The Accounting Standards Board (ASB) is an independent regulatory body. It has the power to set accounting standards. It is thought that it will issue proposals next year requiring companies to reflect the true cost of issuing share options to staff (directors and employees) in the annual profit and loss account. This move is generally likely to be unpopular as the net profit will have to be reduced. The corporate taxation impact of this is at yet unclear. The ASB views are,as yet, unfinalised however it seems highly likely that some form of provision will be introduced supported by the view that share options form part of the remuneration package and should be accounted for accordingly.
Broadly speaking share options are rights to buy equity shares at a fixed price in the future (rather like warrants). If a company grants share options at £1 it will not incur any cost if the share price is £1 (even if the staff sell the shares at a profit in due course). The ASB is likely to say that allowing staff to exercise share options at a level below the share price current at the time the option is exercised is really an opportunity cost forgone ie. the staff gain the difference at the expense of existing shareholders.
If companies lobby the ASB it is possible that it may water down the proposals by allowing the companies to choose whether to implement the measures or not. If a choice is made available it is likely that only a minority of companies will implement the measures.
In a time when the encouragement of share schemes and profit sharing is apparently high on the Chancellor`s agenda some may consider these proposals ill timed. Abbey National, for example, stated that implementation of the ASB proposals would have a substantial impact on profits causing companies to rethink their whole strategy over shares.
Despite this, and in advance of these provisions, Boots announced earlier this year that it would voluntarily take a £63 million charge to cover its current share option scheme. This is a space definitely worth watching for those involved in advising on employee benefits.