Replacing of share options
Where previously granted options are no longer incentivising employees, perhaps because significant falls in the company’s share price have caused the options to go “under water” (where the exercise price is higher than the market value of the underlying shares), the company may consider issuing replacement options with a lower exercise price or longer vesting period. If so, the company will need to identify the new issue as replacement options in order to avoid a higher charge to the profit and loss account. If not, when the existing options are cancelled, the company will have to charge the rest of the expense that would be recognised over the remaining vesting period, as well as the fair value expense related to the new issue of options.
However, if the new issue of options is identified as replacement options, then the charge to the profit and loss account is based on the difference between the fair values of the new issue options and the existing options at the date of grant of the new options (hence a lower charge).
Share based payment issued by a parent company to a subsidiary’s employees
Where in a group company, a parent provides share options to employees of a subsidiary group (perhaps as part of a group wide employee incentive scheme), it is the company receiving the benefit of the employees’ services that must recognise the charge to profits, regardless of the fact it is the parent company providing the shares. It is important therefore that the correct systems are in place to identify these share based awards and to ensure the correct charge is recognised in the correct group company.
Unlisted Companies
Calculating the fair value of share based payments for unlisted companies will be complex given the absence of a public market to ascertain the market value of the shares at grant and the expected volatility of the share price.