comment letters from ABA 1 (recommending including only awards already reported in an issuer's executive compensation disclosure and reported in the equity incentive plan and non-equity incentive plan awards columns of the Grants of Plan-Based Awards Table pursuant to 17 CFR 229.402(d) that are granted, earned or vested based wholly or in part upon attainment of a financial reporting measure); and Kovachev (recommending reference to the 17 CFR 229.402(a)(6)(ii) definition of incentive plan, excluding compensation determined by metrics such as market share or customer satisfaction). comment letter from Freshfields (we expect all UK companies that are FPIs either already have a clawback in place, or will implement one when their directors' remuneration policy is next submitted for shareholder approval, and we believe that the Economic Analysis in the Release understates the compliance burden for FPIs especially if the FPI becomes subject to two clawback regimes). [431] See17 CFR 230.238, 17 CFR 240.12a-9, 17 CFR 240.12h-1(d). Transaction price is the amount of the consideration an company is entitled to receive in exchange for transferring goods or services to customers. Any Deadline - Any Subject. See Start Printed Page 73129 Thank you for your comments / suggestions. 176. Under the final rules, a listed issuer's compensation recovery policy will require recovery of erroneously awarded compensation received after an individual began serving as an executive officer of the issuer during the recovery period. See See, e.g., A change from an accounting principle that is not generally accepted to one that is generally accepted, however, would be a correction of an error. We note that capital formation could be hindered if an issuer chooses to forgo or delay listing because of the final rules and the alternative methods of raising capital result in less liquid securities being issued or less thorough disclosures being required. [559] Some commenters recommended a bright-line standard involving a single date, such as the date of the Item 4.02(a) Form 8-K filing. [150] comment letters from BRT 1 (suggesting it is a tenet of the Federal securities laws that disclosure of immaterial information is not required); EY; NACD; and SCG 1. Horizons (Sept. 2016) (finding that CFO pay structure is correlated with the transparency of restatement disclosure (Big R vs. little r)). In particular, issuers whose financial reporting is unaffected may have better access to capital by virtue of investors being able to make more informed comparisons between them and issuers whose financial reporting would become more accurate as a result of the final rule requirements. We believe that at lease commencement, the lessee must measure the lease liability and right-of-use asset in accordance with, Variable lease payments, or contingent payments, are defined in the. See The fair value of the equipment at lease commencement is $500,000. See [1090 0 R 1091 0 R 1091 0 R 1091 0 R 1091 0 R 1091 0 R 1091 0 R 1088 0 R 1089 0 R 1089 0 R 1089 0 R 1089 0 R 1089 0 R 1086 0 R 1087 0 R 1087 0 R 1087 0 R 1085 0 R 1078 0 R 1079 0 R 1080 0 R 1081 0 R 1073 0 R 1074 0 R 1075 0 R 1076 0 R 1077 0 R 1068 0 R 1069 0 R 1070 0 R 1071 0 R 1072 0 R 1067 0 R 228 0 R 229 0 R 230 0 R] 143. This content is copyright protected. Finally, oversight by audit committees and outside auditors may serve as an additional mitigating factor. 523. determining whether any amount of incentive-compensation is required to be recovered under the final rules. Performance Pay and Top Management Incentives, ), Lessors can elect, by class of asset, to not separate nonlease components from associated lease components under qualifying circumstances. comment letters from ABA 1 (stating that if the rule is not applied on a wholly prospective basis, it should apply only to erroneously awarded compensation granted after the effective date of final Rule 10D-1); BRT 1; CCMC 1; Coalition; Mercer; Meridian; NACD (stating that questions of contractual violations are serious and may not be resolved merely through an amendment to by-laws); and SCG 1 (suggesting that issuers may only be able to amend plans on a prospective basis, as plans often prohibit amendments that impair a participant's rights to an outstanding award, unless the participant consents). Because a greater amount of performance-based compensation would be at risk for recovery, implementing this alternative could also increase the amount of expected compensation the executive officer would require in order to voluntarily bear the increased uncertainty. 