ED 106 Director, Executive and Related Party Disclosures

Mr Keith Alfredson
Chairman
Australian Accounting Standards Board
PO Box 204
Collins Street West
MELBOURNE 8007

The Group of 100's comments on ED 106 are set out below. The comments have been developed in the context of the uncertainty relating to the status of the proposals in view of the FRC's announcement regarding the adoption of IASB standards by January 2005.

For example, we are uncertain as to whether these proposals will continue to be developed as an Australian standard, whether the less detailed requirements of IAS 24 'Related Party Disclosures' will be adopted or whether the existing disclosures required under Section 300A of the Corporations Act will be repealed or amended. While we believe that such disclosures are important for accountability, corporate governance and transparency, we note that the existing suite of IASB standards does not include requirements to disclose director and executive remuneration.

We acknowledge that the effect of national considerations may result in the requirements of an IASB standard on related party disclosures being supplemented by national requirements either in an accounting standard or in legislation. It is unreasonable to expect that an international standard dealing with general principles would be sufficiently comprehensive to deal adequately with/or respond to diverse national concerns. In these circumstances the IASB standard may well be the threshold requirement for disclosure.

While the G100 strongly supports the replacement of banding requirements in ED 106 and the need for transparency in reporting director and executive remuneration we are concerned that the scope is limited to disclosing entities. We are unaware of the reasons for retaining the existing inconsistency between requirements applying to disclosing entities and those applying to executives and other holders of authority in other entities including public sector entities.

If there is a justification for disclosure of all components of remuneration for directors and executives on the grounds of stewardship and accountability we believe that the same arguments are equally relevant to other sectors and would encourage the Board to address this shortcoming in the scope of the requirements.

