IFRS 2, Share-based Payment, requires companies to value all share-based payments for goods and services as an expense in their profit and loss statement. As IFRS 2, Share-based Payment, acknowledges that the valuation of the share-base payment may be complex, the IASB demands that expert advice be sought by companies accounting for complex share-based payments. If the amounts are material, auditors usually recommend that companies seek an independent share option valuation for compliance with IFRS 2, Share-based Payment.
Intangible Business is an independent valuation specialist, with deep experience of share option valuation under IFRS 2, Share-based Payment. Although terms geared to the value of a company’s equity may also be found in licensing, supply and distribution contracts, incentive options issued to employees are the most common kind of share-based payment that require valuing under IFRS 2.
Share-based payments issued to employees differ from options commonly traded by investors in several important ways:
- Employee share-based payments often have vesting conditions and required service periods which must be fulfilled in order to be eligible for exercise.
- Share-based payments issued to employees are often exercised early, sub-optimally, as the employee is typically an undiversified investor and liquidity may be a concern. Recognition of a truncated maturity also acknowledges the lack of transferability of the share-based payment.
- Employee share-based payments are commonly forfeited in the event that the holder ceases to be employed by the company.
The IASB recognises these differences in IFRS 2, Share-based Payment. Taking these assumptions into account when valuing share-based payments under IFRS 2, Share-based Payment may legitimately, significantly reduce the expense of an option grant.
Intangible Business has valued many types of share-based payments under IFRS 2, Share-based Payment, from the simple to the exotic. Our experience of IFRS 2, Share-based Payment requirements enables us to choose the simplest share-based payments valuation model which reflects all relevant and allowable assumptions. This saves fees and supports the lowest expense to your profit and loss statement.