Expected volatility for newly listed entities

Per IFRS 2, an entity should consider historical volatility of the share price over the most recent period that is generally commensurate with the expected option term.

If a newly listed entity does not have sufficient information on historical volatility, it should nevertheless compute historical volatility for the longest period for which trading activity is available.

It could also consider the historical volatility of similar entities following a comparable period in their lives. For example, an entity that has been listed for only one year and grants options with an average expected life of five years might consider the pattern and level of historical volatility of entities in the same industry for the first six years in which the shares of those entities were publicly traded.

In estimating a volatility measure for newly listed entities, our solution only considers the available share price data for the entity itself, and ignores the volatility of similar listed entities as encouraged by IFRS 2.

If an entity is newly listed, the fair value provided by our solution may not strictly comply with requirements of IFRS 2.

If the entity does not have sufficient share price history, the volatility initially calculated by the solution can be amended to by the user to reflect a more appropriate volatility estimate by considering the similar listed peers.
In this instance, a user can calculate and enter a more appropriate volatility measure by obtaining share price data for similar listed entities with more comprehensive historical share price data, and calculating the annualised standard deviation of the continuously compounded rates of return on the share over a period of time.

If the entity has less than 12 months available share price data, and if you require assistance in determining an appropriate volatility measure in this instance, please contact us.

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