Parth Shah
on
Under Ind AS 102, your ESOP expense equals the grant-date fair value per option multiplied by the number of options expected to vest, spread across the vesting period. That is the whole calculation in one line. Everything else is detail, an important detail, but detail.
The Ind AS 102 ESOP expense calculation trips up finance teams because the accounting rarely behaves the way people expect. The number is fixed on the grant date and never revisited. Some forfeitures reverse the expense and some do not. Repricing an option can only ever increase the charge.
This guide covers the accounting side of ESOPs: who has to apply the standard, how the expense moves through your books, what the journal entries look like, and whether you can claim a tax deduction for it. At MyValuation, we issue grant-date fair value reports for exactly this purpose.
Key Takeaways
- ESOP expense under Ind AS 102 = grant-date fair value per option × options expected to vest.
- For equity-settled options, grant-date fair value is fixed permanently and never remeasured for share price movements.
- Ind AS 102 applicability is irreversible once triggered, and pulls in group companies regardless of their own net worth.
- Graded vesting requires tranche-by-tranche recognition, front-loading roughly half a four-year grant’s cost into Year 1.
- Service and non-market conditions reverse the expense when they fail; market and non-vesting conditions do not.
- Cash-settled SARs and phantom stock are remeasured at every reporting date and bring earnings volatility with them.
- Modifications and repricing can only add expense; cancellations accelerate it immediately.
- The ESOP discount is judicially recognised as deductible following CIT v. Biocon, subject to the pending Supreme Court appeal.
An Ind AS 102 ESOP expense calculation is only as defensible as the valuation underneath it. The formula takes a minute; the volatility benchmark, expected life estimate and peer set behind it are what an auditor actually interrogates and what a due diligence team reopens during your next round.
MyValuation delivers grant-date fair value reports certified by an IBBI Registered Valuer, alongside exercise-date perquisite FMV certification, sensitivity tables and full model workings built for auditor review. Reports are issued in 5-7 business days. You can also explore our full ESOP valuation services to see what each report covers.
What Is Ind AS 102 and Why Does It Put ESOPs on Your P&L?
Ind AS 102 (Share-based Payment)
is the Indian accounting standard that requires a company to record the cost of shares, options and share-linked benefits given to employees as an expense in its profit and loss account. It is India’s convergence with IFRS 2 and applies to every share-based payment, whether the recipient is an employee, a director or a vendor.
The logic is simple. Your employees delivered services. You paid for those services with equity instead of cash. A cost was incurred, so a cost must be recorded. The fact that no money left the bank is irrelevant.
This is why ESOP expense is a non-cash charge. It reduces reported profit but never touches cash flow. In the cash flow statement it is added back to profit as a non-cash item, which is why fast-growing companies often show a widening gap between reported loss and operating cash burn.
What does the standard actually require?
Paragraphs 10 and 11 of Ind AS 102 require equity-settled share-based payments to be measured at the fair value of the equity instrument on the grant date. Intrinsic value = the plain difference between share price and exercise price, is permitted only in the rare case where fair value cannot be estimated reliably.
That grant-date fair value is then never remeasured for equity-settled options. If your share price triples the following year, your ESOP expense does not change by a rupee. What does get revisited is the estimate of how many options will vest which is an estimate revision, not a revaluation.
How Do You Calculate ESOP Expense Under Ind AS 102?
The calculation runs in five steps. Work through them in order for every grant.
Step – 1: Fix the grant date.
This is the date the company and the employee reach a shared understanding of the scheme’s terms. Normally the date the board approves the grant and the employee accepts the grant letter, not the date the letter is drafted.
Step – 2: Value one option.
Use an accepted option pricing model, which needs the underlying share value, exercise price, expected life, expected volatility, risk-free rate and dividend yield. Our guide on choosing between Black-Scholes, binomial and Monte Carlo covers when each model applies.
Step – 3: Estimate how many options will actually vest.
Reduce the number granted by an evidence-backed forfeiture rate drawn from your own attrition history.
Step – 4: Compute total expense.
Multiply Step 2 by Step 3.
Step – 5: Allocate it across the vesting period.
Straight-line for a single cliff. Tranche by tranche for graded vesting.
The formula, stated once:
Total ESOP Expense = Grant-Date Fair Value per Option × Number of Options Expected to Vest
A worked example
Take a Pune-based SaaS company that grants 40,000 options to its team on 1 April 2026. The exercise price is ₹100. An independent valuer computes a grant-date fair value of ₹60 per option. Vesting is 25% per year over four years. Based on three years of attrition data, the company estimates a 10% forfeiture rate.
- Options expected to vest: 40,000 × 90% = 36,000
- Total expense over the plan’s life: 36,000 × ₹60 = ₹21,60,000
That ₹21.6 lakh is the ceiling. It will be adjusted for actual attrition, but it will not move because the share price moved.
