Companies could find profits slashed by 50%, researcher warns

Companies could find their profits slashed by up to 50% when new accounting rules on employee share options come into force next year, according to research conducted by a University of Ulster graduate.

Among the worst-hit will be companies based in Ireland, and those which are smaller in size and working in the technology sector.

John Mathers, a trainee chartered accountant with Deloitte in Belfast, as part of his study for an MSc examined the impact of proposals for new accounting practices concerning employee share options. Over the last decade, more and more companies have been offering employees share options both as a way of boosting productivity and of increasing staff loyalty.

Under current accounting practices, companies can offer attractive share option packages without impacting on their reported profits. For many years, users of accounts have argued that this impairs the quality and transparency of financial reporting.

The recently formed International Accounting Standards Board last year issued a document addressing this issue. The Board agreed with the argument that share options are a form of remuneration and like any other form of remuneration should be reflected in reported profits. In the UK and Ireland, the Accounting Standards Board endorsed the proposals and it is expected that a new standard, making the expensing of employee share options mandatory, will be issued in the first quarter of 2004.

In his study of 67 US listed companies, incorporated in the UK and Ireland, Mr Mathers found that the proposals are likely to have a very significant impact, with 28.8% of companies experiencing a decrease in reported profits of at least 10%. He also found that five companies from the sample would experience a reduction of at least 50%.

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