Valuation of Share-based Compensation under IFRS 2

The share-based payment of employees is becoming increasingly significant for publicly listed companies, venture capital-financed start-ups, and also for remuneration agreements as part of company purchase-sale agreements.

Since the publication of IFRS 2 in February 2004, all companies reporting in accordance with international accounting requirements must disclose the treatment of share-based compensation programs such as stock options at profit or loss. This also applies if the shareholder solely grants the management incentives and the balance sheet of the company is not affected otherwise.

Valuation Models under IFRS 2

The valuation of these programs is to be carried out in accordance with IFRS 2 on the basis of a recognized valuation model. This usually involves a binomial model or a Monte Carlo simulation. The complexity of the option price models and the various parameters included in the models frequently lead to application difficulties in practice and to significant expenditures of time in the development process. IFRS 2 requires consideration of a wide range of model parameters such as the strike price, the term for the option, and volatility of the underlying stock price. The inclusion of absolute and relative objectives (e.g. the performance of the stock price relative to a comparable index) is becoming increasingly important. Usually, the respective companies do not have the know-how to program the valuation models.

Valuation of Share-based Payment in Accordance with IFRS Requirements by FAS AG

Our experts will give you the necessary technical support for this. Depending on the purpose of the valuation and the design of the payment program (e.g. stock options, phantom shares, matching shares, etc.), the advisors at FAS AG use an appropriate valuation model. Specification of the necessary, relevant capital market parameters such as volatility, correlation or the term-specific, risk-free interest rate are derived from databases. Our valuation models are prepared and already known to the leading auditing firms so that the audit process usually runs smoothly. Prior to discussing the results with your auditor, we will coordinate the accounting policy parameters and implications with you. If desired, we will supply documentation for the model and for the corresponding valuation parameters in compliance with the requirements of the auditor and the German Financial Reporting Enforcement Panel [Deutsche Prüfstelle für Rechnungslegung, DPR].

Selection of a Compensation Program

In addition, we support our clients by helping them choose a suitable remuneration program and use simulation to show the implications of individual alternatives on the balance sheet and income statement in advance.

 Dirk Spalthoff Member of the Board/Partner