You can find Ledgy's IFRS 2 report under Reporting > Financial > IFRS 2

The IFRS 2 report uses the underlying grant, vesting, and valuation data entered into Ledgy to calculate an expense per vesting tranche of a grant. These tranche values are aggregated at the grant, entity, and/or company level to reach a total expense per period.

Expenses are calculated by determining a cumulative expense for each opening and closing balance date:

Ledgy automatically calculates the fair value per grant based on valuation parameters specified by you (these can be overridden if necessary). The fair value is then multiplied by the amortized vesting quantity to get the cumulative expense as of a particular balance date.

Fair market value (share price), volatility, and risk-free rate are valuation parameters required to run Black Scholes and determine a fair value Ledgy. These inputs are added by creating a "fair value" valuation transaction.

To add a valuation transaction for financial reporting:

Grants use the latest valuation as of the measurement date, e.g. an equity-settled grant use valuation parameters dated on or before the grant date. Fair value transactions only affect the IFRS 2 report and not the cap table or stakeholder dashboards.

Ledgy currently offers two accounting standards:

Once you've selected IFRS 2, there are several sub-reports to choose from:

The expensing report is further separated into multiple “views” (different tabs in the exported spreadsheet) that show the building blocks for calculating the expenses.

As with other Ledgy grids, you can create your own custom views by adding or removing columns and grouping the values by whichever field you desire. Just click "Create new view" then "Edit view" to make changes.

You can adjust your accounting settings from the IFRS 2 report page. Any saved changes take effect immediately.

The default financial year start date is the 1st of January. However, if your financial year starts on another date you can change it here.

You can choose between a yearly, semester (half year), quarterly, or monthly reporting intervals depending on how frequently you book expenses.

Ledgy offers two amortization methods: front-loaded and linear. These are applied per grant based on the vesting schedule:

See the forfeiture rate section for more information on forfeiture rates.

See the fair value section for more information on valuations.

Ledgy considers whether a grant is equity or cash-settled when calculating expenses. Equity-settled grants are valued once on the grant date, based on the latest valuation parameters as of the grant date. Cash-settled grants are “marked to market” meaning they are re-valued every period, using the latest valuation parameters on the last day of the period.

Because mark-to-market awards are re-valued every period, this means the expense can keep changing even after vesting has completed. Only once the award is settled (e.g. paid out) is compensation finalized and further expensing ceases. Ledgy automatically handles this based on the valuation parameters you add to the platform.

Below are the default settlement approaches per grant type in Ledgy:

For both equity and cash-settled transactions, IFRS 2 states that entities should measure awards at their fair value. Ledgy offers three valuation methods for calculating the fair value of a grant:

These valuation methods are run at the grant level, not the vesting tranche level.

Black Scholes is an option pricing formula that takes several assumptions and estimates a terminal value for an option. It is a commonly used pricing model in the financial industry due to its simplicity and is generally accepted when it comes to share-based payment expensing. The valuation parameters are:

The following sections provide more detail on the assumptions used in this model.

The expected term is the length of time the grant is expected to be outstanding before it is exercised or forfeited. Typically measured in years, it is derived from the grant date, expiry date, and vesting schedule. Ledgy automatically calculates the expected term at the grant level based on this information. If a grant does not have an expiry date, expected term cannot be calculated and no fair value will be determined.

For mark-to-market grants, expected term is calculated from the measurement date.

The strike price (or exercise price) is the price an option holder must pay to exercise the option, or convert it into an actual share. This is specified on the grant. If a grant is missing a strike price, calculating fair value using Black Scholes is not possible and the expense will be blank.

The fair market value is the most recent share price associated with the awards. For listed companies, this would be the public market price. For private companies that do not have a live market price, the share price is usually agreed via financing rounds or local tax authorities (e.g. an HMRC or 409A valuation). In Ledgy, you specify the fair market value by creating "fair value” valuation transactions. Grants use the latest share price as of the measurement date (e.g. the grant date for equity-settled awards). If no share price can be found the expense will be blank.

Volatility is a statistical measure of how much a stock price fluctuates over a period of time. For Black Scholes, expected volatility is estimated based on historical volatility, however, private companies without historical data often use a publicly traded peer group to determine a proxy volatility rate.

In Ledgy, you can enter volatility for a specific date using Fair Value transactions, or have Ledgy automatically calculate volatility using a peer group. Peer groups can be managed under "Fair value" settings when generating a report (see below). Volatility is derived from the share prices of peers over a period matching the expected term of the tranche. We use market data from EODHD. Peers will be used for any measurement dates between the Peer Start and End dates. If no peers are added, or the measurement date falls outside the peer dates, Ledgy will use the risk-free rate from the most recent Fair Value transaction.

The risk-free rate is the hypothetical return on an investment with no risk, often benchmarked to government bonds where the risk of default is negligible.

In Ledgy, you can enter the risk-free rate for a specific date using Fair Value transactions, or have Ledgy automatically calculate it from government bonds. You can select a bond country under "Fair value" settings when generating a report (see below). Ledgy will use the interest rate from bonds whose maturity matches the expected term of the tranche. We use market data from EODHD. If the expected term falls between maturities, linear interpolation will be used. For any measurement dates before the effective date, Ledgy will use the value from the most recent Fair Value transaction.

Ledgy assumes the dividend yield is 0.

Ledgy also offers Monte Carlo as an alternative to Black Scholes. It is a stochastic (random sampling of inputs) method that simulates many possible scenarios and estimates a result. Ledgy’s implementation of Monte Carlo takes the average of 1 million approximations to calculate an expected value. Please note this is more computationally intensive than Black-Scholes.

This valuation method simply uses the fair market value share price to calculate the expense (Ledgy assumes awards are issued at zero cost to the stakeholder). It only applies to restricted shares and will automatically be used for RSUs in Ledgy. These awards cannot be valued using methods like Black Scholes because there is no expiry date and therefore no expected term.

When an employee leaves a company or is otherwise terminated, expenses need to be adjusted to reflect any terminated unvested shares. Expenses are not adjusted for terminations of vested shares since vested shares are considered compensated under IFRS 2.

When part of a grant is terminated in Ledgy, the expense is reduced by the terminated amount. The reduction is applied to the period in which the termination takes place and any future periods, so past expenses are unaffected. This can result in a negative expense when expenses are front-loaded, which is perfectly fine. If a forfeiture rate is being used, any estimated forfeitures will be “trued up” in the period of the termination so that the total expense reflects the actual number of vested shares.

The forfeiture rate is an estimate of what percentage of awards will fail to vest, usually because an employee leaves the company. Applying a forfeiture rate will reduce the expense. If you choose to use one, the rate should be carefully selected by analyzing historical forfeiture data as well as expectations for the future. If expectations change, the rate should be updated. Ledgy does not suggest a rate based on historical data but you can use the historical forfeiture report to evaluate your historical data in Ledgy. You should save all supporting calculations to justify your chosen rate in an audit.

Two forfeiture methods are offered:

If you don't want to use a forfeiture rate simply set the value to 0%.

To vary forfeiture rates by period and/or department, use custom accounting.

You can apply custom overrides at either the grant or tranche level.

Custom accounting allows you to override certain values for target groups of grants. Specifically, you can:

You might use this if you have fair values calculated outside of Ledgy, or have historical expenses that need to be reflected in Ledgy.

Steps:

Excel template logic:

Measurement date - effective date from which the value should be applied

Targeting columns - determine which grants will be affected (you can use any combination, if none are specified the value will apply to all grants)

Override values - values applied to the target group

If rows are in conflict with one another the bottom-most row takes precedence. Please be careful to not delete any lines in the bulk edit template.

Successfully uploaded values will be displayed in-app. In the “Detailed” view, grants that have an overridden valuation used in the IFRS 2 report will have a “Valuation method” = “User input”.

Fair value assumptions can also be overridden at the tranche level, to vary fair value by tranche. To enable tranche-level valuations, please contact us.

You can override the following parameters per tranche:

You'll need to specify a measurement date for each set of fair value overrides. The report will use the tranche values with the most recent measurement date as of the balance date.

Ledgy can adjust expenses based on performance condition expectations. See our help article on performance conditions for financial reporting.

Ledgy can allocate expense to cost centres based on stakeholder movements. See our help article on cost centre movements for financial reporting.

Expenses are only recognized from the grant date, so any vesting before the grant date will be accumulated and expensed on the grant date.

If a vesting pause is added to a grant, this will affect the tranche vest dates and therefore change the expenses in Ledgy (including past periods). Users should carefully review grants with vesting pauses for correctness.

If expenses are blank, this is usually because the grant is missing values necessary to the (Black Scholes) valuation model. Please double check the following are present:

If you need to represent historical expenses prior to using Ledgy, custom accounting can help accomplish this.

Ledgy offers additional reports related to expensing that can be useful.

See the disclosures help article. (coming soon)

See the deferred tax assets help article. (coming soon)

IFRS 2 Share-based payment standard