| The Accounting treatment prescribed can be illustrated by the following numerical example. Suppose a company grants 500 options on 1/4/1999 at Rs. 40 when
the market price is Rs. 160, the vesting period is two and a half years, the maximum exercise period is one year and the total employee compensation for the year 1999-
2000 is Rs. 900,000. Also supposed that 150 unvested options lapse on 1/5/2001, 300
options are exercised on 30/6/2002 and 50 vested options lapse at the end of the exercise period. The Accounting value of the option being the maximum of:
a) 500 x [(160-40) - 25% x 160] = 500 x [120 - 40] = 500 x 80 = 40,000
b) 500 x (160-40) - 10% x 900,000 = 60,000 - 90,000 = -30,000
c) Zero
would be equal to Rs. 40,000.
The Accounting entries would be as follows:
1/4/1999 Deferred Employee Compensation Expense 40,000
Employee Stock Options Outstanding 40,000
(Grant of 500 options at an Accounting value of Rs. 80 each)
31/3/2000 Employee Compensation Expense 16,000
Deferred Employee Compensation Expense 16,000
(Amortisation of the deferred compensation over two and a half years on straight-line basis)
31/3/2001 Employee Compensation Expense 16,000
Deferred Employee Compensation Expense 16,000
(Amortisation of the deferred compensation over two and a half years on straight-line basis)
1/5/2001 Employee Stock Options Outstanding 12,000
Employee Compensation Expense 9,600
Deferred Employee Compensation Expense 2,400
(Reversal of compensation Accounting on lapse of 150 unvested options)
31/3/2002 Employee Compensation Expense 5,600
Deferred Employee Compensation Expense 5,600
(Amortisation of the deferred compensation over two and a half years on straight-line basis)
30/6/2002 Cash 12,000
Employee Stock Options Outstanding 24,000
Paid Up Equity Capital 3,000
Share Premium Account 33,000
(Exercise of 300 options at an exercise price of Rs. 40 each and an Accounting value of Rs. 80 each)
1/10/2002 Employee Stock Options Outstanding 4,000
Employee Compensation Expense 4,000
(Reversal of compensation Accounting on lapse of 50 vested options at end of exercise period)
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