Yet we don’t have comprehensive accounting guidance that deals with these kinds of transactions in a consistent manner. At present we have the strange situation that if a company pays its employees in share options it often doesn’t have to recognise an expense in the profit and loss account; yet if the employees are paid in cash, an expense is recognised.
This issue affects not only the UK, it’s an international problem. In the US, the Financial Accounting Standards Board tried to resolve it by developing FAS 123 Accounting for Stock-Based Compensation. This was controversial, although the debate focussed on the politics rather than the correct accounting treatment.
In the end, the FASB didn’t make it compulsory for companies to recognise stock-based compensation in accordance with FAS 123.
However, FASB continues to believe financial statements would be more relevant, and representationally faithful, if the fair value of employees share options was included in the profit and loss account, just as all other forms of employee remuneration are included.
Many people argue that recognising an expense will cause the demise of employee share schemes. If that is so, it suggests the only reason we have these schemes is to allow companies to pay their employees without having to account for it! These deals should stand or fall on their own economic merits – not on the basis that the accountant has looked the other way.
Because this is an international issue, we worked with other members of the G4+1 group of standard-setters to develop the discussion paper on share-based payment. All members of the G4+1 are publishing our paper at the same time. This will help us when it comes to developing an accounting standard based on the paper’s proposals, as we will be able to consider international views in addition to the UK responses. And we are expecting quite a few of those!
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