Identifying the issues
All companies not applying FRSEE already providing share based payments to their employees or are intending to do so, must consider what FRS 20 (or IFRS 2) means for them. While estimating both the amount and the timing of the charge to their profit and loss accounts, companies may also wish to consider the sensitivity of these charges to variations in the inputs to the relevant option pricing model.
Determining the correct strategy
Determining the correct strategy for your company will depend on the role share based payments play in its remuneration policies. Where company policy actively supports the use of such payments, the potential benefits of granting awards with or without market based performance conditions should be carefully considered against the accounting impact. In determining strategy, the company should focus on managing dilution, cash flow and controlling the overall cost of providing the share based payments to its employees.
Actions to take for ahead of this years accounting year end
Companies both listed and unlisted, need to consider:
- what type of option pricing model is most appropriate for their circumstances;
- ensure that they have the data (e.g. forfeiture history and historical exercise patterns) available to implement the valuation requirements of the Standards;
- gather the inputs for the selected option pricing model;
- simulate the effect of implementation on the financial statements; and
- carry out sensitivity analysis of the valuation to the key assumptions in the model
Unlisted companies will have a significant amount of extra work, as valuations of the underlying shares will also have to be carried out and expected volatility assessed. Under auditor independence rules the company auditors will not be able to undertake these valuations.