Share-based payments under IFRS

Report

Introduction: 

IFRS 2 “Share-based payment” requires a company to disclose information about how the fair value of the equity instruments granted during the period is determined (para 46). This inter alia includes information such as the: model used; weighted average fair value; share price; exercise price; expected volatility; option life; expected dividends; and risk free interest rate (para 47(a(i))).

It also requires information that enables users of the financial statements to understand the nature and extent of share-based payment arrangements (para 44). The latter includes information such as a reconciliation of movements in outstanding options (para 45(b)), the weighted average share price of options exercised during the period (para 45(c)) and the range of exercise price and weighted average remaining contractual life (para 45(d)).

Focusing on a sample drawn from 24 large listed European companies that report under International Financial Reporting Standards (IFRS), supplemented by Company Reporting comment, this report reviews to what extent a company discloses: how options granted during the period are fair valued, including the option pricing models and assumptions used; and the nature and extent of option schemes, as required by IFRS 2. It also includes a survey of the option pricing models used by companies.

Key observations include the following. Eight out of the 19 companies with valid entries fulfil the IFRS 2 requirements in terms of fair value disclosures. Eight out of the 22 companies with valid entries fulfil the IFRS 2 requirements in terms of the nature and extent of option schemes. There is no dominant use of an option pricing model.

Companies under examination: 

Our sample consists of 24 listed European company accounts which feature in the Standard & Poor’s Europe 350 dataset with period ends from 30 June 2010 and had reported by early February 2011. The sample contains a spread of industry classes. The companies of which the accounts have been analysed are as follows:

 
Period end
Auditors
Country
Industry class
Associated British Foods
18 September 2010
KPMG
UK
Food products
BHP Billiton
30 June 2010
KPMG
UK
General mining
British Sky Broadcasting
30 June 2010
Deloitte
UK
Broadcasting & entertainment
Compass
30 September 2010
Deloitte
UK
Restaurants & bars
Daily Mail and General Trust
03 October 2010
Deloitte
UK
Publishing
Diageo
30 June 2010
KPMG
UK
Distillers & vintners
Hays
30 June 2010
Deloitte
UK
Business training & employment agencies
Imperial Tobacco
30 September 2010
PricewaterhouseCoopers
UK
Tobacco
Infineon Technologies
30 September 2010
KPMG
Germany
Semiconductors
Kone
31 December 2010
PricewaterhouseCoopers
Finland
Industrial machinery
Lonmin
30 September 2010
KPMG
UK
Platinum & precious metals
Mediobanca
30 June 2010
Ernst & Young
Italy
Banks
Novartis
31 December 2010
PricewaterhouseCoopers
Switzerland
Pharmaceuticals
Novozymes
31 December 2010
PricewaterhouseCoopers
Denmark
Biotechnology
Pernod Ricard
30 June 2010
Mazars & Deloitte
France
Distillers & vintners
Porsche
31 July 2010
Ernst & Young
Germany
Automobiles
Roche
31 December 2010
KPMG
Switzerland
Pharmaceuticals
Sage
30 September 2010
PricewaterhouseCoopers
UK
Software
SGS
31 December 2010
Deloitte
Switzerland
Business support services
Siemens
30 September 2010
Ernst & Young
Germany
Electronic equipment
Smiths
31 July 2010
PricewaterhouseCoopers
UK
Diversified industrials
Sodexo
31 August 2010
PricewaterhouseCoopers & KPMG
France
Restaurants & bars
ThyssenKrupp
30 September 2010
KPMG
Germany
Iron & steel
Wolseley
31 July 2010
PricewaterhouseCoopers
UK
Industrial suppliers

 

Analysis: 
Fair value of options

As shown below, only eight companies gave all information about the pricing model and the assumptions used. This represents 42% of the 19 companies which granted options this year and used option pricing models. Six companies omitted one of the assumptions. In our view, companies to be considered as examples of best practice are Sage and Daily Mail and General Trust which not only provided information about options granted during the year but also a history of those granted previously. In contrast, Associated British Foods and Smiths only gave a brief disclosure about the awards and options granted. Novozymes did not give any information about the fair value of options granted during the year. It instead calculated fair value of options outstanding at the end of the year and disclosed how this was calculated. 

