Share option communication critical

NEW RULES on executive option schemes will push stakeholder communications up the priority list for many Australian companies, according to PricewaterhouseCoopers.

Under the new international financial reporting standard (IFRS 2, share-based payments) from January 2005 Australian companies will be required to expense share option schemes at fair value. Currently, they’re only required to disclose the fair value of options granted to directors and certain key executives, without recognising an expense.

The standard means companies will need to clearly communicate the impact of this expense, according to Regina Fikkers, a financial reporting standards partner at PricewaterhouseCoopers.

“For the first time, shares and options issued to executives will hit the bottom line. The impact on profits may be substantial, so stakeholder communication is a crucial issue for management – and one they should address early,” she said.

“Analysts will show a keen interest in the amounts that will appear in the income statement to help them evaluate the accuracy of market perception.”

PricewaterhouseCoopers suggested that companies may need to move quickly to determine the standard’s likely effect before the implementation date of 1 January 2005.

Australian companies with share-option schemes will need to understand the scope of the standard and determine the data requirements, said Fikkers, with different companies being impacted in different ways.

For larger companies, implementation will be especially complex for senior executives’ share-option awards that contain individual performance criteria.

For smaller companies which operate a simple employee share scheme, the new rules will require any associated trusts to be consolidated by the employer.

In valuing options and other option-like instruments to calculate the expense under IFRS2, companies will not have to use any specific option valuation model, but will need to apply a generally accepted valuation technique and make allowances for factors that market participants would apply in valuing these options, according to Richard Stewart, a valuation and strategy partner at PricewaterhouseCoopers.

Fikkers said that stakeholders and the market should welcome the increased transparency on share options, as it will enable the market to compare like with like.