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IFRS2/FRS20 - Accounting For Share-Based Payments
Just when you thought you had got to grips with FRS17, along comes IFRS2 and FRS20.
IFRS2 and FRS20 are new accounting standards which require a value to be placed on share-based payments and shown as an expense in the Profit & Loss account. Share-based payments include all types of share awards such as stock options, share grants under long term incentive plans and employee share save schemes.
IFRS2 (International Financial Reporting Standard 2) is the new international accounting standard covering share-based payments. IFRS2 is effective for accounting periods beginning on or after 1 January 2005.
FRS20 (Financial Reporting Standard 20) is the equivalent UK accounting standard and has the effect of implementing the requirements of IFRS2 for UK companies that do not already prepare their financial statements in accordance with international accounting standards. For listed companies, FRS20 comes into effect for accounting periods beginning on or after 1 January 2005. For unlisted companies, FRS20 comes into effect for accounting periods beginning on or after 1 January 2006. Companies applying the FRSSE (Financial Reporting Standard for Smaller Entities), i.e. small companies, are exempt from FRS20.
IFRS2/FRS20 will have a major impact on Profit & Loss accounts for those companies that have historically excluded these types of award from their financial statements.
Companies should consider the impact of the new accounting standard as soon as possible. Calculations will need to be carried out now in order to produce realistic budget figures for next year together with suitable prior year comparative figures.
The basic principle is that share-based payments must be assessed by reference to "fair value" using an option pricing model which takes into account expected future movements in the company's share price. As well as carrying out the necessary calculations, Barnett Waddingham LLP can advise on the choice of underlying assumptions and the sensitivity of the results to a change in these assumptions. We can also prepare the necessary disclosure information required by the new accounting standards.
If you need any help or advice please speak to your usual Barnett Waddingham consultant. Alternatively, please call Jon Bridger, Nick Griggs or Matt Tickle on 01242 538500.
Barnett Waddingham LLP, November 2004.