Employee Share Based Payments

Determining the fair value of all employee share-based payments and recognising this value as an expense in financial statements is required under AASB 2 / IFRS 2.

Management needs to consider the impact of their employee share plans, option plans and phantom equity arrangements on their company's performance.
American Appraisal's team of professionals has broad experience in determining fair value and uses sophisticated methodology to determine fair value for different option pricing models as deemed appropriate for different schemes.

Flexible approach
For instance the traditional Black-Scholes model was developed only to value short-term, freely tradable options. So American Appraisal uses a more flexible approach which provides more accurate results that reflect the fact that employee options are usually subject to vesting schedules, forfeiture conditions, cannot be transferred and are almost always exercised before expiry.

Most experts agree that a lattice model works best for the majority of schemes since it enables expected changes in volatility to be factored into the fair value.

The binomial model builds a tree of all possible share price outcomes and is the most popular lattice model. However, the binomial model is not particularly effective for recognising the likelihood that employees will exercise options prior to their expiry, especially if the share price increases. In this case the trinomial or adaptive Monte Carlo simulation models are significantly more accurate than the binomial model.

American Appraisal assists clients by providing:

• Advice regarding implementation of AASB 2 / IFRS 2
   
• Advice on, and design of, the most suitable option pricing model for individual schemes
   
• Indicative valuations for entities to assess the P&L implications of recognising share-based payments
   
• Robust fair values of share-based payments for inclusion in financial statements to withstand the scrutiny of regulators and auditors

See how we placed a fair value on employee share based payments for a leading Australian company.

Interested?

Download our brochure on employee share based payments.