Key Consideration for ESOP Accounting
![](https://betafinpartners.com/wp-content/uploads/2024/08/download.png)
It is that part of the year when a lot of unlisted startups are finalising their books of accounts for ESOP Expenses This is governed by Guidance Note on Accounting for Sharebased Payments issued by ICAI, 2020 / Ind AS 102/ IFRS 2/ US GAAP ASC 718 Under the Black Scholes Model, the variables that influence the Fair value of the option are: • Exercise Price • Fair value of Shares / Market Price • Current Expected dividend yield • Risk free rate of return • Expected option Life • Volatility of the stock Generally, the key things to watch out for are The framework says that the valuation of options will be as on the grant date- so one has to clearly map the valuation matrix during the entire year, if grants have happened throughout. Often for practical purposes, auditors allow a Valuation report as on 30th September i.e. middle of the year; to be used for the entire year CCPS Issuance prices are Level 1 inputs and the most preferred in the Fair Value Hierarchy (Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date) The question is how do we get the implied Equity Value? A lot of companies have a view that they can consider issuance price of CCPS as the fair value of equity- assuming 1:1 conversion ratio. In other cases, they assume an standard number, say 15%, based on judgement i.e. equity will be 15% lower than CCPS- which essentially has no rational But the key questions remain that CCPS as a class of instruments needs to be valued higher than equity because of superior rights such as anti-dilution clause, liquidation preference. So preferably an exercise of applying the OPM Backsolve method should be followed. Since the ESOP Plans usually carry restrictions around transferability of the shares, the fair value of equity to be considered for BSM should be adjusted for DLOM. Chaffe is a widely accepted method for this The ESOP costs to be booked should be adjusted for e. The higher the attrition rate, the lower will be the cost to be charged to P&L – hence the CFO would be happy to have the attrition number to be optimised Ind AS – 102 – Share-based Payment does not specifically mandate the method for calculating attrition and hence it is open to wide interpretation If you go by the historical attrition, you can take the annualised value of average Monthly Attrition i.e. Exits during April / ( Opening + Closing ) /2 , Exits during May / ( Opening + Closing ) /2 …. Else, you can take Exits during April-March / ( Opening of April + Closing of March) /2 If we take a cue from AS 15 and Ind AS 19, one needs to make an assumption about how many people are expected to leave the service of the employer in future. So, its a futuristic assumption and not about the past. The past experience should only be used as a guide to set the assumption. So, let us say the past attrition was 20% but now the company has a Retention Scheme in place, it can jolly well expect that attrition be only 10%. The attrition number is also to be adjusted for any redundancies planned in the future, say layoffs in a startup that are planned And then match the expected attrition for whether it matches with the attrition assumed in the Gratuity and Leave Encashment actuarial reports. Auditors generally check for that When the options have a graded vesting schedule (for example, 25% vesting each year over four years), they should be treated like multiple grants and the fair value of each grant is amortised over the respective vesting period (the separate grant approach). Practically it needs some care to code it properly Best to source from listed peers else the industry averages Interest rate that is adopted should not be discrete but be continually compounded i.e. YTM of a Zero-Coupon Bond for the given tenure This is an important point of judgement- what is the management’s expectation on the expected dividend. In a loss-making startup, it is assumed to be zero. You could average their historical dividend yield (typically zero) with the average dividend yield of a relevant and comparable peer group.
