payments are payments for services rendered by employees during the vesting period, the value of share-based payments should be recognized as expense during the vesting period, i.e. before value of such payments are known with certainty.
Two principal issues involved in accounting for employee share-besed payments are (i)problem of valuation of share-based payments before vesting date and (ii) problem of allocation of the estimated value of share-based payment to a particular accounting period during the vesting period for recognition as expense.

14. Pricing – decide at the Grant date itself
Fair value
Amount at which Stock option can be exchanged between knowledgeable , willing parties in an arms length transaction
Or; the present value of future expected benefits
Intrinsic value
Intrinsic value of an option is the excess of market price of the underlying share on the grant date over the exercise price.
Pg 7.4 type -

15. Illustration 1 and 9 of module
Type of SBPs
Equity settled
Cash settled
Valuation
Fair value
Intrinsic value
Pg 7.4 type -

16. Particulars
Year 1
Year 2
Year 3 A
Number of employees expected to satisfy vesting conditions B C D
Fair value of options expected to vest( A X ___X Fair Value Per option) E
Cumulative fair value to be recognized till date F
Cumulative fair value already recognized G
Expense to be recognized for the period (E-F)

17. Accounting procedure for ESOP
The amount recognised as expense in vesting period is debited to “Employees Compensation Account “ with a corresponding credit to an equity account called “Stock Options Outstanding”
The Stock Option Account is transitional in nature as it ultimately gets transferred to another equity account such as Share Capital , Securities Premium or General reserve