 
 
 
Assumptions
 
Model used
fair value
share price
Exercise price
Expected volatility
Option life
Expected dividends
Risk Free interest rate
Sage*
ü
ü
ü
ü
ü
ü
ü
ü
Daily Mail and General Trust*
ü
ü
ü
ü
ü
ü
ü
ü
Compass
ü
ü
ü
ü
ü
ü
ü
ü
British Sky Broadcasting
ü
ü
ü
ü
ü
ü
ü
ü
Hays
ü
ü
ü
ü
ü
ü
ü
ü
Imperial Tobacco
ü
ü4
ü
ü
ü
ü
ü
ü
Lonmin
ü
ü5
ü
ü
ü
ü
ü
ü
Novartis
ü
ü
ü
ü
ü
ü
ü
ü
BHP Billiton
ü7
ü
ü
ü
ü
ü
ü
û
Roche
ü
ü
ü
ü
ü
ü
ü
û
Kone
ü
ü
ü
ü
ü
ü
û
ü
Pernod Ricard
ü
ü
ü
ü
ü
û
ü
ü
Diageo
ü
ü
ü
û
ü
ü
ü
ü
Sodexo
ü
ü
û
ü
ü
ü
ü
ü
Wolseley
ü
ü
û
û
ü
ü
ü
ü
Associated British Foods
û
ü
ü
ü8
û
û
ü
ü
Smiths
ü
ü
û
û
ü
û
ü
û
Mediobanca
û
û
û
ü
û
û
û
û
Novozymes
û
û
û
û
û
û
û
û
SGS
N/A6
ü
N/A6
N/A6
N/A6
N/A6
N/A6
N/A6
Siemens1
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Porsche2
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
ThyssenKrupp3
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Infineon Technologies1
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
* Includes a history of assumptions used in each grant. 1. No new grant. 2. No evidence of share-based payment schemes. 3. Cash-settled schemes only.                                                                                                                          
4. No separate disclosure for LTIP. 5. Odd place to present (options outstanding rather than granted). 6. Market price. 7. Not across each scheme. 8. but not stated.

 

Nature and extent of share-based arrangements

The table below shows that eight companies within the sample of 24 generally fulfilled the minimum disclosure requirements (areas in white and light grey). More than half with valid entries did not disclose the weighted average share price of options exercised during the year. Ten companies disclosed all exercise prices for options outstanding at the yearend rather than ranges of exercise prices. We identified seven types of disclosures on top of the IFRS 2 minimum requirements, which are number of options expected to vest, reconciliation of movements in unvested options, unrecognised expense and expected recognition period, expiry dates, remaining expected life, intrinsic value and year-end fair value. Each type is extracted in the “Illustrative Extracts” section. For further details of the companies’ disclosures, see the tables below.

 

 
Reconciliation (number)
Reconciliation (exercise price)
Reconciliation (exercisable)
Share price (exercised)
Range of exercise prices
All exercise price
Remaining contractual life
BHP Billiton
ü
ü
ü
ü
 
ü
ü
Sodexo
ü
ü
ü
ü
 
ü
ü
Associated British Foods
ü
ü
ü
ü
ü
 
ü
British Sky Broadcasting
ü
ü
ü
ü
ü1
 
ü1
Wolseley
ü
ü
ü
ü
ü
 
ü
Imperial Tobacco
ü
ü
ü
ü
 
ü
ü
Sage
ü
ü
ü
ü2
ü
 
ü
Compass
ü
ü
ü
ü3
 
ü4
ü
Diageo
ü
ü
ü
û
ü
 
ü
Siemens
ü
ü
ü
û
 
ü
ü
Smiths
ü
ü
ü
û5
ü
 
ü
Novartis
û6
ü
ü
ü
ü
 
ü
SGS
ü
ü7
ü
û8
 
ü
ü
Daily Mail and General Trust
ü
ü
ü
ü
û
û
ü
Pernod Ricard
ü9
ü9
ü9
û
 
ü
ü
Mediobanca
ü
ü
ü
N/A
û
û
ü
Hays
ü
ü
ü
û10
 
ü
û10
Lonmin
ü
ü
ü
û
û
û
ü
Roche
ü
ü
ü
û
û11
û11
ü
Kone
ü
û
ü
û
 
ü
ü
Novozymes
û12
û13
ü
û
 
ü
ü
Infineon Technologies
û14
û14
ü
û
ü
 
ü
Porsche15
N/A
N/A
N/A
N/A
 
 
N/A
ThyssenKrupp16
N/A
N/A
N/A
N/A
 
 
N/A
1. Not only for options outstanding but also for exercisable. 2. Only for ESOS. 3. Not across each scheme. 4. Odd place for disclosure - disclosed in share capital note rather than share-based payments note. 5. Explicit disclosure of irregular exercise of options but discloses only weighted average share price during the period rather than at the date of exercise. 6. Odd movement arising from "sold". 7. no aggregate disclosure for options outstanding and exercisable. 8. SGS states that it cannot be calculated as exercise dates are unknown (disclosure of share price during the period instead?) 9. Disaggregated across each grant but no aggregated disclosures. 10. No disclosure for Sharesave scheme. 11. Weighted average exercise price by year of grant. 12. Options forfeited and expired appear to be aggregated into "terminations". 13. no disclosure for options granted and terminated. 14. Options forfeited and expired disclosed only in aggregate. 15. No evidence of share-based payment scheme. 16. cash-settled schemes only
Disclosure of all exercise prices is an alternative to the requirement of a range of exercise prices.
 
