The International Accounting Standards Board has called for the cost of stock options to be deducted from company profits. This approach is likely to be adopted by the European Union from 2005. But will American standard-setters also fall into line?, asks The Economist in its latest edition.

Fearful and yet resolved, the world’s main accounting standard-setters this week joined the most important battle in their history: the attempt to make companies treat share-based payments to their employees as an expense. Up to now, companies have had the choice to record stock options only in the footnotes to their financial statements.

Under a new draft rule from the International Accounting Standards Board (IASB), a private group based in London, companies will have to deduct them from their profits. The effort may yet founder on opposition from business. If it does, investors may as well forget the idea that standard-setters have the ability to set accounting rules that try to reflect economic reality.

Although only a group of small countries and a few hundred big companies follow the IASB’s standards at present, all listed companies in the European Union will have to meet them from 2005.

The board’s draft standard on stock options, released on November 7th, has also been put out for comment by standard-setters in Australia, Britain and New Zealand. America’s Financial Accounting Standards Board (FASB) will offer it as an “invitation to comment” paper later in November, setting in motion the first stage of its own rule-making process.

In 1994, when FASB first tried to require companies to treat share-based payments as a cost, it nearly perished in the effort. Congress threatened to take away its standard-setting powers, and the chairman of the Securities and Exchange Commission (SEC), Arthur Levitt, urged it to back off.

However, FASB’s new chairman, Bob Herz, says that after America’s run of corporate scandals, the enemies of old are now likely to be less vocal. This time, crucially, institutional investors will support FASB; in 1994 they too clamoured against. Mr Herz says that his aim is for FASB to participate in the IASB’s process, and for the two jointly to issue a standard at the end of next year requiring companies to deduct the cost of employee stock options.

For Sir David Tweedie, the IASB’s chairman, FASB’s actions in the months ahead will be crucial. If FASB is once again bullied, European companies will fight against any attempt to make them lower their profits while their American competitors are off the hook. Although the Europeans are committed to the IASB’s rules by 2005, they reserve the right to endorse or reject individual standards. French banks have campaigned against another of the IASB’s recent new rules, requiring that derivatives be marked to market.

For now, the group of accountants responsible for advising the European Commission on the IASB’s standards is divided over whether or not share-based payments should be treated as a cost, says a group member. The political committee that will make the final decision has yet formally to meet, and its views are unknown.