Module 8 – Accounting and Disclosure Flashcards
Who do the UK Market Abuse Regulation notification rules apply to? (Notes 2.2)
The rules apply to ‘persons discharging managerial responsibilities’ (‘PDMRs’) and those persons closely associated with the PDMRs (‘PCAs’).
Who should be notified and by when under UK MAR? (Notes 2.4)
The PDMR or PCA must first notify both the company and the FCA promptly and, in any event, within three working days of the transaction. The FCA must be notified using an online form. In practice,
many companies complete and submit the FCA forms on behalf of PDMRs and their PCAs.
The company must also disclose the transaction to the market in a manner which enables fast access to the information non-discriminatory basis, e.g., an RNS announcement, promptly and, in any event, within two working days of the company being notified of the transaction by the individual.
What is gender pay gap reporting? How is it different to equal pay? (Notes 3.1, 3.2)
- Gender pay gap reporting is a measure of the difference between men’s and women’s average
earning across an organisation. - Companies caught by the regulation will have to publish their gender pay gap figures by 4 April in the year following the snapshot date.
- There is an important distinction between ‘equal pay’ and the ‘gender pay gap’. It is illegal to pay men and women different amounts for doing the same job under the Equality Act 2010.
What are the 3 different sections of a directors’ remuneration report? (Notes 4.1)
- Annual statement of the remuneration Committee chair
- The policy report on directors remuneration (subject to an annual vote at least once every three years)
- Annual report on directors remuneration (annual advisory note)
What is the consequence of not producing a compliant directors’ remuneration report? (Notes
4.8)
Failure to prepare the annual report on directors’ remuneration for any financial year is an offence punishable by a fine. The offence is committed by every person who was a director immediately before the end of the period for filingfor the year in question.
- Producing a report that does not comply with the Companies Act 2006 requirements is an offence punishable by fine. The offence is committed by every director who knew that the report did not comply (or was reckless as to whether it complied) and who failed to take reasonable steps to make it comply, or to prevent the accounts from being approved.
- Failure to include the relevant remuneration reporting information on the company’s website is punishable by a fine for every officer in default.
- If there is a false or misleading statement in certain sections of the accounts, including the annual
report on directors’ remuneration, or an omission of anything required to be included, a director is liable to compensate the company for any loss suffered if they knew: or it was false or misleading or were reckless as to whether it was; or the omission was dishonest concealment of a material fact.
What are the key components of a company’s accounts? (Notes 6.4)
- balance sheet, a snapshot of the financial position at the beginning and end of the financial year;
- profit and loss account (sometimes called an income statement), showing the income and expenses over the financial year and the net profit or loss for the year;
- total comprehensive income, showing the net profit for the year and other gains and losses not part of the net profit;
- statement of changes in equity, explaining how shareholder funds have changed over the year;
- cash flow statement, explaining how cash has changed over the year;
- notes explaining the entries in main statements, as well as other information of importance to the reader of the accounts;
- directors’ report;
- strategic report;
- remuneration report; and
- auditors’ report.
What are consolidated accounts? (Notes 6.6)
Consolidated accounts show the financial position and financial performance of a group of
companies, totalling the separate accounts of each of the individual companies in the group.
What is the accounting treatment of shares in an employee trust (EBT)? Why are they treated in that way? (Notes 10.2)
EBT shares are treated as ‘treasury shares’ because the rules proceed on the assumption that the company has de facto control of its trust so that the trust should effectively be a ‘special purpose entity’ and will be treated as part of the company.
How is the fair value of an award calculated? (Notes 9.2 & 9.4)
- Fair value is the accountants’ version of market value and means the amount that would be received for selling an asset (a resource such as goods) or paid to transfer (to someone else) a liability (an obligation) in a market transaction;
- To estimate the fair value of shares, we use observable market data or valuation techniques;
- To estimate the fair value of share options and share appreciation rights, we either use observable market data or financial models (such as the ‘Black Scholes’ model)
- For options, it is necessary to use a valuation model. A model that is commonly used is called ‘Black Scholes’. IFRS 2 specifies factors to be taken into account in finding the fair value of an
option.