412. The Commission did not propose to otherwise exempt categories of listed issuers, such as emerging growth companies (EGCs),[26] The 2022 staff memorandum also considered the impact on smaller registrants. Stuart Gillan and Nga Nguyen, See also [275] We disagree with the contention put forth by some commenters that Section 10D is limited to incentive-based compensation that is linked to the achievement of specific financial metrics. Accordingly, a reporting entity would not include payments that vary solely on the basis of future use or performance in lease payments, regardless of the probability of occurrence (except in cases where the arrangement contains a guaranteed minimum payment or penalty that effectively amounts to a floor for lease payments). One commenter suggested that a greater number of investment companies could be affected by the proposal, but as this commenter did not include data addressing the compensation arrangements that would fall within the scope of the proposed requirements, and because we have no other reason to believe that our estimates should be adjusted, we are not adjusting our methods of estimating the number of investment companies that the final rules would affect. For complete information about, and access to, our official publications Lessee Corp enters into a 5-year lease for equipment with Lessor Corp. Start Printed Page 73117 In contrast, one commenter specifically opposed such an exemption. As indicated in the Proposing Release, we understand that under current accounting standards the following types of changes to an issuer's financial statements do not represent error corrections, and therefore would likewise not trigger application of the issuer's compensation recovery policy under the listing standards: Retrospective application of a change in accounting principle;[112], Retrospective revision to reportable segment information due to a change in the structure of an issuer's internal organization;[113], Retrospective reclassification due to a discontinued operation;[114], Retrospective application of a change in reporting entity, such as from a reorganization of entities under common control;[115], Retrospective adjustment to provisional amounts in connection with a prior business combination (IFRS filers only);[116] See also Under 26 U.S.C. comment letters in response to the Reopening Release from Cravath; Hunton; and McGuireWoods (suggesting that calculating the amounts would be difficult and would require additional economic analysis by issuers). comment letters from Exxon (enhancing the ability to recover promptly); CEC 1 (ease of recovery and ability to recover the full pre-tax amount of excess compensation); and WAW (reduced cost of recovery and risk of litigation with executives). Certain provisions of our rules, schedules, and forms that will be affected by the final rules contain collection of information requirements within the meaning of the Paperwork Reduction Act. See, e.g., Variable payments are excluded from lease payments even though Lessee Corp and Lessor Corp concluded it is probable that the total number of nonoperational days will exceed the 15 day maximum, resulting in days when Lessee Corp is not required to make payments to Lessor Corp. See, e.g., To avoid duplicative disclosure, we are amending Instruction 5.a.iii to Item 404(a) of Regulation S-K largely as proposed. This first video covers the basic principles including the 5 step model in IFRS 15. See See also 256. Although there has been a large increase in the percentage of filers that disclose a compensation recovery policy since 2015,[412] In response to concerns raised in the post implementation review, in order to avoid recognition of such day-one loss under, A reporting entity that elects the exception for short-term leases would not apply the lease classification criteria. For example, as described in Section II.C.2.a.iii, incentive-based compensation would not include awards based on nonfinancial events, such as opening a specified number of stores, and it would include cash awards based on satisfaction of a performance target that is based on a financial reporting measure even if the performance target was not pre-established or communicated, or the outcome was not substantially uncertain. As proposed, incentive-based compensation would include options and other equity awards whose grant or vesting is based wholly or in part upon the attainment of any measure based upon or derived from financial reporting measures. See, e.g., Similarly, a number of commenters expressed concern about excluding, or recommended including, time- or service-based awards. 337 (2021) (As of 2014, about 60 percent of S&P 1500 companies granted some form of performance-based equity awards). See17 CFR 240.10D-1(a)(2) and (3). Brian J. Bushee An option may be reasonably certain to be exercised by the lessee when a significant economic incentive exists. (finding that 69% of compensation recovery policies specify that recovery applies only to persons directly responsible for the triggering event, and that 63% of companies have a disclosed statute of limitations for the recovery policy that is less than three years). ICI submitted a comment letter on the original proposal in 2015 as well as on the Reopening Release (Nov. 22, 2021). 