Recent downturn may reignite use of share-based payments

Share-Based Payments in the Current Environment

The events of the last three months and the impact that COVID-19 has had on the economy, the share market and broader business sentiment – not to mention the uncertain shadow it has helped cast over future business cash flows – could lead to an increased level of businesses considering share-based payments as a means of rewarding key staff or completing transactions whereby a significant component of the purchase consideration is made via scrip.

Given this potential – it is worthwhile considering the impact share-based payments can have on financial performance of a business and recapping valuation considerations associated with these types of payments more broadly.

The issue of equity in lieu of cash payments for services, as part of bonus remuneration structures or as part of satisfying all or part of the purchase consideration of an acquisition is becoming more and more common with private and public companies. As small private companies are not required to comply with the AASB Standards, this article focuses primarily on the implication of share-based payments to public companies, however, private companies should also consider these implications.

Advantages and Disadvantages of Share-Based Payments

The immediate advantage to the issuer, the company, is that it can retain the services of consultants, advisers, employees, executives or fund acquisitions on a non-cash basis via the issue of equity such as shares, options or performance rights. However, there are also disadvantages to using equity in this manner such as the dilution impact to existing shareholders and financial reporting impact. There is also the tax impact that these structures may impose on the recipients – whereby they may be required to pay tax on a benefit they have received without the benefit of having necessarily obtained any cash to fund any tax impost.

Impacts of Share-Based Payments

Understanding the valuation impact of share-based payments before they are issued or agreed as part of a transaction is an important consideration before entering into a binding agreement regarding the terms of any equity issued in lieu of cash payments. Although there is a clear distinction between value and cost in that such transactions may not ‘cost’ the issuer real dollars out of a bank account – they often always have a ‘value’ which must be brought to account and expensed through the books.

Understanding the financial impact of these different products and how they should be accounted for as well as their potential impact to the issuer’s financial statements before they are entered into is fundamental to understanding whether any such offer should be made in the first instance.

PKF Corporate Finance prepare valuation advice with respect to share-based payments for valuation advisory, financial reporting and shareholder approval purposes. We would be pleased to assist with your requirements in understanding and quantifying the impact of share-based payments should you be looking to consider these as part of a remuneration package or as part of an offer to fund a component of purchase consideration.