Share Based Payments Give example of Infosys.. At Infosys, where Narayana Murthy's driver is believed to have become a crorepati by exercising his ESOPs.. Who will work more in my CA firm… partner or just employee.. Lly in Companies , who is the owner – anyone who owns a share of a company ..

Framework As development of Standard is likely to take time, at present the Institute has decided to bring out the Guidance Note on Share Based Payments in 2005 IFRS 2 also deals with Share based payments in a wider term but presently , we shall deal with all the sums as per the Guidance note . As you know, I always wish to start with building a framework before starting any summation.

Who is an employee? a) a permanent employee of the company working in India or out of India; or b) a director of the company, whether a whole time director or not ;or

Share based payments includes- ESOP Employees Stock Options Plans ESPP Employees Stock Purchase Plan SARs Stock Appreciation Rights I would much appreciate if you cud write this down .

SBP with Cash Alternatives But for Accounting purpose , Share based payments are classified into - Equity settled Employees receive options or shares in lieu of services eg. ESOP and ESPP Cash settled Employees receive cash based on the price of the enterprise’s share eg SARs SBP with Cash Alternatives Employee has a choice whether the enterprise settles the payment in cash or by issue of shares I would much appreciate if you cud write this down .

What is Employee Stock Option? It is the option given to employees of a company which gives them the right to purchase or subscribe to specified number of shares offered by the company at a future date at a pre-determined price ie the exercise price Clearly, the ESOP is a call option held by the employees , which is settled by actual delivery of shares . The employer is the writer of the option, but he does not charge any option premium. The employer recognises the premium sacrificed , or in other words the value of call , as expense over the vesting period.

Employee Stock Purchase Scheme Employee Stock Purchase Scheme (ESPS) means a scheme under which the company offers shares to employees as part of a public issue or otherwise. At discounted price .

Taxable as Capital Gain Life Cycle of ESOP Grant Vesting Exercise Sale Taxable as perquisite Taxable as Capital Gain February 2011

Grant – Meaning Grant means issue of option/units to employees under ESOP Grant Date – Date on which the employer and employee agree to the terms of an ESOP Employee is granted the right to an incentive i.e. shares upon fulfillment of certain specified conditions, if any. February 2011

Vest - Meaning Vest means to become entitled to receive shares upon satisfaction of the specified conditions as agreed under an EIP. Date of vesting refers to the date on which the employee has unconditional right to receive shares under the EIP i.e. restrictions are lifted Vesting Period is the period between the grant date and the vesting date Vesting Conditions are the conditions under the ESOP that must be satisfied for the employee to become entitled to receive shares Conditions may include service conditions, viz. completion of a specified service period, specified performance targets to be met, etc. February 2011

Exercise - Meaning Exercise means making of an application by the employee to the employer for issue of shares against the option vested in him. Exercise Period is the time period after vesting within which the employee should exercise his right to apply for shares against the option vested in him Exercise Price is the price payable by the employee for exercising the option granted to him Alternatively – the date on which the employee is eligible to have the shares allotted/transferred to him February 2011

Few dates worth remembering!! Grant date The day a share based payment plan is announced and accepted by employees is called grant date Vesting date The day when the employees become entitled to such payments is called the vesting date Exercise Date Exercise date is the date when an option is exercised by paying the exercise price. Explain Vesting period -Vesting means the process by which the employee is given the right to apply for shares of the company against the option granted to him in pursuance of ESOS .. And Contractual life.. To qualify for the incentives, the employees put in their efforts during the vesting period to fulfill specified vesting conditions, e.g. reaching a specified sales/profit targe t Exercise means making of an application by the employee to the company for issue of shares against option vested in him in pursuance of the ESOS Exercise Period means the time period after vesting within which the employee should exercise his right to apply for shares against the option vested in him in pursuance of the ESOS

Why and how to recognize?? The value of share-based payment depends on the market value of shares on vesting date/exercise date and hence cannot be known with certainty before these dates. Nevertheless, since the share-based payments are payments for services rendered by employees during the vesting period, the value of share-based payments should be recognized as expense during the vesting period, i.e. before value of such payments are known with certainty. Two principal issues involved in accounting for employee share-besed payments are (i)problem of valuation of share-based payments before vesting date and (ii) problem of allocation of the estimated value of share-based payment to a particular accounting period during the vesting period for recognition as expense.

Pricing – decide at the Grant date itself Fair value Amount at which Stock option can be exchanged between knowledgeable , willing parties in an arms length transaction Or; the present value of future expected benefits Intrinsic value Intrinsic value of an option is the excess of market price of the underlying share on the grant date over the exercise price. Pg 7.4 type -

Illustration 1 and 9 of module Type of SBPs Equity settled Cash settled Valuation Fair value Intrinsic value Pg 7.4 type -

Particulars Year 1 Year 2 Year 3 A Number of employees expected to satisfy vesting conditions B C D Fair value of options expected to vest( A X ___X Fair Value Per option) E Cumulative fair value to be recognized till date F Cumulative fair value already recognized G Expense to be recognized for the period (E-F)

Accounting procedure for ESOP The amount recognised as expense in vesting period is debited to “Employees Compensation Account “ with a corresponding credit to an equity account called “Stock Options Outstanding” The Stock Option Account is transitional in nature as it ultimately gets transferred to another equity account such as Share Capital , Securities Premium or General reserve