KPMG Reporting Insights Remuneration reporting: when change happens

KPMG Reporting Insights Remuneration reporting: when change happens May 2016 kpmg.com.au

KPMG Insights: Remuneration reporting 1 Introduction Remuneration reporting for key management personnel (KMP) in accordance with the requirements of the Corporations Act 2001 (the Act) is a complex area for preparers, auditors and shareholders. Even the most seasoned preparer can be thrown off when situations change. What should be disclosed when a KMP leaves the entity?, How do I deal with this new long-term incentive plan? and even Who are my KMP? are all questions that occasionally require thoughtful consideration. This publication is designed to assist with some of the common areas of concern, based on questions frequently addressed at KPMG. Overarching principles Two overarching principles ought to be adhered to when contemplating remuneration reporting disclosures for KMP: disclosures should reflect the period of service as a KMP, and disclosed amounts should follow the recognition, measurement and classification requirements of accounting standards. Period of service as a KMP We ll go into further detail later in the publication, but the first overarching principle is that the amounts to be disclosed for a KMP and the accompanying narrative should reflect the remuneration attributed to that person in respect of their service as a KMP. Recognition, measurement and classification Under the Corporations Regulations 1, the amounts to be disclosed in the Remuneration Report should reflect the measurement of the expense under accounting standards, as well as their classification. That is, the amounts that are disclosed in the Remuneration Report should agree to the amounts recognised in the financial statements. Relevant accounting standards are AASB 119 Employee Benefits and AASB 2 Share-based Payment. Refer to the latest edition of KPMG Insights into IFRS for detailed guidance on accounting for transactions under these standards. The Corporations Regulations 2 also require the disclosure of payments and benefits for each KMP according to several prescribed categories that align to the relevant accounting standards: Category Short-term employee benefits Post-employment benefits Long-term employee benefits other than short-term or post-employment benefits Termination benefits Share-based payments Required sub-categories (a) cash salary, fees, and short-term compensated absences, (b) short-term cash profit-sharing and other bonuses, (c) short-term non-monetary benefits, and (d) other short-term employee benefits; (a) pension and superannuation benefits, and (b) other post-employment benefits; (a) amounts attributable to a long-term incentive plan; and (b) other amounts; (a) equity-settled, showing (i) shares and units and (ii) options and rights, (b) cash-settled, and (c) all other forms of share-based payment compensation including hybrids. Refer to the example remuneration report at Appendix 2 for an example of how the above categories are used when disclosing amounts of remuneration. 1. Corporations Regulations 2001 2M.3.03(4). 2. Corporations Regulations 2001 2M.3.03(1) items 6-9, 11.

KPMG Insights: Remuneration reporting 2 Question 1: who are the KMP? s300a (1)(c) of the Act requires the disclosure of remuneration information for key management personnel. s9 of the Act defines key management personnel as having the same meaning as in the accounting standards. AASB 124 Related Party Disclosures defines key management personnel as those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. KPMG Insights into IFRS 3 provides guidance as to the determination of the composition of KMP for some common international scenarios. Consideration of a common Australian scenario follows. KMP of an entity acquired during the period Being a KMP of an entity acquired during the period does not automatically result in that person being a KMP of the acquiring consolidated entity. An assessment should be performed to determine whether (and when) the person becomes a KMP of the acquiring consolidated entity, including consideration of the significance of their role within the acquiring consolidated entity. This could be the date of acquisition or the date the person s employment commences with the acquiring consolidated entity, whichever is earlier. In other words, the date the person commences as a KMP is unlikely to be before their commencement date with the consolidated entity. Example 1 Company A acquires Company B. The CFO of Company B is a KMP of Company B both before and after the acquisition date. From that date, an assessment needs to be performed to determine whether the role of Company B CFO meets the definition of a KMP from the perspective of the Company A Group (with Company A as the parent). This is often a matter of judgement based on the relative importance of Company B to the Company A Group and how executives report to the Group CEO or Board of Directors. Question 2: what disclosures are required when a person becomes a KMP? Internal promotion When an existing employee is promoted or otherwise becomes a KMP of the entity, the employee s remuneration starts being disclosed in the remuneration report. The amounts disclosed should only be for the period the employee was a KMP. For some elements of compensation, this will be straightforward, while other elements may require more judgement. Example 2 On 27 October 20X6, Mr Pine is promoted to Group CFO of Company C, a KMP