Module 8 - Accounting and Disclosure Flashcards
What is a balance sheet?
A snapshot of a company’s financial position at the end of the year
What is a profit and loss account?
Income/ expenditure of a company over the financial year
What are consolidated accounts?
Accounts of all the group companies, put together; these are the published accounts and at the end there is usually a brie section which are the parent company’s accounts
What is the purpose of the accounts?
To give a true and fair view of the state of affairs of a company over a financial year; it is addressed to shareholders
What rules regulate accounts?
The Companies Act 2006; Regulations under the Companies Acts; Accounting standards (there are various); and for London listed companies: the Listing Rules and UK Corporate Governance Code
There is also usually guidance provide by some institutional investors
Where is the law regulating a company’s accounts? What has been the most recent update to these regulations?
The Companies Act 2006 Sections 394 & 396 - basic rules that set out that company must prepare accounts for each financial year
Large & Medium Sized Companies and Group 2013 (Accounts and Reports) Regulations or the “Accounts Regulations” - include further rules, especially about executive pay
Most recent update to the above: Companies (Miscellaneous Reporting) Regulations 2018
What are the rules about Directors’ emoluments and where are the rules?
Schedule 8 of the Companies Act 2006 - disclosure requirement for UK-incorporated listed companies
New Rules coming about Rem Report to expand scope of who/what should be disclosed - now unquoted trading companies are also included
Large private companies have to make a clear statement about which corporate governance codes they are going to follow
What share plans related information might be included in the Directors’ Report?
Schedule 7, Para 11: involvement of employees in performance; what activities are used to engage employees in the companies performance (share plans!)
Paragraph 13, Takeover directive disclosure requirements; change of control provisions (share plans might also be mentioned here
What are the directors’ obligations with the annual accounts?
Approve & sign; Have independed audit; send to shareholders and put to vote; Put the Directors’ Rem Report (DRR) to vote; File with Companies house (within 6 months of year end or 9 months for private companies)
How long do companies have to file their annual accounts after the end of the financial year?
6 months (or 9 months if private company)
Who sets the UK Accounting Standards and the UK Corporate Governance Code?
FRC - Financial Reporting Council
What is UK GAAP?
Generally Accepted Accounting Practice in the UK (UK GAAP) is the body of accounting standards and other guidance published by the UK’s Financial Reporting Council (FRC). The financial reporting framework in the UK is effective from 1 January 2015.
What is the IASB?
International Accounting Standards Board - Creates the International Accounting Standards (IASs) and the International Financial Reporting Standard (IFRSs)
What does IAS stand for?
International Accounting Standards - set by the IASB
What does IFRS stand for?
International Financial Reporting Standard - set by the IASB
How much the FRC and IASB differ in thinking?
The FRC largely sticks to IASB thinking
What is IAS 24?
Set by IASB; disclosure of party related transactions and includes key management personnel; requires disclosure on aggregated basis (not on individual basis) of:
- short term and post employments benefits
- Other long term benefits
- termination benefits
- Equity compensations benefits
When was there a major shift in the financial reporting standards? What was the more recent change to FRS?
Major change in mid-2000’s - the new FRS applied to accounts ending on or after 1 January 2015
How did the old financial reporting standards impact the profit/loss account?
Actual shares would show a more straightforward cash charge and then increase in the number of shares; options were the major issue - there would be no impact on the company’s profits - was a very good deal for companies but was not accurate reflection of what was happening
What is a Section 86 Trust?
A discretionary trust for the benefit of employees; established by a company to help provide shares for its share plans - trust can pay less than nominal value for shares
What is the accounting treatment for a company that has a trust?
FRS 102 and IFRS 10 - for accounting purposes, the trust is part of the company (even though they’re meant to be independent and discretionary)
Accounting for trusts: What happens to accounts if there is a cash gift or loan to the trust?
No impact on accounts
Accounting for trusts: What happens to the accounts if a Trust borrows from a bank?
as if the company had borrowed itself (so shown as a liability to the company)
Accounting for trusts: What happens to the accounts if the Trust buys shares?
FRS: cost deducted from the company’s assets
IFRS: treated as treasury shares
Accounting for trusts: What happens to the accounts with Trust expenses?
Deduct as if they are the company’s expenses
Accounting for trusts: What happens to the accounts if there are Dividends?
No impact on accounts
Share based payments: How are they accounted for?
The accounts treat it like the company has received goods or services of the value of the share based payment. Therefore this payment needs to be ‘recognized’ which means it needs to be deducted from profits.
Share based payments: What does it mean to ‘recognize’ an expense? Does it have to be matched in the accounts?
It means that an expense is shown in the P&L account and is deducted from the profits of the company
Yes, It has to matched by a credit in the balance sheet
Share based payments: Where is the credit shown on the balance sheet?
For most arrangements, in shareholder funds
For Phantom schemes, in Creditors
Share based payments: How is the expense ‘recognised’? What value do you use? What happens if the award fails to vest? What if it’s a phantom?
Find the fair value at grant
Deduct a proportion each year of the vesting period
(Ignore any real expense)
If award fails to vest, reverse the charge (ONLY for non-market condition)
Phantom: True up to fair value each year
What are different methods to calculate fair value?
