05 Jul 2012

Reporting and AGM season: what to watch for

by Geoff Hoffman

Companies have some new issues to deal with, directly affecting the planning process for both the AGM and the annual report.

This year's reporting and AGM season will be an interesting one.

Although there isn’t a lot of new legislation, companies still have some new issues to deal with. This directly affects the planning process for both the AGM and the annual report.

Two Strikes

There are now two classes of company:

  • companies which didn't receive a "First Strike" (ie. 25%+ vote against the remuneration report) at last year's AGM; and
  • companies which received a "First Strike" at last year's AGM.

For both of them, this year's AGM will be different from last year's.

Both classes of company will have to ensure that the AGM chair can vote undirected proxies on the remuneration report. This will be an easier exercise than last year, thanks to some last minute legislative changes in June.

Those changes will allow the chair to vote undirected proxies if:

  • the proxy does not specify the way the chair is to vote on the remuneration report; and
  • the proxy expressly authorises the chair to exercise the proxy even if the resolution is connected directly or indirectly with the remuneration of a member of the key management personnel for the company.

This means that the proxy form for the remuneration report vote will have to be drafted to fit these requirements. Although fiddly, this will be a lot simpler that the convoluted procedures that were required last year.

That's where the good news ends for companies which received a first strike last year.

Getting ready for the second strike

Companies which receive a second 25%+ vote against the remuneration report in 2012 must proceed to consider a spill of the whole board (except the managing director). It works this way:

  • if the AGM records a second 25%+ vote against the remuneration report, the AGM must then vote on whether to hold a separate general meeting to vote on a motion to spill the entire board (except the managing director);
  • if that "spill" motion is passed, the company must hold a general meeting within 90 days, 
  • immediately before that general meeting, all of the directors (except the managing director) are removed from office;
  • the general meeting then votes on the membership of the board.

This means that the notice of the AGM and the proxy forms sent to shareholders must include the spill motion. The notice will also need to explain to shareholders that the spill motion depends on the vote on the remuneration report and therefore may not actually be put to the meeting.

Slightly less complicated is the requirement that, if the company received a first strike at the 2011 AGM, its 2012 remuneration report must address any comments about the remuneration report made at the 2011 AGM.

ASIC's new annual report hit list

As usual, ASIC has released a list of areas of concern for the upcoming wave of annual reports.

The list for 2012 contains some differences from its predecessors:

  • Revenue recognition, expense deferral and other comprehensive income: Prompted by incidents of companies' recognising rights to future income as up-front revenue rather than as an intangible asset measured at amortised cost, ASIC is warning that company revenue recognition policies should recognise revenue in accordance with the substance of the underlying transaction. 
  • Asset values: In general terms, ASIC wants directors to be careful about the appropriateness of underlying assumptions when arriving at asset values. It has also flagged specific concerns about substantial assets held in emerging economies and the impact of the carbon tax and the minerals resource rent tax.
  • Off-balance sheet arrangements: ASIC says that directors should carefully review the treatment of off-balance sheet arrangements, particularly where the company has the right to obtain the majority of the benefits of any special purpose entity’s activities or any assets transferred to another entity. If it is still felt that arrangements should remain off balance sheet, the details of the arrangements and any exposures should be disclosed, together with the reasons why they are not on balance sheet.
  • Going concern: As in previous years, ASIC cautions that some companies are not being realistic when reporting that their company is a going concern, with particular reference to liquidity, debt refinancing and compliance with loan covenants.
  • Non-IFRS financial information disclosures: ASIC remains concerned that some companies are not following its guidance on the use of non-IFRS financials (including alternative profit figures).
  • Operating and financial review: ASIC's only comment is that directors "should also ensure that the OFR complies with the law."
  • Current vs non-current classifications: it appears that the message of the Centro case has not been universally understood, since ASIC is still finding financial reports in which current liabilities have been incorrectly classified as non-current.
  • Estimates and accounting policy judgments: directors should ensure that they make material disclosures of sources of estimation uncertainty and significant judgments in applying accounting policies, specific to the company's assets, liabilities, income and expenses.
  • Financial instruments: Directors should focus on financial instrument disclosures, given that ASIC has found failures to disclose an ageing analysis of financial assets that are past due but not impaired and/or an analysis of impaired financial assets. Other disclosure deficiencies included the methods and significant assumptions used to value financial assets for which there was no observable market data.
  • New accounting standards: Finally, ASIC draws attention to the effect of three new accounting standards (AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements and AASB 12 Disclosure of Interests in Other Entities). Although these will only apply for the first time to financial reporting periods beginning on or after 1 January 2013, 2012 financial reports will have to disclose their impact.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.