Looking to create a share scheme?
Don't forget the accounting!
Share-based payment arrangements can be powerful tools for companies to align the interests of their employees with the interests of their shareholders. These arrangements can represent a significant portion of the remuneration paid to employees, directors, and service providers, particularly for start-up companies.
As a result, the identification, measurement, and disclosure of share-based payment arrangements can be material to the entity’s financial statements.
If your organisation is creating a share-based payment arrangement, you should consider the terms and the resulting accounting treatment upfront. Different structures, such as payments made in shares or payments made in cash for amounts that are based on the price of shares, can result in significantly different impacts to profit or loss and the balance sheet.
Considering the accounting upfront will enable you to design a plan that not only provides the right incentives to employees, but will result in an accounting treatment that reflects the way the directors and management think about the business.
Early planning will also allow you to meet your financial reporting deadlines. Many share-based payment arrangements require a difficult valuation exercise, particularly for privately-held entities where it can be challenging to measure certain inputs to the valuation model, such as the current fair value of the entity’s shares. Adequate time should be allocated to perform the valuation and to draft the required financial statement disclosures, which can be extensive.
In this publication we highlight a few of the key accounting considerations that should be taken into account when designing a share scheme.