ESOP Expense Under Ind AS 102: Method, Journal Entries, Disclosure

Every option granted to an employee costs the company something, and Ind AS 102 puts that cost in the profit and loss account although no cash leaves. The ESOP expense under Ind AS 102 is fixed on the grant date, spread across the vesting period and trued up for employees who leave, with a matching credit in equity. Companies covered by the Companies (Indian Accounting Standards) Rules, 2015 must book it, and auditors, investors and the Securities and Exchange Board of India (SEBI) scrutinise it. This article covers the method, entries and disclosures, using one grant worked year by year.

How is ESOP expense calculated under Ind AS 102?

ESOP expense under Ind AS 102 equals the fair value of each option on the grant date, estimated with an option pricing model, multiplied by the number of options expected to vest, recognised over the vesting period. The debit goes to employee benefits expense and the credit to a share options outstanding reserve in equity (paragraphs 10, 11, 19 and 20, Ind AS 102).

Which companies must book ESOP expense under Ind AS 102?

Ind AS 102 applies to companies that follow Indian Accounting Standards under Rule 4 of the Companies (Indian Accounting Standards) Rules, 2015: listed companies (other than those listed only on SME exchanges), unlisted companies with net worth of ₹250 crore or more, and the holding, subsidiary, joint venture and associate companies of those entities. Every other company follows the Guidance Note on Accounting for Share-based Payments issued by the Institute of Chartered Accountants of India (ICAI) in September 2020.

Net worth is tested on the latest audited accounts. A company that first crosses the threshold moves to Ind AS from the next financial year, and a subsidiary of an Ind AS company is pulled in whatever its own size. Treelife’s guide to Ind AS applicability for private companies covers how net worth is computed and why the obligation does not reverse if net worth later falls.

Ind AS 102 and the ICAI Guidance Note compared

Point	Ind AS 102	ICAI Guidance Note, September 2020
Who applies it	Companies covered by Rule 4 of the 2015 Rules	Companies not required to follow Ind AS
Measurement basis	Fair value on grant date. Intrinsic value only where fair value cannot be estimated reliably (paragraph 24)	Fair value recommended. Intrinsic value method also permitted (paragraphs 72 and 73)
Graded vesting	Each tranche is a separate grant (Implementation Guidance IG11)	Each vesting date is a separate grant (paragraph 74)
Grants covered	Per the Ind AS roadmap. First-time adopters get relief for options vested before transition (Ind AS 101, paragraph D2)	Grants with a grant date on or after 01/04/2021 (paragraph 87)
Earnings per share	Ind AS 33	AS 20 (paragraphs 77 and 78)
ESOP trust	Usually consolidated, and shares it holds are treasury shares	Company books the expense as if it ran the plan, and loans to the trust are eliminated (paragraph 76)

The Companies (Indian Accounting Standards) Amendment Rules, 2026 (G.S.R. 725(E), 12/08/2026) do not touch Ind AS 102; they amend Ind AS 101, 107, 109, 110 and 7. ICAI’s 2021 exposure draft of AS 102 is not notified, so the Guidance Note stays in force. The choice that matters in practice is the second row. A Guidance Note company granting at fair market value can book nil under intrinsic value, a number an Ind AS investor or acquirer will later restate. A first-time adopter need not apply Ind AS 102 to options that vested before the transition date (Ind AS 101, paragraph D2), but unvested grants are in scope, so the working papers are cheaper built at the first grant than at the transition. Treelife’s Ind AS 101 workplan covers transition.

Ind AS 102 follows IFRS 2, so an IFRS parent sees the same number. A US GAAP parent may not: ASC 718 lets it choose straight-line expensing for graded awards with only a service condition, while Ind AS 102 and IFRS 2 require each tranche to be expensed separately, so an Indian subsidiary of a US group should expect the numbers to differ early on.

ESOP accounting method: grant date, fair value and model inputs

The method has four steps: fix the grant date, measure the fair value of one option on that date, estimate how many options will vest, and recognise the product over the vesting period. After grant, only the number of options is revisited. The fair value per option is never remeasured for an equity-settled award (paragraphs 11, 19 and 20, Ind AS 102).

