ESOP Accounting Under IND-AS 102: Why Startups in India Get Valuation Compliance Wrong

November 26, 2025

In 2025, Indian startups granted over $12 billion in ESOPs, yet a significant number failed to comply with IND-AS 102. According to industry reports, more than 60% of startups in India struggle with ESOP valuation and expense recognition, leading to audit qualifications and tax complications.

For founders and CFOs, understanding the nuances of ESOP accounting is not just a regulatory requirement, it is essential for building trust with employees and investors.

What is IND-AS 102 and Why Does it Matter?

IND-AS 102 governs the accounting of share-based payments, including ESOPs. It requires companies to measure ESOPs at fair value on the grant date and recognize the expense over the vesting period. This ensures transparency and accurate reflection of employee compensation in financial statements.

Key Requirements:

• Fair Value Measurement: Use models like Black-Scholes or Binomial for unlisted shares.

• Expense Recognition: Spread the cost over the vesting period.

• Disclosures: Detailed reporting in financial statements.

Failure to comply can result in misstated profits, audit issues, and loss of investor confidence.

ESOP Accounting Workflow

Common Valuation Mistakes in ESOP Accounting

Many startups inadvertently make errors when valuing ESOPs under IND-AS 102. These mistakes can lead to non-compliance, audit issues, and can negatively impact both financial reporting and investor confidence. Below are the most frequent pitfalls founders and finance teams face:

• Using Intrinsic Value Instead of Fair Value: IND-AS 102 mandates fair value accounting, but some startups still use the face value or intrinsic value method, leading to understated compensation expenses.

• Relying on Outdated or Generic Valuation Models: Not updating the valuation model after new funding rounds or company milestones can result in inaccurate ESOP expenses.

• Ignoring Key Valuation Inputs: Overlooking factors like expected volatility, expected dividend yield, or employee exit rates can distort fair value calculations.

• Inadequate Documentation: Failing to properly document the methodology, assumptions, and data sources used in valuation can lead to compliance issues during audits.

• Not Consulting Professionals: Many startups attempt ESOP valuation internally without involving valuation experts or experienced CA firms, increasing the risk of errors.

• Neglecting Disclosure Requirements: Omitting detailed ESOP disclosures in financial statements is a common oversight, often flagged by auditors and investors.

For example, there’s a mid-stage technology startup that launched an ESOP plan for its employees. While recording the ESOP expense, the finance team used the face value of ₹10 per share instead of calculating the fair value as per IND-AS 102. Later, when the company raised funds at ₹150 per share, the auditors found that the ESOP cost was heavily understated.

Because of this, the company had to correct its financial statements, which affected reported profits and raised concerns among investors. The company also realised that it had not documented important details like expected volatility, dividend yield, and employee exit rates. This created delays during the audit and questions about compliance.

This example shows why startups should follow proper fair value methods, maintain clear documentation, and seek expert help to avoid costly errors later.

Impact of ESOP Valuation Mistakes on Startups

Deferred Taxation: What Startups Need to Know

The Finance Act 2020 allows eligible startups to defer tax on ESOPs. Tax is payable at the earliest of 48 months from exercise, sale of shares, or when the employee leaves. However, companies must recognize a deferred tax asset or liability for the difference between book expense and actual tax deduction. Missing this step can distort profits and tax provisions.

Audit and Compliance Implications

Auditors closely examine ESOP accounting. Incomplete disclosures or incorrect expense recognition can lead to audit qualifications. This can delay startup funding India and affect investor trust. Proper documentation and compliance with IND-AS 102 are essential for smooth audits and due diligence.

Best Practices for ESOP Accounting

• Obtain board and shareholder approvals for ESOP schemes.

• Use fair value models recommended by ICAI.

• Recognize expenses over the vesting period.

• Maintain clear documentation and disclosures.

• Update valuations after funding rounds or major events.

• Address deferred tax implications proactively.

How Professional Support Helps

Navigating ESOP compliance is complex. Engaging the trusted CA firms in Bangalore ensures accurate valuation, proper expense recognition, and audit-ready documentation. Firms like BC Shetty & Co offer expertise in ESOP structuring, compliance, and the startup registration process, helping startups avoid costly mistakes.

Conclusion

Getting ESOP accounting right is crucial for startups in India. It affects financial statements, tax liabilities, and the ability to attract and retain talent. By following IND-AS 102, using professional valuation methods, and maintaining robust documentation, startups can avoid compliance pitfalls and build a strong foundation for growth. If you plan to invest in startups India, ensure ESOP compliance is part of your due diligence.

For expert guidance on ESOPs, compliance, and more, visit www.bcshettyco.com