Share-based payments fall within the scope of International Financial Reporting Standards (IFRS 2)

Retaining the right staff with the right rewards
 
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Share-based payments are common practice in businesses around the world which are formulated by corporations to incentivise their staff members. Many entities grant shares or share options to their employees, and remuneration packages often include share plans and share option plans for directors, senior executives and other employees. There are a number of types of long and medium-term share incentive schemes which are commonly issued by companies and reffered to by different names including: Share Appreciation Rights, Performance Share Plans, Share Options Schemes, Bonus and Deffered Share Plans, Conditional and Forfeitable Share Plans, Restricted Share Plans, Phantom Share Schemes, as well as many variations of these.

In order to align staff behavior to the objectives of the company, the number of awards which ultimately vest to each employee may be linked to the performance of the company. These performance conditions which are attached to the awards, either pertain to the performance of the company in terms of its market share price performance (e.g. the performance of the share price in relation to peer companies' share prices) or its company-specific performance (e.g. to target levels of HEPS).

Drive positive long-term staff behaviour,
and improve the performance of the
company

Share-based payments
 

Share-based payments fall within the scope of International Financial Reporting Standard 2: Share-based payment (“IFRS 2”) and are required to be recognised and reported in the financial statements at fair value. The fair value calculation consists of highly complex financial modelling techniques which take into account the specific terms and conditions of each scheme, the relevant derivative pricing theory, provisions of IFRS 2, and best market practice. IFRS 2 sets out the specific disclosure and reporting standards relating to the expensing of the fair value for the relevant reporting periods depending on the settlement classifications (equity or cash-settled). As such, an onerous internal accounting process of disaggregating gross fair values (as well as net of expected pre-vesting forfeitures) to various levels and divisions within the organisation, is required. The profit or loss and the financial position must reflect the effects of all share-based payment transactions.

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The fair value calculation
consists of highly complex financial
modelling techniques

Black-Scholes, Monte Carlo simulations, Modified Binomial trees, hybrid models
 
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The share incentives schemes that exist in the market, require highly complex and tailored models for valuation and expensing purposes. The terms and conditions of each scheme, the relevant derivative pricing theory, provisions of IFRS 2, and best market practice will determine the appropriate valuation methodology that needs to be applied.