position. Previously, Mr Pine was the group financial controller, a non-kmp position. Mr Pine s remuneration from 27 October 20X6 is required to be disclosed in the 30 June 20X7 remuneration report, reflecting his service as a KMP. Remuneration earned (and expensed) prior to this date was not in his capacity as a KMP and is not required to be disclosed. If Mr Pine received his first share-based payment arrangement as a result of the promotion to Group CFO, then clearly only the amount recognised in the financial statements from the date service commenced in the KMP role for the newly-granted award should be disclosed in the remuneration report. However, if Mr Pine received sharebased payment grants in his earlier role, the 30 June 20X7 remuneration report disclosures should only include the portion of the share-based payment expense for those earlier awards relating to the period from 27 October 20X6 to 30 June 20X7. Any share-based payment expense related to Mr Pine s employment prior to 27 October 20X6 is not disclosed in the 30 June 20X7 remuneration report. Similarly, any bonus arrangement in force for the full financial year should be apportioned between the periods before and after Mr Pine s elevation to KMP, with only the amounts apportioned to the period when Mr Pine was a KMP disclosed in the remuneration report. Sometimes the newly promoted employee s bonus arrangement will be revised as part of their promotion. In these circumstances, the portion of the bonus arrangement that relates to the KMP period is disclosed. 3. Insights into IFRS 12th edition: 5.5.40.

KPMG Insights: Remuneration reporting 3 The diagram below illustrates the periods to be included in the 30 June 20X7 remuneration report for Mr Pine. Prior bonus The Regulations 4 require the disclosure of the number of options or performance rights in effect at the start of the year, granted, vested and forfeited during the year, and the balance outstanding at the end of the year and a similar roll forward of other equity instruments such as ordinary or preference shares. Since Mr Pine is not a KMP at the start of the year, the balance of any instruments outstanding at the start of the year are not required to be disclosed. In our experience, some organisations disclose N/A for the opening balance amounts in these scenarios, with the number already held disclosed as an other change during the period. Footnotes to the tables explain the KMP s individual circumstances. Other practices may also be acceptable if appropriately disclosed. Shareholder approval of remuneration structure Often, the share-based payment grants for incoming CEOs require approval by shareholders at the next Annual General Meeting (AGM). Since the AGM will take place four to five months after year-end (normally October/November for June year-ends), the exact details of the CEO s remuneration package may not be known or approved when completing the remuneration report. 27 Oct X6 30 Jun X7 Include in rem report Existing share-based payment New share-based payment New bonus Existing bonus plan AASB 2 requires the determination of the grant date in order to calculate the measurement of a share-based payment; this is the date when there is a shared understanding of the terms and conditions of the share-based payment arrangement. For there to be a shared understanding, there must be an offer and an acceptance of that offer, as well as approval by the Board or other designated authority. When an element of a KMP s remuneration structure requires shareholder approval at the AGM, there cannot be a shared understanding until the date of the AGM. However, the award is still expensed from the date that service commences for the award. In these circumstances, a provisional measurement of the grant date fair value is required at the reporting date. This involves management making a best estimate of the fair value of the award, and recording the relevant accounting entries and making the appropriate disclosures on this basis. The valuation will be re-performed and become final when the grant date is achieved, in this case at the AGM date. Example 3 Ms Tan is appointed the CEO of Company D on 1 April 20X6. Her employment contract includes details of her performance rights awards that must be approved by shareholders at the AGM, due to take place on 27 October 20X6. Company D has a 30 June 20X6 yearend. Given the grant date has not been achieved, what should be recognised in Company D s 30 June 20X6 financial report and remuneration report? (a) Nothing there is no shared understanding therefore no amounts should be recognised (b) The full fair value of the share-based payment award as at 1 April 20X6 (c) The proportional amount from April to June 20X6, based on the estimated grant date fair value of the share-based payment award measured as at 30 June 20X6. If you answered (c), then you are correct. Ms Tan is providing employment services under a contract that includes a potential share-based payment and as a result, Company D is required to recognise an expense in relation to this service from 1 April to 30 June 20X6 based on the estimated grant date fair value and include this expense in the remuneration report. For more detailed guidance on the accounting for share-based payments, refer to KPMG Insights into IFRS 5 or KPMG s IFRS Handbook: IFRS 2 Share-based Payment 6. 4. Corporations Regulations 2001 2M.3.03(1) items 15 & 17. 5. Insights into IFRS 12th edition: Chapter 4.5. 6. Speak to your KPMG Advisor to obtain a copy.

