Financial reporting and executive bonuses under COVID-19 conditions

The COVID-19 crisis is posing many challenges for businesses in Australia and worldwide. Many sectors in the economy face uncertainties about future economic and market conditions, and the future impact on the businesses within. As a result, companies are forced to re-think their traditional processes around  financial reporting since the pandemic is wreaking havoc on the planning, budgeting and valuation process.

To provide some guidance on where to start and what principles to adhere to, ASIC issued a media release titled ‘Focuses for financial reporting under COVID-19 conditions’ on 7 July 2020. 

ASIC reiterated that Directors should make appropriate enquiries of management to ensure that key processes and internal controls have operated effectively during periods of remote work. With regard to disclosures around assistance and support by governments, ASIC notes that JobKeeper, land tax relief, loan and rent deferrals and waivers should be appropriately accounted for and disclosed.

And it is the JobKeeper assistance and executive pay that may pose an issue for some proxy advisors and investors ahead of the 2020 AGM season. The government's JobKeeper stimulus package has the potential to positively impact financial results and consequently the management incentive outcomes linked to these results.

Some proxy advisors noted that investors should and will be sceptical where executives receive bonuses at the same time as claiming the JobKeeper package. Some investors also mentioned that remuneration reports not accurately reflecting government subsidies may be at a higher risk of dissent. In general, investors expect that Boards will step in and exercise their discretion especially where the outcomes do not reflect the company’s achievement for the year, having regard to what is ‘fair and reasonable’.

This follows ASIC’s information sheet on ‘Board oversight of executive variable pay decisions during the COVID-19 pandemic’, which focused on the importance of a robust remuneration governance framework and specific factors to consider when exercising discretion on executive variable pay in the current environment. Specifically, ASIC suggests that to help ensure that the exercise of discretion is in the best interests of the company, boards may wish to adopt practices or frameworks to prompt the use of discretion in the company’s variable pay scheme, and apply practices or frameworks that guide the exercise of discretion before variable pay decisions are made, including scenario planning.

‘In the current environment, the quality of financial reports and related disclosures is more important than ever for investors and to maintain confident and informed markets,’ said ASIC Chair James Shipton. Entities with businesses adversely affected by the COVID-19 pandemic should focus on the reporting of asset values and financial position. Investors will expect clear disclosure about the impacts on an entity’s businesses, any risks and uncertainties, key assumptions, management strategies and future prospects.’

ASIC also noted that as part of their imminent review of ~200 larger listed entities, their focus will be on entities and industries adversely affected by the current conditions, but those who have been positively affected will not be overlooked either.

ASIC has extended the deadline for both listed and unlisted entities to lodge financial reports under Chapters 2M and 7 of the Corporations Act by one month for certain balance dates up to and including 7 July 2020 balance dates.

For the full ASIC media release, please click here. For the full information sheet on board discretion, please click here.