An ESOP Valuation Report is a critical document for any company offering stock options to its team. Because ESOPs are a form of “non-cash” compensation, the government and accounting standards require you to put a fair value on them to ensure proper taxation and transparent financial reporting.
At KRPR, we manage the entire ESOP lifecycle, from drafting the scheme to providing the mandatory valuation reports needed for both your Audit and Tax filings.
Service: ESOP Valuation Report
Why do you need two different valuations?
In India, ESOPs are valued twice to satisfy two different sets of laws: Accounting Rules (for the company’s books) and Tax Rules (for the employee’s salary tax).
| Feature | Accounting Valuation (Audit) | Tax Valuation (Perquisite Tax) |
| When? | Done at the time of Granting the options. | Done at the time of Exercising (converting to shares). |
| Why? | To show the “Option Expense” in your Profit & Loss statement. | To calculate the tax the employee owes on the benefit. |
| Method | Black-Scholes or Binomial Model. | Fair Market Value (FMV) of the underlying share. |
| Signatory | Registered Valuer or Actuary. | Merchant Banker (Mandatory for unlisted companies). |
Key Components of the Report
Our valuation experts use global mathematical models to determine the “Fair Value” of your options. The report includes:
The Black-Scholes Analysis: A scientific calculation that considers the share price, the exercise price, and the “time value” of the option.
Volatility & Risk-Free Rate: Assumptions based on industry trends and government bond yields.
Exercise Price vs. FMV: A clear breakdown of the “spread” or the discount given to employees.
Vesting Impact: How the expense will be spread over the years as employees “earn” their options.
What is required to start?
To prepare a robust ESOP valuation, we will need:
ESOP Scheme Document: The rules governing your plan (vesting, exercise period, etc.).
Grant Letters: Details of how many options were given and at what price.
Latest Share Valuation: A recent Registered Valuer report to fix the base price of the shares.
Financial Projections: 5-year forecasts to help determine the volatility and growth of the company.
Our 5-Step ESOP Valuation Process
We coordinate between our CA and Merchant Banker teams to give you a one-stop solution.
Data Analysis: We review your ESOP pool and individual grant letters for accuracy.
Model Selection: For startups, we typically use the Black-Scholes Model to value the “option” at the grant stage.
Drafting for Audit: We provide the Fair Value numbers your auditor needs to record the expense in your annual financials.
Tax Determination: When an employee is ready to exercise, our Merchant Banker team prepares the FMV report required under Rule 3 of the Income Tax Rules.
Compliance Filing: We assist in filing Form PAS-3 with the ROC once the shares are officially allotted.
How long does it take?
Accounting Valuation (Grant Stage): 5–7 business days.
Tax Valuation (Exercise Stage): 7–10 business days (requires Merchant Banker review).