IVF & Fertility Hospital
Valuation of Share Appreciation Rights (SARs) under IND AS 102 for a Leading IVF & Fertility Hospital
- IVF & Fertility Hospital
- Share Appreciation Rights (SARs)
Client Overview
Our client is a renowned healthcare organization based in Bangalore, specializing in IVF, Fertility, and Pharma services. The company has grown into one of the most respected names in the industry, with a turnover exceeding ₹60 crores as a group in FY 2024–25.
In line with its long-term employee retention and incentive strategy, the company introduced a Share Appreciation Rights (SARs) plan for its key employees. This required an independent valuation of SARs under the Indian Accounting Standard (IND AS) 102 – Share-Based Payments for accurate recognition in its financial statements.
Our firm, being one of India’s leading Registered Valuers, was engaged to carry out this valuation assignment.
Understanding Share Appreciation Rights (SARs)
Share Appreciation Rights (SARs) are a form of share-based compensation where employees benefit from the increase in the value of the company’s shares over time, without actually owning them. Essentially, SARs reward employees for the company’s performance by paying out the appreciation amount either in cash or equity shares.
There are two common types of SARs:
1. Cash-Settled SARs
In this structure, the employee receives cash equivalent to the difference between the market value of shares on the exercise date and the value on the grant date.Under IND AS 102, cash-settled SARs are treated as liabilities and are remeasured at fair value at each reporting date until they are finally settled. This means that any changes in fair value affect the profit and loss account each year until the liability is extinguished.
2. Equity-Settled SARs
In this type, employees receive shares instead of cash at the time of exercise. Here, the fair value is determined on the grant date itself and remains fixed thereafter. The corresponding expense is recognized over the vesting period and is not remeasured in subsequent periods.
IND AS 102 Compliance and Valuation Requirements
Under IND AS 102, the valuation of SARs must reflect the mode of settlement and timing of the fair value determination:
- For cash-settled SARs, the fair market value of equity shares must be determined as of every reporting date to remeasure the liability until the settlement date.
- For equity-settled SARs, the fair value of the underlying shares must be determined as of the grant date, and that value remains fixed for accounting purposes.
Since in our case the SARs were cash-settled, it was mandatory to determine the fair market value (FMV) of the company’s equity shares as of the financial reporting date to ensure accurate liability recognition in compliance with IND AS 102.
Our Approach and Methodology
We adopted a two-step approach to ensure a fair, compliant, and defensible valuation of SARs:
- Step 1: Valuation of Equity Shares
- Our team first determined the Fair Market Value (FMV) of the company’s equity shares using the Discounted Cash Flow (DCF) Method, which falls under the Income Approach.
- The DCF method estimates the company’s intrinsic value by forecasting its future free cash flows and discounting them back to their present value using an appropriate discount rate (Weighted Average Cost of Capital or Cost of Equity).
- This approach was particularly suitable for the client, given their stable revenue streams, consistent profitability, and long-term growth prospects in the fertility and healthcare sector.
- Step 2: Valuation of Share Appreciation Rights (SARs)
- Once the FMV of equity shares was established, we valued the SARs using the Black-Scholes Option Pricing Model, a globally recognized and preferred method for valuing options and rights-based instruments.
About the Black-Scholes Model
The Black-Scholes Model provides a mathematical framework to estimate the fair value of options and rights. It takes into account factors such as:
- The current fair market value of the company’s shares
- The exercise price of the SARs
- The expected volatility of the share price
- The risk-free interest rate
- The expected life or term of the SARs
- The dividend yield (if applicable)
This model assumes that share prices follow a lognormal distribution and are subject to continuous compounding returns, making it especially appropriate for cash-settled SARs, which behave similarly to European-style call options.
Why We Used the Black-Scholes Model
- It is consistent with IND AS 102 and widely accepted by auditors and regulators.
- It captures the impact of market volatility and time value effectively.
- It provides a transparent and objective valuation framework for both financial reporting and audit compliance.
Other Acceptable Models
- In certain complex cases, alternative models may be used, such as:
- Binomial (Lattice) Model – useful when vesting or exercise conditions vary over time.
- Monte Carlo Simulation – used for market-linked or performance-based rights.
- However, given the straightforward nature of our client’s SAR structure, the Black-Scholes model was the most appropriate and efficient choice.
Key Considerations in Applying the Model
While applying the Black-Scholes model, we ensured careful consideration of:
- Realistic and data-backed volatility assumptions, derived from comparable listed peers.
- The correct risk-free rate corresponding to the term of the SARs.
- Expected life estimation aligned with employee exercise behaviour and vesting schedules.
- Management validation of all input parameters to ensure compliance and reliability.
Execution and Outcome
In this assignment, the company had issued cash-settled SARs, to be converted into cash upon exercise. Accordingly, we performed the DCF-based equity valuation and then applied the Black-Scholes model to derive the fair value of the SARs.
After obtaining all relevant data from management such as financial projections, employee details, and SARs plan terms we completed the entire valuation assignment within 7 to 10 days, ensuring both accuracy and timeliness.
The client successfully implemented our valuation report for financial reporting for FY 2024–25, and the auditors accepted it without any revisions or queries, reflecting the robustness of our methodology.
Value Delivered to the Client
Our engagement provided tangible value through a blend of technical expertise, precision, and timely execution:
- Expertise in Complex Financial Instruments: Leveraged our deep experience in valuing share-based payments and option-like instruments.
- Regulatory Compliance: Ensured complete alignment with IND AS 102 and best practices in fair value measurement.
- Timely Delivery: Completed the valuation within a tight turnaround time of 7–10 days, avoiding any reporting delays.
- Cost Efficiency: Delivered a comprehensive solution in a cost-effective manner.
- Audit-Ready Output: Provided a transparent, defensible, and audit-compliant valuation report, successfully used in financial reporting.
Conclusion
This case study highlights our firm’s capability in conducting complex financial reporting valuations, specifically for cash-settled Share Appreciation Rights (SARs). By combining the Discounted Cash Flow method for equity valuation with the Black-Scholes model for SAR pricing, we ensured a technically sound and compliant outcome under IND AS 102.
Our ability to deliver accurate, audit-ready valuations within tight timelines demonstrates why we are recognized as one of India’s leading registered valuers for financial reporting, startup valuation, and complex securities valuation.
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