Expected to vest (number)
Reconciliation (unvested)
Unrecognised expense & expected recognition period
Expiry dates
Remaining expected life
Intrinsic value (outstanding)
Year-end fair value
BHP Billiton
 
 
 
ü
 
 
 
Sodexo
 
 
 
ü
 
 
 
Associated British Foods
 
 
 
 
 
 
 
British Sky Broadcasting
 
 
 
 
 
 
 
Wolseley
 
 
 
 
 
ü1
 
Imperial Tobacco
 
 
 
 
 
 
 
Sage
 
 
 
 
ü
 
 
Compass
 
 
 
ü
 
 
 
Diageo
 
 
 
 
 
 
 
Siemens
 
 
 
 
 
ü
ü
Smiths
 
 
 
 
 
 
 
Novartis
 
ü
 
 
 
 
ü2
SGS
 
 
 
ü
 
 
 
Daily Mail and General Trust
 
 
 
 
 
 
 
Pernod Ricard
 
 
 
ü
 
 
 
Mediobanca
 
 
 
 
 
 
 
Hays
 
 
 
 
 
 
 
Lonmin
 
 
 
 
 
 
 
Roche
 
 
 
 
 
 
 
Kone
 
 
 
 
 
 
 
Novozymes
 
 
 
ü
 
ü3
ü
Infineon Technologies
ü
ü4
ü
 
 
ü
 
Porsche
 
 
 
 
 
 
 
ThyssenKrupp
 
 
 
 
 
 
 
1. also for options exercised during the period. 2. only for non-vested options. 3. only for current year grant.
4. also weighted average grant date fair value/remaining life and aggregated intrinsic value.

 

A survey of the option pricing models used by companies (not only on current year grant)

Our analysis indicates that there is a variety of option pricing models used, with similar frequencies across our sample companies. The Black-Scholes model is used 11 times, the Monte Carlo Simulation is used 12 times and another Binomial approach is employed 11 times. It is noted that the selection of a model depends on the terms of a share scheme.

 
Black-Scholes
Monte Carlo Simulation
Binomial
Sage
ü
ü
 
Compass
ü
ü
ü
BHP Billiton
ü
ü
 
Diageo
 
ü
ü
Sodexo
 
 
ü
Vodafone
 
 
ü
Associated British Foods
 
 
ü
Novozymes
ü
 
 
British Sky Broadcasting
ü
ü
 
Hays
 
 
ü
Imperial Tobacco
ü
ü
 
Infineon Technologies
ü
ü
 
Lonmin
ü
ü
 
Novartis
ü
 
 
Daily Mail and General Trust
 
 
ü
Pernod Ricard
 
ü
ü
Smiths
 
ü
ü
Wolseley
ü
ü
ü
Roche
 
ü
ü
Kone
ü
 
 
Mediobanca
N/D
N/D
N/D
Siemens
N/D
N/D
N/D
SGS
N/A
N/A
N/A
Porsche
N/A
N/A
N/A
ThyssenKrupp
N/A
N/A
N/A
N/A – not applicable. N/D – no disclosure

 

Summary - Conclusion: 
  • Eight out of the 19 companies with valid entries fulfil the IFRS 2 requirements in terms of fair value disclosures.
  • Eight out of the 22 companies with valid entries fulfil the IFRS 2 requirements in terms of the nature and extent of option schemes.
  • There is no dominant use of an option pricing model.

 

Extracts

Associated British Foods: Only a brief disclosure about the fair value of share awards granted without showing the model used and some of the inputs. 

 

Novozymes: No disclosure about the fair value of options granted during the year but instead calculated the fair value of options outstanding at the end of the year and disclosed how this was calculated.

Sage: Historical information

Daily Mail and General Trust: Historical information 

Infineon Technologies: Information about unvested options and unrecognised expense

BHP Billiton: Expiry dates of share awards 

Sage: Remaining expected lives

Siemens: Intrinsic value

Siemens: Year-end fair value

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