Share-Based Payments (SBP)

This article covers the following: Valuations Inputs for the SBP report Outputs of the SBP report Expected Future Value sheet Prices Estimate Sheet

Valuations

Capdesk allows for multiple valuations to be added reflecting the condition of a company's estimated capital. You can read more about how to add a valuation here:
https://support.capdesk.com/how-to-create-a-valuation

The two valuations that will be needed to generate a Share-Based Payments report are the "Share Price Estimate" valuation and the "Fair Value" valuation.

To use the Share-Based Payments report, you will need both Fair Value Estimates and Share Price Estimates for all grants. Both are estimates and so you will need to calculate this. We do offer a Black Scholes calculator to calculate Fair Value Estimates, but Capdesk does not offer help with defining the input parameters needed for the calculator itself.

Once you have both Fair Value and Share Price Estimates for all grants, the grants are linked to the estimates by date and share class. For example:

A grant is granted on the 13.05.2018 and we have two Fair Value Estimates on the share class of the grant. One on the 10.01.2018 and one on the 13.06.2017. Then the grant will be linked with the estimate evaluated on the 10.01.2018 since it is the closest estimate on the share class.

 

When estimates have been set up for all grants, you can order the report. This report is rather complex and, compared to other reports, there are a few more parameters to specify.

 

Share price estimate:

The inputs for the share price estimate are:

  • The valuation date (the date at which the valuation was made)
  • The share class (which share class was valued)
  • The share price (the share price estimate)
  • (Optional) Should not valuate at the grant date
    • If checked, this valuation will only be used to evaluate the grants that are linked to it. If unchecked, this valuation will also be used to evaluate grants at the grant date.

Fair value

The inputs for the fair value valuation are:

  • Valuation date (the date the valuation has been made)
  • Valuation model (Capdesk has different models available, those currently available are: Black-Scholes, Monte Carlo, Binomial and Other)
    • If you select: Monte Carlo, Binomial or Other, you can input the value you have for the fair value to use in the share-based payment report as well as a description
    • If you select Black-Scholes you can adjust the input parameters to calculate the fair value
  • (For Black Scholes calculations) exercise price
    • (the exercise price of the option, used as an input parameter in the valuation model. For share-based payments reporting, IFRS2 requires that this basic valuation model input is documented. If multiple Fair Value valuations for the same option type are registered on the same date, the correct valuation for each grant in a share-based payment calculation will be selected based on exercise price)
  • Dividend Yield(%) 
    • The dividend yield used as an input parameter in the valuation model
  • Time to Mature (years)
    • The expiration, or expected remaining lifetime, or time to maturity, used as an input parameter in the valuation model
  • Spot Price 
    • The spot price, or current share price, used as an input parameter in the valuation model
  • Risk-free interest rate (%)
    • The risk-free interest rate, used as an input parameter in the valuation model
  • Volatility (%)
    • The volatility used as an input parameter in the valuation model
  • Share class
    • the share class that the option (which this fair value pertains to) will exercise into
  • (Optional) Should not valuate at the grant date
    • If checked, this valuation will only be used to evaluate the grants that are linked to it. If unchecked, this valuation will also be used to evaluate grants at the grant date.

Black-Scholes equation:

 

 

S is the price of the underlying security, X is the Exercise Price, R is the risk free interest rate, q is the (continuous) payout and σ is the standard deviation of the underlying asset, t is the current date, T is the maturity date, T-t is the time to maturity for the option and N(.) is the cumulative normal distribution.

Inputs for the SBP report

There are a few inputs that require attention before ordering the SBP report.

  • Include drafts (if you have unpublished data (or you haven't gone live yet) and you wish to have a report based on this data, you will need to select this box)
  • Use Fair Value at grant date?

A lot of calculations are being made on the Vesting Tranches of the grants in this report, so sometimes it makes more sense to use the Fair Value Estimate at the date that the tranche actually vests rather than the one at the grant date. This might be the case if you have a grant with tranches 5+ years out in the future. Then the Fair Value Estimate at the grant date might look a lot different than the estimate when the options actually vests. So, if this is unticked, Capdesk uses the fair value at the vesting date rather than the one at the grant date.

  • Period

This defines how data is grouped in the report. They can either be grouped by month, quarter or year.

  • Use value phasing?

Whether or not to apply value phasing.
To describe value phasing, as an example, assume that we have a grant granted on the 01.01.2018, with three vesting tranches (01.01.2018, 01.02.2018 & 01.04.2018). For simplicity, we note that each tranche has an expected future value (EFV) of 8. We order the report with period = months

  1. Without value phasing:
    When calculating the expected future value in the report, each tranche just adds its future value to the given period. Since each tranche have a future value of 8 and they are all in different periods, we just have the following outcome:

    EFV Jan/18

    EFV Feb/18

    EFV Mar/18

    EFV Apr/18

    8

    8

    0

    8


     

  2. With value phasing:

    When calculating the expected future value for each tranche, we phase the value to all previous periods. This means that a tranche will add equal amounts to all periods up until its own period. In our example, the first tranche adds 8 to the first period, because there are no periods before that. The second tranche is in the second period and its future value is split into the first and second period, with 4 going into each. The last tranche is also in the last period, so its future value is split into all the periods, with 2 going into each period, so we get the following outcome:

    EFV Jan/18

    EFV Feb/18

    EFV Mar/18

    EFV Apr/18

    8 + 4 + 2 = 14

    4 + 2 = 6

    2

    2

 

  • Deflation:

    Deflation is a calculation factor trying to account for employee churn when calculating the Expected Future Value of a tranche (if 10 % of employees churn before first tranche vests, then a tranche of “value £100” is, on average, only “worth” £90). Using “simple deflation” will apply the same deflationary factor to all grants. The “advanced deflation” is used to group grants with different deflations and can be used to model slightly more complex scenarios where employee churned is judged to differ across grant categories. Deflations can be defined with a threshold. If an option holder holds fewer options than the threshold, then they fall into that category.
    For example, if we have the below:

    10% deflation

    15% deflation

    Default deflation 20%

    Threshold 1000

    Threshold 2000

    -


    Then all grants of an option holder with less than 1000 options will fall into the 10% deflation category. All grants of option holders with between 1000 and 2000 options will have deflation of 15%. All grants of option holders with more than 2000 options will fall within the default deflation category of 20%.

Outputs of the SBP report

There are 6 sheets in our Share-Based Payment report:

 

  • Sheet 1: Description: As with all our reports, a description of what was ordered and a description of the actual report.

 

  • Sheet 2: Checklist: You will need to input some generic information (especially for sheet 4) to Capdesk, i.e. Terms & Conditions for grants and plans or Vesting Descriptions for grants. If these haven’t been inputted, then we’ll notify the user about it in this sheet.

 

  • Sheet 3: Expected Future Value: This is by far the most heavy and complex sheet. There’s a row for each option grant that has vesting tranches within the period of the report.

    Firstly, we display some general information on the grants to distinguish them from each other.
    Secondly, we display the expected future values for each grant. These are grouped by the periods selected as input (Month, Quarter, Year). The expected future value in a given period for a given grant is defined as the sum of vested for the grant within the period times the Fair Value Estimate of the grant/tranches times the deflation percentage for the grant, or more formally:

    This is what we want to report here for all periods and all grants. If value phasing is used, we add the value on all periods before the current period (as described more thoroughly above in Inputs for the SBP report)

 

  • Sheet 4: Grant Details

 

This sheet contains several descriptions on the grants, like terms and conditions and/or vesting schedule descriptions.

 

  • Sheet 5: Financial Models

 

Similar to the sheet above, we show the Fair Value Estimates used for the EFV calculations. These are the ones input under, valuations in Capdesk.

 

  • Sheet 6: Price Estimates

 

To be IFRS 2 compliant, we need to record what has happened overall to the grants in the company in each period. This sheet does that. It states what was outstanding at the start of the period and what is outstanding at the end of the period. It also states what happens within the period. So anything exercised, cancelled or expired will also be recorded here along with how much is exercisable (i.e. total amount of vested options at the end of the period). The sheet also includes price estimates for all the above numbers, as required to be IFRS 2 compliant. Exercise prices within the period and the remaining contractual life is also included.

 


Extra details of the calculations behind the sheets' figures:

This section outlines the specific calculations in the report using the following abbreviations and definitions:

EFV = Estimated Fair Value

WAEP = Weighted Average Exercise Price 

WASP = Weighted Average Share Price

WAFV = Weighted Average Fair Value at Measurement Date

Outstanding = granted - exercised - cancelled

OutstandingPeriodStart = Anything outstanding at the start of the period, where outstanding is defined as above

Expected Future Value sheet:

The calculations in  this sheet depend on whether value phasing is applied or not. Expected values without applying value phasing simply calculates value vesting within the period in question. Expected values when applying value phasing does that, but for each period, all future value is also factored in and added, so that each period not only accounts for value vesting within the period, but also for a suitable fraction of all expected future value; this results in allocating more EFV volume "early" and less value "later on".

Without value phasing:

For each grant, for each period we calculate EFV as amount vested in the period * the deflation percentage * the fair value of the grant.

With value phasing:

For each grant, for each period, the "base EFV" for the grant and the period is calculated as above. To yield the final EFVs,  each such "base EFV" is distributed equally across all earlier periods. So for a particular grant in a particular period, the EFV is the sum of base EFVs for the period and all future periods for that grant. (Above is an example of how calculating EFV in this way looks as compared to calculating without value phasing).

Price estimates sheet:

The below formulas detail how each figure in the price estimates sheet is calculated using suggestive mathematical notation.

Outstanding Start of Period: For all grants with options outstanding at the start of the period: 

Outstanding WAEP: For all grants with options outstanding at the start of the period:

Granted: For all grants granted in the period:

Granted WAEP: For all grants granted in the period:

Granted WAFV: For all vesting tranches on all grants that vests in the period:

Cancelled: For all grants with cancellations in the period:

Cancelled WAEP: For all grants with cancellations in the period:

Exercised: For all grants with exercises in the period:

Exercised WAEP: For all grants with exercises in the period:

Exercised WASP: For all grants with exercises in the period:

Expired: For all grants that expires in the period:

Expired WAEP: For all grants that expires in the period:

Outstanding End of period: For all grants with anything outstanding at the end of the period:

Outstanding WAEP: For all grants with anything outstanding at the end of the period:

Exercisable: For all grants with anything outstanding at the end of the period:

Exercisable WAEP: For all grants with anything outstanding at the end of the period:

Contractual Life: For all grants with anything outstanding at the end of the period: