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Share-Based Payment

Date recorded:

:

1. Features of employee share options:

a. There is usually a vesting period, during which time the options are not exercisable. The Board agreed that for European type options, where a Black Scholes type of model is used, no adjustment is necessary for a vesting period as that was already built into the model. For US type options, where a binomial model is used, an adjustment would be necessary as a vesting period is not a component of the model.

b. There are conditions attached to vesting, such as continued employment. If those conditions are not satisfied, the options are forfeited. Board discussion centred mainly on determining the value of an option at grant date, when the option is issued. It was suggested that the value is the cost to the entity. Three methods were put forward to consider how to build forfeitures into the valuation of options. They were:

  • anticipate estimated vesting at grant date and do not revise;
  • the number of options expected to vest is constantly revised after grant date;
  • the number of options granted is reduced as employees leave, but any expense already recognised is deemed to reflect employee service previously provided and is not revised.

The Board concluded that it could not reach a conclusion at this stage and requested that the project manager provide a range of worked examples showing different scenarios, including more or less options being forfeited.

c. Employee options are usually not transferable. The Board agreed that if the estimate is made at grant date, then the expected life rather than the option life should be used in the option-pricing model, so as to account for non-transferability.

d. The option term is often significantly longer than traded options. The Board agreed that the fact that the option term is often longer than that of traded options means that estimation errors are more likely to occur. However, option pricing models can be modified to reflect the longer term.

2. Capital structure effects: Option pricing models are generally based on the assumption that the option is written by a third party, and so is not dilutive in nature. However, share options are usually written by the company and therefore may be dilutive in nature. The Board agreed that the Standard should contain guidance with regard to making appropriate adjustments to the share option-pricing model used.

3. Measurement date: The Board discussed which measurement date was the most appropriate. It was agreed that the objective is to measure the value of services received. It was concluded that grant date is the most appropriate measurement date. A vote was taken with only one Board member dissenting (this member preferred vesting date, or possibly exercise date).

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