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Share Based Payment (IFRS 2)

What is Share Based Payment

Since the introduction of IFRS 2 most listed and large businesses now have to present an expense in their annual accounts to reflect a cost associated with awarding equity to employees.

Valuation and Cost

A challenge faced by companies with respect to share based payment is quantifying the expense to recognise. This is particularly challenging because the rules around IFRS 2 are complex and diverge from traditional accounting concepts such as valuing at cost or net realisable value.

Under the existing regime the expense recognised by companies needs to be based on a notional value of the equity awarded to employees to make it comparable to other forms of consideration and generally the techniques used to arrive at a value are either Black Scholes or Monte Carlo.

Performance Conditions

Embedded into share awards there are often performance conditions which need to be met before the awards vest. These performance conditions can complicate the valuation as well as change the accounting treatment depending on whether performance conditions are market or non-market based conditions.

Cash or Equity Settled

Whether a scheme is cash or equity settled can on occasion be difficult to assess and the different treatment can change how the expense is recognised and how the expense interacts with the balance sheet, which can impact metrics such as EPS, Return on Equity and various other benchmarks.

How Pett Franklin can help

We have decades of experience in valuing share awards for the purposes of share based payment from our knowledge of:

  • Black Scholes & Option Pricing
  • And Monte Carlo financial modelling

And can provide share based payment reports which companies can use to satisfy their auditors and sensibly reflect the accounting charge associated with share based payment.

We can also advise on the treatment of performance conditions and whether a scheme is equity or cash settled as well as integrate all of this into a share scheme implementation engagement.