When a company issues shares to acquire an investment in another entity, everyone accepts that the acquirer has incurred a cost that should be recognised in the financial statements at fair value. Yet, when shares are issued to acquire goods and services, a cost measured at fair value is often not recognised in the profit and loss account. And, when employee services are involved, a fair value cost is rarely recognised.

The ASB is strongly of the view that this anomaly needs to be eliminated and that the way to do that is to change the existing accounting treatment of share-based payments – in other words, of employee share options, employee share purchase plans and other share-based payments made for goods and services.

That view is shared by standard-setters around the world. It is, furthermore, a view that is shared by users, who argue that the absence of a consistent approach to, and an appropriate profit and loss account charge for, share-based payment transactions is affecting the usefulness of financial statements.

In the last few years the ASB has been at the forefront of the work being carried out to address these concerns, and its staff prepared the G4+1 Discussion Paper ‘Share-based payment’, which was issued in July 2000.

Since 2001, the IASB has been leading the debate, and publication of an exposure draft of a proposed international standard on the subject is now imminent. The principles underlying the proposed international standard are as follows:

• The standard should apply to all share-based payment transactions, including all employee share option schemes, all SAYE-type arrangements, all stock appreciation rights and similar arrangements, and all share-based payment transactions involving goods and non-employee services.
• Where an entity enters into a share-based payment transaction that involves the receipt of goods or services, it should recognise the goods or services received in the financial statements either as assets (if the asset definition is met) or as an expense.
• The goods or services received should be measured at fair value. In particular, where the consideration given in exchange for the goods or services is an equity instrument, the grant date fair value of that equity instrument should be used and no adjustments should be made for changes in that fair value after the grant date. Where the consideration given in exchange for the goods or services is the acceptance of a liability, the vesting date fair value of that liability should be used. (It is worth noting here that the G4+1 paper concluded that the vesting date fair value should be used in all cases.)
• The share-based payment expense should be recognised over the period in which the services involved are rendered or as the goods involved are received.

On the day the IASB issues its exposure draft, the ASB will issue its own exposure draft, FRED 31 ‘Share-based Payment’. FRED 31 will invite comments on the IASB’s draft standard and will set out proposals for the implementation of the international standard in the UK. The ASB will be proposing in the FRED that a UK standard identical to the international standard should be implemented in the UK for accounting periods beginning on or after 1 January 2004 (the proposed implementation date of the international standard).

On implementation of that UK standard, existing UITF Abstracts on share-based payments – including UITF Abstract 13 ‘Accounting for ESOP Trusts’, UITF Abstract 17 ‘Employee share schemes’, and UITF Abstract 30 ‘Date of award to employees of shares or rights to shares’ – will be withdrawn. Consequential amendments may also need to be made to UITF Abstract 32 ‘Employee benefit trusts and other intermediate payment arrangements’.

FRED 31 will have a 120-day comment period