As a startup, attracting and retaining top talent is crucial for growth. One way startups achieve this is through equity-based compensation plans. However, accounting for such plans can be complex and time-consuming. IFRS 2, the Share-based Payment Standard, is a set of accounting rules issued by the International Accounting Standards Board (IASB) that outlines the principles for recognising and measuring share-based payment transactions in financial statements.
Most countries have a local standard that is largely in line with the global IFRS 2 standard. In Australia it’s AASB 2, Ind AS 102 is applicable in India, in Indonesia look out for PSAK 53, and SB-FRS 102 in Singapore.
What are the requirements?
The recognition of share-based payment expense is based on the fair value of the award at the grant date (called measurement date), considering any expected vesting conditions, such as the achievement of performance conditions or the completion of a specified service period. The fair value is then recognised as an expense over the vesting period.
Why is it important?
IFRS 2 requires startups to estimate the fair value of equity-based awards. This can be a complex and time-consuming process, especially for startups that are just starting to grow and have limited resources. However, it is important to accurately estimate the fair value as this will impact the company's financial statements and could affect investor decisions, and cause issues at the time of audit.
Qapita Valuations team of analysts has broad experience of delivering audit-ready valuation reports. Whether you need 409A valuation for your US-based employees or Fair Value for your latest grant of ESOPs – reach out to us for help.
In addition to the accounting requirements, IFRS 2 also has implications for startups' corporate governance and reporting. Companies must disclose information about the nature and terms of equity-based awards in their financial statements, including number of awards granted, weighted average exercise price, remaining contractual life of the options and weighted average fair value of awards on the grant date. This information helps investors and other stakeholders understand the company's compensation policies and practices.
Qapita’s equity management platform can help you generate year-end expense amortisation reports and appropriate disclosures.
Obtaining valuation (fair value) of awards
The fair value of instruments should be determined using an appropriate option-pricing model such as the Black- Scholes model, Binomial models such as the Lattice model or other similar models that take into account factors such as the share price, exercise price, expected volatility of the underlying securities, expected life of the option and the risk free rate.
For private companies, share price is calculated by an independent valuer, like Qapita. Volatility is also calculated using the volatility of their comparable peer companies.
Treatment and valuation requirements for cash settled plans differ, as different requirements apply. For instance, cash settled awards are required to be marked to market at every reporting period until settlement.
Expense amortisation and year-end reporting
For equity-settled awards, the fair value of options on the grant date is recognised over the vesting period with a corresponding increase in equity. Each vesting tranche is considered as a separate grant and amortised over the respective vesting period.
On the other hand, for cash settled awards, the fair value of awards is recognised over the vested period with a corresponding increase in the liability and marked to market every reporting period.
How Can Qapita help?
Our solution can help you with the entire spectrum of valuation and reporting obligations of your company:
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Disclaimer: It is recommended that companies seek professional advice to ensure compliance with IFRS when accounting for equity-based compensation.