Valuation Considerations in Employee Share Schemes (ESS) & Employee Share Option Plans (ESOP)

Employee Share Schemes (“ESS”) and Employee Share Option Plans (“ESOP”) are used to incentivise employees by issuing them shares, options or rights in relation to receiving equity in their employer. These types of arrangements come in all shapes and sizes and have become increasingly popular in Australian non-listed companies as a way to keep employees engaged and incentivised, while also retaining key management personnel. 

In ESS and ESOP arrangements, it is critical for both the employer and the employees to understand their rights and obligations, and the likely tax implications before the scheme is established. In particular, a market value for the shares or rights must be established on the date the ESS is executed and the shares, rights or options are conveyed to the employee. This market valuation is ordinarily carried out by an independent expert valuer, and is used to support the implementation of the ESS or ESOP scheme. In all ESS and ESOP schemes, a market valuation is a necessary step to avoid any unwanted tax implications for employees, and ensure the employer has fulfilled its governance and reporting obligations. 

This article considers the valuation implications for both employers and employees in relation to ESS and ESOP arrangements.

Considerations for Employers 

• The ESS or ESOP will trigger reporting requirements in the financial statements of the employer 
• AASB2: Share Based Payment stipulates that the ESS or ESOP will need to be measured with reference to the market value of the equity instrument being granted, not the value of the service provided by the employee 
• Therefore, the employer must establish a market value for the ESS or ESOP at the grant date considering market conditions and non-vesting conditions, employee service conditions and other non-market conditions in relation to estimating the likely number of shares issued or to be issued 
• Employers can then rely on this market valuation for the purposes of regulated financial reporting, and communicating the benefits of the scheme to its employees 

Considerations for Employees 

• The ESS or ESOP will likely trigger income tax implications for the employee depending on the terms of the scheme
• If the price of the shares/rights/options is less than the market value of the shares, the ATO takes the view that the difference between the market price and the exercise price of the shares will be subject to income tax 
• Accordingly, it is important to establish a market value for the shares or options being issued so that employees are informed of their potential tax implications 
• Employees can then rely on the market valuation at the time the scheme is established and obtain their own tax advice in relation to the ESS or ESOP

Find Out More

Groves & Partners are expert business transaction advisors and valuers, with significant experience in valuing shares in companies for the purposed of ESS and ESOPs. If you believe you may require a valuation of your proposed ESS or ESOP and would like to know more about how we can work with you, contact us on 1300 892 717 (+61 2 7208 7970) or email info@groves.com.au.