London (Feb. 23, 2004) -- The International Accounting Standards Board issued a draft rule this week that requires companies that follow international accounting standards to expense stock options.

The standard, International Financial Reporting Standard 2, Share-based Payment (IFRS 2), requires companies to reflect in their profit or loss and financial statements the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees.

Prior to Thursday, when the rule was issued, there was no international accounting standard covering the recognition or measurement of share-based payments. According to the board, “The omission of expenses arising from share-based payment transactions with employees” caused “economic distortions and corporate governance concerns” among users of financial statements. “The issue of IFRS 2 fills this gap in international standards,” the board noted in announcing the standard.

“Typically, transactions in which share options are granted to employees are not recognized in an entity’s financial statements,” said IASB chairman Sir David Tweedie. “As a result, the entity’s expenses are understated and its profits are overstated, which is potentially misleading to users of financial statements.”

While the debate over option expensing has run for decades, the tide may be turning. The Canadian Accounting Standards Board in December passed a rule requiring expensing for all public company employee stock-based compensation awards. That rule took effect Jan. 1, making Canada the first major jurisdiction to require option expensing. The IASB’s U.S. counterpart, the Financial Accounting Standards Board, is expected to issue its own exposure draft on stock options shortly. And in recent years, several major U.S. companies, including Coca-Cola, H&R Block, American Express and Neuberger Berman Inc., said that they would start expensing the cost of stock options.

-- WebCPA staff

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