Share Based Compensation
Pre-IPO companies often adopt Employee Stock Ownership Plans (ESOP) or Restricted Stock Units (RSUs).
An increasing number of listed or pre-IPO companies have implemented incentive mechanisms in the form of equity (e.g. Employee Stock Ownership Plans) in order to motivate, attract and retain talent. The provision of equity awards allows the interests of the directors or employees to be more closely aligned with the company.
- Direct interests in private company shares
- Employee stock options
- Stock appreciation rights
- Restricted stock units
Under IFRS 2, share-based payments are required to be reflected in the financial statements at fair value, which often requires the use of complex mathematical models (e.g. Black-Scholes option pricing model) and involves numerous parameters.
In addition to value, there may be tax and financial reporting implications. Under the taxation rules for compensation, employees are always taxed on the value of the shares at the date of transfer to the employee.
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Apart from the tax and financial reporting implications described above, there may be additional work if the entity is an early stage company. Early stage companies typically grant equity awards to employees and others in exchange for goods and services. Estimating the fair market value (or fair value) of early stage companies can be difficult because such companies often lack revenues or earnings, have complex capital structures and undergo significant changes in a short period of time, among other factors. As a result, the AICPA has issued guidance on valuing equity in early stage companies in its guide Valuation of Privately Held Company Equity Securities Issued as Compensation.