The International Accounting Standards Board (“IASB”) has maintained its position by insisting that companies take a charge against profits for share options which are cancelled by employees and result in no actual cost to the employing company.
The IASB has refused to listen to objections from the UK’s Accounting Standards Board (“ASB”) which declared this accounting treatment “harsh, if not penal” in relation to savings related share option plans (“SAYE plans”).

The issue

Broadly, under an HMRC approved SAYE plan, employees enter into an SAYE savings contract to save a fixed amount over three or five years. An option is granted at the outset over the maximum number of shares (based on the share price at the time of grant) which may be acquired with the total savings and bonus which is payable at the maturity of the savings contract.

An approved SAYE plan has three features which generally make it attractive. First, the options may be granted at up to a 20% discount to the market value at the time of grant. Secondly, any gains on the exercise of the option will normally be free of income tax. Thirdly, the bonuses payable under the SAYE savings contract are tax-free.

Under IFRS 2, companies have to estimate the value of options on grant and spread the cost over the period until they vest. Employees may stop making their monthly contributions for a variety of reasons resulting in the SAYE options lapsing.


Logic would suggest that if an employee stops saving under an SAYE savings contract say two years into a five year option with the result that the connected share option lapses, the company should be able to write back two-fifths of the estimated costs that it has taken against profits. However, under the IASB’s exposure draft, the company cannot reclaim the two-fifths and has to expense the other three-fifths of the costs immediately, even though no shares will ever be issued.

Illogical to many

The IASB has rejected criticisms of this rule by making a distinction between the cost of options and the cost of buying an employee’s services. They say that the company’s overriding goal is to ensure that the costs of an employee’s services are reported in the accounts. The expense of share options should be viewed as a proxy for that cost, rather than an accounting objective in itself. The cancellation of an SAYE contract does not, they say, alter the fact that the company has bought the employee’s services and needs to account for that “transaction”.

Bad news for SAYE

Many companies that operate an SAYE plan may withdraw them unless the IASB back down. With the Government keen to encourage employee share ownership and with 2,200,000 million UK employees currently participating in an SAYE plan; it is difficult to see how the IASB can maintain its position.

Prolonging the agony

The IASB has admitted that the final ruling on this issue could be delayed as late as the fourth quarter of this year. The Board says that it will extend the project to clarify the definition of performance targets and the treatment of all non-vesting conditions. The IASB envisages two outcomes: publication in the second quarter of a final amendment based on a revised Exposure Draft; or the issue of a revised Exposure Draft before publishing a final amendment towards the end of the year.

However, there may be a glimmer of hope. Under IFRS2, where a non-market based performance condition applies and the condition is not met, the accounting charge is cancelled and any charge already taken is added back.

If companies require participants to continue to save as a condition of being able to exercise the option and they then stop saving, the option will lapse due to a failure to meet a non-market based performance condition. If the company’s auditors accept this analysis the accounting charges could be reversed.