By Bill Anderson, FCCA, Chief Executive Officer — Assetica, Dubai, UAE
Definition: ESOP valuation is the fair value measurement of awards under an employee share option plan, such as share options, restricted share units and phantom shares. Under IFRS 2 Share-based Payment, equity-settled awards are measured at grant-date fair value and expensed over the vesting period. Cash-settled awards are remeasured at each reporting date until settled. For an unlisted UAE company, the work starts with the ordinary share value.
Assetica provides ESOP valuation for UAE companies on the mainland, in the free zones and in the DIFC and ADGM. We are an independent valuation and corporate finance advisory firm in Barsha Heights, Dubai, with over 500 valuations across 15+ countries. We work to RICS, IVS and IFRS standards. A recent round price is rarely the value of the ordinary shares your employees hold, so we value those shares first. Then we match the option model to the award terms and source every input. The result is a grant-date value your auditor can test and your board can approve. We do not broker deals or take success fees, so the number has no agenda.
You need a valuation whenever IFRS 2 needs a number. The first occasion is the launch of a scheme, when the first awards are granted. Each later grant needs its own value, because every grant is measured at its own grant date. Phantom shares and other cash-settled awards need a fresh value at every reporting date until they are paid. Repricing options or extending their life is a modification, so the incremental fair value is measured on that date. A funding round usually moves the ordinary share value, so grants made after it need new evidence. UAE subsidiaries whose staff hold awards over a parent company's shares also carry an IFRS 2 charge, and need support for the value used. Historic grants that were never valued tend to surface before a first audit, a raise or a sale.
IFRS 2 Share-based Payment treats an employee equity award as an expense, even though no cash leaves the company. Equity-settled awards are measured at grant-date fair value and spread over the vesting period. Grant date is when both sides have a shared understanding of the terms. If board or shareholder approval is needed, it is the approval date. Where staff start earning awards before approval, the expense starts earlier on an estimate, trued up at grant date. Service conditions and non-market targets, such as revenue or EBITDA, do not change the value of each award. They change the number expected to vest, which is revised each period. A sale or IPO that staff must still be employed for is usually treated the same way. Market conditions, such as a share price or exit value hurdle, go into the fair value. Missing one does not reverse the charge if the other conditions are met. IFRS 13 does not apply to share-based payments. IFRS 2 sets its own fair value basis.
For a private company, the share price is the input that drives every other number, and it has to be built. We value the business using income and market approaches, calibrated to any recent round or secondary sale. We then bridge from enterprise value to equity value. Where investors hold preference shares, that equity is not shared pro rata. Liquidation preferences and other investor rights mean ordinary shares are usually worth less than the round price per share. SAFEs and convertible notes outstanding at the grant date form part of that structure too. We allocate equity value across the share classes, usually with an option pricing method calibrated to the latest round. Where an exit is in sight, a probability-weighted expected return method or a hybrid may fit better. The report walks from the headline round price to the ordinary share value, so every step can be followed and challenged.
IFRS 2 does not prescribe a model. It requires a technique consistent with generally accepted methods for pricing financial instruments. Every option pricing model must take into account at least six inputs: exercise price, option life, share price, expected volatility, expected dividends and the risk-free rate. Black-Scholes suits options that must be exercised soon after vesting, or where an expected term can fairly stand in for exercise behaviour. A binomial or lattice model fits when exercise behaviour matters, such as long exercise windows or early exercise once options are well in the money. Monte Carlo simulation handles market conditions, such as an exit value hurdle or total shareholder return against peers, where the payoff depends on the path the share value takes. Restricted share units and nil-cost options are valued from the share itself, less any dividends the holder will not receive before vesting. The model is chosen for the award, not for convenience.
An auditor usually tests the inputs harder than the model. A report that holds up states the grant date and approvals, the ordinary share value and its derivation, and the model with the reason for choosing it. Every input is sourced. Volatility comes from a named group of listed peers, measured over a period that matches the expected term. The risk-free rate is a zero-coupon government yield in the currency of the exercise price, matched to the term. An exercise price in US dollars therefore points to US Treasury yields, not AED rates. The expected term reflects vesting, exercise windows and the likely timing of an exit. Graded vesting is expensed tranche by tranche, which front-loads the charge. The schedule then feeds the IFRS 2 disclosures, including the weighted average fair value of options granted and the inputs used. Investors and buyers ask a parallel question in due diligence: was each grant approved, priced and recorded properly?
Most ESOP problems surface years later, in an audit or a due diligence review, and they follow a pattern. The round price per share is applied to ordinary shares, overstating their value and the charge. The grant date is taken from the offer letter rather than the approval. Revenue or EBITDA targets are built into the option price instead of the vesting estimate. Graded awards are expensed on a straight line. Phantom plans are booked as equity and never remeasured. Underwater options are repriced without measuring the incremental fair value. Leaver terms that buy back vested awards at cost are ignored, although they can stretch the real vesting period to an exit. Volatility comes from a single listed company, or from a period that does not match the term. Historic grants are valued with hindsight. Each of these is easier to prevent than to unwind in front of a buyer.
