ESOPS Issued 10,000 qty

Issued on 1st Jan , 2001 Diff between these two dates is called --> Ser
Vesting Date 31st Dec, 2003
ESOP Expiry 31st Dec, 2010
CMP stock 200
Exercise Price of ESOP 180
Intrinsic Value 20
Fair Value using BSM 30
Company expect all 10,000 ESOPS to be excercised
Demonstrate Treatment on BS and IS

Total ESOP Expenses over 3 years 300,000.00

1 2 3
Income Statement - EXPENSE 100,000.00 100,000.00 100,000.00
BS-EQUITY- ESOP Reserve 100,000.00 200,000.00 300,000.00

ON exercise
Cash Received 1,800,000.00
Increase in Paid in Capital and Securities prem 1,800,000.00

Reduce ESOP Reserve 300,000.00

Increase in Paid in Capital and Securities prem 300,000.00

How willl the accounting change if company expect (on grant date) only 8000 ESOPS to be vested ?
Total ESOP Expenses over 3 years 240,000.00

1 2 3
Income Statement - EXPENSE 80,000.00 80,000.00 80,000.00
BS-EQUITY- ESOP Reserve 80,000.00 160,000.00 240,000.00

ON exercise
Cash Received 1,440,000.00
Increase in Paid in Capital and Securities prem 1,440,000.00

Reduce ESOP Reserve 240,000.00

Increase in Paid in Capital and Securities prem 240,000.00
e two dates is called --> Service Period --> 3 yrs

o be vested ?
 Qty
RSU 100
Price on grant date 40
Vesting Period of four Years
on Settlement date , FV stock 90 or 25

Accounting 1 2 3
RSU Expense 1000 1000 1000
Tax Rate
Expected Tax Benefit

Taxation 1 2 3
RSU Expense 0 0 0
Tax Rate
Expected Tax Benefit

Taxation 1 2 3
RSU Expense 0 0 0
Tax Rate
Expected Tax Benefit

The result for US GAAP reporters is that share-based compensation introduces volatili
(income tax expense as a percentage of income before taxes) and may cause large diff
 4 TOTAL EXP IFRS _Income Statement
1000 4000 Impact on Income tax Expense
30%
1200

4 TOTAL EXP
9000 9000
30% 1200
2700 Tax Windfall
4 TOTAL EXP
2500 2500
30% 1200
750 Tax Shortfall

pensation introduces volatility in the effective tax rate

es) and may cause large differences between an issuer’s effective and statutory tax rates, as in Example 3.
 IFRS _Transfer to Equity US GAAP_Income Statement
Impact on Income tax Expense

1500 2700

-450 750

x rates, as in Example 3.
US GAAP_Transfer to Equity

0
 PAT $1,000,000.00
Date Qty Description
1st Jan 10000 Outstanding
1st Feb 5500 Share Grant settled
1-Apr 3000 New Issue
1st Oct 2000 Buy Back

Weighted Avg Number of Common Shares OS during the year ?

BEPS ?

Date Qty Description Time Adj WANCSODTY

1st Jan 10000 Outstanding 1 10,000
1st Feb 5500 Share Grant settled 0.916666667 5,042
1-Apr 3000 New Issue 0.75 2,250
1st Oct 2000 Buy Back 0.25 -500
16,792

BEPS $59.55
PAT 100
Common Share OS 10
ESOP OS 10
Exercise Price 80
Average Share Price 100

Basic EPS PAT 100 =

Common Share OS 10

Diluted EPS PAT 100 =

Common Share OS + X 12

Treasury Stock Method

STEP1 : Assume that ESOPS are Exercised and 10 shares are issued.Money recd 80*10 = 800

STEP2: Using this money, we buy back shares in open market, @ average price .
Number of Shares Bought back = 800/100 = 8

STEP 3: X = Shares issued in STEP 1 - Shares bought back at STEP 2, 10 - 8 = 2

Shortcut for X
Number of ESOPS * Disocunt (in %) to employee
10 * 20% = 2

Particulars
 10

8.333333333

Qty
10
10
-8

12
Common Shares OS 50,000.00
Company issued 10000 ESOPS
Exercise Price 60
Market Price of Shares at issuance 100
Value of Options using BSM 45
Vesting Period of 3 years
Average Share Price during year 1 80

Income Statement 1 2 3
Employee Comp Expense $150,000.00 $150,000.00 $150,000.00
Basic number of shares OS 50,000.00
Simple and Dilutive number of shares $59,375.00

Step 1: Assume that ESOPS are excercised , money received 10000*60 = $600,000

Step 2: Calculate the shares bought back

Net Proceeds $750,000.00 = $9,375.00

Average Price in year 1 80

Net Proceeds
Money Received by exercise of the option $600,000.00
Add: Unrecognied comp expense $150,000.00
TOTAL $750,000.00
 Number of Common shares $50,000.00
RSU Issue size 10,000.00
FV on Grant Date 80
Average Stock Price in yr 1 200
Average stock price in yr 2 8
Average stock price in yr 3 250
Average stock price in yr 4 5

