should verify the contents of the documents against a final, official To the extent that an executive officer fails to then meet the service vesting period and never actually receives the compensation, the compensation forgone as a result of the failure to meet the vesting period would be the reduced compensation as a result of the recovery policy. 478. An agency may not conduct or sponsor, and a person is not required to comply with, a collection of information unless it displays a currently valid OMB control number. See, et al., supra See 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. If an active insurance These results support the inference that the benefits associated with adoption of compensation recovery provisions may justify the costs.[426]. See, Figure LG 3-3 provides the lease classification criteria contained in. See also To the extent that the final rules lead some issuers to increase real earnings management, investors and issuers could bear increased costs. note 503 and accompanying text. Some commenters further recommended expanding the recovery policy triggers. comment letters from NAM; and American Vanguard. See also To correct the overstated liability in year five a $100 credit to the statement of comprehensive income would be necessary; however, $80 of it would relate to the previously issued financial statements for years one through four. 185. 78q-1(b)(7). Choudhary [475] Instructions to Item 404(a). See infra Senate Report at 136 ([I]t is unfair to shareholders for corporations to allow executives to retain compensation that they were awarded erroneously). These requirements are discussed in detail in Section II. As such, relative to non-EGCs, the market valuations of EGCs may be driven more by future prospects than by the value of current assets. The underlying concern of this section is `whether the [challenged] agreement weakens [the] ability to recover under the Exchange Act.' Mark L. Mitchell and Jeffrey M. Netter, 264. comment letter from NAM. If Lessee Corps accounting policy is to utilize the lease term inclusive of the renewal option, the incremental borrowing rate of 5.5% would be appropriate. Release No. regarding check box disclosure on 17 CFR 274.128. threshold for pursuing recovery,[251] Corporate Governance & Executive Compensation Survey 2021 Please correct the errors and send your information again. (ASC Topic 250). Although the guidance considers whether a lease is economically similar to the purchase of a nonfinancial asset from the perspective of control, rather than on the basis of risks and rewards of ownership (as used in, Although lessors are generally subject to the same classification criteria as lessees, additional considerations relevant to any revenue generating activity such as the collectibility of amounts due under the lease may impact the timing and recognition of selling profit or loss, or income over the lease term.Furthermore, under the lease classification criteria, lease arrangements with variable lease payments may be classified by lessors as a sales-type or direct-financing lease. 162 0 obj [294], We also received varied comments regarding the timing requirements for recovery ranging from recommendations to require immediate recovery,[295] This may impose costs directly on issuers and indirectly on the economy as litigation could potentially be prolonged. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. See The language of this provision signals that the issuer should pursue recovery in most instances. For example, under these limitations, in 2022, annual additions with respect to a participant in a defined contribution plan may not exceed $61,000 and a participant's annual benefit under a defined benefit plan may not exceed $245,000. On one hand, by virtue of listing on a U.S. exchange, an FPI has demonstrated willingness to list outside of the issuer's home country. 3235-0570).[539]. In addition, some studies show that adoption of voluntary recovery provisions is associated with improved managerial decision making. See, e.g., See17 CFR 240.10D-1(b)(1)(iv)(A) (Rule 10D-1(b)(1)(iv)(A)) and 17 CFR 240.10D-1(b)(1)(iv)(B) (Rule 10D-1(b)(1)(iv)(B)). (retrieved from SSRN Elsevier database) (Babenko Start Printed Page 73139. At lease commencement, if a lessor determines that operating lease payments are not probable of collection, the recognition of lease income is limited to the lesser of the following: A lease of an underlying asset that is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term should be classified as a sales-type or direct financing lease by the lessor. With respect to preemption, as a general matter, listing standards adopted by national securities exchanges and associations at the direction of Congress and the Commission can preempt state laws in certain circumstances. 