What is Forfeiture Rate?
The forfeiture rate is the percentage of share-based payment awards that an entity expects to be forfeited before they vest, typically due to employees leaving. Under IFRS 2 it is built into the recognized expense so that only awards expected to vest are eventually expensed.
How It Works
- Estimate the historical rate of departures during vesting periods.
- Apply that rate to the total grant date fair value of outstanding awards.
- Recognize the net expense over the vesting period.
- True-up actual forfeitures against the estimate at each reporting date.
Saudi Context
Saudi companies offering long-term incentive plans to a high-mobility workforce often see meaningful forfeiture rates and disclose the assumption in their share-based payment note.
Example
A company grants 1,000 options expected to vest after three years and assumes a 5 percent annual forfeiture rate, so total expected vesting is roughly 1,000 x (0.95)^3 = 857 options.