Independent measurement of the fair value of employee share options as required by IFRS 2 (Share-Based Payment). UAE companies preparing IFRS statements must measure fair value at grant date and expense it over the vesting period. Common models: Black-Scholes for simple vesting, binomial/lattice for performance conditions or early exercise.
Issuing ESOPs, RSUs, or phantom equity to attract and retain talent is increasingly common in UAE startups. Getting the IFRS 2 accounting wrong affects your income statement, your next funding round, and your IPO readiness.
IFRS 2 applies whenever a company grants equity or equity-like instruments to employees, directors, or consultants as compensation, broader than most founders realise.
Startups in DIFC, ADGM, IFZA, RAKEZ or other free zones that have granted or plan to grant share options, and prepare IFRS financial statements audited by Big Four or mid-tier firms.
UAE businesses backed by private equity with management equity incentive plans, co-investment structures, or carried interest arrangements almost universally require IFRS 2 compliance.
Businesses preparing for a UAE listing (DFM, ADX, Nasdaq Dubai) must have historical IFRS 2 compliance going back 3+ years, non-compliance is a listing blocker.
UAE subsidiaries participating in group share plans (parent company stock options or RSUs granted to UAE employees) must account for the cost under IFRS 2 locally.
All DIFC and ADGM entities apply IFRS. Any equity compensation plan, including phantom equity or share appreciation rights, triggers IFRS 2 measurement requirements.
Restricted Stock Units, share appreciation rights, and phantom equity are all share-based payments under IFRS 2, even cash-settled plans require fair value measurement each reporting date.
IFRS 2 requires an option pricing model to measure fair value. The model chosen depends on your ESOP structure.
A closed-form solution for pricing European-style options using six inputs: share value, exercise price, volatility, risk-free rate, time to expiry, and dividends. Simple, transparent, widely accepted by auditors.
Builds a multi-period tree of possible share price outcomes, handling early exercise, performance vesting, market-based hurdles, and flexible exercise windows.
Every IFRS 2 ESOP valuation requires careful determination of six core inputs. Expected volatility is the most subjective and most auditor-scrutinised, for private UAE companies with no share price history, it is estimated from comparable listed peers. Expected term for private company options often reflects the likelihood of exercise around a liquidity event rather than waiting to expiry.
| Input | What It Is | Source / Proxy |
|---|---|---|
| Current Share Value (S) | Fair value of the underlying share at grant date | Independent business valuation or recent funding round |
| Exercise Price (K) | Strike price in the ESOP plan document | ESOP plan document |
| Expected Volatility (σ) | Expected future share price variability | Comparable listed company volatility (sector peers) |
| Risk-Free Rate (r) | Return on a risk-free investment | UAE/US sovereign bond yield matching expected term |
| Expected Term (T) | Expected time from grant to exercise | Vesting schedule + liquidity event assumptions |
| Expected Dividends | Dividends reducing option value | Company dividend policy (typically nil for startups) |
| Discount for Lack of Marketability (DLOM) | Applied to private company shares at grant date | Empirical data, put option models, benchmark studies |
Fixed fee, agreed before work begins. No hourly billing. Every engagement includes a detailed, audit-ready IFRS 2 valuation report.
Single grant date, standard time-based vesting, Black-Scholes model. Most UAE startup ESOP plans.
Multiple grant dates, performance conditions, binomial modelling, or complex vesting. PE-backed and pre-IPO companies.