AASB 2 Share-Based Payments

AASB 2 Share‑based Payments sets out how entities account for share‑based transactions, including employee options. In many cases, there is no observable market price. As a result, entities must estimate fair value at grant date. This means that AASB 2 valuations are required in most unlisted or privately held entities.

How AASB 2 measures share‑based payments

AASB 2 requires entities to measure share‑based payments at fair value. In practice:

• where the fair value of services cannot be measured reliably, the entity uses the fair value of equity instruments granted
• where market prices exist, those prices should be used
• where market prices do not exist, the fair value must be estimated using an option pricing model

As a result, valuation becomes central to financial reporting.

Key inputs in an AASB 2 valuation

An option gives the holder the right to acquire shares at a fixed price. However, the value of that right depends on uncertainty. In simple terms an option is valuable when the future share price exceeds the exercise price. For this reason, option valuation focuses on probability, timing and assumptions.

AASB 2 requires several inputs when valuing options. These include:

• current share price
• exercise (strike) price
• expected volatility
• vesting period and expiry date
• expected dividends
• risk‑free interest rate

Each input requires judgement. Option valuation is not a formula. It is an evidence‑based assessment. Key assumptions impact option value:

• Share price volatility. Higher volatility increases the probability of favourable outcomes. As a result, option value increases.
• Exercise price. A higher exercise price reduces likelihood of exercise. Therefore, option value decreases.
• Time to expiry. Longer duration increases flexibility. As a result, value increases.
• Dividends. Dividends reduce the underlying share price. Therefore, call option value decreases.
• Risk-free rate. This reflects the time value of money. It affects the present value of the exercise price.

Vesting conditions under AASB 2

AASB 2 distinguishes between market and non‑market vesting conditions.

• Market conditions. Examples include: share price targets and market‑based performance hurdles. These conditions are included directly in the valuation.
• Non-market vesting conditions. Examples include: service conditions and internal performance targets. These conditions are not included in the valuation and are reflected by adjusting the number of options expected to vest

Common issues in AASB 2 valuations

In practice, most issues arise from assumptions rather than models. Common issues include:

• inconsistent volatility assumptions
• misalignment between forecasts and valuation inputs
• inappropriate peer or comparable selection
• incorrect treatment of dividends
• insufficient documentation of assumptions

As a result, many valuation issues are evidence and judgement issues, not technical errors.

Audit and valuation considerations under AASB 2

AASB 2 valuations are closely linked to audit requirements. Under auditing standards:

• ASA 540 requires auditors to assess whether the valuation is reasonable and consistent with the financial reporting framework
• ASA 620 requires auditors to evaluate the competence, capability and objectivity of the valuer
• ASA 500 requires sufficient appropriate audit evidence to support the valuation

This means that an AASB 2 valuation must not only produce a reasonable result, but must also:

• use appropriate methodology
• rely on supportable assumptions
• provide sufficient documentation

Link to International Valuation Standards (IVS)

In practice, AASB 2 valuations are often prepared using frameworks consistent with the International Valuation Standards (IVS). IVS requires:

• a clearly defined scope of work
• identification of the basis of value
• appropriate valuation approaches
• transparent inputs and assumptions
• complete documentation of conclusions

As a result, AASB 2 sits within a broader framework linking valuation methodology, financial reporting and audit evidence.

When an AASB 2 valuation is required

A valuation is typically required where:

• the entity is unlisted
• there are no observable market prices
• options are issued under employee incentive plans
• assumptions require independent support for audit purposes

In these circumstances, valuation supports both compliance and audit.

How AASB 2 valuations are prepared

Valuations are typically prepared using: Black‑Scholes models or Binomial (lattice) models. The choice depends on:

• the complexity of the option
• the structure of vesting conditions
• available data