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Accounting for Share Based Payments in start up.

How to determine fair value before transactions in shares - IFRS2.

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A start-up client has granted share options with an exercise price at nominal value vesting over 3 years. Initial funding has been in the form of grants and SAFEs so no shares issued yet other than founder shares.  Other companies in similar situation do not seem to apply IFRS2 or note the effect is not material. 

Is it correct to ascribe a low/neglible fair value to the shares and therefore no charges to P&L are needed? B y offereing share options salaries paid by client are below normal market rates but not significantly. The share options are mainly a retention incentive.

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By paul.benny
07th Sep 2021 12:00

There's rather more to it than the value of the shares at the date of the option. The point of granting options is the hope that that the shares will increase in value between grant and exercise. And the point about accounting for them is that the increase in value is, in effect, payment to the option holder. Your second paragraph acknowledges this.

How you account for the increase in value depends on the particular terms of the option, the vesting period and the conditions governing the option-holder's disposal of their shares. A proper answer to your question requires sight of all of the relevant documentation.

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Replying to paul.benny:
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By Mgdaly
07th Sep 2021 16:21

Hi Paul, thanks for your response.

My understanding of the IFRS is that the fair value has to be determined at the date of grant of the option and not based on any future increase over time. The options are standard EMI with an exercise price set at nominal share value and simple time based vesting conditions over 3 years from the date of grant.

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By paul.benny
07th Sep 2021 22:07

I think you're still missing the point.

Accounting for share-based payment isn't a one time exercise. You have to revisit annually until (in this case) the options have been exercised. The options are in effect a long term bonus scheme and the accounting is to accrue the cost of providing that 'bonus' as it is earned.

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Replying to paul.benny:
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By Mgdaly
08th Sep 2021 08:50

Paul, yes I appreciate that. I am looking at the first visit and doing the assessment of fair value at the first balance sheet date after the options were granted. Of course in future years there will be more options, other share transactions etc. etc.

My question really is how do you measure fair value with no established share price in existence?

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By paul.benny
08th Sep 2021 14:48

So you're looking at the change in value between grant date and period end?

The option price enables you to derive a value of the business at date of grant. I'd then look at earnings projections to attempt to value the shares today. That may be more, less or the same as the value at date of grant. It may be that you there is no change or that the cost is immaterial. But you have to do the assessment first.

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Melchett
By thestudyman
08th Sep 2021 09:51

There are so many different share option schemes to consider and determining values are also not the same method. Some require HMRC approval, some do not etc...This is important, IFRS will assume the share has been valued at fair value and provides the relevant treatment subsequently.

For EMI it is standard to have a valuation agreed with HMRC beforehand. This should happen before the grant.

https://www.gov.uk/guidance/submit-an-enterprise-management-incentives-e...

On a practical basis, is there a very good reason why the client (who is a start up) is using IFRS reporting? It seems extremely over the top

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Replying to thestudyman:
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By Mgdaly
08th Sep 2021 14:01

The company is reporting under FRS 102 and the share based payment provisions therein are very similar to IFRS with no exceptions for small companies. As the options were granted very early the fair value as agreed with HMRC was the nominal share value which is the exercise price.

The standard talks about using valuation models but I am not sure if these can be applied in this case.

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