The international accounting standard on share-based payments ‘IFRS 2’, implemented in Australia via the standard ‘AASB2’ will come into effect for financial years starting on or after 1 January 2005. The provisions of the standard itself have been well documented, but the impact on Australian companies’ remuneration strategies has not yet become clear.

AASB 2 brings challenges and opportunities for Australian companies, and also a focus on securing the best value for money in the choice of incentives given the company’s history, environment, culture and objectives.

What are the challenges?

• complicated methodologies for valuing share based payments.
• risk management issues – errors in the valuation calculations may have unforseen impacts on a company’s results
• a need to obtain input from various functions (e.g. financial, treasury, tax, human resources, investor relations) to reach the most appropriate solution
• increased disclosure requirements and the shareholder vote on executive remuneration become effective for financial years starting on or after 1 July 2004.

What are the opportunities?

• minimising cost – considering alternative forms of award which may result in a lower accounting expense for perhaps better value, for example using “Performance Shares” rather than share options
• minimising dilution and impact on Earnings Per Share (“EPS”) – considering incentives that require fewer shares to deliver the same economic value
• assessing the most appropriate way to deliver shares – new issue or market purchase
• the increased corporate governance requirements provide an opportunity for companies to make a positive statement to their shareholders about the commercial rationale behind their executive remuneration strategies.

Act sooner rather than later

Many companies are undertaking a careful review of current arrangements, looking at the form of incentive used, structure of awards, method of delivery of shares and their alternatives. Options are no longer the ‘cheap’ way of incentivising employees so companies should model the impact of AASB2 both on current incentive plans, in terms of outstanding incentives and the anticipated level of future awards and on alternatives that could be implemented. Potential accounting expense, impact on dilution and EPS should all being considered.

The use of performance conditions also impacts on this decision - would market based or non-market based conditions better suit the culture of the company and its approach to expensing?

After deciding which form, structure and financing alternative is most appropriate for them, companies should look at the practicalities and transitional issues, such as amendment of documentation, and assessment of the impact of AASB2 on the likelihood of meeting existing EPS performance targets.

Finally, companies will need to assess which key messages and decisions from this process should be delivered to shareholders to effectively communicate their remuneration strategy.

Get to grips with the detail

Deloitte’s global team of equity and remuneration specialists are currently assisting organisations in various countries, including Australia, to review and assess the most appropriate solution.

For a detailed look at IFRS including up-to-date news, visit our specialist site on IFRS or contact one of our experts: