Share-based payment
Employee share option and share award valuation
Granting options or shares to your team creates an accounting charge, a disclosure obligation and, for the recipients, a tax event. Each of those needs a fair value at a specific date, produced by a model the auditor recognises and inputs that can be evidenced.
- Standard
- SFRS(I) 2 Share-based Payment
- Measurement date
- Grant date for employees; service or delivery date for non-employees
- Instruments covered
- Share options, ESOW and restricted share awards, performance shares, phantom shares, stock warrants
- Models used
- Black-Scholes-Merton, binomial lattice, Monte Carlo simulation
- Typical output
- Fair value per instrument, expense schedule across the vesting period, disclosure note support
- Related tool
- Valtech ESO calculator
Why a share plan needs a valuation at all
Share-based payment is an expense even though no cash leaves the company. The accounting standard requires the goods or services received to be measured at the fair value of the equity instruments granted, determined at grant date, and then recognised over the period the employee earns them. Because there is no cash outflow to anchor the number, the entire charge rests on the valuation — which is why auditors test it and why a defensible model matters.
Three separate audiences use the result:
- The auditor, testing the charge in profit or loss and the related equity movement
- Investors and acquirers, who read the dilution and the plan terms during diligence, and who dislike finding an unquantified plan late in a process
- Employees and the tax authority, since gains on employee share options and share ownership plans are taxable in Singapore and the taxable amount depends on the value of the underlying shares at the relevant point
The hard part for private companies: valuing the underlying share
For a listed issuer, the share price is observable and the modelling effort goes into the option itself. For a private company it is the reverse — the option model is the easy part, and the underlying ordinary share value is the judgement.
That value is rarely the price of the last funding round. Preferred shares issued to investors typically carry liquidation preferences, conversion rights, participation features and sometimes anti-dilution protection, all of which make a preferred share worth more than an ordinary share in the same company. Treating the last round price as the value of an ordinary share systematically overstates the option value and understates the discount employees are actually receiving.
How we get to the ordinary share value
- Establish total equity value at the grant date using income, market or transaction-based evidence
- Model the contractual waterfall across every share class, applying preferences, participation caps and conversion economics in the order the constitution and shareholder agreement specify
- Allocate value across classes using an option-pricing framework or scenario-based method appropriate to the company’s stage and exit expectations
- Apply a supportable discount for lack of marketability to the ordinary shares
- Where grants span several dates, value each grant date separately rather than rolling one valuation forward
A common and expensive shortcut. Companies frequently grant options across two or three dates in a year and then obtain a single valuation covering all of them. Under SFRS(I) 2 each grant is measured at its own grant date. Where equity value moved between those dates — because a round closed, or performance shifted — a single figure will not survive review, and the correction usually arrives during a due diligence process at the worst possible moment.
Choosing the option model
| Plan feature | Appropriate model |
|---|---|
| Plain vanilla option, single exercise window, service condition only | Black-Scholes-Merton with an expected-life input |
| American-style exercise, early exercise behaviour, staged vesting | Binomial or trinomial lattice |
| Market conditions such as a share price hurdle or relative TSR ranking | Monte Carlo simulation |
| Performance conditions based on revenue, profit or milestones | Modelled through the expense estimate, not the fair value — and revised as expectations change |
| Cash-settled phantom shares or share appreciation rights | Liability measurement, remeasured at each reporting date until settlement |
The inputs that get challenged
- Volatility. A private company has no share price history, so volatility is derived from listed peers matched on sector, size and leverage, over a period aligned to expected life. The peer set has to be justified, not just listed.
- Expected life. Contractual term overstates it for most plans. Where exercise history exists, use it; where it does not, use a reasoned assumption and disclose it.
- Risk-free rate. Singapore Government Securities yields matched to expected life.
- Dividend yield. Usually nil for growth companies, but not automatically — a company with a distribution history needs it modelled.
- Forfeiture and attrition. Affects the number of instruments expected to vest and therefore the cumulative expense, and is trued up as actual leavers become known.
What we deliver
- Fair value per option or award for each grant date in the period
- The equity value and share-class allocation underpinning the ordinary share value, shown transparently
- An expense schedule mapped across the vesting periods, ready for the accounting entries
- Input sourcing and peer volatility analysis in a form the auditor can test
- Support for the share-based payment disclosure note
- Where required, valuation of share awards issued historically, reconstructed on a point-in-time basis for each past grant date
Fuller background on this service, including our published work on share awards issued within multi-class capital structures, is available on the main site at valuation of employee share options.
Frequently asked questions
Do private companies in Singapore need to value their share options?
If the company prepares financial statements under SFRS(I) or full IFRS and has granted options or share awards, it recognises a share-based payment expense measured at the grant-date fair value of the instruments. That measurement requires a valuation. Companies applying the SFRS for Small Entities framework have simplified requirements but are not exempt from measuring equity-settled awards.
Is the last funding round price the right value for an employee option?
Usually not. Investors typically hold preferred shares carrying liquidation preferences and other economic rights that ordinary shares do not have, so a preferred share is worth more than an ordinary share in the same company. Options are almost always over ordinary shares, so the underlying value has to be derived by allocating total equity value across the share classes, then discounting for lack of marketability.
Is a Singapore ESOP valuation the same as a US 409A valuation?
The analysis overlaps heavily -- both derive an ordinary share value from total equity value through a share-class allocation -- but the drivers differ. A 409A valuation exists to set an exercise price that satisfies US tax rules and carries a safe-harbour presumption when refreshed at least every twelve months. A Singapore engagement is usually driven by SFRS(I) 2 accounting. Groups with US-linked entities often need both, and we scope them together.
How often does the valuation need to be refreshed?
For accounting, each grant is measured at its own grant date, so a fresh measurement is required whenever new instruments are granted. In practice, a valuation more than six to twelve months old, or one that predates a funding round or a material change in performance, should not be used to support a new grant.
Are employee share option gains taxable in Singapore?
Gains from employee share options and share ownership plans granted in respect of Singapore employment are generally taxable as employment income, with the taxable amount based on the value of the shares at the relevant point less what the employee paid. Timing and reporting rules depend on the plan and the employee's circumstances, and specific tax advice should be taken -- but the share valuation itself is the input both the company and the employee will need.
Granting options this quarter?
Send us the grant dates, the plan rules and your latest cap table. We will confirm what is needed for each grant date and quote on that basis.