IFRS2
Accounting standards for stock options adopted

Share-based payments such as stock options - often used as a management incentive - are to be treated in future as expenses as far as company accounting is concerned. The Commission has adopted a Regulation which endorses the International Financial Reporting Standard (IFRS) No. 2 on Share-based Payment. IFRS 2 means that companies will need to reflect share-based payments, including stock options for staff, more clearly in their accounts.

The text was supported almost unanimously by the Member States at the Accounting Regulatory Committee (ARC) in December and by the European Parliament. This standard belongs to the so-called stable platform of accounting standards which all listed European companies will need to use, as they move to international accounting standards from January 2005.

Expense treatment

Granting stock options can be a very effective way for companies to motivate managers and staff, but like any other form of remuneration, it has to be considered as an expense. IFRS 2 aims to improve the quality of financial reporting by giving financial markets a clearer and more complete picture of a company’s transactions. It requires for the first time that companies reflect in their income statements the effects of share-based payment transactions, including expenses associated with granting stock options to management and employees.

In the past, those transactions were not recognised in the company’s income statements but were only disclosed separately in the notes to the accounts. In future, “expensing” stock options in the income statement will have some impact on reported earnings.

IFRS 2 does not specify which valuation models for stock options should be used. As a principle-based standard, it only describes the factors that should be at least taken into account when estimating the fair value of share based payments.

The Commission will monitor the future effects of IFRS 2 on European companies and review the applicability of the standard by July 2007 at the latest.

The standard applies for annual accounting periods beginning on or after 1 January 2005 for listed companies in their consolidated accounts. For equity-settled share-based payment transactions, the entity shall apply this IFRS to grants of shares, share options and other equity instruments that were granted after 7 November 2002 and had not yet vested at the effective date of this IFRS.

Thus, for most companies the standard will apply for the 2005 accounts to be published in 2006.

For further information
http://ec.europa.eu/internal_market/accounting/ias_en.htm