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03-202 Valuing options for directors and executives
The Australian Securities and Investments Commission (ASIC) today issued final guidelines about the way Australian listed companies should include values of options in the disclosure of directors’ and executive officers’ emoluments in their annual directors’ reports for reporting years ending on or after 30 June 2003.
All listed companies are required to comply with their obligations under s300A (1)(c) of the Corporations Act.
‘ASIC expects all listed companies to comply with their legal obligations, and will consider action against directors if full remuneration, including option values, is not disclosed’, ASIC Chief Accountant, Mr Greg Pound said.
‘Directors’ reports must disclose the value of remuneration relating to options granted to each director and each of the five highest-remunerated executive officers. Companies are not relieved of their statutory obligations merely because they regard the calculation or disclosure as too difficult or onerous’, he said.
‘The guidelines will help companies and directors to fulfil their statutory disclosure obligations. This will ensure that shareholders are properly informed about the full value of the remuneration of the directors and executive officers’, Mr Pound said.
The final guidelines take account of the comments ASIC received in response to its draft guidelines, which were issued for comment on 7 May 2003.
The guidelines cover the valuation methods to be applied, as well as when to include option values for the purpose of emolument disclosures. ASIC has drawn on the International Accounting Standards Board’s Exposure Draft ED 2 Share Based Payment (ED 2), which provides an appropriate basis for valuing options and allocating their value over time.
The Australian Accounting Standards Board issued ED 2 as an Australian exposure draft (ED 108) and recently announced its intention to issue an accounting standard requiring remuneration disclosures in financial reports to include amounts relating to option values on the same basis as outlined in ED 2.
The ASIC guidelines require the options to be valued at the time they are granted and then to have that value apportioned over the period from grant date to vesting date. The options must be valued at market if they are listed, or by a valuation method that meets the requirements of ED 2 and ED 108 and the method chosen should be disclosed in the directors’ report.
‘The application of the guidelines will result in option values appropriate for reporting under s300A. We expect that companies will already know the value of options previously granted. Any decision by directors in relation to the granting of options and as to the overall level of emoluments provided to directors and executive officers must have been made with regard to some measure of the amount being provided, and assessed as appropriate for an individual’s performance’, Mr Pound said.
‘Prior to the issue of ED 2 and ED 108, valuations could have been undertaken using a whole range of different models and techniques. ED 2 and ED 108 provide authoritative and clear guidelines on the types of option valuation models that can be applied - companies should benchmark their current valuation models against those in ED 2 and ED 108 to ensure that they reflect these valuation principles.
‘The ASIC guidelines will ensure valuations are more consistent across the market, by addressing the date as at which options are to be valued, the periods in which the values are to be disclosed, and referring to the limited range of models which cover the factors identified in ED 2 and ED 108’, he said.
The guidelines do not deal with the expensing of options or other share based-payments in the financial statements. This matter will be resolved by the issue of a final accounting standard by the Australian Accounting Standards Board. The disclosure in the directors’ report is a Corporations Act disclosure requirement that is not covered by Accounting Standards.
‘The option valuation principles in ED 2 and ED 108 have been applied to facilitate a more consistent approach to option valuations for meeting disclosure requirements under the Act. However, all entities preparing financial reports under the Act are also encouraged to apply the guidelines, in determining the amounts shown as remuneration of directors and executive officers, in their annual financial reports for the purposes of current accounting standards’, Mr Pound said.