1. Fix the grant date. Grant date is when company and employee share an understanding of the terms. An offer alone is not a grant, so the date is the employee’s acceptance, or later if shareholder approval or the exercise price is pending (Implementation Guidance IG1 to IG3). For a private company the special resolution under Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 comes first. SEBI defines grant date as the compensation committee approval date, but for accounting it defers to the accounting standard (Regulation 2(1)(q), SEBI SBEB and SE Regulations, 2021).
2. Measure the fair value of one option. Use an option pricing model (paragraph B4), with the inputs and model choice set out below.
3. Estimate the options expected to vest. Service conditions and non-market performance conditions change the count, never the value per option (paragraph 19). Revise the count at each reporting date, and on vesting date set it equal to the options that actually vested (paragraph 20).
4. Recognise the cost as service is rendered. Debit employee benefits expense and credit equity over the vesting period (paragraphs 7 and 15). If the options vest immediately, book the full amount on grant date (paragraph 14). Where an employee’s service qualifies as part of an asset, such as development cost capitalised under Ind AS 38, that share of the cost is capitalised rather than expensed (paragraph 8).

Which option pricing model should you use?

Use Black-Scholes-Merton for plain options with service conditions, a binomial lattice where early exercise or changing inputs matter, and Monte Carlo simulation where vesting depends on a share price hurdle. Ind AS 102 prescribes no model (paragraphs B4 to B7).

Option pricing models for employee options

Model	Best fit	Limit
Black-Scholes-Merton	Plain options with service or non-market conditions, one expected life per tranche	Assumes exercise at expiry, so early exercise enters through the expected-life input (paragraphs B5 and B17)
Binomial lattice	Long-lived options, early exercise patterns, inputs that change over the life	More judgement and more working papers
Monte Carlo simulation	Market conditions such as a share price or valuation hurdle (paragraph 21)	Needs a simulation engine and statistical skill

How do you set each input for an unlisted company?

Every model needs at least six inputs: exercise price, option life, share price, expected volatility, expected dividends and the risk-free rate (paragraph B6). For an unlisted company four need documented judgement, and auditors test volatility and life first.

Setting model inputs when there is no traded share

Input	How to set it for an unlisted company	Effect of a higher value on fair value
Share price	Equity value per share from a valuation report dated as at the grant date (listed company: closing price)	Higher
Exercise price	Per the grant letter	Lower
Expected life	Time from grant to expected exercise, which for startups usually follows a liquidity event. Support with exercise history and exit plans (paragraphs B16 to B21)	Higher
Expected volatility	Historical or implied volatility of comparable listed companies over a period matching the expected life, or a figure consistent with the valuation method (paragraphs B27 to B30)	Higher
Expected dividends	Nil if none are paid or planned. Nil also where employees receive dividend equivalents (paragraphs B31 to B36)	Lower
Risk-free rate	Government security yield for the expected life. India has no traded zero-coupon curve, so a matching-tenor yield serves as the proxy (paragraph B37)	Higher

Base case is tranche 3 of the worked example below.

Sensitivity of one option’s fair value (₹, illustrative)

Input	Low case	High case	Base case
Volatility 35% / 55%	40.65	52.81	46.81 (45%)
Expected life 3.5 / 5.5 years	41.09	51.77	46.81 (4.5 years)
Share price ₹80 / ₹120	31.69	63.15	46.81 (₹100)
Risk-free rate 6.5% / 7.5%	46.08	47.53	46.81 (7.0%)

Volatility, expected life and share value move the charge sharply. The risk-free rate barely does, so spend the working-paper effort on the first three.

Why must the valuation be dated as at the grant date?

A company that grants in April and applies an October valuation to the April grant has not complied, and auditors test this first at growth-stage companies. Commission the valuation before the grant, or have the valuer date it as at the grant date. Because fair value is never remeasured, a grant at a seed valuation locks in a low charge, while the same percentage at Series C carries a higher one.

What is the difference between fair value and intrinsic value for an ESOP?

