Share Based Payment GEO debate 10 January 2002

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Share Based PaymentGEO debate 10 January 2002

• Alan M Judes

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What happened to July 2000 discussion paper?

• G41 became an IASB project
• paper reissued in name of IASB
• working towards an exposure draft
• Political pressure
• Financial pressure senators writing to chairman
  of trustees
• Standard Poors until IASB reports there will
  be charge for share based payments
• ABI/NAPF/FMA strongly supportive of paper

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Current Opinions

• IASB Agenda - top of agenda, series of
  consultation meetings ending 15 December 2001
• AIMR Survey - disclosure/expense required
• FEI Lobbyists - Financial Executives
  International - spent 75m against FAS 123
• European Union - want a standard to be applied
  in EU
• South African consultation

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Overview of G41 Proposals

• Recognition of transaction
• Measurement basis
• Measurement date
• Allocation over performance period

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No Cost Therefore No Charge

• For new issue shares theres no cash paid out
• But there is a transaction
• - the purchase of employee services
• - the issue of an equity investment
• Other non-cash, share based transactions are
  recognised e.g. business transactions
• There is a cost to shareholders

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Warren Buffett

• If options are not a form of compensation, what
  are they?
• If compensation is not an expense what is it?
• If expenses should not go into calculation of
  earnings, where should they go?

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OK its Employee Remuneration, but

• EPS is hit twice - numerator and denominator
• so it should be, company can issue shares and pay
  appreciation to employee
• Adverse economic consequences inhibit
  incentives and increase taxes
• accountants simply report what happens
• truth and fairness in financial reporting

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Significance of Issue

• Pervasiveness 499 of Fortune 500
• Truth in reporting good disclosure does not
  make up for poor accounting
• Corporate Governance
• Best deal for investors many UK companies get
  zero tax deduction

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Measurement Basis

• Historical cost
• Intrinsic value
• Fair value
• option pricing model
• non transferability
• unlisted companies

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Measurement Date

• Paper supports vesting date
• Grant date
• Service date
• Vesting date
• Exercise date

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Allocation of Charge

• Accrue over performance period
• Estimate at balance sheet date
• Include in equity (shareholder funds)
• Finalise at vesting date

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Other Issues

• Lapsed options
• Re-pricing
• Cash alternatives
• SARs
• Other forms of share based payment

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Discussion in Johannesurg last month

• Recognise? - generally very much in favour
• Fair value measurement? - yes
• Option pricing models? - yes
• Vesting date vs other dates? - argument
• Accrual over performance period? - yes

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Final slide!

• Why do companies grant options to employees?
• attract, retain, reward, motivate, pay in
  non-cash form
• How should one account for the transfer of value
  of assets to employees?
• as a charge against income