10. What may make statutory accounts more complex? 

1. Share options – The fair value of share options granted and vested to employees, contractors and legal advisors may be required to be included as an expense in accounts (see below).
2. Convertible loans – They may need to be recorded in the accounts differently from the legal agreements where the balance is split between equity and loans and interest is calculated at a market interest rate rather than the rate in the agreements.
3. Share subscriptions and preferred shares – these can either be recorded as loans or equity (depending on the agreements)

When is a share-based accounting adjustment required?

• When a company grants shares or share options in exchange for services or goods e.g. remunerating or rewarding employees or contractors for their services.
• When the fair value of total share options granted are material in value and any condition that will allow the share options to be exercised is likely.
• When share options are exercised or lapse.
• When a company is preparing its accounts in accordance with FRS 102 or FRS 102a.

What is share based accounting?

• An accounting adjustment to record a cost to the company for the services or goods received and paid for with shares or share options.
• This is shown as an expense in the profit and loss account and a corresponding increase in  equity in the Balance sheet.
• The increase in equity will be in share capital if shares are issued or in a designated “share based payment reserve” account if options are granted.
• When share options are exercised, their cost will be deducted from the share -based reserve.

How is the cost taken to the Profit and loss calculated?

• For non-employees this is based on the cost of goods and services agreed with the non-employees and usually supported by a contract and invoice from the non-employee.
• A valuation of the share options is required using an accepted valuation model. This value is not the same as any value agreed with HMRC for the market value of shares for EMI schemes.
• If there are vesting conditions attached to share options, then these may be recognised over a period of time depending on when vesting conditions are met.

How do we value share options?

• We first assess whether the fair value of share options granted are likely to be material and will confirm with the company the probability of any exit events.
• If the fair value of options is not likely to be material and/or an exit event is determined to be unlikely then no further work or accounting adjustments are required.
• However, if the fair value is material and exit event more likely than not then we will quote for that additional work required.
• Our quote is based on the expected time that will be spent on the valuations, including the number of valuations and cost per employee over the vesting period.
• Once the fee is agreed we will request the documentation and information required and complete the calculations and any agreed accounting adjustments.