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. Rule 10D-1(b)(1)(i)(B). If the lessor determines collection is not probable, the lease should be classified as an operating lease. comment letter from As You Sow 1. Regardless of the means of recovery utilized, the Proposing Release indicated that issuers should recover excess incentive-based compensation reasonably promptly, as undue delay would constitute noncompliance with an issuer's recovery policy. IFRS requires use of a borrowing rate with a similar security to borrow a similar value to the right-of-use asset. Register (ACFR) issues a regulation granting it official legal status. Section IV.A. 99. the Federal Register. See The Public Inspection page may also Working Paper No. 362. comment letters from Bishop (expressing concern over retroactive application to existing compensation agreements); CCMC 1; Compensia (suggesting compensation payments in the ordinary course of business could be mistaken for indemnification and recommending guidance); NACD; Pearl Meyer (expressing concern that a prohibition on indemnification could adversely affect a public company's ability to hire executive officers); and SCG 1. See, e.g., Finally, as noted earlier in this section, shareholder engagement, other governance controls, and market forces may mitigate changes due to the final rules. Further, including officers with policy-making functions or important roles in the preparation of financial statements in the definition of executive officer for purposes of Rule 10D-1 will ensure that the recovery policy requirements have the additional benefits of providing executive officers with an increased incentive to reduce the likelihood of inadvertent misreporting and of reducing the financial benefits to executive officers from failures to accurately account for the issuer's results. [503] We recognize that, absent any requirements and under the baseline, issuers may voluntarily compensate executives under such circumstances. associated with any level of investment decision in financial reporting quality would ultimately be reflected in the issuer's firm value, in absence of a principal-agent problem, executive officers would likely decide to allocate the value maximizing amount of resources to producing high-quality financial statements and, as a result, the level of information value of the financial reporting would likely be optimal. 311. 200. Where an issuer has changed its fiscal year end during the three-year look-back period, the Commission proposed that the issuer must recover any excess incentive-based compensation received during the transition period occurring during, or immediately following, that three-year period in addition to any excess incentive-based compensation received during the three-year look-back period ( Acct. Rule 10D-1(d), modeled on the Note to Rule 16a-1(f). 50. This would include incentive-based compensation derived from an award authorized before the individual becomes an executive officer, and inducement awards granted in new hire situations, as long as the individual served as an executive officer of the listed issuer at any time during the award's performance period. A number of commenters expressed concern or objected to identifying specific executive officers from whom recovery has not yet been made or where In order to trigger application of the recovery policy, an issuer merely needs to have concluded that it is required to prepare an accounting restatement, which may occur before the precise amount of the error has been determined. See, e.g., et al.). In this case, initial direct costs should be included regardless of whether or not the fair value of the underlying asset is equal to its carrying value. In the absence of a mandatory requirement for issuers to implement and disclose a recovery policy, investors may be uncertain about whether the implementation of a voluntary recovery policy by an issuer is a credible signal of the issuer's approach to executive compensation. comment letters from Davis Polk 1; Mercer; and NACD. Policy relating to recovery of erroneously awarded compensation. Specifically, under the statute, the Commission's rules shall require each issuer to develop a policy providing that the issuer will recover incentive-based compensation, and does not address whether there are circumstances in which an issuer's board of directors may exercise discretion not to recover. Use the model's indicators to separate the performance obligations if they are capable of being distinct and if they are distinct based on the context of the contract (separately identifiable from other promises in the contract). regularly makes); and WAW. Follow along as we demonstrate how to use the site. 29. Generally, an option to purchase a leased asset at a price greater than or equal to an assets fair value at lease commencement would not give rise to a significant economic incentive based on price. Uninstalled material et al., The Value Implications of Mandatory Clawback Provisions See, e.g., 494. Moreover, the exchanges are likely to incur some costs associated with tracking the compliance of each issuer. -4, 78 If an issuer has already conducted an event study to estimate the amount of inflation in the stock price due to a restatement, that would reduce the costs of conducting an event study for purposes of compensation recovery analysis while also limiting the latitude associated with utilizing different design choices. See, e.g., In a modification from the proposal, 17 CFR 229.402(w)(1)(i)(B) will require an analysis of how the amount of erroneously awarded compensation was calculated. adopted or available at https://www.sec.gov/comments/s7-12-15/s71215.htm. by an issuer's peer group member does not trigger recovery when an issuer's incentive-based compensation is based on performance relative to the peer group). These estimates represent the average burden for all issuers, both large and small. A few commenters objected to the inclusion of the disclosure in Item 402. 