6.1 The amounts disclosed in respect of remuneration other than share-based payment compensation must be measured in accordance with the requirements in AASB 1028 Employee Benefits or, when that Standard does not prescribe measurement requirements for a particular item of remuneration, on the basis of the cost to the entity providing that item.
6.1.1 Where an entity provides non-monetary benefits to a specified person, the remuneration includes the effective net cost to the entity of providing the benefits. For example, where an entity provides a director or executive with the personal use of a house rented by the entity, the cost of that benefit includes the rental incurred by the entity and any related fringe benefits tax. Where an entity provides low interest or interest-free loans (including loans assisting the acquisition of its equity instruments by employees), the amount is based on the marginal cost to the entity of borrowing those funds less any interest payable by the employee. The marginal cost to the entity should be based on arm’s length interest rates and not on a concessional rate that an entity may obtain from a related party.
6.1.2 AASB 1028 does not prescribe measurement requirements for items such as commissions that are not employee benefits or for post-employment benefits that are superannuation benefits or medical benefits. In such cases, the amount included in the remuneration disclosed is measured as the net marginal cost incurred, directly or indirectly, by the entity providing the benefit.
Accrual Basis
6.1.3 Remuneration may be earned by a director or executive in one reporting period and paid in a subsequent period. Consistent with the accrual basis of accounting adopted in general purpose financial reports, such items are included in the amount of the remuneration disclosed in respect of the reporting period in which the benefits were earned. For example, amounts that will be paid in a period after an individual has resigned are accrued and disclosed in the period in which the individual earned the right to be paid. An item of remuneration included in the amount disclosed in one reporting period is not also included in remuneration in a subsequent reporting period when that amount is paid. This ensures that the same amount is not included twice in remuneration disclosed.
6.1.4 In some cases, a bonus payable at the end of the preceding reporting period may have increased in value during the reporting period and remain unpaid at the end of the reporting period. Any change in value is included in remuneration in the current reporting period and the amount disclosed is measured as the amount owed at the end of the reporting period less the amount owed at the start of the reporting period. The change in value in the final period in which the benefit is paid is measured as the amount paid less the amount owed at the start of the reporting period.
Section 6 - AASB 1046 - Director and Executive Disclosures by Disclosing Entities - January 2004 - Measurement of Remuneration | Zoe
6.1.5 The total amount disclosed as remuneration for a reporting period may not be equal to the sum of amounts recognised as expenses in the statement of financial performance. Differences may arise for a number of reasons, including the fact that remuneration can include amounts paid, payable or otherwise made available by a related party that is not included in the economic entity. An amount disclosed as remuneration in respect of a specified director may have been included in an amount recognised as a management fee or there may be differences arising from the timing of recognition as an expense.
Present Value Measurement of Non-Current Items
6.1.6 In accordance with AASB 1028, when items other than share-based payment compensation and some specified types of compensation are expected to be settled more than twelve months after the reporting date, such items are measured as the present value of the estimated future cash outflows. In cases where the mechanics of discounting lead to the amount disclosed in the preceding reporting period being less than the amount either paid in or still owing at the end of the reporting period, the increase in the amount is included in remuneration disclosed in the reporting period.
Stock Appreciation Rights
6.1.7 Cash stock appreciation rights (SARs) and hybrid SARs (that may be settled with cash or equity instruments at the discretion of the employee) are included in the definition in paragraph 12.1 of share-based payment compensation but are not included in equity compensation. The cost to an entity is measured as prescribed in paragraph 6.4 and included in the remuneration component disclosed in accordance with paragraph 5.2(a)(ii).
Share-based Payment Compensation
6.2 Equity compensation provided as remuneration by the disclosing entity or any of its subsidiaries must be measured using the fair value of its equity instruments at the grant date, as described in paragraph 6.3, less any amount paid or payable by the recipient for that instrument. The amounts disclosed as remuneration for the reporting period are determined in accordance with the directions in Appendix 2 and the principles in Appendix 6.
6.2.1 The amount payable by the recipient on the acquisition of an equity instrument does not refer to any amount payable in the future to acquire another equity instrument, such as the price to be paid for a share when an option is exercised. In situations where an employee is granted a share and is required to pay an amount less than the market value of the share at the grant date, the benefit to the recipient as remuneration is measured as the difference between the market value of the share and the amount payable to the issuing entity.
