Stock Option Expensing Rule Adopted By EC

by Ulrika Lomas, for LawAndTax-News.com, Brussels

10 February 2005

The European Commission announced on Monday that it has adopted a Regulation endorsing International Financial Reporting Standard (IFRS) No. 2 on Share-based Payment.

The approval of IFRS 2 means that companies will need to reflect share-based payments, including stock options for staff, more clearly in their accounts. In the past, those transactions were not recognized in firms' income statements but were disclosed separately in the notes to the accounts.

However, expensing stock options in income statements is likely to have some impact on the reported earnings of affected companies.

Speaking following the adoption of the new standard, Internal Market and Services Commissioner Charlie McCreevy explained that:

“Endorsement of IFRS 2 is very much in the interest of European capital markets and European investors. 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."

"IFRS 2 will improve the quality of financial reporting by giving financial markets a clearer and more complete picture of a company’s transactions."

The Commission revealed that it will monitor the future effects of IFRS 2 on European companies and review the applicability of the standard by July 2007.

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