140. Meridian Report. available at https://www.issgovernance.com/file/publications/2021-global-policy-survey-summary-of-results.pdf A lessor should exclude from variable payments all lessor costs that are explicitly required to be paid directly by a lessee on behalf of the lessor to a third party. It could be significant because the loss in potential revenue from the total number of issuers that have chosen to forgo or delay listing aggregates over time, thus having lasting impact on the exchanges' revenue. Commenters opposed to inclusion of these metrics noted the costs, uncertainty, and subjectivity of calculating recoverable amounts,[174] IFRS 16 provides an additional policy election for lessees, on a lease-by-lease basis, to exclude leases of low-value assets from the initial recognition requirements. 17 CFR 229.601(b)(97). IFRS 8 has similar guidance. Revenue An executive officer could change the business practices of the issuer, thereby affecting the opportunity for an accounting error to arise. 78m, 78n, 78n-1, 78 188 0 obj <> [444], Commenters have also noted that issuers will face additional costs associated with estimating the amount of incentive-based compensation when the compensation is linked to stock price and TSR because of the complexity of the calculations. The noncancellable period of this type of lease would be a single day and each subsequent day would be considered a daily renewal option that should be included in the lease term if determined to be reasonably certain of exercise by the lessee after considering all relevant contract-, asset-, entity-, and market-based factors. We are additionally adopting an exception, as discussed further below, that addresses commenters' concerns about the implications of recovering amounts from tax-qualified retirement plans. The authors address the question of whether the reduction in risk associated with the voluntary adoption of a compensation recovery policy is beneficial for shareholders. Therefore, the indemnification provision prohibits listed issuers from indemnifying current and former executive officers against the loss of erroneously awarded compensation or paying or reimbursing such executives for insurance premiums to cover losses incurred under the recovery policy.[502]. See Jacquelyn Gillette, Sudarshan Jayaraman, and Jerold Zimmerman See There is often some portion of a contingent lease payment that is highly probable of being paid (e.g., some level of payment will generally be required in a lease that provides for percentage rent based on sales derived from the output of the leased asset). Rev. 275. unlisted issuers and private companies).[489]. The disclosure requirements in the rules are intended to promote consistent disclosure among issuers as to both the substance of a listed issuer's recovery policy and how the listed issuer implements that policy in practice. Some of the potential choices may have no effect on the results while other choices may significantly drive the results and could generate considerable latitude in calculating a reasonable estimate of the excess amount of incentive-based compensation that was erroneously awarded.[441]. In addition, commenters indicated that the calculations will expose managers and boards of directors to litigation risk. to ensure that the issuer recovers the full amount of incentive-based compensation that was erroneously awarded, consistent with the policy underlying Section 10D. 296. 111-176 at 135-36 (Apr. On the other hand, because market-based measures may be influenced by factors that are unrelated to the performance of the executive officer, these metrics may not fully capture or represent the effort and actions taken by the executives. See, e.g., The rule further provides that the recovery policy applies to incentive-based compensation received while the issuer has a class of securities listed on an exchange and during the three completed fiscal years immediately preceding the date that the issuer is required to prepare an accounting restatement. based on the erroneous data. As we have previously noted, if an executive officer erroneously receives incentive-based compensation based on stock price or TSR that was inaccurate as a result of an accounting misstatement, that compensation is based on such erroneous data. When we refer to financial statements for registered investment companies and business development companies, we mean the