ESOPs are Employee Stock Option Plans, which was brought out by the Securities and Exchange Board of India (SEBI) in 1999. Under this plan, employees receive the right to purchase a certain number of shares or options in the company, often set at a predetermined price, as a reward for their performance and either in addition to or as a part of their overall benefits package. ESOP programs offer human resource managers an invaluable advantage in aiding them retain top talent within the company. 

ACCOUNTING FOR ESOPS

Organisations offering ESOPs are required to provide for them, as an expense in their profit and loss statements. The accounting valuation is needed for working out the employee compensation cost at the time of ESOP grants itself, which is apportioned over the vesting period of ESOP. There are two methods of doing ESOP valuations — intrinsic value method and fair value method.

In India, the accounting for ESOPs is defined by Guidance Note 18 of the Institute of Chartered Accountants of India (ICAI). According to the Indian GAAP standards, there are two methods of doing ESOP valuations — intrinsic value method and fair value method. In the case of fair value method to valuate ESOPs, the Black-Scholes model is universally preferred as it takes into account every variable factor and arrive at the right estimate for employee’s compensation cost. 

DATA REQUIREMENTS FOR ESOP VALUATION

The following details are required for ESOP valuation:

1. ESOP policy of the company

2. Signed ESOP agreement & Copy of special resolution passed. 

3. Face value of shares issued 

4. Financial advisory opinion 

5. Equity Shares valuation report from qualified Chartered Accountant for valuation period

6. We need projected revenue statement and balance sheet working of the company for the next 5 years taking from as the base date. 

7. Further we also need the computations made by company, after making due adjustments, to arrive at the free cash flows during projection period and terminal cash flows to perpetuity.