6.2.2 Share-based payment compensation benefits that are not equity compensation are measured in accordance with paragraph 6.4 and are included in the component disclosed in accordance with paragraph 5.2(a)(ii). They are not included in the equity compensation components required by paragraph 5.2(c).
6.3 The fair value of equity instruments at grant date is:
(a) in the case of shares and units, the market price at grant date (or estimated market price if not publicly traded) of an equivalent share or unit (being paid up to the same extent and carrying equivalent entitlements or restrictions);
(b) in the case of options and rights that are publicly traded, the market price at grant date;
(c) in the case of options and rights that are not publicly traded over publicly-traded shares or units, estimated using an option-pricing model that takes into account, as at grant date, the exercise price and expected life of the instrument, the current price of the underlying share or unit and its expected volatility, expected dividends and the risk-free interest rate for the expected life of the instrument;
(d) in the case of options and rights over shares or units not publicly traded, estimated as at grant date using an option-pricing model and the six variables identified in paragraph 6.3(c), and using as the volatility variable the expected average volatility in the entity’s industry; and
(e) in the case of any other equity instrument, estimated using the method in paragraphs 6.3(a), (b), (c) or (d) that most closely reflects the functional characteristics of the instrument.
6.3.1 The amount included in the equity compensation components disclosed as the remuneration of directors and executives is derived from the fair value of the equity instrument at the grant date, less any amount due from the recipient, and allocated in accordance with the principles in Appendix 6. Where an equivalent instrument is traded on an active and liquid market, the fair value is the market value at the grant date.
6.3.2 In the case of share options and rights, the method of determining the fair value of the equity instrument depends on the circumstances. If an equivalent option or right is quoted on an active and liquid market, the market value at the grant date is used. If an option or right is not traded but the underlying instrument is publicly traded, an accepted option-pricing model, such as the Black-Scholes (modified for dividends) or a binomial model, can be used, provided it is appropriate for the type of option or right and takes into account the six variables prescribed in paragraph 6.3(c).
6.3.3 In the case of options or rights over shares or units that are not publicly traded, it is unlikely there will exist a reliable estimate of expected volatility specific to the underlying equity instruments. Paragraph 6.3(d) requires the volatility variable to be taken as the average expected volatility for the industry of the entity responsible for issuing the shares or units underlying the options or rights.
6.3.4 In respect of the variables for volatility, dividends and option life to be used in estimating the value of options or rights, it would not be acceptable to use unadjusted historical data unless currently-available information indicated the future would be little different from the past. The expected values for these variables are determined as the best estimates from the range of reasonable expectations based on historical information modified to reflect current knowledge and the extent to which past experience has been shown to be a reliable predictor of future experience.
6.3.5 The risk-free interest rate referred to in paragraph 6.3(c) is the implied yield on zero-coupon national government bonds with a remaining life equal to the life of the option or right that is being valued.
6.3.6 A reasonable estimate of the fair value at grant date of options, rights and other equity instruments can usually be obtained by using a generally accepted option-pricing model. Performance rights will usually be measured in the same way as options, since commonly they are functionally equivalent to options without an exercise price. The option-pricing model adopted is determined with reference to the terms of the performance right and the trading status of the underlying equity instrument. In some circumstances, it may be necessary to adopt an option-pricing model that has been specifically modified to take into account unusual features of the equity compensation scheme. For example, where the exercise price decreases (or increases) by a specified amount linked with specified changes in the price of the underlying share, compensatory modifications are made. It is assumed that equity compensation schemes will only be created and accepted when directors and executives can estimate the fair value of the equity component and compare it with alternative forms of compensation. The option-pricing model that generated the values used when deciding on the structure of a remuneration package may continue to be the most appropriate model.
6.3.7 When the value of an equity instrument has changed from that at grant date as a consequence of external influences changing one or more of the six variables included in the option-pricing model, the value of the instrument is not remeasured in reporting periods subsequent to granting.
6.3.8 Changes in value caused by a decision of the entity to alter the terms of options or rights (such as changing the remaining life or exercise price) are included in remuneration, unlike changes resulting from external influences that affect all shareholders equally. Remeasurement is required and the details are disclosed in accordance with paragraph 7.6. When the issuing entity alters the terms of vested options or rights, the effect of the change (identified in paragraph 7.6(e)) is included in remuneration in the reporting period in which the decision is made, in the component identified in paragraph 5.2(c)(iii). When the alteration occurs before vesting date, the change in value identified in paragraph 7.6(e) is added to the value of the grant remaining to be allocated to reporting periods up to vesting date, as determined in Appendix 6. Unlike changes to vested options or rights, a change before vesting date causes an increase in the remuneration component identified in paragraph 5.2(c)(ii) and the total is not disclosed in the component in paragraph 5.2(c)(iii).