Black Scholes
Monte Carlo
What factors are included in the black scholes valuation model? (6)
Market price at grant Exercise price Expected option lief Volatility Dividends Risk-free interest rate
Black Scholes: What happens if the exercise price is discounted to market price?
This increases the fair value
Black Scholes: What happens if there is a longer option life?
Increases fair value
Black Scholes: What happens if there is high volatility?
Increases fair value
Black Scholes: What happens if there are high dividends?
Reduces fair value
Black Scholes: What happens if there is a high risk free interest rate?
Increases fair value
What impact do market-based performance conditions have on the fair value? How about if the condition is failed?
Only market-based conditions can reduce the fair value (so based on share price, ex. TSR)
However, here is no reversal if the condition is failed.
What impact do non-market based conditions have on fair value?
Don’t reduce fair value but taken into account later; Never an reductions for conditions not related to employment (eg ShareSave)
Share based payments: What is the fair value of an award of free shares?
Much more straightforward than valuing options, likely to be close to the full market price
Share based payments: What happens if awards lapse?
They reverse (require a ‘write back’) if:
- Failure of non market condition
- Lapse of phantom for any reason
No reversal if:
- Failure of market condition
- Lapse after vesting
Accelerate immediately:
- Lapse of sharesave option bc of termination of savings contract
Share based payments: What happens if an award is surrendered?
Accelerated if a real share award
Trued Up if a phantom (so look at what was actually paid)
With net settlement there is no requirement to treat as a phantom, only get the net amount
Share based payments: What is the accounting for SIP awards?
(Not specifically covered by IFRS 2/ FRS 102)
But likely:
Free/Matching Shares: full value on allocation
Partnership shares: normally no charge
If forfeitable, spread over the period
Share based payments: What is the accounting for subsidiaries/ recharges? What is recharge normally equal to?
(Not specifically covered by IFRS 2/ FRS 102)
The fair value expense goes in the Employer company accounts, rather than the parent
Recharge normally equal to fair value
Share based payments: What are the disclosure requirements?
Need to disclose awards made and the factors taken into account to find the fair value
MAR: What is it? Key Dates? Key Facts? Changes from old legislation?
Market Abuse Regulation
3 July 2016
notification requirements by PDMRs and PCAs
Disclosure rules replaced by disclosure guidance, includes AIM companies rather than just listed companies
MAR: What is considered a notifiable transaction?
Options - grant, exercise
Awards - grant, vesting
Shares - sale, acquisition
Includes phantoms as they are related to shares
MAR: Deadline to inform and to whom? What amount need to be disclosed?
PDMR/PCA must notify FCA
AND
Company must notify market
both within 3 days!
Need to disclose amounts over 5kGBP (annual aggregate basis)
FCA online form - need to give name of individual and transaction details (nature, price, date, volume)
Rem Report: Relevant legislation? Three key elements?
Companies Act 2006 3 parts: 1. Annual Remco Chair statement 2. Policy (table/report) 3. Annual report
Rem Report: Where does it have to be filed/ posted?
Filed with Companies House
Posted on company’s external facing website
Rem Report: Annual Remco Chair statement - what is included?
Major decisions
Key changes in policy (if any) and why
How remuneration supports long/short term strategic objectives
Summarise exercise of discretion
Share plans: often includes changes or new share plans and where discretion was used
Rem Report: Policy - what is included?
Forward-looking
Takes effect usually after AGM or start of next financial year
Execs paid off the previous policy
Binding vote and has to be reviewed at least every 3 years
Includes: Future policy table, recruitment rem, illustrations of rem policy, consideration of employees in group and shareholder views, use of discretions
Rem Report: Annual Report - what is included?
Backward-looking, covers implementation of policy over year, parts are audited and it is only put to an advisory vote - shareholders can force another rem vote or put on naughty list if they are unhappy
Includes: single figure (all earnings in prev and this year), pensions entitlement, payments to past directors, due to loss of office, statement of shareholdings and interest, scheme interests, Statement of who was involved in pay decisions, Voting at general meeting
Rem Report: Annual Report - What is included in the performance graph?
Company’s performance against an index
TSR over up to 10 years
Table showing total rem w/ total rem and share awards for CEO)
Line, not curve
What different guidelines exist that influence company remuneration reporting?
IA Guidelines
GC100 Guidance
Disclosure under listing rules
What is Gender Pay Reporting?
Not about equal pay; under Equality Act 2010 Regulations 2017; companies with over 250 employees on snapshot date (April 5) need to disclose and then report by 4 April of the following year
Gender Pay Reporting: What 6 metrics do you have to report on?
- Mean gender pay gap (hourly pay)
- Median gender pay gap (hourly pay)
- Mean bonus pay gap
- Median bonus pay gap
- Proportion of males/females getting a bonus
- Proportion of males/females in each pay quartile (hourly pay)
Gender Pay Reporting: how do company’s publish results?
Company has to report on:
- Government’s gender pay reporting service
- Employer’s public-facing website
Need to be published within 12 months of snapshot date
Can add optional narrative to explain results and detail any actions if you’d like to
Gender Pay Reporting: Where do share plans fit in?
Share plans usually considered ‘bonus pay’ at the time that income tax arises (so usually vest/exercise)
Plans that have tax advantages or only subject to CGT not usually included as bonus pay
Hourly rates of pay includes bonus pay - prorated if it relates to a longer period of time
