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Financial District

DERIVATIVES &

SHARE BASED COMPENSATION

DERIVATIVES & SHARE BASED COMPENSATION

Derivatives are contracts that derives its value from the performance of an underlying entity, these include common financial instruments such as bonds, futures and options. Derivatives are often structured by investment firms such as private equities and venture capitalists as an investment instrument during investments into target companies, and as such are a frequent subject of audit engagements as the fair values of such derivatives may not be easily determined due to various unique rights and clauses that may be included in the contracts.

 

Share based compensations such as Employee Stock Ownership Plans (ESOPs) are to be recognised as an expense to the company in accordance with International Financial Reporting Standards 2: Share-Based Payments (IFRS 2). Goods or services acquired in a share-based payment transaction should be recognized when they are received and ESOPs are required to be fair valued at its date of issuance. 

The process for valuing derivatives and share based compensations often involve the application of option pricing models such as black scholes model, monte carlo simulation or binomial/trinomial tree lattice. Lim & Young specializes in the development and application of customized models to support the valuation of derivatives and share based compensations including:

  • Valuation for wide range of derivatives including convertible bonds, options and equity derivatives

  • Valuations for share-based compensation such as ESOPs

  • Monte Carlo simulations capturing path dependency and correlation

  • Binomial / Trinomial lattice models such as Hull White model

  • Closed form solutions such as the Black-Scholes model

  • Preferred stock for tax and financial reporting purposes

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