IASB’s new standard – ED2 Share Based Payment – would require companies to estimate the fair market value of stock options from the date of grant. Companies would then have to disclose how they arrived at the fair value measurement.
The estimation would then be deducted from company profits.
Stock options that are repriced would also be accounted for. The proposal would recognize the repricing as an additional expense, based on the incremental value provided.
Option expensing is expected to have an impact on the overall financial markets. Companies composing the S&P 500 would have seen net income totals 30% lower if option expensing had been in effect in 2001, according to Dresdner, Kleinwort, Wasserstein. US technology would have felt an even greater pinch, with net income figures being reduced by as much as 75% in 2001, according to the estimation.
US accounting standards do not currently require the expensing of stock options. However, the Financial Accounting Standards Board (FASB), the body responsible for setting US standards, is considering possible changes to its current stock option accounting.
IASB is inviting comment on the proposal until March 7, 2003. For more information or to obtain a copy of the full proposal go to www.iasb.org.uk .
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