Remuneration Disclosure Changes – Hedging Your Bets, And More

As we reported a couple of months ago (HERE), the Australian Treasury is considering reducing the compliance burden associated with executive and director remuneration disclosures. However, at a recent public meeting (with an audience, we are told, of about 3), Treasury presented a paper outlining proposals to the AASB. Included in the discussion was possible disclosure of incentive hedging policies (well, so much for simplification…). That is, company policy relating to executives selling the potential gains from options and rights before the end of any performance period.

Investment banks provide various option hedging products. Some also allow executives to keep a proportion of up-side difference between market price and exercise price. Unfortunately, only a small proportion of listed Australian companies have explicit policies disallowing executives this practice, although there is a trend for more boards to adopt a formal policy.

While the meeting between the AASB and Treasury was public, Treasury’s paper was not. However, Treasury told us that they would most likely have revised Corporations Act director and executive disclosure requirements ready for public comment in late August or early September, subject to Mr. Costello’s approval. We will, of course, keep you informed.

In another development, long anticipated, yet somewhat late, amendments have recently been made to disclosure requirements. New Corporations Act regulation 2M.3.03 and 2M.6.04 have been updated with effect for all reporting periods ending after March 31 2006 (although Parliament only passed the legislation on June 6). Basically the changes allow companies to:

  • Disclose remuneration in the directors’ report in a form that is consistent with the financial report. Prior to the change, disclosures in the directors’ report had to be in the superseded AASB 1046 format and method, while financial reports had to use the new AASB 124 standard;
  • Permit listed companies to transfer the bulk of their annual financial report remuneration disclosures to the directors’ report, so saving on duplication.

The change to AASB 124 will result in differences to prior reporting measurement methods. This will include:

  • Changing from cash contributions for post employment benefits to a method that is consistent with the accrual expensing required under AASB 119. The main impact will be on reporting any defined benefit superannuation expense using actuarially determined expenses (plus possibly administrative and other costs of the DB plan, depending on how your accountants interpret AASB 119!);
  • Share based payments, which now will include any cash payments based on shares (such as share appreciation rights). Previously these were reported in the “primary” category. In addition, if share based compensation is dependent on reference to a “market condition” (such as vesting according to relative TSR performance), then this has to be built into the valuation method of the payment, with no adjustment or reversal allowed based on actual outcome. Before, under AASB 1046,an adjustment was allowed based on the number of equity units that vested.

Incorporation of most of AASB 124 into the directors’ remuneration report will not exempt directors from complying with the disclosure of Corporations Act s300A. But it will remove all of the duplicated reporting shared between the two, produce consistency in valuation methods, and save a few more trees.

© Guerdon Associates 2024
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