The Full Share Scheme Service: Disclosure in Accounts

Posted by admin at 15:51 on 13 Feb 2017


When a Company grants share is it necessary to disclose this event in the Company's accounts. The level of disclosure required depends on whether the Company has adopted Financial Reporting Standard for Smaller Entities (FRSSE) accounting standard, or whether it is required to report under FRS20/IAS2.

For FRSSE companies a disclosure of the options granted in the year must be shown in the accounts.  It is necessary to provide a breakdown of the number of options granted, the grant date, the exercise price, the performance conditions and the number of employees involved.

A simple table will suffice:

EMI Options

For those Companies who are not eligible to adopt FRSSE, the options must be expensed to P & L in addition to providing the relevant disclosure.  We have previously written a blog on why we believe this artificial expense to be wrong (please see here).

In effect, the calculation is applying a cost to the company for granting options.  Factors to take into consideration include; the exercise price, performance conditions attached to the options, and when the options may be exercised.  In relation to the cost of the options, the biggest factors include; the volatility of the company (if quoted) or comparators, any dividends being paid, and the price paid for the option in relation to the price agreed with HMRC.

If a company does not report under FRSSE, the implications of nil cost options, should such an award be desired, must be considered from the outset.  The impact would be the full 'cost' of the options needs to be expensed in the financial year in which the option was granted.

A Company's auditors are not able to assist with options expensing as they will not be able to create and audit their own numbers. We at RM2 therefore work with a number of companies and accountants to provide this reporting information.  Our reports are prepared using option pricing models, principally the Black-Scholes-Merton method, and include the figures that need to be expensed over the life of the options. This means you only need to pay for the option expensing service once (unless you grant new options or option holders leave).

A share option will have a positive value if the exercise price is less than the fair value of the underlying share.  An option may also have a positive value if the exercise price is equal to or more than the fair value of the share.  This is because an option is a right but not an obligation to purchase.  It can therefore never have a negative value.  In almost every case there will be some chance, however small, that the value of the underlying share will rise above the exercise price of the option, and thus the option will have a positive value.

Tax relief is available in the UK for the cost of share incentives when the benefits are released to employees through a statutory share scheme or where the benefits are subject to income tax and national insurance contributions. The Accounting Standards Board has launched a consultation on the future of share based payment accounting for unquoted UK companies. The consultation closes on 31 July 2013 and we will update our guidance once the outcome of the consultation is known. Amongst possible changes considered are (i) the complete abolition of the accounting expense for equity-settled share based payments for unquoted companies on the grounds that the calculation of the expense is too artificial and (ii) its replacement with an enhanced disclosure regime for equity based awards, such as options. To view the full consultation, please see here.

If you would like to discuss your requirements please call the RM2 team on 020 8949 5522 for more information.