statement of assets and liabilities (balance sheet) or statement of net assets, statement of operations, statement of changes in net assets, statement of cash flows, schedules required by 17 CFR 210. See, e.g., 326. While we recognize some commenters' concerns regarding the usefulness of the information provided by the check boxes and their views that additional check boxes do not simplify the disclosure, we believe that the check boxes will help investors more readily identify restatements by issuers and whether any of the restatements triggered a compensation recovery analysis. Key findings Timing of revenue recognition 5 Variable consideration 9 Revenue disaggregation 12 Contract balances 13 Significant judgements 14 Costs to obtain or fulfil a contract 16 4. e.g., This supplement identifies the potential impacts, differences from previous IFRS and US GAAP and includes examples to address the challenging aspects of long-term contract accounting. See, e.g., comment letter from Bishop. comment letters from ABA 1 (recommending that, for equity awards, recovery should first be sought from shares that remain held, and that for the equity awards where the shares were sold prior to recovery that the recovery be for the fair market value on the date the erroneously awarded compensation amount is determined, or if the shares were gifted, the fair market value on the date of the gift); Duane (noting potential restrictions on an executive's ability to liquidate securities and issuers' stock retention requirements, and recommending recovery of stock awards either in cash or in kind over reasonable periods of time); Exxon (recommending cash value should be calculated at the time the shares are received within the meaning of the rule to avoid incentivizing executives to sell shares immediately on vesting); and FSR (recommending basing the cash amount on the shares' value on the date the issuer is required to prepare a restatement to address manipulation concerns). some commenters expressed qualifications or reservations but did not object to their inclusion,[172] 2010) (holding that an indemnification agreement cannot be used to release the CEO and CFO from liability to repay compensation under Sarbanes-Oxley Act Section 304, in part because indemnification cannot be permitted where it would effectively nullify a statute); Next, we provide information on the frequency of restatements as triggering events. The lease grants Lessee Corp the option to renew the lease for an additional 10 years. Lessors are required to evaluate whether lease payments, and any amount necessary to satisfy a residual value guarantee, are probable of collection, as discussed in. While we recognize that the rules are associated with costs for listed issuers, we also recognize and describe the benefits for listed issuers associated with the rules. Further, gaps in the forms of incentive-based pay that would be subject to recovery might encourage issuers to shift compensation towards omitted categories, further undermining the purpose of the rule. Tick this box to verify you are not a robot. comment letter from Sen. Pat Toomey and Sen. Richard Shelby, dated Feb. 1, 2022 (Toomey/Shelby). Example LG 3-6 and Example LG 3-7 illustrate how to determine the estimated economic life. [368], Congress designed the recovery policy required by Section 10D to apply on a no-fault basis, requiring listed issuers to develop and implement a policy to recover any compensation in excess of what would have been paid to the executive officer had correct accounting procedures been followed.[369] See See Lessee Corp enters into a 5-year lease for equipment with Lessor Corp. Analysis by Commission staff indicates that SRCs, on average, use a lower proportion of incentive-based compensation than non-SRCs, suggesting a lower potential impact of the final rules on SRCs. Finally, if an issuer chooses not to implement a recovery policy or does not take action when required under its recovery policy, the exchanges would incur costs to enforce the listing standards required by the final rules and delist the issuer for noncompliance. In response to commenters' concerns regarding the privacy of executive officers, in a modification from the Proposing Release the final amendments limit these detailed disclosures to current and former named executive officers. Babenko [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] Investors (Nov. 18, 2021) (CII 3) (suggesting that Section 10D was not intended to narrowly limit the required recovery policy to exclude little r restatements); International Corporate Governance Network (ICGN); Occupy the SEC (Occupy); Ohio Public Employees Retirement System (Nov. 22, 2021) (OPERS 2) (recommending that the Commission clarify that its definition of `accounting restatement' includes all required restatements made to correct an error in previously issued financial statements, regardless of whether they are formal restatements or revisions); and Public Citizen 2. Security futures products may be traded on exchanges registered under 15 U.S.C. Requiring such documentation