KPMG Insights: Remuneration reporting 4 Question 3: what disclosures are required when a person ceases to be a KMP? The amount to be disclosed as KMP remuneration should reflect all amounts attributable to that person in respect of their service as a KMP. Therefore, if the KMP leaves the employment of the entity or ceases to be classified as a KMP, then disclosures are required only for the period when the person was a KMP. Under the accruals approach required by accounting standards, the timing of payment is less important than the timing of the service that leads to the payment. Example 4 (a) Q: Company E is a disclosing entity with a 30 June 20X6 year end. Mr Archer was the CFO of Company E and in that role is a KMP. Mr Archer s employment contract commenced on 1 July 20X0 and was terminated on 1 March 20X6. What amounts should be disclosed for Mr Archer given he was no longer a KMP at year end? A: Since Mr Archer was a KMP at the start of the year, Company E s remuneration report should include details of his remuneration from 1 July 20X5 to 1 March 20X6, including any termination benefits, share-based payments or bonuses arising from service in that period. Example 4 (b) Q: Ms Tyler has been the Operations General Manager at Company F since 1 January 20X5. In prior years, this position was determined to be a KMP, however after a restructure of the business on 1 January 20X6, the role no longer has the authority and responsibility to qualify as a KMP. What amounts should be disclosed for Ms Tyler in 20X6 given she was no longer a KMP at year end? A: Since Ms Tyler was a KMP at the start of the year, Company F s remuneration report should include details of her remuneration from 1 July 20X5 to 1 January 20X6. Employee benefits attributed to Ms Tyler s service after 1 January 20X6 are not required to be disclosed. Is it appropriate to disclose negative amounts? In certain circumstances, components of a KMP s remuneration can be negative. If the amount determined under accounting standards is negative, then this is the amount that should be disclosed in the remuneration report. Example 5 To continue Example 4(a), Mr Archer was a participant in Company E s share rights plan. Details of one grant under the plan are set out below. Grant Service Commencement Date Vesting Date Conditions Grant date fair value of a performance right 10,000 share rights, which convert to ordinary shares upon vesting 1 July 20X3 30 June 20X6 3 year service condition only $240

KPMG Insights: Remuneration reporting 5 Assuming Mr Archer forfeited this grant on 1 March 20X6 as a result of failing to meet the service condition, the share-based payment expense would be recognised as follows. Year Expected total Cumulative expense at period end $ Current period 20X3-X4 2,400,000 7 800,000 8 800,000 20X4-X5 2,400,000 1,600,000 9 800,000 20X5-X6 0 0 (1,600,000) 10 Thus, the expense recognised in the 20X6 financial statements in relation to Mr Archer is ($1,600,000) and this is also the amount to disclose in the remuneration report. Often entities will draw a connection in the narrative disclosure between any negative expense amounts to the cessation of service by the KMP. Good leavers clauses Contemplated by share-based payment agreement specifically include good leaver clauses. These clauses make specific mention of how the entitlements attributable to a person will be treated upon death, retirement or other specified scenarios. In many of these scenarios, the accounting result is that the sharebased payment expense that would have previously been recognised over the remaining vesting period is instead accelerated and recognised over the revised vesting