Terms & Condition
Terms & Condition These terms and conditions (“Terms”) govern your use of BetaFinPartners.com (“the Website”), owned and operated by BetaFin Partners LLP (“we”, “us”, “our”). By accessing or using the Website, you agree to be bound by these Terms. If you do not agree with any part of these Terms, you may not use the Website. Use of the Website 1.1. Permitted Use: You may use the Website for lawful purposes and in accordance with these Terms. 1.2. Prohibited Use: You may not: Use the Website in any way that breaches any applicable local, national, or international law or regulation. Use the Website to transmit, or procure the sending of, any unsolicited or unauthorized advertising or promotional material. Use the Website to knowingly transmit any data, send or upload any material that contains viruses, Trojan horses, worms, time-bombs, keystroke loggers, spyware, adware, or any other harmful programs or similar computer code designed to adversely affect the operation of any computer software or hardware. Intellectual Property 2.1. Ownership: The Website and its entire contents, features, and functionality (including but not limited to all information, software, text, displays, images, video, and audio, and the design, selection, and arrangement thereof) are owned by us, our licensors, or other providers of such material and are protected by copyright, trademark, patent, trade secret, and other intellectual property or proprietary rights laws. 2.2. License: We grant you a limited, non-exclusive, non-transferable license to access and use the Website for your personal and non-commercial use only. User Contributions 3.1. User Content: The Website may contain interactive features that allow users to post, submit, publish, display, or transmit to other users or other persons (hereinafter, “post”) content or materials (collectively, “User Contributions”) on or through the Website. 3.2. Rights: By posting User Contributions on the Website, you grant us and our affiliates a perpetual, irrevocable, worldwide, royalty-free, and non-exclusive license to use, reproduce, modify, adapt, publish, translate, create derivative works from, distribute, perform, and display such User Contributions (in whole or part) and/or to incorporate them in other works in any form, media, or technology now known or later developed. Disclaimer of Warranties 4.1. No Warranties: The Website is provided on an “as is” and “as available” basis, without any warranties of any kind, either express or implied. 4.2. Use at Your Own Risk: You use the Website at your own risk, and we do not warrant that the Website will be uninterrupted or error-free, that defects will be corrected, or that the Website or the server that makes it available are free of viruses or other harmful components. Limitation of Liability 5.1. Exclusion of Liability: In no event shall we or our affiliates, licensors, service providers, employees, agents, officers, or directors be liable for damages of any kind, under any legal theory, arising out of or in connection with your use, or inability to use, the Website, any websites linked to it, any content on the Website or such other websites, including any direct, indirect, special, incidental, consequential, or punitive damages, including but not limited to, personal injury, pain and suffering, emotional distress, loss of revenue, loss of profits, loss of business or anticipated savings, loss of use, loss of goodwill, loss of data, and whether caused by tort (including negligence), breach of contract, or otherwise, even if foreseeable. Governing Law and Jurisdiction 6.1. Jurisdiction: These Terms shall be governed by and construed in accordance with the laws of India, without regard to its conflict of law principles. 6.2. Dispute Resolution: Any dispute arising out of or in connection with these Terms shall be exclusively resolved in the courts of India. Changes to the Terms 7.1. Modification: We may revise and update these Terms from time to time in our sole discretion. All changes are effective immediately when we post them. 7.2. Notification: You are expected to check this page periodically so you are aware of any changes, as they are binding on you. Contact Us 8.1. Contact Information: If you have any questions about these Terms, please contact us at clientservices @ betafinpartners dot com
Privacy Policy
At BetaFin Partners LLP, we are committed to safeguarding your privacy and ensuring the security of your personal information. This Privacy Policy outlines how we collect, use, disclose, and protect the information you provide to us. By using our services or visiting our website, you consent to the practices described in this policy. Information We Collect Personal Information: We may collect personal information, including but not limited to your name, contact details, email address, and other identifiable information when you engage with our services, submit inquiries, or use our website. Usage Information: We collect information about how you interact with our website and services, including your IP address, browser type, and usage patterns. This information is used to improve our website and services. How We Use Your Information Providing Services: We use your personal information to provide the services you request, including but not limited to tax consultancy, business advisory, and compliance services. Communication: We may use your contact information to communicate with you about our services, updates, and important information. Improving Services: Your usage information helps us analyze and enhance our services, tailor our content, and improve the user experience. Legal Compliance: We may use and disclose your information to comply with legal obligations, such as tax regulations and reporting requirements. Information Sharing We do not sell, trade, or otherwise transfer your personal information to third parties without your consent, except when required by law or when necessary for providing our services. We may share your information with trusted service providers who assist us in operating our website and conducting our business. Data Security We employ industry-standard security measures to protect your personal information from unauthorized access, disclosure, alteration, and destruction. While we strive to protect your personal information, no method of transmission over the internet or electronic storage is entirely secure, and we cannot guarantee absolute security. Your Rights You have the right to access, correct, or delete your personal information held by us. If you wish to exercise these rights or have any concerns about your data, please contact us using the information provided below. Changes to this Privacy Policy We may update this Privacy Policy from time to time to reflect changes in our practices or for other operational, legal, or regulatory reasons. Thus, we advise you to review this page periodically for any changes. Contact Us If you have any questions, concerns, or requests regarding this Privacy Policy or how we handle your personal information, please contact us at: BetaFin Partners LLP