TAIWAN

By Herman Hong

Taiwan Government Considers Changing Bonus-Share System

Under Taiwan accounting rules, companies can give shares of stock to employees and account for it from retained earnings - the earnings available to shareholders after the company pays its taxes and all operating expenses, without counting it as an expense on income statements. U.S. Accounting rules, by contrast, treat such awards as a cost. These controversial accounting rules help Taiwan companies maintain a big part of their employees' pay from affecting their reported profits. Moreover, the bonus shares are recorded in the financial statements at par value, even if the market price is several times higher, and can be sold immediately upon issue.

Offering bonus shares were always unwelcome to institutional investors. One way to minimize such share issues is to make employees pay for these shares. In the United States, that means pressuring companies to assign a value to stock options as soon as they're handed out, instead of at the time they are exercised. The bonus share system has been in place for more than two decades, but it has become increasingly popular in recent years among Taiwan’s tech companies, many of which stock awards as a large portion of their employee compensation. Many executives credit the system with helping Taiwan’s tech companies become global competitors, and say scrapping the plans would make it harder to retain talent.

Nonetheless, in the event the change is introduced and share bonuses are treated as expense, the hit to profits would be only on paper. That is because the companies incur no actual cost in issuing shares, and cash flow and actual earnings would not be affected. But the figures for P/E ratios and earnings per share would make the company's stock seem much pricier.

As share prices have slumped and accounting controversies have blazed in the United States this year, however, international investors and others have become increasingly critical of the practice. The critics say Taiwan’s system alters earnings in some cases, and substantially dilutes stakes of existing shareholders. Foreign analysts estimate that using U.S. accounting practices for the bonus shares would knock 20 percent to 30 percent off average expected earnings for Taiwan’s tech companies for this year, and 70 percent or more off earnings for 2001.

Policymakers face a dilemma in working out this problem. The government in Taipei is studying the issue, consulting analysts, accountants, and tech executives. Officials at the Economic Affairs Ministry and the Securities & Futures Commission are tight-lipped about what they might do. It's not even certain that legislation will be introduced. Burdened with low ratings in the opinion polls, President Chen Shui-bian may decide to put off the issue to avoid alienating the industry. Yet if Chen backs off, Taiwan tech share will be less appealing to foreign investors.