period. Sometimes, the terms and conditions of share-based payment arrangements Example 6 Ms Nichols is General Counsel at Company X and is a participant of the Company s long-term incentive plan. In Company X, the position of General Counsel is a KMP. On 1 April 20X6 Ms Nichols announces her intention to retire on 30 September 20X6. As the incentive plan agreement sets out that participants are entitled to the full amount of their award on retirement, management should accelerate the recognition of the share-based payment expense. Company X has a 30 June 20X6 year-end. Grant Service Commencement Date Vesting Date (ignoring retirement event) Conditions Grant date fair value of a performance right 5,000 share rights, which convert to ordinary shares upon vesting 1 July 20X4 30 June 20X7 3 year service condition only $120 7. Calculated as 10,000 performance rights * $240 fair value. 8. Calculated as $2,400,000 total expected cost * 1/3 vesting period. 9. Calculated as $2,400,000 total expected cost * 2/3 vesting period. 10. Calculated as the reversal of all previously-recognised amounts as a result of the forfeiture.

KPMG Insights: Remuneration reporting 6 Example 6 continued... If Company X had been expecting Ms Nichols to remain in employment throughout the 3 year vesting period, a share-based payment expense would be recognised as follows: Year Expected total Cumulative expense at period end $ Current period 20X4-X5 600,000 11 200,000 12 200,000 20X5-X6 600,000 400,000 13 200,000 20X6-X7 600,000 600,000 14 200,000 The amounts disclosed in the remuneration report would be $200,000 each year. However, because of Ms Nichols announcement during 20X5-X6 to retire partway through the 20X6-X7 year, the expense recognised for the award should be amended as follows on the basis the full amount will be awarded on retirement: Year Expected total Cumulative expense at period end $ Current period 20X4-X5 600,000 200,000 200,000 20X5-X6 600,000 533,333 15 333,333 20X6-X7 600,000 600,000 66,667 16 The amount disclosed in the 20X5-X6 remuneration report would be $333,333 rather than $200,000. Alternatively, if the plan agreement sets out that participants are entitled to the pro rata proportional amount of their award on retirement, based on the proportion of the total service period served to that point, management should treat the award as a forfeiture of the portion that does not vest. 17 In this scenario, Ms Nichols would be entitled to three-quarters of the number of performance rights, i.e. 3,750 shares 18. The following table reflects how the expense would be included in the remuneration report each period in the case of a pro-rata vesting: Year Expected total Cumulative expense at period end $ Current period 20X4-X5 600,000 200,000 200,000 20X5-X6 450,000 400,000 19 200,000 20X6-X7 450,000 450,000 20 50,000 11. Calculated as 5,000 performance rights * $120 fair value. 12. Calculated as $600,000 total expected cost * 1/3 vesting period. 13. Calculated as $600,000 total expected cost * 2/3 vesting period. 14. Calculated as $600,000 total expected cost * 3/3 vesting period. 15. Since Ms Nichols has given her notice to retire, management determine that the revised vesting period is from 1 July 20X4 to 30 September 20X6, i.e. 27 months. At 30 June 20X6, with 3 months remaining, the cumulative expense should be 24/27 * $600,000 = $533,333 16. Following on from footnote 15, the amount recognised in 20X6-X7 is 3/27 * $600,000 = $66,667. 17. Refer to Insights into IFRS 12th edition: 4.5.860.10. 18. Calculated as 5,000 shares * 27/36 months = 3,750 shares. 19. Calculated as 3,750 shares * $120 *24/27 = $400,000. 20. Calculated as 3,750 shares * $120 = $450,000.

