Sharing Value
Recognising the fair value of share options granted to employees.
The problem
A new accounting standard, IFRS2, means that companies need to recognise the fair value of the share options granted to employees. Existing methods (such as Black-Scholes) are unsuitable as they do not allow for the special features of employee share options, such as the option lapsing if the individual leaves the company.
Our client needed an approach that was flexible enough to allow for the unusual features, yet is quick and easy to use.
Solution
We constructed a model that built on our knowledge of stochastic calculus, the branch of mathematics that underpins option valuation methods. We added further to the model by building in allowances for employees to leave the company, or for individuals to exercise their options at times not thought to be optimal. We packaged this model into an excel function, so the user only had to specify the parameters in a spreadsheet to generate the option value.
Benefit to client:
Producing the model as a spreadsheet function meant that the client could use the model themselves in their office. This meant they could value new grants, or look at the sensitivity of the value to the different assumptions, extremely quickly.
