The European Union announced Monday it would begin immediately enforcing new accounting rules that require listed companies to book employee stock options as current expenses. The rule was endorsed last December by the 25 EU governments. This week the European Parliament and the European Commission approved the measure, clearing the way for instituting the new method of accounting. Previously companies were only required to disclose stock options in notes to the financial statements.
The Associated Press reports that the new rule is retroactive to January 1, 2005. Approximately 8,000 European companies are affected by the ruling. Technology and telecommunications companies may be hardest hit as those types of companies rely heavily on using stock options as incentives.
Charlie McCreevy, EU internal market and services commissioner, stated, "Granting stock options can be a very effective way for companies to motivate managers and staff, but like any other form of remuneration, it has to be considered as an expense."
The new ruling, International Financial Reporting Standard (IFRS) No. 2 on Share-based Payment, does not specifically state which valuation models should be used for stock options, but does describe the factors that should be taken into account when estimating the fair value of such payments. Additional clarification is expected to be issued by the European Commission within the next two years.
The Financial Accounting Standards Board (FASB) in the United States is preparing to implement a similar requirement in this country. The option-expensing rule is set to become effective for financial statements dated after June 15, 2005. FASB has been working closely with the International Accounting Standards Board (IASB) to create global standards for valuing stock option.