The following Share Incentives guidance note Produced in partnership with William Franklin provides comprehensive and up to date legal information covering:
This Practice Note looks at some of the more complex issues associated with the equity settled accounting regime. For a more basic overview of the equity settled accounting regime, see Practice Note: Overview of the equity settled share based payments accounting regime. For an introduction into the cash settled share-based payment regime, see Practice Note: Analysis of cash settled share based payments accounting regime.
Where the equity award is an option or some other equity instrument which is not an ordinary share, a theoretical value of the instrument will need to be calculated. Although Black Scholes option pricing theory mathematics is not prescribed by the share based payments (SBP) standards, it has become the defacto-accepted basis for valuing options for SBP accounting purposes.
Basic Black Scholes is a complex formula, but it can be solved algebraically to calculate a theoretical value of an option based on the six Black Scholes assumptions. The theory is introduced in the Practice Note: Overview of the equity settled share based payments accounting regime, however, as a re-cap, the six Black Scholes assumptions are:
market value of the ordinary shares
exercise price of the option over ordinary shares
expected life of the option
expected dividend yield of the ordinary shares
expected volatility of the ordinary shares, and
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