If you have issued share awards, share options or cash bonuses that have a value linked to a share price then you will need to assess their fair value in accordance with IFRS 2.
IFRS 2 requires a suitable valuation model to be used to assess the fair value. The appropriate option pricing model will depend upon the underlying characteristics of the award grant and, in particular, whether or not the award includes market-based vesting conditions. The inputs into the option pricing model must be based on assumptions that are appropriate for the nature and characteristics of the underlying shares and consistent with the specific characteristics of the award itself. Inputs may include the underlying share price, share price hurdle, the risk free rate, volatility, and dividend yield for example.
Different valuation models will be suitable in different circumstances and their suitability will be affected by factors such as the performance conditions attached to the award. Some of the most commonly known models include:
- the black-scholes model;
- the binomial model;
- the monte-carlo simulation model; and
- the barrier option model.
How can we help?
We have extensive experience in providing clients with independent, professional valuations, and accounting/valuation advice in relation to a variety of different reward schemes. Examples of the services that we can deliver include:
- accounting advice based on a review of the agreed contractual terms between employer and employee, including the impact on current and deferred tax;
- an independent assessment of fair value at grant date and, where necessary, at each reporting date or when a modification occurs; and
- detailed reports to support the accounting treatment and valuations for audit purposes.