Valuing Options & Performance Rights for AASB 2
Speak to the specialists at Value Logic to assist you with:
• Independent valuations for AASB 2 and ITAA 1997
• ESS reporting to the ATO
• Advice on the technical and commercial aspects of employee incentives
Synonymous with option valuation, exactly how does the Black-Scholes model work and when is it used?
A lattice-based or “tree shaped” model that offers flexibility and customisation, but is it always useful?
Monte Carlo Simulation
Allowing the most flexibility for multiple variables in the valuation, when does AASB 2 require its use?
AASB 2 Share Based Payment governs the way in which companies must report the cost of issuing equity instruments (such as options and performance rights) to employees.
One of the key issues entities face in recording the expense is what value is placed on the equity instrument?
Where the equity instrument is not listed on a stock exchange, there is no ready market data for that instrument to be able to determine a market value. As such, resort must be had to valuation techniques to come up with a market value for those instruments.
How do you value options?
Shares can be valued in a number of ways, including simply taking the value of the balance sheet and dividing it by the number of shares on issue.
But how do you value options over shares?
Various models can be used to provide a valuation for options, including:
- Black-Scholes model – one of the most widely know and used methods of calculating the value of options.
- Binomial model – more customisable model to take into account shares the pay dividends or options that can be exercised early.
- Monte Carlo Simulation – a “what-if” analysis that can take into account all manner of exercise conditions and hurdles that must be met before the option can be exercised.
Picking the right methodology is half the battle – also knowing the right inputs to include in the calculation is imperative to getting the correct valuation result.
Regardless of which methodology is the most appropriate, the “garbage in, garbage out” rule still applies. You must ensure that the right variables are used for the particular option being valued.
How is this done?
With experience in the reporting requirements of AASB 2 Share Based Payments, and the experience in performing valuation of options issued under Employee Share Option Plans, Value Logic is positioned to provide you with the expertise and service necessary to meet your reporting requirements.
We are conscious of the deadlines that reporting entities face, and deliver professional results with timely service to ensure you are on time and on track.
Contact us to find out more!