Accounting Treatment Of Options Adopted By Listed Companies In China

Recently, some media have approved that the SFC and the Ministry of finance have agreed on the accounting principles for the implementation of equity incentive in listed companies, and specific measures will be introduced soon.

In the second batch of non tradable share pilot companies, Zhonghua International and other listed companies have implemented the equity incentive plan.

After the share reform is launched, there will be a minority of listed companies with equity incentive plans.

Therefore, the relevant accounting standards should be solved urgently.

We estimate that the Accounting Standard No. XX - stock option (hereinafter referred to as "stock option") should be completed and drafted. The reason why it has not been released is due to the lack of relevant laws and regulations.

Therefore, once the stock market incentive rules issued by the industry are formally promulgated, the draft of stock option guidelines will also be selected.

The stock option granted to employees will increase the remuneration cost of employees. The accounting standard for equity incentive plans of listed companies should have considered the convergence of the accounting standards of stock options in the future.

We believe that the stock option rule will stipulate that the stock option of a listed company should be increased on the day of grant, which is consistent with the international accounting standards.

Under the premise of no new guidelines, according to China's current accounting system and accounting standards, if a listed company is allowed to adopt the employee equity incentive plan, the company's practice in implementing stock option incentives is simply to adjust the company's equity structure, for example, the capital stock can be converted into capital stock.

As the whole process has no cash income and expenditure, it has no effect on total assets, income statement and cash flow statement.

According to such accounting treatment, the situation revealed only reflects that the earnings per share of the original shareholders have been diluted.

However, the essence of employee equity incentive plan is due to the granting party, that is, the company receives the reward from the service of the employee, and the service of the employee is the resources received by the company at the consideration of the equity instruments (shares or share options). The company enjoys the consumption of the resources actually accepted, so it needs to be recognized as a cost.

The relevant accounting regulations will require that employees' stock options be increased on the grant day, thereby reducing the current profits and losses.

IFRS2's accounting treatment for employee equity incentive plan (FAS123), which is revised in 2004 by the United States, is based on share based payment (hereinafter referred to as "FAS123"), and the IFR second notice - share based payment (hereinafter referred to as IFRS2), which stipulates that a listed company shall be recognized as a staff compensation fee on the grant day.

As China's stock options standards are mainly drawn from international accounting standards in the formulation, and the relevant provisions will also converge with them, we will introduce the relevant accounting treatment of IFRS second announcement - share based payment.

The goal of IFRS2 is to provide financial reporting on the share based payment pactions, including the accounting treatment of employees' share options pactions.

Next, we will give three examples to introduce the accounting treatment of employee equity incentive plan (IFRS2).

1. without any additional conditions, the company will directly grant the employee a positive stock. In this case, the company must confirm the employee's remuneration according to the number of shares granted and the market price per share on the date of grant.

Example: A company decided to award 20 executives in January 1st to 5000 shares per person, and the company's share price was $20. Then, the company has to confirm the salary of 5000 x 20 x 20 = 2000000 in January 1st in January 1st.

In accordance with the requirements of service life for 2. years, the employee stock option is granted to the employee. In this case, the company must calculate the fair value of each share option on the share grant date with the prescribed option pricing model, and take into consideration the factors such as employee turnover and so on.

Example: A company decided to award 5000 executive stock options for each of the 20 executives in January 1st, and each grant was accompanied by conditions requiring employees to stay in the company for the next three years in January 1st.

According to the option pricing model, the company estimates that the fair value of each share option is $20.

Based on the weighted average probability, 10% of the employees in the main estimate will leave in the next four years.

Scenario 1: the company estimates the turnover rate completely.

Situation two: the number of employees who quit is different from the estimate: in 20X6, 1 employees quit, and the company estimates that 2 employees will leave, leaving the turnover rate to 15%.

In 20X7, another 1 employees left, and the company raised the turnover rate to 20%.

In 20X8, another 1 employees left.

3., with the requirement of service life, the stock option is granted to the employee, and the price of the exercise price is related to the company's performance. In this case, the company still needs to calculate the fair value of each share option on the option grant date with the prescribed option pricing model.

Example: A company decided to give 20 executives in January 1st 5000 subscription options per person, and each grant was accompanied by requirements for employees to stay in the company for the next three years. The company has 5000 options.

If the annual net profit growth rate of the company's net profit is not less than 10% per year and the maturity price is $30, otherwise, the exercise price will be $40.. On the date of award, the company will estimate the fair value of the share option at each option 16. 16. when the exercise price is 30 when the exercise price is $30. The fair value of the share option is $12 per option.

The company estimates that no employee will leave in the next three years.

In the first year, the company's net profit growth rate was 12%, while the growth rate in the next two years is expected to exceed 10%. In the second year, the net profit growth rate of the company is 13%, while the third year growth rate is still more than 10%.

In third years, the company's growth rate was only 5%.

In practice, the company's equity incentive plan can also be combined with the company's share price performance, and can also give employees the right to choose shares and cash.

However, the company must confirm the remuneration expenses and reduce the current profits and losses on the grant date.

We calculate the impact of equity incentive on net profit of the company. We take the average number of the sample stock of the Shanghai and Shenzhen 300 index to simulate the company's A, and calculate the impact of the implementation of equity incentive on the company's net profit.

A's total share capital is 1 billion 600 million shares, with net profit of 540 million yuan in 2004.

On the date of implementation of the equity incentive plan (grant date), the company's stock price is 6.1 yuan, assuming that the fair value of the option calculated by the menstrual power pricing model is 1 yuan.

As can be seen from the table, the impact on net profit depends entirely on how much the stock is sent and the price of the stock and options.

The company generally adopts the option of granting options.

Under the scheme of granting options, companies usually attach a certain service life requirement, which will reduce the impact on the company's current profits and losses to a certain extent due to the implementation of equity incentive.

However, it is worth noting that the decrease in current profits and losses is directly proportional to the proportion of stock offerings. Therefore, the elasticity of the proportion will be very large. If we want to reduce elasticity, we need to attach a relatively long service life requirement.

From the experience of foreign countries, the implementation of the equity incentive plan will reduce the net profit, which will make the management face a relatively large surplus pressure. Moreover, the decline of profits will often lead to a decline in the share price of the company, thereby reducing the profits of employees when they exercise their rights.

Therefore, there are listed companies to create accounting profits through accounting fraud, thereby promoting the rise in share prices.

In order to avoid big fluctuations in corporate profits and stock prices, China's listed companies must consider carefully when implementing the stock incentive plan.