Intrinsic value is the share’s value minus the exercise price. Fair value adds the option’s time value, so an option struck at market price has nil intrinsic value but a positive fair value. Ind AS 102 expenses fair value and allows intrinsic value only where fair value cannot be estimated reliably (paragraph 24 and Appendix A). This accounting fair value is not the exercise-date value used for perquisite tax.

ESOP expense Ind AS 102 worked example: a four-year graded vesting grant

A grant of 1,00,000 options vesting in four equal annual tranches produces a charge that is heavy in year one, because each tranche is expensed over its own vesting period. In the example below, about 51 per cent of the expected cost falls in year one, against 25 per cent under a straight-line method. All figures are illustrative.

The facts:

• Grant date is 01/04/2026. The company grants 1,000 options to each of 100 employees. The exercise price is ₹100 and a grant-date valuation puts the share at ₹100.
• Four tranches of 25,000 options vest on 31/03/2027, 31/03/2028, 31/03/2029 and 31/03/2030. The only condition is continued service. Expected attrition at grant is 10 per cent a year.
• Black-Scholes inputs: volatility 45 per cent from peer companies, risk-free rate 7.0 per cent, no dividends. Expected life is the vesting period plus 1.5 years, since exercise is assumed to follow a liquidity event after vesting. That gives ₹34.33, ₹41.09, ₹46.81 and ₹51.77 per option, rounded to ₹34, ₹41, ₹47 and ₹52 for tranches 1 to 4.
• At 31/03/2027, 23,000 tranche 1 options actually vest and the company revises expected attrition to 8 per cent a year.

Expense schedule for the worked example (₹, illustrative)

Year end	Options counted, tranches 1 / 2 / 3 / 4	Cumulative expense	Charge for the year
31/03/2027	23,000 actual / 21,160 / 19,467 / 17,910	17,53,593	17,53,593
31/03/2028	23,000 / 21,000 actual / 19,000 / 17,500	26,93,333	9,39,740
31/03/2029	23,000 / 21,000 / 19,200 actual / 17,800	32,39,600	5,46,267
31/03/2030	23,000 / 21,000 / 19,200 / 17,600 actual	34,60,600	2,21,000

For an unvested tranche the cumulative expense is options counted × fair value × years elapsed ÷ vesting period. For a vested tranche it is options vested × fair value. The year one working at 31/03/2027 is:

• Tranche 1: 23,000 × ₹34 = ₹7,82,000
• Tranche 2: 21,160 × ₹41 × 1/2 = ₹4,33,780
• Tranche 3: 19,467 × ₹47 × 1/3 = ₹3,04,983
• Tranche 4: 17,910 × ₹52 × 1/4 = ₹2,32,830
• Total: ₹17,53,593

Three points follow. First, spreading the final ₹34,60,600 evenly would book ₹8,65,150 a year, so straight-line understates year one by about half. Second, the final charge equals vested options times grant-date fair values: 23,000 × ₹34, 21,000 × ₹41, 19,200 × ₹47 and 17,600 × ₹52. The 19,200 tranche 3 options that vested, against an estimate of 19,000, explain the year three upward true-up, booked in the period of the change without restating earlier years (paragraph 20). Third, once a tranche vests, later departures or expiries do not reverse its charge (paragraph 23).

Journal entries for ESOP expense under Ind AS 102

Ind AS 102 needs few entries over the life of a grant: a periodic debit to employee benefits expense with a credit to share options outstanding, and transfers within equity at exercise or expiry. Nothing is booked on grant date itself unless the options vest immediately (paragraphs 7, 14, 15 and 23, Ind AS 102).