KPMG Insights: Remuneration reporting 7 Not contemplated by share-based payment agreement i.e. discretionary In other cases, the terms and conditions of the share-based payment arrangement do not clearly outline the impact of being a good leaver and the entity s board/ management make a discretionary decision about vesting at the time the employee finishes employment. In these circumstances, following the guidance in KPMG Insights to IFRS 21, management should determine whether exercising the discretion constitutes a modification 22 to the original grant or whether it constitutes the cancellation of the original grant and the issuance of a new grant 23. The outcome of this determination will then be reflected in the remuneration disclosures. Comparative disclosures The tenure of directors and executives can end for several reasons; they can resign, the entity can terminate their contract, or upon death. Preparers and auditors often seek guidance on the impact on comparative disclosure requirements in these scenarios. As noted above, the amount to be disclosed as KMP remuneration should reflect all amounts attributed to that person in respect of their service as a KMP. Example 7 Mr Smith was a KMP of Company G until his resignation and departure on 1 April 20X6. In Company G s 30 June 20X6 remuneration report, both current and comparative period remuneration is required to be disclosed. Mr Smith may be removed completely from Company G s 30 June 20X7 remuneration report, as Mr Smith was not a KMP at any point during the 20X7 year 24. However, this can lead to a difference when compared to the disclosures given under AASB 124 in the related party note in the financial statements. To avoid this disparity, some organisations elect to include former KMP remuneration in the remuneration report to ensure the comparative KMP remuneration per the remuneration report continues to reconcile to the comparatives in the related party disclosure. Two possible approaches are set out in the Appendices. The Corporations Regulations 25 require the disclosure of the number of options and performance rights in effect at the start of the year, granted, vested and forfeited during the year, and the balance outstanding at the end of the year. Since Mr Smith is not a KMP at the 20X6 year end, the balance of any performance rights or options that were not forfeited as a result of his resignation are not required to be disclosed. Entities sometimes disclose N/A or nil for the year end disclosures in these scenarios, with an explanatory note referring to the individual ceasing employment. Termination payments In some cases, KMP are given a payment upon termination that requires the former employee to refrain from engaging in employment with a competitor. This is commonly referred to as gardening leave or a non-compete payment. Alternatively, the individual s contract may allow for a payment in exchange for immediately ceasing employment instead of serving out their contractual notice period. These are sometimes called payments in lieu of service. The payment may be a lump sum amount or may be paid through normal payroll amounts over the course of the notice period. A question arises as to whether this remuneration ought to be accounted for and disclosed as a termination benefit or as a post-employment benefit. As mentioned earlier, the period of service that earned the payment is often more relevant than the timing of the payments. Under AASB 119: Post-employment benefits are employee benefits (other than termination benefits and short-term employee benefits) that are payable after the completion of employment. Post-employment benefits are recognised over the related period of service. On the other hand, termination benefits are recognised at the time of termination. Termination benefits are employee benefits provided in exchange for the termination of an employee s employment as a result of either: (a) An entity s decision to terminate an employee s employment before the normal retirement date; or (b) An employee s decision to accept an offer of benefits in exchange for the termination of employment. Payments that are linked to cessation of a service ought to be analysed to determine the appropriate classification. The main factor to consider here is whether the benefits are being provided in exchange for employment services (and recognised over a service period), or as a result of employment termination (and recognised at a point in time). The distinction will then be applied when disclosing the payments in the remuneration report their classification, timing and amount will following the accounting standard requirements. For more detailed guidance on the accounting for termination payments, refer to KPMG Insights into IFRS 26. 21. Refer to Insights into IFRS 12th edition: 4.5.620.10. 22. Refer to Insights into IFRS 12th edition: 4.5.1280.30. 23. Refer to Insights into IFRS 12th edition: 4.5.1430.10. 24. Corporations Act 2001 s300a(1)(c) requires the Remuneration Report for a financial year to include the prescribed details of each KMP of the company or consolidated group. 25. Corporations Regulations 2001 2M.3.03(1) items 15, 17 & 18. 26. Refer to Insights into IFRS 12th edition: 4.4.1450.10.

