Reporting Equity-Settled Share-Based Payments with Capdesk

As any company issuing employee incentive schemes will recognise, the profit/loss accounting of (and external reporting of) the liabilities such schemes represent in the corporate finances can be complex.

The widely adopted IFRS 2 standard, a financial reporting standard, provides guidance on what to report and how to calculate values. The standard defines an equity-settled share-based payment to be any transaction in the company “receives goods or services as consideration for equity instruments of the entity (including shares or share options)”. This is exactly the case for most employee option schemes, including most EMI schemes in the UK: employees offer work (the service) in return for share options. IFRS 2 specifies how to account for such transactions (as well as similar transaction settled via cash, or cash/equity).

IFRS 2 reporting

The Disclosure chapter of IFRS 2, §2.44 - 2.52, sets out what to disclose to users of the financial report. In aggregate, the requirements amount to

  • calculating future value estimates across all share-based payments, estimating the so-called fair value of those payments, and
  • document those calculations, and
  • report a set of related figures, such as, for option schemes, aggregated values and averages of new options granted, options exercised, and options lapsed in the reporting period.

To meet reporting requirements, necessary fair value estimates must be calculated and documented, and then all share-based payments must be taken into account when computing overall figures. This can be painstaking if - for instance - a company has many option grants  with variable vesting schedules, as the individual vesting schedules play a huge role in how liabilities are accounted for. Classical calculation of share-based payments figures can thus quickly grow into a large task, involving several data sources, hard-to-maintain spreadsheets, and complex spreadsheet formulas.

Capdesk to the rescue

Capdesk solves this, by having a central registration of all option data and all fair value estimates. Once the required input data is registered, getting the IFRS 2 report is as easy as clicking a button:

Order SBP

 

Estimated Future Values and the Black-Scholes calculator

In many cases, estimating fair value using the so-called Black-Scholes formula  for option pricing is viable for share-based payments accounting. Capdesk features a Black-Scholes calculator, calculating the fair value estimate directly once the formula’s basic inputs have been specified.

SBP - Create Fair Value valuation

Once you register a fair value estimate on Capdesk, the necessary calculation documentation also automatically goes into the Share-Based Payments report generated. And of course, the fair value estimates are used to compute estimates of future values, across all option grants and all vesting schedules, regardless of the vesting schedule’s potential complexity or non-standard nature.

Capdesk's calculator by the way uses the "European with dividends" version of the Black-Scholes formula,

 

Bs

                                                                          where

bs2

 

and S = Spot Price, d = Dividend yield %, m = Time to mature (years), SP = Strike price, IR = Risk free interest rate (%), V = Volatility (%); N denotes the standard normal cumulative distribution function.

If you need to use an alternative formula version or another financial model (such as Monte Carlo), Capdesk also supports registration of this.

Compliance Check

Capdesk’s Share-Based Payments report also include a compliance check, specifying what data registrations are missing in order for the report to be fully IFRS 2 compliant  disclosure-wise. Compliant reporting thus boils down to fixing this todo list, and has never been easier.

 

 

Disclosure Calculations

For the share-based payments report, a company needs to compute, for all reporting periods covered, figures such as

  • Outstanding - Start of Period
  • Outstanding - Weighted Average Exercise Price
  • Granted
  • Granted - Weighted Average Exercise Price
  • Granted - Weighted Average Estimated Future Value
  • Cancelled
  • Cancelled - Weighted Average Exercise Price
  • Exercised
  • Exercised - Weighted Average Exercise Price
  • Exercised - Weighted Average Share Price
  • Expired
  • Expired - Weighted Average Exercise Price
  • Outstanding - End of Period
  • Outstanding - Weighted Average Exercise Price
  • Exercisable
  • Exercisable - Weighted Average Exercise Price
  • Exercise Prices
  • Maximum Exercise Price
  • Minimum Exercise Price
  • Weighted Average Remaining Contractual Life

Seems like a lot of error-prone Excel formulae? Luckily, Capdesk has your back here. All values are computed and correctly weighted averaged over the desired periods. In fact, I will not detail the computations here or even show a screenshot - you can simply check out the report on Capdesk.

Disclaimer

Capdesk does not provide advice on legal, financial or tax matters. If you need such advice, you should ask a professional adviser. Capdesk can also help finding the right advisor for you.

Martin Damhus
Martin Damhus

Martin is our CIO and co-founder at Capdesk. He holds an M.Sc. in Mathematics and Computer Science from University of Copenhagen, and is currently based in our Copenhagen office.