IFRS 2 Share Based Payments has never been a popular accounting standard with many in the business community.
It’s also often unpopular with students, especially the deferred tax elements of it. This is despite the fact that share based payments often provide an opportunity for easy marks (we promise!)
The reason given for finance directors’ dislike of IFRS 2 is often that it involves subjective estimation of the value of share options and other equity-based compensation. This can be complicated and subjective.
Another reason why it’s unpopular might be that it involves stating the full truth of how much executives are actually being paid, including non-cash related rewards.
One person who is feeling the heat of this at the moment is Bob Diamond, who is CEO of Barclays Bank. The bank has just published its remuneration report and it’s predictably controversial.
In an environment where many people, fairly or unfairly, blame perceived greed of bankers for the global financial crisis, CEO remuneration of a salary of £250,000 and a cash performance bonus of £550,000 might be considered brave by many.
But this is only a part of the story.
Once the expected value of equity based remuneration is included, the total figure rises to a bonus of £6,500,000. In the days before IFRS 2, the total reported remuneration would have been less than £1 million. No wonder some directors look on the pre-IFRS 2 days as the good old days!
If a person had invested £100 in Barclays shares on 31.12.05, those shares would now be worth £53. This compares with a profit of 26% on FTSE shares in general over the same period. At a time when shareholders have taken these substantial losses, this type of remuneration is likely to upset investors. This possibly explains why the bank takes up 18 full pages to explain (or perhaps justify) its remuneration policy!