Explanation:

Intrinsic value method: Intrinsic value is the excess of the market price of the share under Esop over the exercise price of the option (including up front payment, if any).

For example, a company grants an Esop to its employees whose current market price (CMP) of the share is R100, which can be exercised after two years for R70. In this case, the intrinsic value of options shall be R30 (R100 –R70). However, if the CMP was R50 instead, there would be no intrinsic value of the option, since the exercise price is more than CMP and, in this case, options could not be exercised and, instead, stand lapsed.