Companies giving stock options to their employees to retain them are expected to see a drop in their profits as they adopt international accounting standards.
The International Financial Reporting Standards (IFRS) that companies have to adopt from April 2010 require them to value the cost of employee stock options as per their fair value and charge for it over the service period. That is, if the share price moves above the price at which the employee is given a right to purchase, then the option value, multiplied by the number of shares, has to be shown in the company’s profit-and-loss account as a cost, explained PricewaterhouseCoopers partner Sunder Iyer. This has the potential to reduce the company’s profitability and earnings per share significantly, accounting experts said.
Companies now have the option to value their Esops as per their fair value, but most of them do not do that since they have the option not to. But once the IFRS becomes mandatory, they lose this option.
Although the right to purchase the share was given at a price close to the market price on that date, they did appreciate over a period of time. This appreciation has made the employee stay with the company. Although the company has not given any discount on the date when the employee has exercised the option, he did benefit from its appreciation.
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The International Financial Reporting Standards (IFRS) that companies have to adopt from April 2010 require them to value the cost of employee stock options as per their fair value and charge for it over the service period. That is, if the share price moves above the price at which the employee is given a right to purchase, then the option value, multiplied by the number of shares, has to be shown in the company’s profit-and-loss account as a cost, explained PricewaterhouseCoopers partner Sunder Iyer. This has the potential to reduce the company’s profitability and earnings per share significantly, accounting experts said.
Companies now have the option to value their Esops as per their fair value, but most of them do not do that since they have the option not to. But once the IFRS becomes mandatory, they lose this option.
Although the right to purchase the share was given at a price close to the market price on that date, they did appreciate over a period of time. This appreciation has made the employee stay with the company. Although the company has not given any discount on the date when the employee has exercised the option, he did benefit from its appreciation.
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