Journal entries across the life of the worked-example grant

Event	Debit	Credit	Amount (₹, illustrative)
Grant date, 01/04/2026	No entry, service not yet rendered	No entry	Nil
Year-end charge, 31/03/2027	Employee benefits expense	Share options outstanding (equity)	17,53,593
Year-end charge, 31/03/2028	Employee benefits expense	Share options outstanding (equity)	9,39,740
Exercise of 23,000 tranche 1 options at ₹100, face value ₹10	Bank 23,00,000 and Share options outstanding 7,82,000	Share capital 2,30,000 and Securities premium 28,52,000	30,82,000
500 vested tranche 2 options expire unexercised	Share options outstanding	General reserve or retained earnings	20,500
Employee leaves before vesting	Share options outstanding	Employee benefits expense	Cumulative expense for those options, netted within the year’s true-up

On exercise the company issues shares for the cash and the reserve released together. Share capital takes the face value and the balance goes to securities premium: ₹23,00,000 plus ₹7,82,000 less ₹2,30,000 gives ₹28,52,000. On expiry of vested options the expense stays, because the service was received, and the company only moves the balance between components of equity (paragraph 23). The balance sits in a separate reserve within other equity.

Related reading: Treelife’s guide to ESOP valuation in India shows which valuer, date and method each report needs, and ESOP pool creation covers cash and dilution budgeting.

How do vesting conditions and exit events change the ESOP expense?

A service condition or a non-market performance condition changes how many options are counted. A market condition changes the fair value per option. Failing a market condition therefore never reverses the charge, while failing a service or non-market condition does (paragraphs 19 to 21, Ind AS 102).

Treatment of each condition under Ind AS 102

Condition	Example	How it enters the expense	If it is not met
Service condition	Employee stays four years	Changes the count of options expected to vest (paragraph 19)	Cumulative expense for leavers is reversed
Non-market performance condition	Revenue or EBITDA target	Changes the count and can change the expected vesting period (paragraphs 15(b), 19 and 20)	Cumulative expense is reversed
Market condition	Share price or valuation hurdle	Built into grant-date fair value (paragraph 21)	Expense stays if the service is complete
Non-vesting condition	Employee must keep contributing to a savings plan	Built into grant-date fair value (paragraph 21A)	Expense stays. Failure by choice counts as cancellation (paragraph 28A)

Many Indian grants depend on an IPO or a sale, and where the exit sits in the terms decides the entry. Practice treats an exit needed for vesting as a non-market performance condition. The company estimates the expected vesting period on the most likely outcome and revises it (paragraph 15(b)). An award judged unlikely to vest carries little expense, and a catch-up is booked when the exit becomes probable, which is why charges often jump around a listing. Where options vest on service alone and the exit only governs exercise, the charge still runs over the service period and the exit enters through the expected-life input. Agree this classification with the statutory auditor before the first year-end.

What happens to the expense when the terms change, or the company cancels or buys back options?

A modification that raises the value of the award adds to the expense. One that lowers it changes nothing, because the company keeps booking the grant-date fair value. A cancellation pulls the whole remaining charge into the period of cancellation, and a buyback of vested options is a deduction from equity (paragraphs 27 to 29 and B42 to B44, Ind AS 102).

Effect of common changes on the expense

Change	Effect on expense	Reference
Cut the exercise price (repricing)	Add incremental fair value, measured at modification date, over the remaining vesting period	Paragraphs 26 and 27, B43(a)
Increase the number of options	Add fair value of the extra options at modification date	B43(b)
Shorten vesting or drop a non-market condition	Apply the modified conditions when estimating the count	B43(c)
Lower fair value or lengthen vesting	Ignore. Keep booking grant-date fair value	B44(a) and (c)
Reduce the number of options	Treat as cancellation of that part	B44(b), paragraph 28
Cancel or settle unvested options	Accelerate the remaining expense. Payment up to fair value reduces equity, any excess is expense	Paragraph 28
Company buys back vested options	Payment up to fair value at repurchase date reduces equity, any excess is expense. No reversal of past charges	Paragraph 29

Repricing is the case a down round forces. On 31/03/2028 the share is valued at ₹70 and the company cuts the exercise price on tranches 3 and 4 from ₹100 to ₹80. With the original inputs and the remaining expected life (2.5 years for tranche 3, 3.5 years for tranche 4), Black-Scholes gives ₹15.09 before and ₹20.52 after for tranche 3, an increment of ₹5.43. For tranche 4 the values are ₹20.25 and ₹25.50, an increment of ₹5.25. On 19,000 tranche 3 options expected to vest, that adds ₹1,03,170 in year three. On 17,500 tranche 4 options it adds ₹91,875, or about ₹45,938 in each of years three and four. The original charges on ₹47 and ₹52 continue, so repricing raises the expense even though the options are worth less than at grant. SEBI also requires shareholder approval by special resolution for repricing by a listed company (Regulation 7(5), SEBI SBEB and SE Regulations, 2021).

