Accounting Guidance Note
No. 2007/2 (Revised)
Accounting guidance notes are intended for use by Australian Government reporting entities covered by:· S49 of the Financial Management and Accountability Act 1997; or
· Clause 2 of Schedule 1, of the Commonwealth Authorities and Companies Act 1997.
The aim of the accounting guidance notes is to provide non-mandatory explanation and examples relating to the interpretation and application of Australian Accounting Standards and the Finance Minister’s Orders to the above entities.
Identification of Executive Remuneration
Purpose
To provide guidance to assist entities in identifying what comprises ‘remuneration’ for reporting and disclosure for the purposes of Division 23 of the Finance Minister’s Orders for Financial Reporting (FMOs). This guidance note sets out the key principles to be used in determining what is included as executive remuneration.
Target audience
This guidance note applies to Australian Government entities for whom Division23 of the FMOs are applicable.
Applicable accounting pronouncements
· AASB 2 Share-based Payments
· AASB 119 Employee Benefits
· Division 23 of the FMOs
Definitions used
· Executive remuneration - includes all employee benefits in the form of consideration paid, payable, or provided for by the entity, or on behalf of the entity, in exchange for services rendered to the entity (an employment relationship) by senior executives.
· Senior executive - as defined in Division 23 of the FMOs.
· Employee benefits - as defined in AASB 119. They include:
(a) short-term employee benefits: such as wages, salaries and social security contributions, paid annual leave and paid sick leave, profit-sharing and bonuses (if payable within twelve months of the end of the period) and non-monetary benefits (such as medical care, housing, cars and free or subsidised goods or services) ;
(b) post-employment benefits: such as pensions, other retirement benefits, post-employment life insurance and post-employment medical care;
(c) other long-term employee benefits: including long-service leave or sabbatical leave, jubilee or other long-service benefits, long-term disability benefits and, if they are not payable wholly within twelve months after the end of the period, profit-sharing, bonuses and deferred compensation; and
(d) termination benefits.
· AASB 2 Share-based payments includes share and equity participation schemes within the scope of employee benefits. Where an entity has payments covered under AASB 2 they should contact the Department of Finance and Deregulation for advice.
Key points
1. Remuneration for the purposes of the FMOs is not necessarily the same as remuneration for taxation purposes.
2. For the purposes of Division 23 of the FMOs, executive remuneration includes all employee benefits such as wages and salaries, accrued leave, performance pay, accrued superannuation, cost of motor vehicles, housing, other allowances, and FBT amounts. For further detail see Attachment A.
3. Allowances treated as assessable income by the Australian Taxation Office (ATO) should be regarded as executive remuneration.
4. In determining whether an allowance would be treated as assessable income an entity should have regard to the following exceptions:
(a) the allowance received is a bona fide overtime meal allowance or a bona fide travel allowance;
(b) the allowance received does not exceed the reasonable amount; and
(c) the allowance has been fully expended on entity related expenses.
For further assistance refer to ATO Ruling 2004/6, and for details on reasonable amounts refer to ATO Determination 2005/32.
5. Amounts in payment or reimbursement of out-of-pocket expenses incurred for the benefit of the entity should not be included as executive remuneration. A reimbursement occurs when the payment is intended to compensate exactly for an expense already incurred (even if actual disbursement has not taken place at the time of reimbursement). If the recipient is an employee, a reimbursement is not considered remuneration, as the employee is being compensated for a business expense of the employer. For further guidance, refer to ATO Ruling92/15.
Contacts
Questions or comments about this Guidance Note should be addressed to Accounting Policy Branch at
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Department of Finance and Deregulation
(Revised December 2010)
ATTACHMENT A
Included in the definition of remuneration
Allowances / Payments made to an employee to relieve the worker of specified expenses. Common allowances include:· Accommodation or living away from home allowance;
· Call out allowance;
· Clothing or footwear allowance;
· Entertainment allowance;
· First aid allowance;
· Higher duties allowance;
· Motor vehicle allowance;
· Qualifications/Instructor’s allowance;
· Remote area allowance;
· Rental allowance;
· Study allowance;
· Telephone allowance;
· Tool allowance; and
· Uniform allowance.