3235-0381); and, Form N-CSR, Certified Shareholder Report of Registered Management Investment Companies (OMB Control No. In addition, we recognize that listed funds that pay for their chief compliance officers' compensation would be affected by the final rule, and that as a result, the number of affected funds likely exceeds the estimate provided in the Proposing Release. comment letter from CEC 2 (indicating based on an Oct. 2021 survey of their subscribers, more than 90% maintain a clawback policy, and citing a study finding that the number of large companies with clawback policies may be as high as 97%). We also note that the final rule covers a broader set of employees than the named executive officers required to report within the Summary Compensation Table. Determining performance obligations and complying The President of the United States issues other types of documents, including but not limited to; memoranda, notices, determinations, letters, messages, and orders. et al., Information Processing Costs and Corporate Tax Avoidance: Evidence From the SEC's XBRL Mandate while others objected to recovering compensation based on qualitative or discretionary standards. recent studies indicate that these policies establish more limited circumstances in which a compensation recovery analysis would be triggered than would be the case under the final rules. Under US GAAP, the specialized accounting for leveraged leases in. International Financial Reporting Standard (IFRS) 15: Revenue from Contracts with Customers was introduced by the International Accounting Standards Board to provide one comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. 327. Under the final amendments, issuer compliance is required whether such incentive-based compensation is received pursuant to a pre-existing contract or arrangement, or one that is entered into after the effective date of the exchange's listing standard. comment letters from ABA 1; IBC; and Sutherland (noting that violating the Internal Revenue Code could result in loss of tax-qualified status for the plan, causing adverse consequences to all participants). Rule 10D-1(b)(1)(i)(B). 456. 3(a), 202, 208, 302, 406 and 407, Pub. By accepting, you agree to the updated privacy policy. Unless otherwise noted, the guidance in this chapter assumes that a lessee is not applying either the short-term or low-value exemptions. comment letter from PWC (suggesting that inclusion of the word material clarifies that the listing standard would not apply to restatements that reflect the correction of immaterial errors). In addition, the Commission proposed amendments to its rules and relevant forms to require disclosure about, and the filing of, the issuer's recovery policy. See17 CFR 229.402(w)(1)(ii). [238] We further note that in the Proposing Release we estimated that there were 61 listed issuers. 390. 537. Nevertheless, for the reasons discussed above, we believe issuers should have discretion not to pursue recovery only in the limited circumstances outlined in the final rule. et al., supra 438. and questioned the feasibility of implementation by FPIs. 549. 118. endobj Thus, the change would avoid serious potential tax consequences for rank-and-file employees by providing a narrow exemption from recovery for a limited amount of incentive-based compensation. We also note that although executives may demand and receive an increase in total compensation relative to the baseline to offset potential losses from recovery, their new compensation agreements would reasonably be expected to tie more closely to true firm performance, as misstatement-driven determinants of pay are replaced by base pay or pay tied to accurate financial or operational metrics. However, IFRS is not as prescriptive as US GAAP as it relates to whether both fixed and variable payments are each allocated to all components within the arrangements. 38. endobj Under the final rules, as a commenter asserted, the increased allocation of resources to the production of high-quality financial reporting may divert resources from other activities that may be value enhancing. A lessor would report revenue net of these amounts. (19) Recovery of erroneously awarded compensation. This measure quantifies how well accruals are explained either by the cash flow from operations (past, current, and future periods) or accounting fundamentals. available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3042973 (retrieved from SSRN Elsevier database). However, if the amount a lessee will receive is based on the actual costs incurred on improvements that are specified in the contract, judgment will be required to determine whether the improvements represent lessee or lessor assets. See, e.g., See also Rule 20a-1 requires funds to comply with Regulation 14A, Schedule 14A, and all other rules and regulations adopted pursuant to Section Are you still working? 164 0 obj [549], PRA Table 3Estimated Burden Allocation for the Affected Collections of Information. The final amendments require more generalized disclosure regarding use of the impracticability exception with respect to other current and former executive officers as a group. As the Commission stated in the Proposing Release, Section 10D does not distinguish among issuers or types of Start Printed Page 73105 note 79 (finding that 74% of Big R and 31% of little r restatements have a negative effect on net income); Christine Tan and Susan Young, The revisions and additions read as follows: (v) Any disclosure provided in response to Item 18 of 249.331 and 274.128 of this chapter (Form N-CSR), as applicable. [FR Doc. Web$15.99 Plagiarism report. A lessee and lessor should first evaluate whether both parties have the unilateral right to terminate the arrangement (i.e., symmetrical termination rights). 