Buybacks work the same way. Suppose the company repurchases 10,000 vested options at ₹45 each while their fair value at the repurchase date is ₹38. Of the ₹4,50,000 paid, ₹3,80,000 is a deduction from equity and ₹70,000 is an expense. A buyback priced above fair value therefore hits the profit and loss account for the premium, which finance teams usually discover after the price has been announced. Buying back unvested options is a cancellation and accelerates the remaining charge. See Treelife’s guide to ESOP cancellation and lapse for payout tax.

How do group plans, trusts and cash-settled awards change the entries?

The company whose employees render the service books the expense, whoever delivers the shares. A plan run through a trust is accounted as the company’s own. A cash-settled right is a liability remeasured every year (paragraphs 30 to 33, 43A to 43D, B49 and B53, Ind AS 102).

Equity-settled and cash-settled awards compared

Feature	Equity-settled option	Cash-settled SAR
What the employee gets	Shares	Cash linked to the share price
Measured at	Grant-date fair value, fixed	Fair value of the liability, remeasured each reporting date and at settlement
Reflects later share price moves	No	Yes
Credit side	Equity reserve	Liability
Effect on profit and loss	Predictable	Moves with the share price

Take 10,000 SARs vesting after two years, with fair value ₹30 at the end of year one, ₹48 at year two and cash settlement at ₹60. Year one expense is 10,000 × ₹30 × 1/2 = ₹1,50,000. Year two is 10,000 × ₹48 less ₹1,50,000 = ₹3,30,000. The post-vesting change, 10,000 × ₹60 less ₹4,80,000 = ₹1,20,000, goes through profit and loss in the settlement year. The total of ₹6,00,000 equals the cash paid. Treelife’s guide to phantom stock in India covers plan design and tax for cash-settled plans.

• Parent grants to subsidiary employees. The subsidiary has no obligation to deliver parent shares, so it books the expense as equity-settled and credits equity as a capital contribution (paragraphs 43B and B53). A recharge from the parent is a separate payment and does not replace the expense (paragraph 43D). For a listed holding company, the parent’s cost must be disclosed in the subsidiary’s notes, and any reimbursement is disclosed by both (Regulation 12(4) and (5), SEBI SBEB and SE Regulations, 2021). See Treelife’s guide to foreign parent company ESOPs for FEMA reporting and the cross-charge.
• ESOP trust. Where the company controls the trust, it is consolidated. Shares the trust holds are treasury shares deducted from equity, a loan from the company to the trust is eliminated, and sales to employees go through equity, never profit or loss. The trust changes how shares are sourced and presented, not the Ind AS 102 expense (paragraph B49). For listed companies, secondary acquisition requires a trust, is capped at 2 per cent of paid-up equity a year and 5 per cent in total, and the company may lend to the trust for the purchase (Regulation 3(1), 3(8), 3(10) and 3(11), SEBI SBEB and SE Regulations, 2021). See ESOP trust setup in India for the legal structure.
• Net settlement. Where the company withholds shares to fund the employee’s tax and pays the authority in cash, the award stays equity-settled up to the employee’s tax obligation. Shares withheld in excess are cash-settled (paragraphs 33E to 33H, Ind AS 102 as amended in 2017; Guidance Note paragraphs 52 to 55). This matters in India because TDS falls due on the perquisite at exercise.
• RSUs and sweat equity. RSU entries match those for options, with fair value equal to the share price less dividends the employee does not receive during vesting (paragraphs B2, B3 and B34). Sweat equity is also within Ind AS 102. See Treelife’s guides to RSU versus ESOP and sweat equity in India for the legal conditions.