When an allowance is paid to an employee, management of expenses and substantiation (for tax purposes) is transferred from the employer to the employee (for taxation purposes, allowances are assessable in the hands of the employee, but they may be able to claim deductions for actual expenses incurred subject to substantiation requirements).
Back pay / Payments in arrears made to an employee or former employee for work previously performed. Includes retrospective payments, along with payments resulting from an award rate increase.
Bonuses / Payments of gratuities or rewards by the employer over and above wage and salary amounts. These may relate to the meeting of pre-determined performance targets.
Commissions / Payments, usually to sales or marketing personnel, made in addition to any wage and salary amounts. This includes bonuses or ‘spotter’s fees’ paid to employees.
Director’s fees / Payments made to, or for the benefit of, a director in their capacity as an employee (commonly referred to as Executive or Working Directors), including payments in the form of director’s fees and emoluments.
Employee share incentive plans / Payment of benefits in shares and options are included in the definition of remuneration. AASB 2 Share-based Payment applies to Employee Share Incentive Plans and sets out the required treatment including valuation methods for such arrangements.
Fringe benefits / A non-cash benefit provided by an employer that is part of the employee’s total remuneration package. Fringe benefits can include rights, privileges or services and is provided to, or for, the benefit of an employee in relation to their employment. Typical fringe benefits include:
· Use of a work car for private purposes by an employee;
· Provision of a discounted or no-interest loan to an employee;
· Payment of an employee’s gym membership;
· Provision of entertainment, for example tickets to a concert or sporting event;
· Benefits provided under a salary sacrifice arrangements.
Fringe Benefits Tax (FBT) is payable by the employer on the value of the reportable fringe benefits provided to employees. The cost of providing the benefit, plus the FBT component, is included in the definition of remuneration.
Health insurance / Payments made to a health fund by the employer, for the benefit of an employee. This includes any ‘top-up’ payments by the employer to cover the difference between an amount billed by a medical provider and that paid by a Health Insurance Fund. Remuneration does not include the proceeds of an insurance claim.
Holiday pay / See annual leave.
Incentives / Amounts paid to either attract or retain an employee, or in relation to meeting a specified performance target.
Leave loading / Amounts paid in together with, or in addition to, any payments to an employer for annual leave.
Long service leave / Accrued leave entitlements for the period.
In practice an entity will often calculate the movement of the leave accrual in days, as long service leave taken will be included in most HR systems as salary and therefore will already be included in the wages and salaries total.
In addition, payments of accrued leave entitlements from prior periods on termination should also be excluded as they have been previously been included in the officer/director’s remuneration.
Overtime / Payment made directly in relation to additional hours worked by an employee, or where such circumstance is incidental to an employee’s duties.
Performance pay / See Bonuses.
Non-work related expenses / Payments that have the character of a fringe benefit, but are in relation to expenses not associated with employment activities. Examples include payments in respect of school or education expenses for children, spouse, or dependants of the employee.
Salary sacrifice benefits / Employer provides non-cash benefits for an employee under an agreement whereby the employee forgoes the equivalent value of the provided benefit in before-tax salary amounts.
Severance pay / Payment made to an employee resulting from cessation of employment due to the employee’s position being made redundant (note the FMOs require amounts in relation to severance element to be disclosed separately).
Sick leave / Payment of normal salary or wages to an employee to cover any period the employee was absent from work due to accident or sickness.
In most HR systems this will be included within the salaries total. If this is the case no adjustment should be made for this item.
Where sick leave is vested, it should be treated as per annual leave. This will be unusual for Commonwealth employees.
Superannuation contributions / Any payment including a premium or lump sum paid to a superannuation fund or retirement annuity plan for the benefit of an employee.
Wages and salaries / Regular payments to employees for work performed over a set period.
Page 1 of 6 Accounting Guidance Note 2007/2
Department of Finance and Deregulation
(Revised December 2010)