media release

IR 06-05 ASIC relief on measuring remuneration

Published

ASIC has announced relief to assist listed companies in measuring and reporting director and executive remuneration in their annual reports.

The relief is provided under ASIC Class Order [CO 06/105] Calculation of director and executive remuneration.

ASIC is granting short term relief to assist listed companies by addressing potential confusion as to the bases for calculating remuneration of directors and executives for disclosure in directors’ reports and financial reports. The relief will remove any doubt over the ability of companies to disclose an individual director or executive remuneration using a single measurement basis.

Background

There are two requirements for listed companies to disclose remuneration of individual directors and executives in their annual reports. Paragraph 300A(1)(c) of the Corporations Act (the Act) requires disclosures in the directors’ report and the accounting standards pursuant to s296(1) of the Act require disclosures in the financial report.

Regulation 2M.3.03 continues to require the measurement requirements of accounting standard AASB 1046 “Director and Executive Disclosures by Disclosing Entities” (AASB 1046) to be applied for the purposes of disclosing remuneration of directors and executives in the directors’ reports of listed companies in accordance with s300A(1)(c).

On 20 December 2005, a new accounting standard AASB 124 “Related Party Disclosures” (AASB 124) containing remuneration disclosure requirements was issued. The new AASB 124 replaced AASB 1046 for years ending on or after 31 December 2005 for the purposes of s296(1), but not for the purposes of s300A(1)(c). Unlike AASB 1046, AASB 124 doesn’t specify a basis for measuring remuneration.

ASIC took the view that because AASB 124 doesn’t specify a basis for measuring remuneration, it would be possible to make both the disclosures under s300A(1)(c) and the new AASB 124 using the measurement basis in AASB 1046. This measurement basis provides a ready source of comparative information, and continues to be used by at least some companies.

AASB 2 “Share-based Payment” (AASB 2) and AASB 119 “Employee Benefits” (AASB 119) can be used as a source of guidance for measuring remuneration under AASB 124. However, the requirements of AASB 2 and AASB 119 are intended for determining expense and income relating to groups of employees. In ASIC’s view, the AASB 2 and AASB 119 measurement requirements should be modified for determining remuneration.

However, ASIC has recently become aware of a view that AASB 124 requires a strict application of the measurement basis for expenses and income in accounting standards AASB 2 and AASB 119 in measuring remuneration. Some companies may also have applied the AASB 2 and AASB 119 measurement requirements but with some modifications.

The strict AASB 2/AASB 119 measurement basis differs in some respects from the basis required by AASB 1046. For example, for the value to be included in relation to options it is not necessarily assumed that employees will meet service based conditions, and any amounts recognised in prior years can be reversed if those conditions aren’t met. For members of defined benefit superannuation funds, actuarial gains and losses recognised in relation to the fund are relevant rather than contributions.

Class Order [CO 06/105]

ASIC Class Order [CO 06/105] Calculation of director and executive remuneration will allow listed companies to apply either of the following for the purposes of disclosing an individual’s director and executive remuneration in accordance with s300A(1)(c) and paragraph Aus25.4 of AASB 124 for years ending 31 December 2005 to 31 March 2006 (both inclusive):

  1. The measurement requirements, categories of remuneration and definition of “remuneration” in AASB 1046 (the AASB 1046 basis); or
  2. The measurement bases in AASB 2 and AASB 119 (but which may be modified as is reasonable to apply those bases to the disclosure of compensation of individuals), the categories of compensation in AASB 124 and the definition of “compensation” in AASB 124.

The relief is conditional on:

  1. the same measurement basis, categories and definition being used for all of the relevant disclosures; and
  2. the directors’ report includes a brief explanation of any differences from using the measurement requirements of section 6 of AASB 1046 (for the avoidance of doubt, these differences need not be quantified).

This relief is of an interim nature. The Government is considering the operation of the regulations affected by the replacement of AASB 1046 by the new AASB 124. ASIC intends to cease providing relief in relation to the disclosure of director and executive remuneration when the regulations are amended.

ASIC recognises that the relief may result in some short-term reduction in comparability of remuneration information between listed companies, but the relief is short term and all listed companies using the relief will be required to disclose the nature of differences in their measurement basis from the AASB 1046 basis.

Aggregate disclosures under AASB 124

The relief doesn’t extend to the aggregate remuneration disclosures under paragraph 16 of AASB 124. Listed companies adopting the AASB 1046 basis for their disclosures by individual may wish to be aware that some hold the view that the aggregate disclosures required by AASB 124 must be determined on a strict AASB 119/AASB 2 approach to ensure convergence with IAS 24. Those holding that view would suggest that this should also drive the basis for measuring and disclosing remuneration of individuals.

Transfer of disclosures

In January 2006, ASIC issued Class Order [CO 06/50] Transfer of remuneration information into directors’ report which allows listed companies to transfer the AASB 124 individual remuneration information from the financial report into the directors’ report where the s300A(1)(c) disclosures reside.

[CO 06/105] includes provisions to allow information presented in substitution for the AASB 124 information to be transferred into the directors’ report, subject to meeting similar requirements to those in [CO 06/50]. These requirements include a requirement for a specific audit opinion in relation to transferred information prepared in accordance with the class order.

Other matters

Class Order [06/106] includes some minor consequential relief and a minor change to Class Order [CO 05/637] Additional month for first financial reports under AIFRS.

Class Orders [06/105] and [06/106] commence on the date they are registered under the Legislative Instruments Act 2003, which is expected to occur within the next few working days of publication of this information release.

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