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Accounting for share-based payments

Martin Howard looks at whether it's time to rethink accounting for share-based payments in private companies under UK GAAP.

Attempting to explain to (non-accountant) directors of a private company why there is an expense in the financial statements for something that will never cost the company anything is a conundrum that many accountants in practice and finance directors will be familiar with. Explaining the charge isn’t tax deductible either seems to only add to their confusion. The cause of this challenge? Share-based payments.

It is, of course, not impossible to value an option; the tools are there and have been used for many years. But given the level of judgement and estimates involved, and the lack of data on which to base such a valuation, is the end result meaningful, or indeed reliable, for the average user of private company financial statements? Whisper it quietly, but is this ‘valuation’ no more than a series of guesses, with the output being given an air of respectability by the use of a complicated mathematical model? As a profession, should we be asking ourselves whether, if the concept is so abstract and technical that only a qualified accountant with a good grasp of mathematical models can understand it, is it relevant?