One refinement worth noting: in a real engagement each tranche is valued separately, because a tranche vesting in one year has a shorter expected life than one vesting in four. A single ₹60 is used here to keep the arithmetic legible.
Not Sure How To Work Out This Number?
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Which Companies Must Apply Ind AS 102?
Ind AS 102 applies to any company covered by the Companies (Indian Accounting Standards) Rules, 2015, notified under Section 133 of the Companies Act, 2013. The roadmap in Rule 4 turns on listing status and net worth.
- Phase I — accounting periods from 1 April 2016: all listed companies, or those in the process of listing, and unlisted companies with net worth of ₹500 crore or more.
- Phase II — from 1 April 2017: remaining listed companies other than those on SME exchanges, and unlisted companies with net worth of ₹250 crore or more.
- Group entities: once a company is covered, its holding, subsidiary, joint venture and associate companies are pulled in regardless of their own net worth.
- NBFCs, banks and insurers follow separate regulator-notified roadmaps.
Two features catch people out. Applicability is irreversible. If once triggered, Ind AS continues to apply even if net worth later falls below the threshold. And a company that begins the listing process must adopt Ind AS from that financial year, which is why pre-IPO companies find themselves restating ESOP numbers under time pressure.
What if you are a private company below the threshold?
You still cannot ignore ESOP accounting. Companies outside the Ind AS framework follow the ICAI Guidance Note on Accounting for Share-based Payments (2020), which superseded the 2005 guidance note and applies to entities reporting under the Companies (Accounting Standards) Rules.
| Aspect | Ind AS 102 | ICAI Guidance Note (2020) |
| Applies to | Companies under the Ind AS roadmap | Companies under Accounting Standards |
| Measurement basis | Fair value mandatory | Fair value or intrinsic value permitted |
| Graded vesting | Tranche by tranche | Tranche by tranche |
| Non-employee awards | Covered | Covered |
| Disclosure depth | More extensive | Comparable but lighter |
Most growth-stage companies choose fair value even where intrinsic value is technically available. Investors performing due diligence expect it, and switching methods later creates an ugly comparability problem in the year of transition. Our guide to ESOP valuation for private companies covers the practical side of that choice.
How Does the Vesting Pattern Change Your Expense Schedule?
Under graded vesting, Ind AS 102 treats each tranche as a separate grant with its own vesting period which front-loads roughly half the total cost into Year 1. This is where most in-house calculations go wrong, and it is the first thing a statutory auditor tests.
The standard 4-year, 25%-per-year Indian vesting schedule is not one award vesting over four years. It is four awards: one vesting in year one, one in two, one in three, one in four. The tranche vesting in year one must be fully expensed in year one.
Continuing the example — ₹21,60,000 total, four equal tranches of ₹5,40,000 each:
| Year | Straight-line (incorrect) | Tranche method (correct) | Difference |
| Year 1 | ₹5,40,000 | ₹11,25,000 | +₹5,85,000 |
| Year 2 | ₹5,40,000 | ₹5,85,000 | +₹45,000 |
| Year 3 | ₹5,40,000 | ₹3,15,000 | −₹2,25,000 |
| Year 4 | ₹5,40,000 | ₹1,35,000 | −₹4,05,000 |
| Total | ₹21,60,000 | ₹21,60,000 | Nil |
The total is identical here only because a single fair value was assumed for every tranche. Value each tranche properly and the totals diverge too, since shorter-dated tranches are worth less.
The practical consequence: if you grant options every year, your ESOP charge climbs steeply for the first three years even at a constant grant volume, because each year’s front-loaded charge stacks on top of the tail of earlier grants. Budget for it before it surprises the board.
Which Vesting Conditions Reverse the Expense, and Which Do Not?
Only service conditions and non-market performance conditions reverse the expense when they fail. Market conditions and non-vesting conditions are priced into the grant-date fair value, so the charge stands whether or not the target is ever hit.
This distinction decides whether an expense sticks or unwinds, and it is routinely missed in schemes that carry a share-price target.
| Condition type | Example | Built into grant-date fair value? | If the condition is not met |
| Service condition | Stay employed for 4 years | No | Reverse cumulative expense |
| Non-market performance | Revenue target achieved | No | Reverse cumulative expense |
| Market condition | Share price crosses ₹500 | Yes | No reversal – expense stands |
| Non-vesting condition | Employee stops contributing to a savings plan | Yes | No reversal – expense stands |
The practical effect is counter-intuitive. A company whose share price never reaches the ₹500 target still carries the full expense for those options, provided the employees stayed. The cost was locked in when the option was valued.
What about vested options that simply expire?
Once options have vested, the service has been received and the expense is permanent. If an employee never exercises and the options lapse, you do not credit the P&L. The balance sitting in the share options outstanding account is transferred within equity, typically to general reserve. Reversing it through profit is a classic audit adjustment.
What Are the Journal Entries for ESOP Expense?
Four events matter. Grant date itself requires no entry since no service has yet been received.
1. Annual expense recognition, in each reporting period during vesting:
- Dr – Employee Benefits Expense – Share-based Payments (P&L)
- Cr – Share Options Outstanding Account (Equity)
2. Forfeiture of unvested options, when an employee resigns mid-vesting:
- Dr – Share Options Outstanding Account
- Cr – Employee Benefits Expense (P&L)
3. Exercise of vested options:
- Dr – Bank, being the exercise price received
- Dr – Share Options Outstanding Account, being the balance attributable to those options
- Cr – Share Capital at face value
- Cr – Securities Premium, being the balancing figure
4. Lapse of vested but unexercised options:
- Dr – Share Options Outstanding Account
- Cr – General Reserve
Note that the credit in entry 1 sits in equity, not liabilities. For equity-settled awards there is no obligation to deliver cash, so nothing belongs on the liability side of the balance sheet.
How Are Cash-Settled SARs and Phantom Stock Treated Differently?
Cash-settled awards create a liability that must be remeasured at fair value at every reporting date until settlement. This is the sharpest departure from equity-settled accounting, and the one that surprises finance teams who assumed a single valuation would carry them through the plan’s life.
A Stock Appreciation Right pays the employee the increase in share value without issuing shares. Because the company will settle in cash, it owes something and that obligation is measured afresh each period, with every movement running through profit or loss.
The consequence is volatility. A company whose share value doubles will see its SAR liability roughly double too, and the entire increase lands in that year’s P&L. Equity-settled options would have shown no change at all. Companies that adopt phantom stock to avoid dilution often do not price in this earnings volatility, and discover it at the first strong year.
Equity-settled ESOP vs cash-settled SAR at a glance
| Feature | Equity-settled ESOP | Cash-settled SAR |
| What the employee receives | Shares on exercise | Cash equal to the share value gain |
| Measurement date | Grant date only | Grant date and every reporting date |
| Remeasured after grant? | No | Yes, until settlement |
| Credit sits in | Equity share options outstanding | Liability |
| Effect on P&L | Fixed at grant, spread over vesting | Moves with share value each year |
| Dilution | Yes – new shares issued | No |
| Valuations needed | Once, at grant | At grant and every balance sheet date |
What Must You Disclose in Your Financial Statements?
Ind AS 102 sets out three disclosure objectives, in paragraphs 44, 46 and 50: the nature and extent of arrangements, how fair value was determined, and the effect on financial performance and position. In practice your notes must carry the following.
- Scheme description – general terms, vesting requirements, maximum option term, and method of settlement.
- Option reconciliation number and weighted average exercise price of options outstanding at the start, granted, forfeited, exercised, expired, outstanding at the end, and exercisable at the end.
- Weighted average share price at the date of exercise for options exercised during the period.
- Range of exercise prices and weighted average remaining contractual life for options outstanding.
- Valuation model and inputs the model used, expected volatility and how it was determined, expected life, risk-free rate, and expected dividends.
- Total expense recognised for the period, with the equity-settled portion shown separately.
- Liability disclosures for cash-settled awards. The carrying amount and intrinsic value of vested rights at period end.
Listed companies carry an additional layer under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, which require scheme disclosures in the board’s report and on the company’s website.
The valuation input disclosures are where thin documentation shows. If your note says volatility was 45% but no working paper explains which peer set produced that figure, expect a question.
Is ESOP Expense Tax Deductible in India?
Yes. The ESOP discount is allowable as business expenditure under Section 34 of the Income-tax Act, 2025 (Section 37(1) of the 1961 Act) and is claimed over the vesting period. The deduction rests on judicial precedent rather than an express provision, which is exactly why the file behind it matters.
What have the courts actually held?
The Bangalore Special Bench of the ITAT in Biocon Ltd. v. DCIT held that the ESOP discount is employee compensation, not a capital cost of raising share capital. The Karnataka High Court affirmed that view, and the Delhi and Madras High Courts have reached the same conclusion.
The Revenue has not accepted the position and an appeal is pending before the Supreme Court. Tribunals have continued to follow Biocon throughout, on the settled principle that a pending appeal does not suspend a binding precedent. Claim the deduction, but document it as a contested position.
How much can you claim, and when?
The deduction accrues across the vesting period in the same proportion the options vest. Only the portion that has vested in a given year carries a deductible cost for that year.
The amount is then trued up at exercise. The final employee cost is the difference between the share’s fair market value on the exercise date and the exercise price, so the provisional amounts claimed during vesting are adjusted upward or downward in the year of exercise. Options that lapse unexercised carry no cost, and the deduction taken for them reverses.
