Accounting for Share Based Payments - the Effect on Employee Share Schemes

At present employee share options and other employee awards are accounted for only on the basis of any "intrinsic value" i.e. the difference between the market value of shares awarded to employees and the price they will eventually pay for them. If options are granted at market value there is no discount and no charge to the P&L account. Under important new proposals¹ supported by international accounting standard setters, it is expected that in future options and awards will be accounted for on their "fair value" at the date of grant. This will mean valuing the option, usually by reference to an option pricing model, and charging the fair value to the P&L account over the award period. For companies which presently grant options at the current market value of their shares, this will mean a new P&L charge. This charge to P&L will also apply to SAYE schemes for which at present there is an exemption. This briefing considers the scope of the proposals and some possible effects on