Employee Benefits ESOP Valuations
ESOP’s 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 in the company, often set at a predetermined price, as a reward for their performance and either in addition or as a part of their overall benefits package.
While traditionally this plan has been afforded to director and trustees, of late we have seen employees at every level show a keen interest in obtaining stock of their company. Many organizations offer ESOPs as an opportunity to targeted employees, in a bid to retain their talent and in return provide motivation for higher performance.
Accounting for ESOPs
Organizations 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.
Armstrong’s ESOP Valuation practice has helped several large enterprises, including a Global Multinational IT Giant and a Logistics Industry leader offer stock option to employees in their Pan-India operations, thus helping them edge out their competitors in retaining talent.