BC246 A simple approach would be to base the accrual on the entity’s share price at the end of each reporting period. If the entity’s share price increased over the vesting period, expenses would be larger in later reporting periods compared with earlier reporting periods. This is because each reporting period will include the effects of (a) an increase in the liability in respect of the employee services received during that reporting period and (b) an increase in the liability attributable to the increase in the entity’s share price during the reporting period, which increases the amount payable in respect of past employee services received.

BC247 This approach is consistent with SFAS 123 (paragraph 25) and FASB Interpretation No. 28 Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.

BC248 However, this is not a fair value approach. Like share options, the fair value of SARs includes both their intrinsic value (the increase in the share price to date) and their time value (the value of the right to participate in future increases in the share price, if any, that may occur between the valuation date and the settlement date). An option pricing model can be used to estimate the fair value of SARs.

BC249 Ultimately, however, no matter how the liability is measured during the vesting period, the liability-and therefore the expense-will be remeasured, when the SARs are settled, to equal the amount of the cash paid out. The amount of cash paid will be based on the SARs’ intrinsic value at the settlement date. Some support measuring the SAR liability at intrinsic value for this reason, and because intrinsic value is easier to measure.