What happens to the accounting treatment when an award lapses? (Notes 9.9)
*If they lapse for failure of a market condition, the profit and loss account charge remains, even though the employee does not actually receive any shares. This is provided that any service/non-market conditions are fulfilled.
- If they lapse for failure of a service/non-market condition, such as failing a performance condition based on EPS or leaving employment, the profit and loss account charge is reversed. This means the company effectively reverses the charge it has taken in previous accounting periods.
- If they lapse after vesting, there is no impact on the accounts at all, even though the employee receives no shares. This is because the accounting treatment is limited to the vesting period and does not take account of anything that happens outside the vesting period.
- If a phantom award lapses, the accounting treatment is trued-up with the result that the previous charge is reversed in the current period. This happens even if the award has vested.
- If a Sharesave option lapses because the employee stops saving, this is treated as a cancellation with the result that the entire fair value charge of the option is accelerated and the company must recognise the remaining charge for that accounting period. This is a real problem for companies which offer Sharesave each year, if they find that employees prefer to take a new Sharesave option at a lower price and cancel their old one. The position can be improved slightly if it can be said that the old option is surrendered in return for the new one but there is still an accounting charge for more shares than the employee will ever receive.
- If an award is surrendered, it is likely that the accounting treatment will again be a cancellation involving an acceleration of the fair value charge. However, in practice a surrender is normally to be expected in the context of a cash cancellation and the question will only be whether the accounting charge should be the amount of the cash paid or the remaining fair value. For a share award, it would be the remaining fair value, while for a phantom, it would be the cash paid. There are special rules for determining whether a share award which can be settled in cash is a ‘cash’ or ‘share’ based award.
What has to be disclosed in relation to the accounting treatment? (Notes 9.12)
IFRS 2 contains detailed disclosure requirements. A company’s accounts must describe the share awards and must also give details of the factors taken into account in arriving at the fair value.
The DRR forms a part of the company’s much larger annual report and accounts.
What three parts is the DRR is
itself broken down into?
- annual statement of the remuneration committee chair;
- the policy report on directors’ remuneration (which is subject to a binding vote at least once
every three years); and - the annual report on directors’ remuneration (subject to an annual advisory vote).
Which share plan transactions must be notified to the company, FCA and market (3)?
- Grant and exercise of options
- Grant and vesting of CSA
- Acquisition and sale of shares
Who is a PCA?
- Spouse or civil partner
- Dependant child
- Relation that has shared the same household for at least a year?
- Legal person/trust/partnership controlled by a PDMR or person above
What specified information needs to be in a notification by a PDMR or PCA (7)?
- Name of person
- Reason for notification
- Name of issuer company
- Description of financial instrument
- Nature of transaction (sale, purchase, exercise)
- Date and place of transaction
- Price and volume of transaction
Gender pay gap reporting regulations apply to which companies?
Companies with at least 250 employees on the snapshot date (5th April)
What are the gender pay gap reporting requirements (4)?
- Mean and median pay gap (hourly rates of pay)
- Mean and median bonus gap
- Portion of males and females receiving a bonus
- Proportion of males and females in each pay quartile (hourly rates of pay)
What four things should a company disclose on their website alongside their reports and accounts?
- Results of share holder votes on resolutions to approve directors remuneration policy
- Revisions to the DRR
- Any payments made to a person ceasing to be a director
- Any payment for loss of office made to a director
Must be kept for 10 years
What must be contained in the future policy table in the policy report (6)?
a) Purpose, how the remuneration supports the companies objectives
b) Operation, eg deferral periods etc
c) Opportunity, value/quantum
d) Performance framework
e) Recovery of sums, malus/clawback
f) Differences, any changes made