a.	It is proposed through the definition of specified executive (paragraph 12.1) that inclusion in the specified executive group be based on the executive’s level of authority. Do you agree with this or should inclusion in the specified executive group be based on the level of remuneration? The G100 considers that inclusion as a specified executive should be based on the level of authority of the executive. We consider that there is a presumption that the level of remuneration reflects the level of authority of the executive but that is not necessarily so in all cases.
b.	It is proposed through the definition of specified executive (paragraph 12.1) that, when a disclosing entity is a parent entity, the group of specified executives will comprise at least five executives with the greatest authority for managing the economic entity. Do you agree with what is proposed or should a disclosing entity that is a parent entity also be required to include in the group of specified executives at least five executives who are employed by the parent entity itself? The G100 believes that disclosure should only be required in the consolidated financial statements and agrees that the disclosure should be in respect of those executives having the greatest authority in the economic entity.
c.	It is proposed (see paragraph 1.2 and illustrations in Appendices 3, 4 and 5) to require a disclosing entity that is a parent entity to disclose only one set of amounts, on a consolidated basis, in the notes in the financial report and not to require separate disclosure of amounts attributable to the parent entity itself (whether based on the individual being employed by the parent entity or on the parent entity being the provider of the remuneration, loans or equity). Irrespective of your answer to question (b) above, do you agree with what is proposed or should a disclosing entity that is a parent entity be required to show in the notes amounts attributable to itself in addition to the amounts on a consolidated basis? The G100 believes that the focus of attention should be the consolidated financial statements.
d.	It is proposed to remove the banded disclosures of executive remuneration currently required from disclosing entities by AASB 1034 (the number of executives earning at least $100,000 per annum, the aggregate remuneration of this group and disclosure of these in bands of $10,000) and not require equivalent disclosure in the new Standard. Do you agree with what is proposed? Yes. The G100 strongly supports this proposal which is consistent with relevant international practice. The G100 strongly supported the removal of the banding in its comments on the development of AASB 1034.
e.	Currently, remuneration for a director who is appointed or ceases to be a director in the current reporting period includes only that arising while holding the position of director and excludes any other remuneration as an employee of the entity for some other part of the reporting period. It is proposed (paragraph 7.3) to require inclusion of all remuneration for a specified director in the reporting period and to identify separately the amounts arising while holding the position of director. Do you agree with what is proposed or should the current practice relating to remuneration of directors appointed for part of the reporting period be continued? If you consider the current exemption in respect of the remuneration of part-period directors should be continued, should it be extended to specified executives? The G100 supports the proposal to require disclosure of all remuneration received from the economic entity by the directors during a reporting period in will they served as a director. The adoption of this proposal would facilitate transparency of arrangements in relation to directors. We do not believe that the requirement should be extended to specified executives particularly where inclusion is based on the level of authority of the executive.
f.	It is proposed that vesting date be used as the date for determining the fair value of equity compensation (paragraph 6.2) and also for determining the amount of equity compensation to be disclosed as remuneration in the current reporting period (paragraph 5.2(c)). Do you agree with what is proposed or should the grant date be used as the date for measuring while retaining vesting date as the basis for including the amounts so measured in the remuneration disclosed in respect of a reporting period? The G100 believes that the amount of equity compensation should be recognised and measured at the grant date. The G100 considers that the fair value of the services received by the entity is best determined at the grant date. It is unlikely that value changes beyond grant date bear any relationship to the services provided to the entity. We note that measurement at the grant date is to be proposed in a forthcoming IASB exposure draft and believe that the requirements relating to disclosure, recognition and measurement of equity compensation should be consistently applied in all relevant accounting standards.
g.	It is proposed (paragraph 5.3) to exclude from remuneration discounts in those share acquisition schemes that are not considered to be compensatory in nature and to specify the criteria necessary for a scheme to gain exclusion. It is proposed (paragraph 5.3(d)) that one of the criteria be that the level of discount from the market price on purchase does not exceed 5% or the discount available to shareholders in a dividend reinvestment plan. Do you agree with what is proposed or should a discount rate other than 5% be specified? Specifying the acceptable level of discount in respect of such employee share schemes is an arbitrary decision. Given that the purposes of share schemes and dividend reinvestment schemes are different there is no substantive reason for specifying the same level of discount.
h.	It is proposed (paragraph 8.3(e)) that the “excess” realised on the exercise of options or rights granted as remuneration be excluded from remuneration but required to be disclosed. Do you agree with what is proposed or should such “excess” be included as remuneration; or not be subject to disclosure? Movements in the value of options or rights after grant date are not relevant to the amount of remuneration and should not be required to be disclosed. The remuneration cost to the entity for services provided is the value transfer at the date of grant and subsequent changes in the value of the options or rights does not change the cost to the entity. The number and terms of equity instruments granted is disclosed and should such information be needed users can prepare estimates.
i.	It is proposed (paragraph 8.3(e)) that the amount disclosed in respect of the “excess” realised on the exercise of remuneration options or rights be calculated using the market value of the equity instrument issued less the aggregate of the amount paid on exercise and the amount previously disclosed as remuneration. Assuming you agree an amount should be disclosed, do you agree with what is proposed or should the amount of such “excess” be calculated using the market value of the equity instrument issued less the amount paid on exercise? We do not believe that this amount should be disclosed. The relevant amount is the value transfer at the grant date. Events after grant date do not impact on the cost of the entity.
j.	It is proposed (paragraph 12.1) that the definition of equity-based compensation benefits differ from that in AASB 1028 by distinguishing more precisely between the different types of compensation that are equity-based but may be settled with cash and not equity instruments. In common with the type of equity-based compensation benefit that can only be settled with equity instruments, AASB 1028 does not specify the classification or measurement of the type of benefit where the decision to settle with equity or cash belongs to the employee. This Exposure Draft proposes that this type will not be classified as equity compensation, that following vesting it will be subject to re-measurement until settled with cash or a choice is made to settle with equity (see paragraph 6.4), and that changes in value will be included in remuneration disclosed in subsequent reporting periods. Do you agree with what is proposed or should this type of equity-based compensation benefit (where the decision to settle with equity or cash belongs to the employee) be classified as equity compensation (and not subject to re-measurement post vesting) for the purposes of measurement and disclosure of the remuneration of directors and executives? The G100 believes that the requirements of the two standards should be consistent.
k.	If the requirements proposed for the measurement of the values of equity-based compensation benefits and disclosure in the remuneration of directors and executives of disclosing entities were to be adopted in the proposed Standard, should AASB 1028 be revised to require the values of equity-based compensation benefits for all employees: to be measured in the same manner; and to be disclosed? Yes. See response to (j).
l.	It is proposed (paragraph 9.1) that the aggregate amounts of loans to specified directors and specified executives required to be disclosed include all loans from each entity included in the consolidated entity. It is noted that current Class Orders of the Australian Securities and Investments Commission exempt Australian banks, credit unions and building societies from compliance with disclosures required by AASB 1017 about loans to related parties other than directors, provided such loans are on an arm’s length basis and made in the course of the entity’s ordinary banking business. Do you agree with what is proposed or should financial institutions or commercial loans be excluded from the proposed loans disclosures? The G100 is unaware of any shortcomings in the existing arrangements and does not consider the case for a change has been justified. The significance of the disclosures should be to identify and report on those transactions which convey some benefit to related parties that are not available to the ordinary customers of the entity.
m.	If section 300A of the Corporations Act were amended so as to permit a reduction in the information on the remuneration of directors and executives currently provided to shareholders in the concise annual report, should AASB 1039 be amended to require disclosure in the concise financial report of a disclosing entity of: the remuneration of specified directors and specified executives; or all the disclosures required in the proposed Standard; or some combination of the above? The G100 believes that in these circumstances the disclosures made in a concise financial report should be of loans made to, and the remuneration of, specified directors, specified executives and a listing of their shareholdings in the entity.