On the legal label: Clause 28 of the Corporate Laws (Amendment) Bill, 2026 (Bill No. 85 of 2026, introduced in the Lok Sabha on 23/03/2026) proposes to give RSUs and SARs statutory footing under Section 62(1)(b). A Joint Parliamentary Committee report was tabled in August 2026 and the Bill was pending on 01/10/2026. Ind AS 102 follows the terms of the award, not the Companies Act label, so the accounting does not wait for it.

How do deferred tax and diluted EPS follow the expense?

The expense creates two follow-on calculations. Ind AS 12 requires a deferred tax asset where a tax deduction is expected later, measured on intrinsic value at the reporting date, with any excess over the cumulative expense taken to equity. Ind AS 33 counts unexercised options in diluted earnings per share under the treasury stock method (Ind AS 12, paragraphs 68A to 68C; Ind AS 33, paragraphs 45 to 48 and 47A).

The accounting charge uses grant-date fair value over the vesting period, while any deduction follows the value at exercise. Take tranche 1 at 31/03/2027 with all 23,000 options vested, a share price of ₹180 against the ₹100 exercise price, and an illustrative 25 per cent tax rate:

• Estimated future deduction: 23,000 × ₹80 intrinsic value = ₹18,40,000
• Deferred tax asset: ₹18,40,000 × 25 per cent = ₹4,60,000
• Part matching the cumulative expense (₹7,82,000 × 25 per cent) goes to profit or loss: ₹1,95,500
• Excess goes to equity (paragraph 68C): ₹2,64,500

The asset needs probable taxable profit (Ind AS 12, paragraph 24). Whether the employer gets a deduction for the ESOP discount, and in which year, is a tax position. The Karnataka High Court in CIT v Biocon Ltd (11/11/2020), reported at (2021) 430 ITR 151 (Kar), upheld the ITAT Special Bench and treated the discount as employee compensation deductible under Section 37(1) of the Income-tax Act, 1961. The Department’s appeal is pending before the Supreme Court without a stay. From 01/04/2026 the general deduction rule is section 34 of the Income-tax Act, 2025. State the litigation risk before booking a deferred tax asset. The employee side is in Treelife’s ESOP taxation guide.

Diluted EPS counts options as if exercised, with assumed proceeds equal to the exercise price plus unrecognised compensation cost (Ind AS 33, paragraph 47A). With 20,000 options outstanding, an exercise price of ₹100, unrecognised cost of ₹20 per option and an average share price of ₹180, assumed proceeds are ₹120 per option. That buys back 0.667 shares at ₹180, so each option adds 0.333 shares and the diluted count rises by 6,667 shares.

What disclosures does ESOP accounting need, and what do auditors test?

Disclosure comes from four sources: Ind AS 102 itself (paragraphs 44 to 52), Schedule III to the Companies Act, 2013, the Board’s report under Rule 12(9) of the Companies (Share Capital and Debentures) Rules, 2014, and for listed companies Regulations 14 and 15 and Part F of Schedule I of the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.

Where each ESOP disclosure sits

Source	What it requires	Where it appears
Ind AS 102, paragraphs 44 and 45	Description of each arrangement. Options outstanding, granted, forfeited, exercised, expired and exercisable, with weighted average exercise prices. Weighted average share price at exercise. Exercise price range and remaining life	Notes to the financial statements
Ind AS 102, paragraphs 46 and 47	Weighted average fair value of options granted, model and inputs (share price, exercise price, volatility, life, dividends, risk-free rate), how volatility was derived, and modifications with incremental fair value	Notes to the financial statements
Ind AS 102, paragraphs 50 and 51	Total expense for the period with the equity-settled portion shown separately. Carrying amount of cash-settled liabilities	Notes, and the employee benefits note
Rule 12(9), Companies (Share Capital and Debentures) Rules, 2014	Scheme-level disclosures every year	Board’s report
Regulation 14 and Part F, Schedule I, SEBI SBEB and SE Regulations, 2021	Method used (intrinsic or fair value), option movement, weighted average exercise prices and fair values split by exercise price against market price, employee-wise grants to senior management, 5 per cent recipients and 1 per cent identified employees, valuation assumptions, and grants in the three years before an IPO	Company website, with a web-link and a statement of material changes and compliance in the Board’s report
Part F, item G, Schedule I	Trust loans, shares acquired, transferred and held, and secondary acquisition as a percentage of paid-up capital	Same web-link
Ind AS 33 and Ind AS 12	Diluted EPS effect and tax effect	Notes to the financial statements
Schedule III (Division II), Ind AS 1 and Ind AS 7	Charge inside employee benefits expense. Reserve inside other equity, with movements in the statement of changes in equity. Charge added back as non-cash in operating cash flows. Exercise cash in financing activities (Ind AS 7, paragraph 17(a))	Primary statements

