Real Options for IFRS-S1 and S2 2024 Mandatory Disclosures: An Alternative Approach to Capital Budgeting Valuation

Victor Manuel Castillo Delgadillo and Luz del Carmen Díaz-Peña ()
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Victor Manuel Castillo Delgadillo: Accounting and Finance Department, Monterrey Institute of Technology and Higher Education, Chihuahua 31300, Mexico
Luz del Carmen Díaz-Peña: Accounting and Finance Department, Monterrey Institute of Technology and Higher Education, Puebla 72590, Mexico

JRFM, 2025, vol. 18, issue 10, 1-18

Abstract: The new financial standards, IFRS S1 and S2, have not only modified the way financial reporting is presented to diverse stakeholders but have also increased uncertainty. These changes make traditional valuation methods inadequate. This article proposes the development of a valuation framework using Real Options Valuation (ROV), which incorporates the disclosures required by S1 and S2 as inputs to the valuation model. The framework proposes a quarterly decision rule for deferring investments, parameters aligned with the new sustainability disclosures, and notes in the financial statements proposed as voluntary reporting. The results show that, under regulatory uncertainty and its associated implications, the deferral option is a more effective technique than the Net Present Value method. For professionals responsible for the valuation process, the proposed model serves as a practical guide for applying the ROV within the capital budgeting process. For investors, it provides an additional element of transparency through disclosure and alignment with other existing accounting standards. This work lays the groundwork for future empirical applications as companies adapt to the implementation of new accounting standards and their associated reporting.

Keywords: project valuation; real options; IFRS S1; IFRS S2; sustainability disclosure; risk management; financial reporting (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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