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How to Calculate ESOP Expenses?

  • Written Written by Equity team 03 February 2023 | 4 min read
  • Editor's Note :

    Accurate ESOP expense calculations are essential for creating a sustainable, long-term plan for employee ownership. In order to accurately calculate ESOP expenses, it is important to consider factors such as the company's valuation, the vesting schedule, and the funding sources for the plan.

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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, that 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 Days
Vested Options
Value
Total Cost of Option
1 01-Apr-22
365 
125 
1,000
1,25,000 
2 01-Apr-23
730 
125 
1,000
1,25,000 
3 01-Apr-24
1,096 
125 
1,000
1,25,000 
4 01-Apr-25
1,461 
125 
1,000
1,25,000 
5

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., Vesting 1, 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 that 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
31-Mar-22

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 

1,096
Vesting 1: - 01-Apr-25
365 
365 
365 
365 
1,461 

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 21-23
FY 21-24
FY 21-25
Total Expense (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 Expense 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 same proportion.
The journal entries in books of accounts will be passed as below in each FY: -

Journal Entries
FY 21-22
FY 21-23
FY 21-24
FY 21-25
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
1,35,357
73,057
31,229

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

For a Streamlined, Automated & Faster processing of ESOP Expense Calculation and Accounting explore Vega Equity - ESOP & Cap table Management Platform. For Free Trial, Book a Demo here and get a free consultation from our team of experts on ESOP Scheme Rolling Out, First Time ESOP Adoption, and Industry Best Practices around ESOPs.

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