New EU stock option rule likely to hit profits

Companies in the European Union will have to treat stock options to management and employees as an expense this year, hitting company profits, the EU executive said yesterday.

Stock options - the right to buy or sell shares at a set price at a future date - have not been counted as a cost in income statements so far and only shown in notes to accounts.

The EU Executive Commission yesterday adopted the disputed International Financial Reporting Standard (IFRS) No 2 on share-based payments.

The move was expected after EU member-states, on December 20th, almost unanimously backed the standard.

"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," according to the internal markets commissioner Mr Charlie McCreevy.

"In future, 'expensing' stock options in the income statement will have some impact on reported earnings," the EU Commission added in a statement.

Stock options have been hugely popular in sectors such as information technology, telecoms and pharmaceuticals.

The United States is also going to require companies to treat options like business expenses, despite fierce opposition by its high-tech industry.

The IFRS 2 accounting standard does not specify how firms should value stock options.

However, the commission said it would keep an eye on the impact of the accounting rule on EU firms and that it would review the standard by July 2007 at the latest.

The endorsement of IFRS 2 is part of a package of new international financial reporting standards that thousands of companies within the European Union are due to have started using from January.

IFRS 3, another key standard on how to calculate goodwill after a merger, is due to be adopted in the coming weeks, commission spokesman Mr Oliver Drewes said.

"IFRS 3 is still outstanding and it's due shortly," Mr Drewes told a daily news briefing. However, he did not give a firm date.

The expensing of stock options is among the accounting novelties likely to affect European Union companies' profit and loss accounts.

Two other key changes are a requirement to account pension liabilities and a new way to calculate goodwill.

Large companies such as Microsoft and Coca-Cola have already started to expense stock options in anticipation of the new accounting measures. - (Reuters)