Employee share ownership schemes may cost companies much more if proposals from the Accounting Standards Board are accepted.
The reason is because the Urgent Issues Task Force (UITF) of the ASB has signalled a clampdown on companies charging shares issued under employee share schemes to the profit and loss account at nominal value.
Currently the law allows shares allocated to employees to be recorded at nominal value, which may be a fraction of their true value. Andrew Lennard, technical director of the UITF said: ‘The profit and loss account should be charged with the fair market value of the shares issued rather than the nominal value.’
The ASB proposals are believed to be a response to the recent rise in so-called ‘cowboy consultancy firms’ selling employee remuneration schemes, which exploiting the gap in the law, and can be interpreted as another step in the direction of valuing options at market value.
ASB chairman Sir David Tweedie said: ‘We just want companies to tell the truth, by recognising the opportunity cost of giving shares to employees and directors.’
The Greenbury Committee’s pay guidelines have encouraged increases in of share awards, either through annual bonuses or longer term incentive plans as an alternative to share options.
The UITF’s measures will also cover share options issued to employees at a discount. It is proposed that the discount be charged to the profit and loss account over an appropriate time period. This will have an impact on SAYE schemes, where the exercise price is normally at a 20% discount to the market.
The proposals are unlikely to affect executive share option schemes as Greenbury came out against executive share options ever being issued at a discounted price.