EMI options and FRS102

How to calculate and account for EMI options granted

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Preparing a set of accounts under FRS102 and trying to understand the implications of Section 26 on EMI scheme, particularly when: the scheme does not have any performance obligations, the options can only be exercised when company is sold and scheme requires the employee to buy/pay for the shares when trigger event takes place.

Now, I do understand how the accounting rules would apply when there is an exchange of services (employees work) for shares taking place over the vesting period and how each year one needs to account for the liability spreading the cost over the period.

However, if the employee is paying for the shares and there are no other obligations attached to the scheme (except still being an employee) then am I right to assume that this scheme would not attract any liability.

Just trying to figure out if there is any disclosure / accounting entries to be made each year under this scenario.

Thanks of your help,


Replies (3)

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By paul.benny
06th Apr 2021 12:43

I've encountered something like this in the past, where there was an option price fixed today and the option-holders make a gain on sale.

That gain in value doesn't all accrue at the moment of sale - you have to estimate that value along the way. I did this by estimating the enterprise value (essentially EBITA x a multiple). The multiple is that implicit in the purchase price when the business was acquired, or, if the options were granted rather later, then that valuation has to be rolled forward.

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Replying to paul.benny:
By victorsales
06th Apr 2021 15:00

Thanks Paul, I can see what you have done here, however one could indeed say that the gain only accrues at the moment of the sale as prior to that point the options are worth nothing. And wouldn't be the premium paid a problem for the new owner therefore only impacting the acquiring company's accounts instead?
i.e: The employee at the point of sale exercises their option and acquires 1,000 new shares of £1 therefore pays £1,000: DR Cash - CR Equity.
Acquiring company pays a multiplier of 10 and buys those same shares for £10,000.
The company issuing the options is not creating a liability in any way as far as I can see.
What am I missing? Thanks

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Replying to victorsales:
By paul.benny
06th Apr 2021 15:56

Accounting for share-based remuneration is largely funny money. The point is to show that granting options carries a cost to the existing shareholders - hence a debit to P&L. The credit does dangle a bit within reserves until the shares are actually issued when it gets converted to share premium.

For the acquirer's accounts, the share options are irrelevant. They've bought shares and don't care how the holders obtained them or at what price. If they're doing acquisition accounting, what matters is the difference between consideration and the fair value of assets.

In typical UK private equity scenarios, options are not that material. But in start-ups, with many employees granted options to compensate for low pay, they can be a significant cost.

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