AASB2 Share based payments and options
Accounting standard AASB 2 Share-based payments specifies the financial reporting required when an entity undertakes a share-based payment transaction, such as the issue of options.
An option is a financial instrument that is based on the value of underlying securities, such as shares. An options contract offers the buyer the opportunity to buy or sell the underlying asset.
Per the standard:
- if the entity cannot estimate reliably the fair value of the services received, the entity measures the value by reference to the fair value of the equity instruments granted;
- the measurement of fair value of equity instrument is based on the market prices of those instruments; and,
- if traded options with similar terms and conditions do not exist, the Fair Value of the options granted are to be estimated by applying an option pricing model.
Option pricing models
The value of option depends on the probability that the share price will be greater than the strike price.
The factors that influence the probability that the share price will be greater than the strike price are the volatility of the share price and the exercise price.
An option allows the owner to delay purchasing the underlying shares. That delay provides the owner the opportunity to earn interest on the amount that would otherwise have been invested in the shares and so the interest rate is incorporated in valuing options.
If a dividend is paid it removes cash and the share price decreases so the value of the call option decreases.Per the standards, when the Fair Value of an option grant is estimated expected dividends are to be included in the option pricing model
The application of an option pricing models thus requires the assessment of the:
- share price;
- exercise price;
- share price volatility;
- exercise and expiration dates;
- expected dividends; and,
- risk free rate.
Vesting conditions
Per AASB 2 vesting conditions, other than Market Conditions, are not considered when estimating the Fair Value of share options at the valuation date.
A Market Condition is a Performance Condition where the exercise price, vesting or exercisability of the equity instrument depends on meeting a performance target that relates to the market price or value of the equity instrument.
Instead, vesting conditions, other than Market Conditions, are reflected by adjusting the number of equity instruments included in the measurement of the transaction amount.