What is Stock Options Accounting?
Stock options are share-based payment instruments that give employees the right to buy company shares at a fixed exercise price after a vesting period. Under IFRS 2, the company measures the fair value of the option at grant date and expenses it over the vesting period in exchange for the employees’ services.
How It Works
- Determine the grant date and the fair value of each option using a model such as Black-Scholes.
- Estimate the number of options expected to vest, considering forfeiture rates.
- Spread the total fair value as personnel expense over the vesting period, with a matching credit to equity.
- Adjust estimates each period; on exercise, transfer the recognised amount to share capital and share premium.
Saudi Context
A growing number of Saudi tech and Tadawul-listed companies use stock option plans to attract talent. Plans are approved by the Capital Market Authority and follow IFRS 2 for accounting. Income tax for non-Saudi shareholders applies on gains realised; for Saudi nationals zakat treatment is reviewed by ZATCA.
Example
A Riyadh tech company grants 100,000 options with a SAR 5 fair value vesting over 4 years. Each year, SAR 125,000 (100,000 × 5 / 4) is recognised as personnel expense and credited to a share-based payment reserve in equity.