UAE corporate tax under Federal Decree-Law No. 47 of 2022 applies at 9% on taxable income above AED 375,000. Taxable income starts from accounting profit, so the IFRS 2 charge feeds into the computation. Agree how and when a non-cash charge is deductible with your tax adviser. Individual shareholders, directors and officers are connected persons under the law. Unless an exemption applies, payments and benefits to them are deductible only up to market value, and only if incurred wholly and exclusively for the business. The FTA's public clarification CTP010, issued in April 2026, judges who is an officer by authority, not job title. Qualifying free zone income can be taxed at 0%, but the charge still sits in the accounts. A DIFC or ADGM holding company scheme needs the holding company's shares valued, rolling up its subsidiaries. Recharges to UAE subsidiaries should follow the arm's length principle. The UAE does not tax employment income, but staff tax resident elsewhere may be taxed on their awards in that country.
Scoping Call: We review the scheme rules, share classes and grant history, confirm what your auditor needs, then fix the fee and timing in writing.
Share Valuation: We value the company, bridge to equity value and allocate it across share classes to set the ordinary share value at each grant date.
Award Modelling: We classify the vesting conditions, choose Black-Scholes, binomial or Monte Carlo to suit the terms, and source volatility, expected term and rates.
Report & Expense Schedule: You receive the IFRS 2 report, a tranche-level expense schedule and disclosure inputs, and we explain the workings to your auditor if asked.
How does ESOP valuation work?
It works in two stages. First, the ordinary shares are valued at the grant date, allowing for any preference rights investors hold. Second, the award is valued with a model that reflects its terms, using volatility, expected term, dividends and a risk-free rate. Under IFRS 2, that grant-date fair value is multiplied by the number of awards expected to vest and expensed over the vesting period. Cash-settled awards are remeasured at each reporting date instead.
Is an ESOP valuation mandatory for private companies in the UAE?
In practice, yes, if your company reports under IFRS. IFRS 2 requires employee equity awards to be measured at grant-date fair value, whether or not the company is listed. UAE corporate tax rules generally require IFRS accounts, with IFRS for SMEs allowed where revenue does not exceed AED 50 million. Both measure share awards at fair value. Qualifying Free Zone Persons and businesses with revenue above AED 50 million must also have audited accounts. The work need not be external, but your auditor will test it.
Can we use our last funding round price for ESOP valuation?
Usually not for the ordinary shares. Investors in a priced round normally buy preference shares with liquidation preferences and other rights that ordinary shares lack. Applying the round price per share to ordinary shares therefore usually overstates their value. The round is still important evidence, so we calibrate to it, allocate value across the share classes and show each step to the ordinary share value.
Black-Scholes or binomial: which model does IFRS 2 require?
Neither is required by name. IFRS 2 asks for a technique consistent with accepted methods for pricing financial instruments, taking into account at least six inputs, from the exercise price to the risk-free rate. Black-Scholes suits options exercised soon after vesting. A binomial model is better where employees can exercise over a long window. Monte Carlo is the usual tool where vesting depends on a share price, exit value or shareholder return target.
How are phantom shares valued under IFRS 2?
Phantom shares and share appreciation rights paid in cash are cash-settled awards under IFRS 2. The company recognises a liability at fair value, including any time value, not just today's payout. The liability builds up as staff provide service and is remeasured at every reporting date until paid, with changes in profit or loss. That means a valuation at each year end, and at each half year if you report then.
Do options granted in previous years need a valuation?
Usually, yes, if they fall within your IFRS accounts and were never valued. Each historic grant is valued as at its own grant date, using only information known or knowable then, so hindsight does not distort the result. If these are your first IFRS accounts, IFRS 1 does not require IFRS 2 for equity awards that vested before the date of transition. How any correction to earlier periods is presented is agreed with your auditor.
What is the ESOP 30% rule, and does it apply in the UAE?
It does not apply to UAE share option plans. The 30% rule is a US tax relief. It lets owners of certain US companies defer capital gains tax on a sale of shares to an employee stock ownership plan. The plan must then hold at least 30% of the company. In the US, that kind of ESOP is a retirement plan holding shares in trust. In the UAE, ESOP usually means an employee share option plan, accounted for under IFRS 2.
How much does an ESOP valuation cost in Dubai?
Assetica does not publish a price list, because the work depends on the scheme. The fee turns on the number of grant dates, the share classes and preference terms, the award types, and whether historic or cash-settled awards need valuing. We agree a fixed fee in writing after a scoping call, before any work starts. Timing is confirmed at the same call and is usually driven by data availability.