Why the tax deduction rarely equals the book charge
The two numbers are built from different measurements taken on different dates. This is the gap behind mistake seven, and it is worth stating plainly.
- Book charge: the grant-date fair value of the option, fixed at grant and never remeasured.
- Tax deduction: the discount measured against the share’s FMV on the exercise date, which is unknown until the employee exercises.
That difference is a temporary one, so it carries deferred tax. Ind AS 12 measures the deferred tax asset on the estimated future tax deduction. Broadly the option’s intrinsic value at the reporting date rather than on the cumulative book expense. Where the estimated deduction exceeds the cumulative expense, the excess deferred tax is recognised in equity, not in profit or loss.
What Are the Most Common ESOP Accounting Mistakes?
Seven errors account for most of the audit adjustments we see on the accounting side of ESOPs.
- Straight-lining a graded vesting schedule. Understates early-year expense materially. The single most frequent error.
- Reversing expense when vested options lapse. Post-vesting expiry is an equity transfer, not a credit to profit.
- Reversing expense when a market condition fails. Share-price targets are priced into fair value at grant; missing them changes nothing.
- Treating cash-settled awards like equity-settled ones. SARs and phantom stock create a liability remeasured at every reporting date.
- Picking a forfeiture rate out of the air. An unsupported 20% assumption will be challenged. Anchor it in your own attrition data and document the working.
- Ignoring modification accounting after a repricing. Incremental fair value is additional expense, not a replacement for the original charge.
- Assuming the tax deduction equals the book charge. They are different amounts on different triggers, and the gap has deferred tax consequences.
Worried Your ESOP Numbers Already Have One of These Mistakes?
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Visit My ValuationConclusion: Getting the Ind AS 102 ESOP Expense Right
The ESOP expense is deductible in India, spread across the vesting period and trued up at exercise but the claim survives on the file behind it. The grant-date fair value under Ind AS 102 and the exercise-date FMV are separate exercises, and MyValuation prepares both to the standard auditors and assessing officers expect.
Need Your ESOP Valuation To Hold Up On Both Sides?
MyValuation’s IBBI Registered Valuers, working with SEBI-registered Category I merchant bankers, deliver the Ind AS 102 grant-date fair value and the exercise-date FMV certificate, with the models, inputs and workings your auditor can follow.
Book a Consultation on Your ESOP ValuationFrequently Asked Questions
1. Is ESOP expense a cash expense?
No. ESOP expense under Ind AS 102 is a non-cash charge that reduces reported profit without any cash outflow. Cash only moves when employees pay the exercise price to acquire shares.
2. Can we use intrinsic value instead of fair value?
Ind AS 102 mandates fair value and permits intrinsic value only in rare cases where fair value cannot be estimated reliably. Companies outside the Ind AS framework may use intrinsic value under the ICAI Guidance Note, but investors and auditors generally expect fair value.
3. Does Ind AS 102 apply to a private company?
Only if it crosses the net worth thresholds in the Companies (Indian Accounting Standards) Rules, 2015, or is a group company of one that has. Everyone else follows the ICAI Guidance Note on Accounting for Share-based Payments (2020), which still requires the expense to be recorded.
4. Is the expense reversed if options expire unexercised?
No. Once options vest, the employee has delivered the service and the expense is permanent. The balance in the share options outstanding account is transferred within equity, usually to general reserve, with no credit to the P&L.
5. What happens to the expense if a share price target is never met?
Nothing. A share price target is a market condition, and market conditions are built into the grant-date fair value. Provided the employee completes the service period, the full expense stands even though the target was missed.
6. How is the expense treated when a company reprices underwater options?
Repricing is a modification. The original grant-date fair value continues to be recognised in full, and the incremental fair value created by the repricing is added and spread over the remaining vesting period.
7. Can a company claim ESOP expense as a tax deduction in India?
The Karnataka High Court in CIT v. Biocon Ltd. held that the ESOP discount is deductible as business expenditure over the vesting period, and tribunals have followed it consistently. The issue is pending before the Supreme Court, so document the claim carefully.
8. What happens to the ESOP reserve when options are exercised?
The share options outstanding account is debited along with the exercise money received, and credited to share capital at face value with the balance to securities premium. The reserve is cleared for those specific options.
9. Does Ind AS 102 apply to RSUs and SARs as well?
Yes. RSUs are equity-settled and measured at grant-date fair value. SARs and phantom stock are cash-settled, creating a liability that must be remeasured at fair value at every reporting date until settlement.
Read More:
- ESOP Valuation in India under Ind AS 102: Methodology, Graded vs Cliff Vesting, and a Worked Example
- ESOP Valuation for Private Companies: Valuation Methods, FMV Calculation, Compliance & Expert Insights
- Understanding ESOP Valuation: Essential Factors and Methods
- Tax Implications of ESOPs for Startup Companies in India
