## Option valuation models

Option valuation models use mathematical techniques to identify a range of possible future share prices at the exercise date. From these possible future share prices, the pay-off of an option can be calculated. These intrinsic values at exercise are then probability-weighted and discounted to their present value to estimate the fair value of the option at the grant date.

This narrative is part of the IFRS 2 series, look here.

### Model selection

There are three main models used to value options:

• closed-form models: e.g. the BSM model;
• lattice models; and
• simulation models: e.g. Monte Carlo models.

These models generally result in very similar values if the same assumptions are used. However, certain models may be more restrictive than others – e.g. in terms of the different pay-offs that can be considered or assumptions that can be incorporated.

For example, a BSM model incorporates early exercise behaviour by using an expected term assumption that is shorter than the contractual life, whereas a lattice model or Monte Carlo model can incorporate more complex early exercise behaviour.

### Simple model explanation

The approach followed in, for example, a lattice model illustrates the principles used in an option valuation model in a simplified manner.

## IFRS 2 Fair value of equity instruments granted

IFRS 2 Fair value of equity instruments granted – Share-based payment transactions with employees are measured with reference to the fair value of the equity instruments granted (IFRS 2.11).

The fair value of a equity instrument granted is determined as follows (IFRS 2.16-17):

• If market prices are available for the actual equity instruments granted – i.e. shares or share options with the same terms and conditions – then the estimate of fair value is based on these market prices. IFRS 2 Fair value of equity instruments granted
• If market prices are not available for the equity instruments granted, then the fair value of equity instruments granted is estimated using a valuation technique.

## WACC

WACC a company is typically financed using a combination of debt (bonds) and equity (stocks). Because a company may receive more funding from one source

## Fair value less costs of disposal

Fair value less costs of disposal -Costs of disposal, other than already recognised as liabilities, are deducted in measuring fair value less costs of disposal.

## IFRS 7 Market risk disclosures

Market risk - The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices.

## Discount rate – How 2 best account it

Discount rate used in discounted cash flow models incorporates the time value of money (the risk-free rate) and a risk premium build from distinct components

## Calculating the value of an acquisition – How 2 complete it best

Calculating the value of an acquisition – This is a detailed example of calculating the fair value of an acquisition, using a logical step by step approach and realistic assumptions and determinations based on transaction and market data. Identifying and valuing intangible asset(s) is a broad endeavor and requires careful consideration of; factors specific to each business, the transaction structure, identifying the primary income generating asset, determining the discount rates, estimating the useful lives for identified intangibles. Examples of such intangibles include customer contracts, trademarks, brands, etc.

 The Deal Fortune, Inc. acquired M&P Company on January 1, 2017. Consideration was \$30 million cash plus additional contingent consideration, as follows: EBITDA Below 1 million: Nil Calculating the value of

## Fundamental Principles of Value Creation

Fundamental Principles of Value Creation – Companies create value by investing capital to generate future cash flows at rates of return that exceed their cost of capital. The faster they can grow and deploy more capital at attractive rates of return, the more value they create.

The mix of growth and return on invested capital (ROIC) relative to the cost of capital is what drives the creation of value. A corollary of this principle is the conservation of value: any action that doesn’t increase cash flows doesn’t create value. Fundamental Principles of Value Creation

The principles imply that a company’s primary task is to generate cash flows at rates of return on invested capital greater than the cost of capital.… Read more

## Calculations IFRS 16 Leases

Calculations IFRS 16 Leases is a case regarding fixed lease payments depending on an index and rent-free period. This case is rather simple, fixed payments depending on an index and rent-free period. Here are only included the journal entries to be made at the inception of the lease contract.

This contract comprises a lease contract for the lease of office space, archive space, inside garage space and outside parking places. The contract consist of special and general conditions. The special conditions prevail the general conditions. Calculations IFRS 16 Leases

The lease contract has a lease term of 12 consecutive years (144 months), starting date is 1 March 2015, ending date is 28 February 2027. Tacit renewal of the agreement Read more