Accounting for Share Based Payments

In 2005 the International Accounting Standards Board ("IASB") introduced a new accounting standard, IFRS2. The IASB determined that when an employee participates in an employee share plan, the plan itself is a reward for services rendered and must, therefore, be of value to the company. IFRS2 sets out the methods that companies must use in order to quantify that value for inclusion as a cost in the profit and loss account.

The IASB standard was quickly followed by the introduction of the UK Accounting Standards Board’s FRS20, which is almost identical to IFRS2.

The reporting standards require companies to calculate the value at date of grant or award of share based payments.

The calculation itself is a complex matter and in practice a number of valuation models can be used, for instance:

• Black-Scholes;
• Binomial Lattice;
• Monte-Carlo.

Although the standard does not specify which model to use, it does require the model to take account of the following inputs:

• The underlying share price;
• The exercise or award price;
• Assumed share price volatility;
• An assumed risk-free interest rate;
• Expected dividend yield;
• The expected the life of the option.

Market based vesting conditions must also be factored in to the equation.

Given that the calculated value of your share based payments will be included as a cost to the company, it makes absolute sense to take expert advice.

MM & K provide our clients with a comprehensive service, utilising a range of valuation models and analysing all aspects of the employee share plans to minimise any hit to the profit and loss account.

We will work closely with your share plan administrators to understand the way your company’s share plans have behaved in the past, so that we can build a picture of future movements and calculate a fair charge.

We have all the relevant expertise, so let us do the hard work for you. To discuss our services further, please contact our Share Plan team.