Regulation 15 requires a listed company to follow the accounting standards notified under Section 133 of the Companies Act, 2013 and any ICAI guidance note. The movement table in paragraph 45 has to reconcile to the register of employee stock options in Form SH-6, and the expense in paragraph 51 has to reconcile to the ledger.

What auditors and investor accountants test

Test	What they ask for	Common failure
Grant population complete	Scheme, resolutions, grant letters, SH-6, cap table, exchange filings, committee minutes	Informal grants missing from the schedule
Grant date and valuation date	Acceptance dates and a valuation report dated as at the grant date	Later valuation applied to an earlier grant
Model inputs	Peer set, volatility window, expected life evidence, rate source	Inputs with no working paper
Modifications and buybacks	Fair value at the event date against price paid	Whole buyback payment taken to equity
Trust	Consolidation, treasury share presentation, loan elimination	Trust shares shown as an asset
Deferred tax	Expected exercise-date deduction, split between profit and equity	Tax effect computed on the book expense only

Common mistakes that cost founders time and money

Five errors account for most ESOP audit adjustments, and each starts as a shortcut. A straight-line schedule, a reused valuation report or a wrong grant date looks harmless in year one, then surfaces as restated comparatives, an auditor query or a delayed investor closing. Fixing it costs more than building the schedule correctly at the first grant.

1. Straight-lining a graded grant. The finance team divides the total by the number of years. In the worked example that books ₹8,65,150 against the ₹17,53,593 required in year one. Treat each tranche as its own grant (IG11) and build the schedule by tranche.
2. Using the latest round price or the tax FMV as the option’s fair value, or a valuation dated after the grant. One report gets reused for accounting and tax. Value the option at grant date with an option pricing model on a share value as at that date, and keep the exercise-date share value for perquisite tax only.
3. Remeasuring after a valuation move. A down round does not cut the expense and an up round does not raise it, because Ind AS 102 uses a modified grant date method (IG9). Only a modification, such as a repricing, changes the charge (paragraph 27).
4. Reversing expense when vested options expire. The service was received, so the charge stays. Transfer the balance within equity (paragraph 23).
5. Using the board meeting date as the grant date. An offer is not a grant. Acceptance, shareholder approval or a pending exercise price moves the date later (IG2 and IG3), and the fair value inputs must be as at that date.

FAQs on ESOP Expense Under Ind AS 102

Q: Is the ESOP expense tax deductible for the company?
A: That is a tax question, separate from the accounting. The Karnataka High Court in CIT v Biocon Ltd (11/11/2020) treated the ESOP discount as deductible employee compensation under Section 37(1) of the Income-tax Act, 1961, and the Department’s appeal is pending before the Supreme Court. From 01/04/2026 the corresponding rule is section 34 of the Income-tax Act, 2025.

Q: Does the accounting expense change the perquisite tax the employee pays?
A: No. The employee is taxed at exercise on the exercise-date fair market value less the exercise price under Section 17(2)(vi) of the Income-tax Act, 1961 for exercises before 01/04/2026, and under section 17 of the Income-tax Act, 2025 from that date. The accounting charge uses a different value on a different date, and neither number feeds the other.

Q: How is the fee for ESOP accounting usually structured?
A: Fees are usually set per annual cycle, driven by grant dates and tranches. Ask for a fixed fee per cycle.