196. 235. See IFRS 15 What are the five steps of (Financial Reporting) IFRS 15? After considering comments to the Reopening Release, and in a change from the proposal, the final rules will additionally require: disclosure relating to an issuer's compensation recovery policy and recovery; tagging of the additional information in Inline XBRL; and additional check box disclosure on the cover of the Forms 10-K, 20-F, and 40-F. We believe Sections 10D(a) and (b) are intended to require listed issuers to adopt, comply with, and provide disclosure about their compensation recovery policies. However, absent satisfaction of the conditions to demonstrate that recovery is impracticable due to costs, we believe a with some suggesting that limiting the impracticability exclusion to home country law in effect as of the proposal's See, e.g., [250] endobj We further eliminated 235 out of 5,364 (4%) of issuers flagged by the keyword search because the disclosures indicated the absence or consideration of compensation recovery provisions rather than their presence. Specifically, 3 out of 5,367 (0.6%) of companies did not file DEF 14A in 2021. However, we believe that a substantial number of issuers will benefit from an increase in the quality of financial reporting. 49 J. Acct. The three most common performance metrics used by the representative sample of the S&P 500 companies in long-term incentive plans were relative TSR (74%), return measures (46%), and earnings per share (31%). It is for your own use only - do not redistribute. 66 J. Acct. I (Elsevier/North-Holland 2004); and John Y. Campbell For example, an issuer may be acting reasonably promptly in establishing a deferred payment plan that allows the executive officer to repay owed erroneous compensation as soon as possible without unreasonable economic hardship to the executive officer, depending on the particular facts and circumstances. For listed FPIs filing an annual report on Form 20-F, Form 40-F or, if a FPI elects to use U.S. registration and reporting forms, on Form 10-K, the amendments require additional disclosure in annual reports and will increase the burden hour and costs estimates for each of these forms. Other commenters suggested that recovery should be triggered when The lessor should estimate any loss on the basis of the total remaining costs reduced by the expected benefits from the sublease of use of the assumed underlying asset. Date:Wednesday 2nd June 2021 Second, both types of restatements address material noncompliance of the issuer with financial reporting requirements. They find a positive and significant relation between adoption of such a policy and long-term stock and accounting performance and a positive and significant short-term stock-market reaction around the date of the adoption. Federal Register 17 CFR 229.512(h) provides that if acceleration of a Securities Act registration statement is requested, the registration statement is required to include an undertaking stating that the registrant has been advised that in the opinion of the Securities and Exchange Commission indemnification of directors, officers and controlling persons for liabilities arising under the Securities Act is against public policy as expressed in the Securities Act and is therefore unenforceable. Many of these commenters expressed concern regarding the cost of implementation versus the perceived benefits, such as the utility of the information to investors. The trigger events would include both Big R and little r restatements that correct errors in previously issued financial statements. i.e., Although reimbursement of insurance premiums by issuers would be prohibited, the insurance market may develop an insurance product that would allow an executive officer, as an individual, to purchase insurance against the loss of incentive-based compensation when the material accounting error is not attributable to the executive. must be recovered. In this regard, we note that Commission staff has provided guidance to assist issuers in making materiality determinations. 19. comment letter from CalPERS 1. 158. OTC Markets Grp. Foreign companies in this study included both FPIs and foreign companies filing on Form 10-K. 57. [370] The new standard provides indicators when control is transferred. Under the proposal, the erroneously awarded compensation would be determined based on the full amount of incentive-based compensation received by the executive officer, rather than the amount remaining after the officer satisfies the officer's personal income tax obligation on it. 80b-1 through 15 U.S.C. Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. For example, if a lessee is required to pay a lessor a deposit at or before the lease commencement date to demonstrate its commitment to lease the underlying asset, the deposit should be accounted for as a fixed lease payment. opening a specified number of stores, completion of a project, increase in market share); and, Equity awards for which the grant is not contingent upon achieving any financial reporting measure performance goal and vesting is contingent solely upon completion of a specified employment period and/or attaining one or more nonfinancial reporting measures.[195]. Other factors to consider include whether the improvement increases the fair value of the underlying asset from the standpoint of the lessor and the economic life of the improvement relative to the lease term. These estimates are based on staff analysis of issuers potentially subject to the final amendments, excluding co-registrants, with EDGAR filings on Form 10-K, or amendments thereto, filed during the calendar year of Jan. 1, 2020 to Dec. 31, 2020, or filed by Sept. 1, 2021, that, if timely filed by the applicable deadline, would have been filed between Jan. 1 and Dec. 31, 2020. See, e.g., The warehouse is 40 years old at lease commencement. In connection with our implementation of Section 10D(b)(1), we are also using our discretionary authority to amend Item 402 of Regulation S-K, Form 40-F, and Form 20-F to require listed issuers to disclose how they have applied their recovery policies. Adopting a narrower definition of incentive-based compensation or financial reporting measures would result in the failure to recover from executive officers incentive-based compensation that was erroneously awarded to them, and therefore would be less effective in achieving the goals of the statute. See AES Corp. We believe that investors will benefit from disclosure of the analysis of how the amount was calculated and agree with commenters that suggested such disclosures could be particularly helpful in assessing the issuer's executive compensation policies and practices for purposes of shareholder voting. Start Printed Page 73115 While recognizing that not all issuers that file restatements will be required to provide recovery disclosure, for purposes of the PRA, we use the five% figure as an upward bound, and estimate that all such issuers will provide the required disclosure. %PDF-1.5 % note 479. These issuers are required to provide information relating to the compensation of their named executive officers that may include policies and decisions regarding the adjustment or recovery of awards or payments if the relevant performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce the size of an award or payment. At lease commencement, Lessee Corp (as sublessor) determines Sublessee is reasonably certain to exercise its options to extend the sublease. WebEntities in the engineering and construction (E&C) industry applying IFRS or US GAAP have primarily been following industry guidance for construction contracts1 to account for revenue. See, e.g., For a lessor, the reduction will affect lease classification and the measurement of lease income on a straight-line basis (if classified as an operating lease) or the net investment in the lease (if classified as a sales-type or direct financing lease). As a leading provider of professional services to insurance organisations across the globe PwC has extensive knowledge of the issues and challenges that insurers face with IFRS 17. and controlled companies. Under the rules, incentive-based compensation is subject to the issuer's recovery policy to the extent that it is received while the issuer has a class of securities listed on an exchange or an association. (E) $600, *******, (97) Policy Relating to Recovery of Erroneously Awarded Compensation. The Commission published a notice requesting comment on changes to these collections of information in the Proposing Release and submitted these requirements to the Office of Management and Budget (OMB) for review in accordance with the PRA. Further, requiring the issuer to establish a direct connection between an executive officer and a material error would add significant time, uncertainty, and litigation risk to recovery determinations, which in turn would increase costs to the issuer and its shareholders. The incremental While commenters generally supported some level of disclosure about an issuer's recovery policy, comments were mixed regarding the specific disclosures that should be required. 59. Select a section below and enter your search term, or to search all click 184 0 obj [104] Example LG 3-9, Example LG 3-10, and Example LG 3-11 illustrate when to include variable lease payments in the calculation of lease payments when classifying a lease. We additionally simplified the language in Rule 10D-1(b)(1)(i)(B) to clarify the meaning of transition period for purposes of the rule without defining the term. AICPA Sees 45% Drop in XBRL Costs for Small To provide consistent disclosure across exchanges, Rule 10D-1 provides that the required disclosure about the issuer's recovery policy must be filed in accordance with the disclosure requirements of the Federal securities laws. 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