New accountancy standards proposed on the treatment of share based payments

On 7th November 2002, the International Accounting Standards Board (IASB) published its exposure draft, ED2 containing proposals on how entities should account for share-based payment transactions. The Accounting Standards Board of the UK (ASB) shadowed the proposals with the publication of its own Financial Reporting Exposure Draft (FRED 31).

Companies in the UK have for some time been issuing shares and share options to their directors and employees under various schemes (such as share purchase plans, and save as you earn schemes). Increasingly, it is becoming common for new companies and business start-ups to use shares and share options to pay for goods and non-employee services.

Currently, there is no UK accounting standard or internationally agreed standard detailing the accounting treatment to be adopted for goods and services received by companies and the shares and share options issued. Briefly, the IASB and ASB propose the following:

• Share based payment transactions involving grants of shares or share options to employees should be accounted for in the same way as other transactions in which an entity receives resources as consideration for its equity instruments. This would mean that when an entity receives goods or other services in exchange for a share based payment, it should recognise an expense.
• Share based payments should be recognised in the financial statements on a fair value measurement basis over the period that services are rendered or goods are received.
• All UK entities should be required to prepare their financial statements in accordance with the proposed standard.
• The new standard should apply in the UK for accounting periods beginning on or after 1 January 2004.
• Certain existing standards will be withdrawn or amended in consequence.

Both the IASB and ASB welcome comments on the proposals by 7 March 2003.

For further information, please contact:

Kate Kelleher, Share Schemes Partner,
at [email protected] or
on +44 (0)20 7367 2860