Q: How long does the first expense schedule take?
A: The schedule is mechanical once the option ledger is clean and the valuation report is in hand. The slow parts are the independent valuation and the auditor’s review, so start the valuation before the grant date.

Q: What documents will the auditor ask for?
A: The scheme and special resolution under Section 62(1)(b), grant approvals and letters with acceptance dates, the valuation report with model inputs, the Form SH-6 register, attrition workings and the exits register, and exercise and lapse records.

Q: Does an Indian subsidiary book an expense for RSUs granted by its foreign parent?
A: Yes. The subsidiary receives the employees’ service, so it books an equity-settled expense with a credit to equity as a parent contribution (paragraphs 43B and B53, Ind AS 102). FEMA reporting sits outside the accounting.

Q: Do options granted to directors and co-founders attract the expense?
A: Yes. Appendix A to Ind AS 102 defines employees to include all management personnel, including non-executive directors, and the Guidance Note includes directors in paragraph 3. SEBI excludes promoters from the definition of employee for listed companies, but Regulation 9A lets founders keep options granted at least one year before the draft offer document, and the accounting is unchanged.

Q: Does DPIIT recognition change ESOP accounting?
A: No. The DPIIT deferral is a timing relief on the employee’s perquisite tax. It does not change the grant-date fair value, the vesting period or the entries above.

Q: What happens to the expense if an IPO-linked vesting condition never occurs?
A: If the exit is a non-market performance condition, the cumulative expense for those options is reversed because they never vest (paragraph 19). If it is only an exercise condition and the service was completed, the expense stays (paragraph 23). Vested options that lapse unexercised stay in equity and move between reserves.

Q: What will an investor’s accountant test?
A: They reconcile the option ledger to the expense schedule, the schedule to the profit and loss account, and the account to the notes, then ask for the model inputs behind each fair value. See Treelife’s ESOP due diligence guide for the EBITDA add-back.

Q: How do you estimate volatility for an unlisted company?
A: Use comparable listed companies’ volatility over the expected life (paragraphs B27 to B30, Ind AS 102). Record the peer set and window.

Q: Is the ESOP expense a cash cost, and does it reduce EBITDA?
A: It is a non-cash charge, added back in operating cash flows. It sits in employee benefits expense, so reported EBITDA falls unless the company presents an adjusted figure. Add-backs are negotiated separately.

The ESOP expense Ind AS 102 requires is a schedule problem more than a valuation problem: one row per grant date and tranche, one count of leavers, and one reconciliation to the notes.

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Regulatory references

• Section 133, Companies Act, 2013, and Rule 4, Companies (Indian Accounting Standards) Rules, 2015
• Ind AS 102, Share-based Payment, paragraphs 7, 8, 10 to 15, 19 to 21A, 23, 24, 26 to 29, 30 to 33, 33E to 33H, 43A to 43D, 44 to 52, Appendix A, Appendix B (B2 to B7, B16 to B21, B27 to B37, B42 to B44, B49, B53, B59, B61) and Implementation Guidance IG1 to IG4, IG9, IG11
• Companies (Indian Accounting Standards) (Amendment) Rules, 2017 (Ministry of Corporate Affairs notification dated 17/03/2017) amending Ind AS 102
• Ind AS 12, Income Taxes, paragraphs 24 and 68A to 68C
• Ind AS 33, Earnings per Share, paragraphs 45 to 48 and 47A
• Ind AS 38, Intangible Assets, and Ind AS 101, First-time Adoption of Indian Accounting Standards, paragraph D2
• Section 62(1)(b), Companies Act, 2013, and Rule 12 (including Rule 12(9)), Companies (Share Capital and Debentures) Rules, 2014
• Schedule III, Division II, Companies Act, 2013
• Guidance Note on Accounting for Share-based Payments, ICAI, September 2020, paragraphs 3, 14, 52 to 55, 72 to 78 and 87
• SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (amended up to 04/12/2025): Regulations 2(1)(q), 3(1), 3(8), 3(10), 3(11), 7(5), 12(4) and (5), 14 and 15, and Part F of Schedule I