The proposed introduction of a new accounting standard which will change the way companies account for share-based remuneration of employees has prompted many local companies to review their existing employee benefit arrangements, according to professional services firm, Deloitte & Touche.
New accounting rules are catalyst for change in employee benefit arrangements
Simon Kite, a director at Deloitte & Touche in Cambridge, said: 'For some time now, companies have been using share-based payment schemes as part of their employee benefit packages. But this may well change if the new accounting standard comes into force as expected on 1 January 2004. Whilst this may seem some time away, a built-in retrospective element proposes that share options granted after 7 November 2002 will be within the new rules - the time to act is now.'
The aim of the proposed new accounting standard is to assign a fair value to share-based payments to ensure that the financial statements properly record the value of services received from employees. Previous accounting practice had been favourable in respect of the use of options. For example, no cost would normally be charged to the profit and loss account if the exercise price was set at the fair value of the underlying shares at the grant date. But under the proposed new standard, those options would be valued using an option pricing model, such as that developed by Black-Scholes.
'The upshot is that the company's accounts will have to record a cost to the business in the Profit and Loss account that may be quite different to the charge recorded under current accounting standards. It's not surprising that this has caused alarm because for many businesses the cost could be significant, particularly given the fact that the valuation will increase according to volatility - the performance of the equity markets over the last year will heighten these fears,' added Mr Kite.
Mr Kite also highlighted other problems that could be caused by the intended option pricing models, especially where private companies were concerned. Given that their shares are not publicly traded, information necessary for inputting into the pricing model would not be readily available, said Mr Kite. This was likely to cause their finance staff one or two headaches.
There was, however, some good news for companies expecting to feel the force of the new standard: 'It's certainly worth companies re-visiting the funding arrangements that they have in place for share plans, as there can be some areas to capitalise on,' Mr Kite continued. 'For example, using existing shares rather than newly issued shares for historic awards can enhance Earnings Per Share. We are also helping companies to deliver more targeted rewards in place of the volatile 'all or nothing' awards, such as options. It is possible to deliver something which is more attractive to the employee, but which actually costs the employer no more than existing share option schemes.
'Companies should also welcome a recent tentative decision by the International Accounting Standards Board to change the draft standard so that it aligns more closely with the US equivalent. As a result, a charge would only be expensed for options that vest. Under the previous draft, a cost would have been recorded even if none of the options were exercised,' added Mr Kite. The UK Standard, when issued, is likely to mirror the international equivalent.
Further information on the impact of International Accounting Standards on UK businesses can be obtained from Simon Kite at firstname.lastname@example.org or from the web-site www.iasplus.com
Notes to Editors
Deloitte & Touche
Deloitte & Touche is the UK's fastest growing major professional services firm based in 23 UK locations, with over 10,000 staff nationwide and fee income of 713.6 million in 2001/2002. It is a member firm of Deloitte Touche Tohmatsu, a leading professional services organisation, delivering world class assurance and advisory, tax and consulting services, with around 120,000 people in over 140 countries. Deloitte Touche Tohmatsu is a Swiss Verein, and each of its national practices is a separate and independent legal entity.
Deloitte & Touche is authorised and regulated by the Financial Services Authority. The information contained in this article is correct at the time of going to press. For further information on Deloitte & Touche, you can access our website on www.deloitte.co.uk
The Deloitte Cambridge office comprises 8 Partners and over 250 staff who deliver a full range of professional services to the East Anglian region. As well as focussing on the life sciences and technology sectors for which the region has become so renowned, the office has long standing specialisms in other sectors including the professions, consumer business, food and agribusiness.