How to Calculate ESOP Expenses?
ESOP Expenses

Looking to know how ESOP expenses are calculated for accounting or do you want to budget the same for yourself? In any case, you are in the right place. Keep reading. But before we jump into the calculation of ESOP expenses, let us first understand the various methods and practices followed for the same.

If you follow Ind-AS for bookkeeping, then you should follow the GRADED VESTING METHOD for cost calculation but in case you follow I-GAAP then you have the option to either adopt the STRAIGHT LINE METHOD or adopt the GRADED VESTING METHOD. Today, we are going to talk about the Graded Vesting Method for ESOP expenses calculation.

Graded Vesting Method

We know that ESOPs are VESTED over a period with different vesting dates (as per their schedule). Each Vesting will have a respective Vesting quantity and Vesting days based on which the cost will be allocated in various FYs starting from the FY in which the grant is made.

Let’s talk about this with an example:

Take an organization, which has issued 500 ESOPs on 01st April 2021 to its employee with a 25% Linear Vesting (Annual) and the valuation of the options as on Grant Date was INR 1000 per option. So, the total cost of 500 options will be INR 500,000/-

Year-end Vesting Date Vesting Date Vesting Date Value Total Cost of Option
1 01-Apr-22 365 125 1000 1,25,000
2 01-Apr-23 730 125 1000 1,25,000
3 01-Apr-24 1096 125 1000 1,25,000
4 01-Apr-24 1461 125 1000 1,25,000
500 5,00,000

Now we will be allocating the cost of each vesting based on the number of days in each FY e.g., for Vesting 1, the cost of INR 125,000 is for 365 days and the same will be allocated in the FY 21-22 and for Vesting 2, the cost of INR 125,000 is for 730 days and the same will be allocated in FY 21-22 and FY 22-23 based on the number of days falling in the FY (equally).

Let us see below the allocation of INR 500,000 in various FYs based on Vesting Days.

In Chart-1 below we will be presenting how the total vesting days are bifurcated in each FYs. First FY will start from Grant FY and the total number of days which can be allocated in FY-1 will be the difference from Grant Date to the Year-end Date.

In Chart-2 below we will be presenting how the vesting cost of each vesting date is allocated in various FYs which is calculated in Chart-1 above.

Chart -1 – Allocation of Vesting Days into each FY (Number of Days in which the cost can be allocated in each FY)

Vesting Dates 365 31-Mar-23 31-Mar-24 31-Mar-25 Total Vesting Days
Vesting 1: - 01-Apr-22 365 - - - 365
Vesting 1: - 01-Apr-23 365 365 - - 730
Vesting 1: - 01-Apr-24 365 365 365 - 1096
Vesting 1: - 01-Apr-25 365 365 365 365 1461

Chart -2 – Allocation of Total ESOP Cost in each FYs based on the number of days calculated in Chart-1 above. (The Total Cost of INR 5 Lacs to be allocated in Each FY)

Vesting Dates FY 21-22 FY 22-23 FY 23-24 FY 24-25 Total Expenses(INR)
Vesting 1: - 01-Apr-22 1,25,000 - - - 1,25,000
Vesting 1: - 01-Apr-23 62,500 62,500 - - 1,25,000
Vesting 1: - 01-Apr-24 41,629 41,629 41,743 - 1,25,000
Vesting 1: - 01-Apr-25 31,229 31,229 31,314 31,229 1,25,000
Total Expenses in Each FY 2,60,357 1,35,357 73,057 31,229 5,00,000

Note: -

If the Grant Date is a mid-year data e.g., 01st October 2021, then the cost will be bifurcated based on the number of days fallen in each FY and distributed in the same proportion.

The journal entries in books of accounts will be passed as below in each FY: - Journal Entries

Journal Entries FY 21-22 FY 22-23FY 23-24
FY 24-25
ESOP Expenses/Compensation A/c - Dr 2,60,357 1,35,357 73,057 31,229
To Share-Based Payment/ESOP Pool Reserve A/c - Cr 2,60,357

Accounting for ESOP is a very important part of the ESOP Management Cycle and can be very complex & cumbersome at times due to manual calculations and the huge amount of time & effort consumed in performing such tasks.


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