KPMG Insights: Remuneration reporting 8 Future services from former KMP Detailed consideration should be made when arrangements are entered into with outgoing KMP, in particular for future consulting or other services to be rendered by the outgoing KMP, to determine the appropriate classification of the benefit. This consideration requires scrutiny to understand what services the entity is obtaining in return for the benefit, including whether the services indicate the person still qualifies as a KMP. Careful analysis ought to be undertaken to determine classification as either: A termination benefit, for past services, triggered by the termination event; A short-term benefit, if the benefit is attributable to future services; Another type of employee benefit or share-based payment unrelated to their service as KMP; or A non-employee benefit, which is not in their capacity as a current or former employee. Question 4: What amounts should be recorded and disclosed? As noted earlier, under the Corporations Regulations 27, the amounts to be disclosed in the remuneration report should reflect the measurement of the expense under accounting standards. Fundamentally, this results in the recognition and disclosure of amounts under some variation of accrual accounting. This means that the timing of cash payments is less relevant than the service that earns the payment. Alternative disclosures Some disclosing entities present an alternative remuneration table alongside the audited statutory remuneration disclosures. A common alternative is on a cash basis or a mixture of cash and accruals. For share-based payments, the alternative measurement may involve remeasuring the awards through to the vesting date and reflecting the outcome of all performance conditions. The objective of these alternative disclosures should be to increase transparency of disclosure for users of the financial report and to enhance their understanding of remuneration outcomes. The basis (or bases) of measurement for the alternative disclosure should be appropriately introduced and explained so that users will understand the significant judgements that the preparers have made in arriving at the disclosed amounts. Dealing with conditions A common feature of equity-settled share-based payment arrangements is a service condition, e.g. Mr P is granted 100 performance rights which vest in three years time and require continuous employment with the organisation. Another common feature of equitysettled arrangements is a performance condition, which can be a market or non-market condition. Broadly speaking, a market condition is based on the price of the equity instruments of the entity, in absolute terms or relative to other entities. Non-market conditions are those not related to the price of the equity instruments. KPMG Insights into IFRS provides further guidance for determining the measurement of sharebased payment arrangements with these conditions 28. Although rare, other non-vesting conditions may exist in an award. Non-vesting conditions are those that do not depend on the service being received by the entity, such as performance conditions that extend beyond the service period. For equity-settled share-based payment arrangements, any non-vesting conditions and/or market conditions are taken into account when measuring the grant date fair value of the award. Under AASB 2, as non-vesting and market conditions are included in the determination of the grant date fair value, the achievement or otherwise of these conditions are not taken into account when estimating the amount of the share-based payment expense. In contrast, service conditions and/or non-market conditions are not taken into account in the valuation at grant date; rather, the expected achievement of these conditions is estimated by management at each reporting date, and incorporated into the share-based payment expense recorded for that period. 27. Corporations Regulations 2001 2M.3.03(4). 28. Insights into IFRS 12th edition: 4.5.350.10.

