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Accounting under commercial law for virtual share options as consideration for consultancy services

Kai Peter Künkele, Sanja Mitrovic
20/07/2026
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In a recent ‘Technical Question’ published in IDW Life, the IDW addresses the accounting treatment of virtual share options which a consultancy firm receives in lieu of cash remuneration for consultancy services rendered. The focus is on the question of whether and when revenue may be recognised by the service provider, and under what conditions the service recipient must recognise a provision for this purpose.

I. Facts

Background. A company active in management consultancy (A-GmbH) enters into a contract with a start-up (B-AG) for the provision of certain consultancy services. To preserve B-AG’s liquidity, it is agreed that, instead of a cash payment, B-AG will grant A-GmbH a certain number of options to subscribe for so-called ‘virtual’ shares once the consultancy services have been completed. For the sake of simplicity, it is assumed that the consultancy services are provided in full within a single financial year of A-GmbH.

 

Exercise following an exit event. The options may only be exercised following the occurrence of a contractually defined ‘exit event’; the exercise price is 0 euros. If A-GmbH exercises the option, it does not acquire any actual shares in B-AG, but merely a claim against B-AG for payment of a sum of money equal to the market value of the B-AG shares at the time of the exit event (cash settlement). It remains to be clarified how this situation is reflected in the annual financial statements prepared in accordance with commercial law of both contracting parties for the financial year in which the services were provided or the virtual share options were granted.

 

II. Definitional Classification: Virtual Share Options

Virtual Stock Options Plans. A virtual share option scheme (also known as a ‘Virtual Stock Options Plan’ or ‘Stock Appreciation Rights Plan’) is understood to mean a commitment by a public limited company to a beneficiary to make a cash payment to that beneficiary in the amount of the positive difference between the value of the share upon exercise of the option and the base price set at the time the option was granted, as soon as – usually after the expiry of a minimum period following the grant of the option (‘vesting period’) – one or more conditions are met.

 

Link to an exit event. In practice, the exercisability of virtual share options is frequently linked to the occurrence of a so-called ‘exit event’, such as an initial public offering, the sale of a majority stake or the disposal of the company’s material assets.

 

III. Accounting by the recipient: Obligation to recognise a provision in principle

Obligation to recognise a liability.

If the promised cash payment constitutes consideration for services already rendered in the past, the recipient must estimate the amount and immediately recognise it as an expense in the form of a provision for contingent liabilities in the amount necessary for fulfilment according to reasonable commercial judgement (Section 253(1), second sentence, of the German Commercial Code (HGB)) (Section 249(1), first sentence, of the German Commercial Code (HGB)).

 

Consideration of the probability of occurrence. As the exercisability of the options is generally linked to an exit event, the probability of its occurrence must be taken into account when determining the amount of the provision to be recognised as a liability as at the relevant balance sheet date. If the future occurrence of the exit event – and thus the arising of the obligation to make a cash payment – is not sufficiently probable, the creation of a provision is not even conceivable in principle, or a provision already created must be reversed.

 

IV. Accounting at the service provider: No revenue recognition

Fulfilment of the obligation to perform is not sufficient. Although the consultancy firm has fulfilled its performance obligation upon completion of the consultancy service, revenue recognition is generally ruled out at this stage. The key factor for recognising the claim to consideration is, in principle, the point in time at which receipt of the consideration is ‘as good as certain’ and any remaining risks must, if necessary, be reflected through impairment losses or provisions. This quasi-certainty is not usually present where the consideration takes the form of virtual share options – particularly where the right to exercise is linked to one or more exit events.

 

Merely a claim subject to a condition precedent. The consultancy firm initially acquires only a claim subject to a condition precedent, or rather merely an entitlement to a future cash payment which, as such, cannot be recognised in the balance sheet. In line with the principles developed for contingent liabilities (Section 158(1) of the German Civil Code (BGB)), capitalisation may only be considered if the cumulative fulfilment of the conditions is expected with a probability bordering on certainty.

 

Implications for the annual financial statements. If, based on the information available up to the date of completion of the annual financial statements, the occurrence of the exit event(s) is not expected with a probability bordering on certainty, the consultancy firm may not recognise revenue for the financial year in which the services were provided.

 

V. Implications for audit practice

Asymmetric accounting treatment. The principles outlined above regularly result in an asymmetric accounting treatment: Whilst the service recipient must recognise the remuneration as a provision in the year the service is provided, provided the exit event is sufficiently probable, the service provider may generally only recognise a corresponding revenue recognition once a significantly higher probability threshold is met – namely, when it is virtually certain.

 

For the audit of both contracting parties’ financial statements, it is therefore essential to carry out a careful and transparently documented analysis of the respective probability of the exit event occurring, as well as the resulting accounting consequences.