a.	It is proposed (paragraph 4.3) that corporate non-disclosing entities continue to be required to disclose the aggregate remuneration of specified directors and their numbers in bands of $10,000 and not their individual remuneration nor the components thereof. Do you agree with what is proposed or should more details be required, such as disclosure of: components of aggregate remuneration; or total remuneration of each specified director; or total and components of remuneration of each specified director? The G100 does not support the retention of banding. We strongly believe that if the requirements are appropriate for disclosing entities they should be applied consistently to all reporting entities, including those in the public sector.
b.	Should more detailed disclosures than those proposed in Section 6 be required in respect of loans to directors of related entities, for example, requiring disclosures equivalent to those proposed for specified directors in paragraph 4.12 of this Part of the Exposure Draft or in Section 9 of Part 1 of the Exposure Draft? The requirements should be consistent with Section 9 of Part 1.
c.	It is proposed (Section 5) to continue to require entities to provide separate disclosures about related parties in a wholly-owned group, such disclosures being excluded from disclosures about other related parties (paragraph 6.1) and less detailed than required under Section 6. Do you agree with what is proposed or do you consider: separation on this basis is not needed and related parties in a wholly-owned group should be treated the same as any other class of related party subject to Section 6; or separation on this basis is desirable for disclosures but the level of detail required to be disclosed should be the same as for any other class of related party subject to Section 6? The G100 does not agree with the proposed changes. We believe that the requirements should be harmonised with the requirements of IAS 24 in respect of intra-group transactions in both the parent and consolidated financial statements.
d.	It is proposed that loans from the entity or any subsidiaries be included in the disclosures required in respect of specified directors (paragraph 4.12), wholly-owned group members (paragraph 5.2(c)) and other related parties (paragraph 6.5(a)). As noted in Specific Matter for Comment (l) of the Preface to Part 1 of this Exposure Draft, current Class Orders of the Australian Securities and Investments Commission provide banks and authorised deposit-taking institutions with limited exemptions from disclosure about loans to related parties other than directors. Do you agree with what is proposed or should financial institutions or commercial loans be excluded from the proposed loans disclosures? Refer response to Part 1.