KPMG Insights: Remuneration reporting 9 Dealing with estimated forfeitures Based on their historical experience, organisations may expect future staff turnover which means there is a less than 100% probability that all employees (including KMP) will remain in continuous employment for the vesting period. Applying this probability across the entire entity for P&L recognition is usually a straightforward estimate i.e. factoring a probability into the total share-based payment expense is not usually problematic. However, a question arises in relation to applying this probability factor to individual KMP and their remuneration disclosures. A 10 percent forfeiture estimate applied to the larger employee population does not necessarily mean that a particular KMP will vest in only 90 percent of his or her award. In the absence of evidence to the contrary, if the KMP is still employed at the end of the reporting period, then this is the likely best evidence of them remaining in employment through to the end of the vesting period. As a result, in these circumstances, it is appropriate to recognise and disclose 100 percent of the share-based payment expense for the KMP (ignoring performance hurdles), despite the less than 100 percent probability applied across the entity. Bonuses not yet approved In some circumstances, preparers are not certain of the amount and/or likelihood of settlement of bonus payments. Paragraph 19 of AASB 119 requires an entity to recognise a bonus if the entity has a present legal or constructive obligation and if a reliable estimate can be made. If these conditions are met for recognition of a bonus expense in the financial report, then it follows that the conditions are equally satisfied for disclosure in the remuneration report. Question 5: What remuneration report issues arise in an IPO or in a business combination? Listing after period end For a company that lists after period end but before lodging the financial statements for that period end, management may wonder whether a remuneration report is required, even though they were not listed during the financial year. We have observed that companies prepare remuneration reports in respect of the reporting period when they become listed after that period end. For example, a company that lists in August 20X6 will include a remuneration report in their annual financial report for the year ended 30 June 20X6. The following factors indicate that a remuneration report is required: The remuneration report is required to be included in the directors report of a company that is a listed disclosing entity. At the time the newly listed company s directors sign the directors report, the company is a listed disclosing entity and so the disclosure requirements of S300A need to be addressed; 29. Corporations Act 2001, s250sa. 30. Corporations Act 2001, s250r(2). At the newly listed company s next AGM, the Act requires the company to allow members a reasonable opportunity to ask questions about, or make comments on, the remuneration report 29 and a resolution that the remuneration report be adopted must be put to the vote 30. For this vote to take place, there must be a remuneration report to consider. New entity in IPO A common feature of an IPO is the incorporation of a top hat or ListCo entity, which, upon listing, acquires the pre-existing operating entities. Quite often, an IPO will be established through continuation of business whereby the financial statements of the newly formed ListCo Group will be prepared on the basis the ListCo had been incorporated at the start of the comparative reporting period. In these circumstances, we believe that comparative KMP remuneration amounts should be disclosed in both the financial report and the remuneration report. The Corporations Act requirements on remuneration reporting only apply to the entity that is actually listed, therefore an argument could be mounted that if ListCo was incorporated on 1 March 20X6 and listed on the ASX on 1 April 20X6, then remuneration disclosures are only required from the date of incorporation to the reporting date. Under this view, no comparative amounts would be required, because the ListCo did not exist in the comparative period. Alternatively, we have also observed circumstances where the ListCo s remuneration report has mirrored the financial statement accounting treatment, i.e. included remuneration disclosures for the entire year, rather than just from the date of listing, reflecting the view that the group is a continuation of the pre-existing operating entities. Either way the users of the remuneration report will benefit from a clear description of the approach the group has taken.

KPMG Insights: Remuneration reporting 10 Question 6: what is a strike and what disclosures are required? In 2011, the Corporations Act was amended to empower shareholders to hold directors accountable for their decisions on executive remuneration, to address conflicts of interest in the remuneration setting process, and to increase transparency and accountability in executive remuneration matters 31. A previous amendment to the Act required that at each AGM, shareholders would cast a non-binding vote in relation to the remuneration report The Bill introduced the two strikes rule as follows: Since 1 July 2011, if more than 25 percent of the votes cast in the nonbinding vote are against the adoption of the remuneration report, the company has a first strike and in the subsequent year s remuneration report, the directors must report on actions taken to address shareholder concerns If, at the subsequent AGM, more than 25 percent of the votes cast in the non-binding vote are against the adoption of the remuneration report, the company has a second strike and a spill vote is held. If successful, the spill vote will require the entire board to resign and seek re-election within 90 days of that AGM at a spill meeting and requires at least 50 percent of the votes cast in order to pass. A managing director is not subject to the resignation and re-election requirements. Following receipt of a first strike, it is important for directors to engage with the relevant shareholders, investor groups and/or proxy advisors in order to understand the reasons for the no vote. This then provides directors with the opportunity to consider the concerns raised, and either: Adjust the remuneration framework in order to address shareholder concerns and explain the adjustments, with supporting rationale, to shareholders, investors and proxy advisors through direct engagement and ultimately disclosure in the remuneration report, or Communicate why the directors consider the chosen framework to be appropriate. This is typically best done through direct engagement with the relevant shareholders, investor groups and/or proxy advisors, as well as additional disclosure in the following year s remuneration report. Some of the areas typically addressed by directors to alleviate shareholder concerns include: Providing clearer communication on how pay and performance are linked Providing additional rationale supporting the choice of remuneration approach (including choice of performance measures), and Completing a review of overall levels of remuneration. The same amendments to the Act also introduced additional disclosures in relation to services provided by remuneration consultants. These disclosures were seen as appropriate in order to increase transparency and reduce the potential for conflicts of interest. 31. Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011.

