Option Expensing Errors A Big Deal

Recently an Australian mining company announced that it had undervalued the expense of executive and director share options in its accounts by $1 million (read that article here). The result also meant that the disclosures of executive and director remuneration were incorrect (for example, the CEO options were originally disclosed as being valued at $77,252 when it should have been $338,173).

Guerdon Associates is in constant touch with most ASX 300 companies’ option plans and expensing as a result of maintaining Australia’s only “live” database (GuerdonData®), and ongoing client work requiring comparative analyses. Our knowledge of plan design and expense valuation methods leads us to believe that the undervaluation is not an isolated instance. Similarly problematic is the overvaluation of equity grants, where companies have not applied an appropriate discount for such things as employee turnover and market performance hurdles. We believe up to 30% of companies could consider a re-check of their option expense valuation. However, capturing and rectifying the errors is a difficult task. Internal and external audit teams do not have the expertise, as a rule, to value options, nor to recognise possible errors for investigation.

For these reasons, Guerdon Associates has launched its own option and rights expensing service in association with the independent actuarial firm PFS. The service is designed to provide a degree of comfort and protection for public company directors and management that options and rights valuations are computed correctly.

© Guerdon Associates 2024
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