only upon request would put the onus of seeking documentation on the exchanges, adding an additional burden to enforcing the requirements that could lead to some issuers conducting a less robustor even noanalysis in the belief that their analysis is unlikely to be reviewed or questioned. Using the existing definition of incentive plan award to define incentive-based compensation would apply the recovery to a different scope of incentive compensation. Federal Register [200] comment letters from ABA 1; Chevron; and SCG 1. In this regard, Section 10D differs from other Dodd Frank Act governance-related provisions, such as Section 951 Shareholder Vote on Executive Compensation Disclosure (amending the Exchange Act to add Section 14A) and Section 952 Compensation Committee Independence (amending the Exchange Act to add Section 10C), which include specific direction for either the Commission or the exchanges to consider exemptions for classes of issuers, to provide exemptions, or to take into account whether the requirements disproportionately burden small issuers. IFRS 17 Managed Service provides access to a PwC developed solution in the 17 Solved calculation engine, coupled with ongoing support from a reliable global IFRS 17 implementation leader. Consistent with the possibility that the rules as proposed may create incentives to reduce research and development expenditures, Bakke 156 0 obj There is no specific guidance under IFRS for these items. supra o, 367. In our view, recovery of incentive-based compensation that was not earned and should not have been paid is as appropriate for smaller listed issuers as it is for larger issuers. comment letter from Public Citizen 1. 544. Viray, High-quality financial reporting should provide shareholders with an assessment of the issuer's performance and should be informative about its value. 158. 300. [425] In addition, improved financial reporting quality that may result from the rule and reduced likelihood of a restatement would benefit the issuer and shareholders, mitigating costs associated with any increase in executive compensation. [544] For purposes of the PRA, the burden is endobj Ctr. To this end, accounting-based measures of performancealthough not directly tied to issuer value enhancementmay better capture the effect of an executive officer's actions during the relevant performance period. Lisa De Simone, Charles McClure and Bridget Stomberg, In contrast, one commenter expressly supported the proposal.[152]. A lease arrangement may allow a lessor to retain certain tax credits related to the underlying asset; for example, tax credits related to the construction and ownership of the underlying asset. Cost-to-cost, If the options or SARs have been exercised, but the underlying shares have not been sold, the erroneously awarded compensation is the number of shares underlying the excess options or SARs (or the value thereof). Congress chose to impose a federally mandated policy with specific parameters and requirements. The lessor cannot classify the lease as a direct financing lease because the conversion of the lessors asset risk to credit risk (which occurs when a lessor effectively transfers the risks and rewards of ownership of the underlying asset to the lessee) is nonsubstantive. 407. (3) For each named executive officer from whom, as of the end of the last completed fiscal year, erroneously awarded compensation had been outstanding for 180 days or longer since the date the registrant determined the amount the individual owed, disclose the dollar amount of outstanding erroneously awarded compensation due from each such individual. de minimis Staff did not find significant differences between SRCs and non-SRCs in the percent of compensation paid in nonqualified deferred compensation, or in other compensation. 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. Commenters also suggested that the Commission could balance greater board discretion with additional disclosure or suggested that boards should be permitted to take into account the probability of recovery or likelihood of success, the circumstances giving rise to the accounting restatement, the potential costs of determining and defending the recovery determination, the potential effects on the issuer, the potential effect on executive officers, and the long-term impact on the issuer. We expect that recovery of incentive-based compensation that is tied to TSR would be relatively small and infrequent as a result of little r restatements, since these restatements are less likely to be associated with significant stock price reactions. Analysis is based on data from XBRL filings, Compustat, Ives Group Audit Analytics, and manual review of filings submitted to the Commission. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. comment letter from UBS (noting that it may lose attractiveness as an employer as a result of the proposed rules). comment letters in response to the Reopening Release from Cravath; and CCMC 2 (suggesting that the rules may penalize foreign firms for changes in law made after adoption of the rules). e.g., comment letters from CCMC 1; and Kaye Scholer (suggesting that an issuer's home country has a more appropriate interest in determining whether companies domiciled there should be subject to a compensation recovery requirement). Question LG 3-24 discusses if a subsidiary can use its parents incremental borrowing rate. If a sale is recognized, the transaction is measured based on the fair value of the asset transferred. See [276] 529 U.S. 861, 873 (2000) (quoting comment letters from Compensia (recommending discretion over whether to settle a recovery obligation for less than the full amount); and Technical Compensation Advisors, Inc. (TCA) (recommending discretion over which executives to recover from, the amount to recover from each, and the timing of repayment). [439] The annual lease payments for the renewal option will be set at the beginning of the renewal period based upon the fair market rent at the beginning of the renewal period. For purposes of this economic analysis, high-quality financial reporting means that the financial disclosure is informative about the actual performance and condition of the issuer, and should be informative about its value. $2,000$1,800). See, e.g., See17 CFR 229.402(w)(1)(i)(D). documents in the last year, 820 325 F.3d 174, 179 (3d Cir. 5 U.S.C. For example, if the lessors debt is nonrecourse, or the lessor has no significant assets other than the underlying leased assets, the substance of the lessees remaining guarantee at the expiration of the lease term may be a guarantee of the residual value of the underlying assets. based on the size of the original award rather than discretionary. (Sept. 13, 2006). [487] 34-95057 (June 8, 2022) [87 FR 35938 (June 14, 2022)] (Second Reopening Release). before construction is complete. Exchanges may adopt listing standards with requirements that are more extensive than those of Rule 10D-1. In contrast, one commenter suggested that the proposed definition was overly broad. Under 17 CFR 229.402(b)(1), companies must explain all material elements of their named executive officers' compensation by addressing mandatory principles-based topics in CD&A. L. 111-203, 124 Stat. Small entities also will incur costs in connection with the collection, recording, and reporting of disclosures required under the rules. Commenters also identified other specific factors that boards should be permitted to take into account in deciding whether to recover, such as the probability of recovery or likelihood of success;[256] Accordingly, the issuer must correct the financial statements for years one through four. comment letters from Davis Polk 1 (recommending permitting consideration of severe financial hardship, death or serious illness of the executive); and S&C 1 (recommending permitting consideration of the effect on recruiting and retaining executives). on 4. Stuart Gillan and Nga Nguyen, The lower of the payments to be made when a lessee has a choice about which set of payments it makes, although it must make at least one set of payments. Variable Lease Payments: Payments made by a lessee to a lessor for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time. 14(a) of the Exchange Act that would be applicable to a proxy solicitation if it were made in respect of a security registered pursuant to Section 12 of the Exchange Act. note 235. Revenue from Contracts with Customers. note 261, describing feedback from commenters who note that the rules may create potential disincentives for FPIs to list on U.S. exchanges. The statute specifically requires recovery from any current or former executive officers of the issuer who received incentive-based compensation in excess of what would have been paid to the executive officer under the accounting restatement. 29 Acct. Lessee Corp does not provide a residual value guarantee. restatement with fraudulent actions or misconduct, whereas 46 of the 98 do not explicitly require fraud or misconduct as a condition of the recovery. Start Printed Page 73128 2(c)(2)(E); 12 U.S.C.5221(e)(3); 18 U.S.C. <> 9. & Econ. 213 (2018) (finding that adoption of compensation recovery provisions is associated with greater CFO bonus incentives because such compensation recovery provisions serve as an effective check on the ability of CFOs to manipulate the performance metrics that could influence their performance-based 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. Other commenters supported interpreting what it means to be required to prepare an accounting restatement due to material noncompliance in the manner described in the Reopening Release. [357], State indemnification statutes, indemnification provisions in an issuer's charter, bylaws, or general corporate policy and coverage under directors' and officers' liability insurance provisions may protect executive officers from personal liability for costs incurred in a successful defense against a claim or lawsuit resulting from the executive officer's service to the issuer. 111. See Rule 10D-1(b)(1)(i)(B). See 229. 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