Accounting for EMI options

Q: How are vesting conditions handled?

Paragraph 26.9 treats conditions in two ways: Service conditions and non market performance conditions, such as staying employed or meeting a profit target, are left out of the fair value. Instead the company estimates how many options will vest and revises that estimate as new information arrives, so leavers who forfeit options reduce the cumulative charge. Market vesting conditions, such as a minimum share price or exit value, are built into the grant date fair value with no later adjustment, provided the other vesting conditions are met. Many EMI options for private companies are exit only: they can be exercised only on a sale or listing, and only by employees still in service. Under paragraph 26.6, the services are recognised over the vesting period, which the glossary defines as the period during which all vesting conditions are to be satisfied. Because that depends on when an exit happens, the directors estimate the expected exit date and recalculate the cumulative charge when the estimate changes. If no exit occurs and the options lapse because a non market condition fails, the cumulative charge reverses.

Q: How does the charge work through the years?

Illustration only. On 1 January a company grants 10,000 exit only EMI options to each of four employees. An option pricing model gives a fair value of £0.60 per option. The directors expect an exit in three years and all four employees to stay. YearEstimate at year endCumulative chargeCharge for year 14 employees, exit after 3 years40,000 x £0.60 x 1/3 = £8,000£8,000 21 employee leaves; exit now expected after 4 years30,000 x £0.60 x 2/4 = £9,000£1,000 3Exit completes at the end of year 3; 3 employees vest30,000 x £0.60 = £18,000£9,000 Each year the charge is debited to staff costs and credited to equity. The £0.60 is never updated for later movements in the share price.

Q: What happens on exercise, lapse or a disqualifying event?

Exercise. Paragraph 22.11 applies the normal share issue rules, so the exercise price received is credited to share capital and share premium. Lapse after vesting. Paragraph 26.9(a) fixes the estimate at the number that ultimately vested on the vesting date, so options that vest but are never exercised do not reverse the charge. Cancellation. Paragraph 26.13 treats a cancellation as an acceleration of vesting, so the unrecognised charge is expensed immediately. A cash payment to settle options is deducted from equity except to the extent it exceeds the fair value of the equity instruments at that date (paragraph 26.13A). Change of terms. A beneficial modification adds the incremental fair value over the remaining period (paragraph 26.12). A disqualifying event affects the tax relief, not the accounting, unless the option terms themselves are changed.

EMI options are equity settled share based payments under FRS 102 Section 26, whatever their tax status. The company values each option at grant date, multiplies that value by the number of options expected to vest, and spreads the total over the vesting period as a staff cost with a matching credit to equity. The HMRC agreed share value is a tax figure, not the option’s fair value, and for exit only options the vesting period depends on the directors’ estimate of when an exit will happen.

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Why do EMI options create an accounting charge?

Section 26 applies whenever a company receives employee services in return for its own equity instruments. Paragraph 26.7 says that for employees the services are measured by reference to the fair value of the equity instruments granted, because the value of the services themselves cannot usually be estimated reliably. The tax advantages of Enterprise Management Incentives do not take an EMI plan outside the standard.

Setting the exercise price at market value does not make the options worthless for accounting. GOV.UK explains that an employee pays no income tax or National Insurance on exercise if they buy the shares for at least their market value at grant and within the permitted period. The option still gives the employee the upside above that price over a period of years, and that right has a fair value. The general Section 26 rules are on the page on FRS 102 Section 26; the tax scheme is covered at Enterprise Management Incentives.

When is the grant date?

Paragraph 26.8 fixes the fair value of employee awards at grant date. The glossary defines grant date as the date at which the entity and the counterparty agree to a share based payment arrangement, being when they have a shared understanding of its terms and conditions, and where the agreement is subject to an approval process, such as shareholder approval, grant date is when that approval is obtained. For EMI that is normally when the option agreement is approved and signed and its terms, including any exit condition and leaver rules, are communicated to the employee.

It is not the date HMRC is notified. GOV.UK says that for options granted on or after 6 April 2024 the company must notify HMRC on or before 6 July following the end of the tax year of grant. That deadline protects the tax position and has no effect on the accounting date.

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Is the HMRC agreed value the fair value?

No. A company can ask HMRC Shares and Assets Valuation to agree a value using form VAL231, proposing the unrestricted market value and the actual market value of the shares; GOV.UK says an EMI valuation is valid for 90 days. That is the value of a share for tax purposes.

