Valuation of share-based remuneration in accordance with IFRS 2

Share-based remuneration of employees is becoming increasingly important in listed companies, venture capital-financed start-ups and also as remuneration agreements in the context of company purchase agreements.

Since the publication of IFRS 2 in February 2004, all companies accounting in accordance with international accounting standards have to face the expense-effective treatment of share-based compensation programs such as stock options. This also applies if only the shareholders grant incentives to the management and the company’s balance sheet is otherwise not affected.

Valuation models according to IFRS 2

The assessment of these programmes shall be carried out in accordance with IFRS 2 using a recognised valuation model. This is usually a binomial model or a Monte Carlo simulation. The complexity of the option price models and the various parameters flowing into the models often lead to application difficulties and considerable time expenditure in the construction. IFRS 2 requires the consideration of various model parameters such as exercise price, term of option and volatility of the underlying share price. The inclusion of absolute and relative performance targets (for example, the development of the share price compared to a comparative index) is becoming increasingly important. There is regularly no know-how for programming the evaluation models in the respective companies.

Valuation of share-based remuneration according to IFRS requirements by WTS Advisory

Our experts provide you with the necessary technical support. Depending on the purpose of the valuation and the structure of the compensation program (for example stock options, phantom shares, matching shares, etc.), WTS Advisory consultants use a corresponding valuation model. The determination of the necessary, relevant capital market parameters such as volatility, correlation or maturity-specific, risk-free interest rates are derived from databases. Our valuation models are prepared and already known by the usual auditing companies, so that the audit process usually runs smoothly. Before discussing the results with your auditor, we coordinate the accounting policy parameters and implications with you. On request, we can provide documentation for the model as well as for the corresponding valuation parameters that can withstand both the auditor and the German Audit Office for Accounting (BaFin).

Selection of a compensation program

In addition, we support our customers in the selection of a suitable compensation program and demonstrate the implications of the individual alternatives on the balance sheet and P&L in advance by means of simulations.

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