Option Valuation

Australian Accounting Standard AASB 2 specifies the financial reporting by an entity when it undertakes a share-based payment transaction. In particular, it requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees.

Under AASB 2, all pricing models applied to the valuation of options are to take into account, as a minimum, the following factors:

• the exercise price
• the life of the option
• the current price of the underlying shares
• the expected volatility of the share price
• the dividends expected on shares (if appropriate)
• the risk-free interest rate for the life of the option

A share-based payment transaction is one in which the entity receives goods or services as consideration for equity instruments of the entity (including shares and share options), or acquires goods and services by incurring liabilities to the supplier of those goods or services for amounts that are based on the price of the entity’s shares or other equity instruments of the entity.

airQuant provides an Option Valuation service to companies to help meet their reporting requirements.