The accounting charge uses the fair value of the option under paragraph 26.11. With no market price for the option, an unlisted company uses an alternative methodology such as an option pricing model, with inputs including the share price, exercise price, expected volatility, option life, expected dividends and the risk free interest rate. The share price input follows the hierarchy in paragraph 26.10, which allows a recent transaction in the shares or a recent independent valuation. The HMRC agreed value can inform that input, but the option’s fair value will normally be different because it reflects time value and volatility. Option life should reflect when employees are expected to exercise, within the contractual limit; GOV.UK says EMI options must be exercised within 10 years, or 15 years where the increased limits apply. See valuing shares for employee schemes.

How are vesting conditions handled?

Paragraph 26.9 treats conditions in two ways:

Service conditions and non market performance conditions, such as staying employed or meeting a profit target, are left out of the fair value. Instead the company estimates how many options will vest and revises that estimate as new information arrives, so leavers who forfeit options reduce the cumulative charge.
Market vesting conditions, such as a minimum share price or exit value, are built into the grant date fair value with no later adjustment, provided the other vesting conditions are met.

Many EMI options for private companies are exit only: they can be exercised only on a sale or listing, and only by employees still in service. Under paragraph 26.6, the services are recognised over the vesting period, which the glossary defines as the period during which all vesting conditions are to be satisfied. Because that depends on when an exit happens, the directors estimate the expected exit date and recalculate the cumulative charge when the estimate changes. If no exit occurs and the options lapse because a non market condition fails, the cumulative charge reverses.

How does the charge work through the years?

Illustration only. On 1 January a company grants 10,000 exit only EMI options to each of four employees. An option pricing model gives a fair value of £0.60 per option. The directors expect an exit in three years and all four employees to stay.

Year	Estimate at year end	Cumulative charge	Charge for year
1	4 employees, exit after 3 years	40,000 x £0.60 x 1/3 = £8,000	£8,000
2	1 employee leaves; exit now expected after 4 years	30,000 x £0.60 x 2/4 = £9,000	£1,000
3	Exit completes at the end of year 3; 3 employees vest	30,000 x £0.60 = £18,000	£9,000

Each year the charge is debited to staff costs and credited to equity. The £0.60 is never updated for later movements in the share price.

What happens on exercise, lapse or a disqualifying event?

Exercise. Paragraph 22.11 applies the normal share issue rules, so the exercise price received is credited to share capital and share premium.
Lapse after vesting. Paragraph 26.9(a) fixes the estimate at the number that ultimately vested on the vesting date, so options that vest but are never exercised do not reverse the charge.
Cancellation. Paragraph 26.13 treats a cancellation as an acceleration of vesting, so the unrecognised charge is expensed immediately. A cash payment to settle options is deducted from equity except to the extent it exceeds the fair value of the equity instruments at that date (paragraph 26.13A).
Change of terms. A beneficial modification adds the incremental fair value over the remaining period (paragraph 26.12). A disqualifying event affects the tax relief, not the accounting, unless the option terms themselves are changed.

What do small companies, micro entities and groups do?

A small company using Section 1A applies the full recognition and measurement rules but gives only the disclosures in paragraph 1AC.31D: a description of each arrangement (paragraph 26.18(a)), the number and weighted average exercise price of options outstanding at the start and end of the period and exercisable at the end, and the total expense for the period (paragraph 26.23). A micro entity using FRS 105 does not account for equity settled share based payments until shares are issued (paragraph 21.2), so it records nothing for EMI options until exercise.

Where a parent grants options over its own shares to employees of subsidiaries, paragraph 26.16 allows each group company to measure its expense on a reasonable allocation of the group charge, with the basis disclosed under paragraph 26.22.

How does the charge interact with corporation tax?

The accounting charge is not deductible. Section 1038 of the Corporation Tax Act 2009 disallows deductions relating to the provision of shares or the related option where relief is or would be available under Part 12. Part 12 then gives its own relief when the shares are acquired: section 1018 sets it at the market value of the shares at acquisition less the consideration given, for shares that are neither restricted nor convertible. The deduction therefore falls in the year of exercise and bears no relation to the grant date charge; see corporation tax relief for employee shares.

Common mistakes include using the HMRC agreed share value as the option value, recording no charge because the exercise price equals market value, dating the grant from the HMRC notification, and failing to revise the expected exit date.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.