This is a composite, illustrative scenario, not an account of a named client. The company's ESOP scheme originally provided for options to vest over four years in equal annual tranches. A compensation committee resolution, passed roughly a year before this audit, amended the scheme to accelerate vesting to three years for all outstanding grants as a retention measure — a modification under Ind AS 102 that should have triggered an immediate recalculation of the grant-date fair value charge over the revised, shorter remaining vesting period. Finance was never formally informed of the amendment and continued expensing the options on the original four-year schedule for the full year that followed, understating the ESOP expense for the period.
Why a modification like this is easy to miss from the accounting side
The compensation committee resolution sat in the board and committee minutes, which the company secretarial function maintained, while the ESOP expense calculation was owned entirely by the finance team working off the original scheme document and grant letters. There was no process requiring committee resolutions affecting ESOP terms to be formally routed to finance for recalculation — the connection depended on someone in finance happening to read the committee minutes, which did not happen until this audit's review of the minutes for the full year flagged the resolution.
What recalculating the expense involved
- 01Identified the modification from the compensation committee minutes, read in full as part of minutes reviewThe specific resolution accelerating vesting from four years to three, with the effective date and the grants it applied to.
- 02Treated it as a modification under Ind AS 102 rather than a new grantA modification that accelerates vesting generally requires recognising, immediately, any remaining unrecognised expense that would otherwise have been spread over the original vesting period — rather than simply continuing to spread the original charge over a now-incorrect timeline.
- 03Recalculated the cumulative expense that should have been recognised to date under the accelerated scheduleThis produced an additional charge for the current year that the original four-year schedule had not captured.
- 04Checked whether the fair value itself, not just the vesting period, needed re-measurementSince the only change was the vesting period and not the option terms or exercise price, grant-date fair value did not need to be remeasured — only the expense recognition pattern did.
| Original 4-year schedule (what was booked) | Corrected 3-year accelerated schedule | |
|---|---|---|
| Cumulative expense recognised to date | Lower — spread over the original, longer period | Higher — recognised faster to reflect the shorter remaining period |
| Current year charge | Understated relative to the amendment | Includes the catch-up for the accelerated recognition |
What went into the file
- The compensation committee resolution and the date it took effect, as the source of the finding.
- The Ind AS 102 modification analysis distinguishing this from a fresh grant and from a fair-value remeasurement.
- The recalculated expense and the proposed catch-up adjustment, agreed with management.
- A recommendation that any compensation committee resolution affecting ESOP terms be formally communicated to finance as a standing process step, rather than relying on finance independently noticing it in the minutes.
Regulatory requirement
Under Ind AS 102, a modification to the vesting conditions of an equity-settled share-based payment that accelerates vesting requires the amount that would otherwise have been recognised over the remainder of the original vesting period to be recognised immediately. This is a change to the recognition pattern, distinct from, and not conditional on, any change to the instrument's fair value.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Payroll & employee costHow to test ESOP expense computation against the vesting scheduleTrace every grant to its vesting schedule, recompute the fair-value charge period by period, and test forfeitures separately from the base charge.
- Payroll & employee costHow to test share-based payment vesting conditions (service vs performance vs market)Classify each vesting condition correctly, test how re-estimation differs between the three categories, and trace any modification to the condition that actually changed.
- Payroll & employee costStartup audit: ESOP expense accounting under Ind AS 102The ESOP charge should be based on fair value at the grant date. Auditing a startup's ESOP expense usually means first finding out whether that valuation exists at all.
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