October 30th, 2012 / Insight posted in

How to account for share options

MB writes: I am a founder shareholder and director of a growing start-up company. We need to lock in some key employees and are about to issue share options to them. How will these options be reflected in our annual accounts? I understand that if the share options are exercised, then new shares will be issued and the share capital of the company will be increased, but will there be any reference in the accounts before the options are exercised?

The simple answer is yes — there will at least be a reference to the share options in the notes to the accounts, writes Chris Lane, a partner at Kingston Smith LLP.

In addition, depending on the size of the company, you may need to make a charge to the profit and loss account for the value of the share options granted. The logic is that the company is giving away some value to employees as an alternative to salary and, therefore, a charge in respect of the options should be made to the profit and loss account.

Determining a value for the share options could be tricky and will depend on a number of factors. There are several models you can use for this.

If you are classified as a small company — which is defined as having two of the following: turnover less than £6.5m; assets less than £3.26m; up to 50 employees — then you can follow the Financial Reporting Standard for Smaller Entities (FRSSE), which does not require the company to charge the cost of the share options to the profit and loss account. A note to the accounts disclosing details of the scheme would be sufficient.

Irrespective of size, any company that issues share options will be able to get an extra corporation tax deduction for the cost of the options issued in the year.