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Providing share-based remuneration to senior employees and directors is a common way to incentivise, or simply “lock-in” key people. It can also be an effective way for early-stage businesses to minimise cash outflow by using share-based payment to pay other key suppliers.
However, AASB 2 Share-based Payments is a challenging standard to implement, both due to its complexity, and because many entities make such transactions only relatively infrequently, and therefore may not be familiar with the detailed accounting requirements. A small change in the terms of an agreement can sometimes lead to a significantly different accounting treatment, meaning that it is easy to make inadvertent mistakes in its application.
In this article, Ralph Martin, RSM Australia’s National Technical Director, takes a look at some areas that commonly cause difficulty in accounting for share-based payments.
How much are they worth? 
Payments to Suppliers other than Employees
Share-based payments to employees are initially valued at the grant date and are usually valued using Black Scholes, Monte Carlo, Binomial, or similar methods. However, a common mistake is to apply these valuation techniques to payments to suppliers other than employees, such as brokers, bankers, suppliers of goods, or service providers.
AASB 2 contains a rebuttable presumption that, for transactions with parties other than employees, the share-based payment shall be valued based on the fair value of the services received, not the fair value of the shares or options issued. It is only where the fair value of the goods received cannot be reliably determined that the fair value of the equity instruments issued should be used.
So, where you have share-based payments with non-employees, such as professional advisers, don’t immediately reach for your Black Scholes calculator or other valuation methods. It may not be the right way to determine what expense you should recognise. Where the supplier also supplies the same or similar goods or services for a cash price, then this would represent the fair value that should be recognised as an expense.