KPMG Insights: Remuneration reporting 11 Appendix 1: ANZ 2015 Annual Report excerpt The following excerpt from the ANZ remuneration report illustrates one way of segregating current and former KMP. 32 32. Australia and New Zealand Banking Group 2015 Annual Report, p50.

KPMG Insights: Remuneration reporting 12 Appendix 2: Example Public Company Limited 2015-16 excerpt The following excerpt from Example Public Company Limited: Guide to annual reports illustrative disclosures 2015-16 illustrates one way of complying with the prescribed categories of remuneration, and one way of segregating former executives. Directors and executive officers remuneration 32 In dollars Executives Salary & fees (D) STI cash bonus (A) Short term Postemployment Nonmonetary benefits Total Other long term Superannuation benefits (D) Termination benefits Share-based payments Proportion of Options and rights (B & C) Total remuneration performance related Name, CFO 2016 194,545 77,500 111,263 383,308 41,500 8,325-215,000 648,133 45.1% 2015 188,233 74,558 109,225 372,016 39,556 8,305-125,000 545,877 Name, COO 2016 490,908 56,000 139,297 686,205 66,800 8,325-62,500 823,830 7.4% 2015 387,831 54,666 137,555 580,052 64,887 8,305 - - 653,244 Name, Finance Director, Karooa Pty Limited, Example Mining Company Pty Ltd Former 2016 380,111 70,000 112,821 562,932 45,800 8,325 - - 617,057 11.3% 2015 310,885 98,666 105,332 514,883 44,661 7,865 - - 567,409 Name, Finance Director, Example Gumnut Limited (resigned [date]) 2016 164,376 37,500 141,756 343,632 28,609 8,325 116,658-497,224 7.5% 2015 200,634 45,666 112,069 358,369 56,127 7,865 - - 430,693 Total executives remuneration 2016 2,924,644 518,528 1,089,609 4,532,781 356,009 91,575 116,658 215,000 5,312,023 2015 2,439,863 573,715 976,767 3,990,345 393,412 79,970-125,000 4,588,727 Total directors and executive officers remuneration 2016 3,674,639 621,028 1,353,726 5,649,393 479,749 99,900 116,658 430,000 6,775,700 2015 3,149,443 668,971 1,227,022 5,045,436 509,729 88,275-250,000 5,893,440 Notes in relation to Directors and executive officers remuneration table A. The short-term incentive bonus is for performance during the respective financial year using the criteria set out on page [x]. The amount was finally determined on 8 August 2016 (2014: 9 August 2015) after performance reviews were completed and approved by the remuneration committee. B. The fair value of the options is calculated at the date of grant using the Black Scholes option-pricing model and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the options recognised as an expense in each reporting period. C. The fair value of performance rights with the relative TSR condition is calculated at the date of grant using the Monte-Carlo simulation model, taking into account the impact of the TSR condition and the lack of dividends during the vesting period. The fair value of performance rights with the operating income growth condition is calculated using the Black-Scholes option pricing model, taking into account the lack of dividends during the vesting period. The value disclosed is the portion of the fair value of the rights recognised as an expense in each reporting period. D. In accordance with AASB 119 Employee Benefits, annual leave is classified as an other long term employee benefit. 32. Example Public Company Limited: A guide to illustrative disclosures 2015-16, p31.

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