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One of the longest-running accounting controversies
is finally over – at least in Singapore. From
next year, companies which offer share options to
employees will be required to value and expense the
cost of those incentive packages to the profit and
loss (P&L) statement under FRS 102 on Share Based
Payment, issued by the CCDG (Council of Corporate
Disclosure & Governance) recently.
Simply put, Singapore's accounting requirement is
now consistent with the existing equivalent International
Financial Reporting Standard (IFRS) issued by the
International Accounting Standards Board (IASB) and
is closer to the US FASB (Financial Accounting Standards
Board) treatment of these rewards packages. This is
a step forward in enhancing corporate transparency,
but it won’t be straightforward for people to
understand how expenses relating to share options
are arrived at.
These expenses will be based on the fair value of
the share options at the date of the grant, multiplied
by the number of share options vested after each relevant
period. One of the most difficult issues in applying
FRS 102 will be determining the fair value of share
options at the date of the grant. Different models
and assumptions can generate different values, so
the subjectivity and volatility of profits, EPS (earnings
per share) figures and directors' remuneration can
be expected to increase.
Companies issuing stock options will also find that
the cost of accounting and reporting the fair values
of the options they grant will increase because, in
order to calculate the value, experts will need to
analyse historical data and project this data for
years ahead.
Key issues
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Companies will have to balance the use of static
models that might give unrealistic estimates with
more dynamic pricing models that may not be cost
effective. |
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Different groups of employees may behave differently
when it comes to exercising share options, so
the value of a share option granted to the CEO
may be different from that granted to an office
supervisor. |
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The valuation of share options for non-listed
companies may actually be more time-consuming
and incur more accounting costs than for listed
companies. Pricing models require the input of
underlying share prices, but this information
is not readily available for unlisted companies.
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The adoption of the accounting standard will inhibit
companies from using stock options liberally because
their bottom line will be affected. Some companies
are already cutting back on issues of stock options
to employees, but if these stock options are replaced
with cash incentives, cash flows may be adversely
affected.
If management instead chooses to reduce employee
incentives across the board, staff morale may be adversely
affected. Hence, the alternatives to share-based payments
have their own drawbacks. Companies must re-examine
their incentive packages for employees to address
the various adverse issues that can arise from implementing
the Standard. Flexible remuneration in the form of
‘benefits-in-kind’ may also be worth considering.
THIS ARTICLE IS REPRODUCED COURTESY OF SMART INVESTOR
MAGAZINE
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