6.3.9 Gains made when a vested option or right is exercised are not remuneration under this Standard and are not required to be disclosed. Similarly, a loss occurring when vested options or rights expire unexercised is not included in (or deducted from) remuneration disclosed.
6.3.10 When equity instruments other than shares, units, options or performance rights are provided, they are measured in accordance with paragraph 6.3(e). The amount disclosed as a component of remuneration in accordance with paragraph 5.2(c)(iv) is determined by applying the principles in Appendix 6 and the directions in Appendix 2. References to options in the Appendices are taken to include other equity instruments that are functionally equivalent even though the name of the equity instrument does not include the word “option”.
6.3.11 Further details on the measurement of equity compensation for individuals in accordance with the principles in Appendix 6 are provided in Appendix 2.
6.4 Share-based payment compensation that is not equity compensation must be measured initially in the reporting period in which the benefit is granted using the method required in paragraph 6.3(e) (substituting reporting date for grant date) and the allocation principles in Appendix 6 to determine the amount included as remuneration in the reporting period. Until the grant is settled or reclassified, changes in value are included in remuneration and must be measured using the same method and allocation principles in subsequent periods as follows:
(a) the value must be measured at the end of each reporting period prior to settlement, or reclassification as equity compensation, and the change in value calculated as the difference between the values at the beginning and end of the reporting period;
(b) in the period in which settlement or reclassification to equity compensation occurs, the value is measured at the date of settlement or reclassification and the change in value is calculated as the difference between that value and the value at the beginning of the reporting period; and
(c) if and when an employee decides irrevocably to receive equity instruments (and not cash) as settlement, a benefit must be reclassified as equity compensation and from that point onwards treated as equity compensation and not subsequently remeasured.
6.5 When an equity compensation grant is reclassified during the reporting period as a cash SAR following a decision by the entity to settle in cash (and not equity instruments), the change in value is included as remuneration under paragraph 5.2(a)(ii) and, in accordance with the principles in Appendix 6:
(a) the change in value must be measured as the difference between the value at grant date and the value at the reporting date or, if settled during the reporting period, at the date of settlement; and
(b) in subsequent reporting periods until settled, changes in value must be measured in accordance with paragraph 6.4.
6.5.1 Share-based payment compensation benefits that are not equity compensation are treated as bonus plans. They comprise:
(a) cash SARs, being stock (or share) appreciation rights where the employee has been granted, conditionally or otherwise, an amount that depends on the future price of the underlying equity instruments; and
(b) hybrid rights, where the employee has the right to decide in the future whether to receive equity instruments or cash (instead of the equity instruments).
6.5.2 A liability recognised in respect of a cash SAR is first disclosed and measured in the reporting period in which the benefit is granted. Any change in the value of the benefit (being an increase or decrease in the liability in accordance with Appendix 6) in a subsequent reporting period is disclosed as remuneration (included in the cash bonus component, paragraph 5.2(a)(ii)) in each reporting period until settled in cash.
6.5.3 When the benefit is a hybrid right and the terms are such that the employee is able to choose at some point prior to settlement that settlement will be in equity instruments and not cash, the benefit is treated as a cash SAR until the decision is made. If the employee chooses cash settlement, classification remains the same and any changes in value of the cash SAR continue to be measured and disclosed at the end of each reporting period until settled. If the employee chooses equity at or prior to the date of settlement, the change from the accrued value at the start of the reporting period to the value at the date of the decision is measured in accordance with paragraph 6.4(b) and included in the amount of remuneration disclosed under paragraph 5.2(a)(ii). In situations when equity settlement is chosen prior to settlement, the benefit is classified as equity compensation and is not subsequently remeasured. Although it could be argued that a change in value on choosing equity would be more properly included with other equity compensation, it may be misleading to associate only the change in value with the number of equity instruments involved. In effect, any amount previously accrued as a liability would be transferred to the appropriate equity account, but that amount would not constitute remuneration for the period in question. Only the change in value during the reporting period until the decision was made is included in remuneration disclosures.