Vesting Period 4
1. Determine treatement in IS each yr
2. Determine treatement in BS each yr
3. Calculate Assumed Proceeds for Diluated share calculations
4. Calculate Dilutive securities

Particulars 0 1 2 3
Income Statement exp $200,000.00 $200,000.00 $200,000.00
BS_Equity _ Reserve $200,000.00 $400,000.00 $600,000.00
Unrecognised employee comp exp (footnotes) 0 $600,000.00 $400,000.00 $200,000.00

Cash Proceeds
Cash Recd 0 0 0
avg Unrecognised employee comp exp (footnotes) $300,000.00 $500,000.00 $300,000.00
Assumed Proceeds $300,000.00 $500,000.00 $300,000.00

Number of RSU 50,000.00 50,000.00 50,000.00

Number of stocks bought back 1,500.00 62,500.00 1,200.00
Dilutive Shares 48,500.00 -12,500.00 48,800.00
Anti Dilutive

Conditions for RSU to be Anti-Dilutive

1. High Stock price on grant date
2. Therefore higher value of avg unrecognied Employee comp expense (earlier years)
3. Significant drop in the share price (compared tp grant date share price)
4. Therefore,the number of shares BB > number of RSU (hence anti dilutive)
 4
$200,000.00
$800,000.00
0

0
$100,000.00
$100,000.00

50,000.00
20,000.00
30,000.00
Loss

Basic Shares
Basic + Diluted

BEPS
DEPS

but DEPS can't be greater than BEPS.

Therefore, for loss making companies BEPS = DE

 -100

10
12

-10
-8.3 Negative 8.33 > Negative 10

greater than BEPS.

s making companies BEPS = DEPS .

Present Value of FCFE 100 Million
Number of Basic Shares OS 5 million
Number of ESOP oustanding 1 million
X (Treasury stock method) 0.2 Million

Approach 1
Value of Equity 100 Million
Number of Shares 5.2 million
Value per Share 19.2307692
Not Conservative
 Approach 2
100 Million
6 million
16.6666667
ot Conservative Conservative
ontribution Made for every 2 weeks = (82,200 /52)*2* 5% = 158
Day Contrbution exp Current Liab Cash Paid CL after Cash Paid
1 11.3 11.3 0.0 11.3
2 11.3 22.6 0.0 22.6
3 11.3 33.9 0.0 33.9
4 11.3 45.1 0.0 45.1
5 11.3 56.4 0.0 56.4
6 11.3 67.7 0.0 67.7
7 11.3 79.0 0.0 79.0
8 11.3 90.3 0.0 90.3
9 11.3 101.6 0.0 101.6
10 11.3 112.9 0.0 112.9
11 11.3 124.1 0.0 124.1
12 11.3 135.4 0.0 135.4
13 11.3 146.7 0.0 146.7
14 11.3 158.0 158.0 0.0
OPPlan Assets 0
Contribution made 710
Actual Returns -21.3
Closing Value 688.7

Net Funded Status at year end 683.7

CSC PSC

Amount 5 0

IFRS IS IS

Income Statement
CSC 5
Expected return -14.2
Employee Comp Exp -9.2
OP PBO 0
CSC 5
PSC 0
Int Cost 0
Changes in Act Assumption 0
Closing Value 5

Diff Between Exp

and
Actual return
Int Exp Expected return Assumption Changes

0 -14.2 0 35.5
(no Opening Liab)

IS IS OCI OCI
 BS OpPBO 97 OP Assets 1010
CSC 9 Actual Return 50.5
PSC 0 Add: Contributions 0
Int Cost 1.94 Less: Benefits paid -5
Acturial Changes 0 Cl Assets 1055.5
Benefits Paid -5
Cl PBO 102.94

Net Funded Status 952.56

Cash Flow Statement

CFO (outflow) 0
 IS CSC PSC Int exp Expcted return

9 0 1.94 20.2

IS Expenses OCI
Service Cost 9 Diff Between 30.3
Int Cost 1.94 (benefit)
Less: Expected return -20.2 -18.26
TOTAL -9.26
Acturial Chnages Diff Between

0 30.3
Value of Plan Assets 100
Value of Liabilities 63
Amount Accumulated in OCI (re-measurement) 16
Remaining Service Life Employeees 5 years
How much of OCI should be amortized to IS this year ?

Under IFRS--> None

Under US GAAP --> determine based on Corridor Method

Corridor Method
STEP 1: Identify higher of Plan Asset or Liability , Plan Assets = 100

STEP 2 : Calculate 10% of STEP 1, 100* 10% = 10

STEP 3 : Excess of Accumulated OCI over STEP 2, 16-10 = 6

STEP 4: Amortize STEP 3, over remaining service life , current yr amortization = 6/ 5 yrs = 1.2