Sections 30(4) and 30(5) of the
The objective of this study was to understand the meaning of the term ‘value’ in Section 30(6)(e) of the Act (including the date of measurement thereof), as intended by the legislature.
This article examined existing literature in a South African corporate and legislative environment.
A non-empirical study of existing literature was conducted by performing a historical analysis within a South African context. A doctrinal research approach was followed.
Possible interpretations of the term ‘value’ include the grant date fair value of the rights, the fair value at reporting date, the fair value on vesting date, the expense calculated in terms of the International Financial Reporting Standard on share-based payments, the gain on exercise of the rights and the intrinsic value on reporting date. It is submitted that the most likely meaning is the grant date fair value.
It was found that the meaning of the term ‘value’, for purposes of Section 30(6)(e) of the Act, is unclear and interpreted differently by different companies. It is, therefore, recommended that the wording of Section 30(6)(e) is amended to reflect the meaning intended by the legislature.
Sections 30(4) and 30(5) of the
According to Steyn and Cairney (
The term ‘value’, as used in Section 30(6)(e), is not defined in the Act and its meaning is unclear. Scrutiny of some listed companies’ annual financial statements confirmed that companies interpret this disclosure requirement differently, with values varying between ‘gross’ values, such as fair value on grant date or annualised grant date fair values, to ‘net’ values, such as gains on exercise of share options only or of all share incentives exercised (or combinations thereof) (Dippenaar & Steenkamp
A non-empirical study of existing literature was conducted by performing a historical analysis within a South African context. A problem-based doctrinal research approach was followed, using interpretive and qualitative analysis. The following steps, as suggested by Hutchinson and Duncan (
Assemble the relevant facts.
Identify the legal issue at hand.
Analyse the issue from a legal perspective.
Study relevant background material such as dictionaries and journal articles.
Locate primary research sources such as case law and legislation.
Interpret, analyse, compare and combine all issues within the context.
Reach a tentative conclusion.
This research objective was achieved by investigating the following:
The meaning of the term ‘value’ as used in Section 30(6)(e) of the Act (including the date of measurement thereof), by exploring the ordinary definition thereof and attempting to use logical reasoning in order to determine the most likely meaning, as there is no specific guidance available in this regard.
The impact of the different possible interpretations of the term ‘value’ in Section 30(6)(e) of the Act on companies’ annual financial statements.
During the study, it was found that a possible interpretation of ‘value’ is ‘fair value’ (as discussed later). Different techniques could be applied to appropriately determine a fair value. It is, however, not in the scope of this study to evaluate or prescribe a specific valuation technique.
The study is structured as follows: a brief discussion of the relevant aspects and principles of interpretation of legislation is presented. This is followed by a summary of all the possible literal (ordinary) meanings of the term ‘value’. Thereafter, the context of the wording in Section 30(6)(e) is explored in an attempt to determine the intended meaning of ‘value’. The possible interpretations of the term are discussed based on the types of SBPs in use and the regulatory frameworks that govern the disclosure of SBPs and a logical reasoning is applied in an attempt to determine the most likely meaning. A practical illustration of the impact of each possible interpretation on a company’s financial statement disclosure is presented and a conclusion regarding the most likely interpretation intended by the legislature, based on the literature study performed, is finally presented. Lastly, recommendations for the amendment of the existing wording in Section 30(6)(e) are made and a future research opportunity is highlighted.
The golden rule of interpreting statutes, subject to certain exceptions, is to apply the literal or ordinary meaning of the words used to determine the intention of the legislature, when the words are clear and unambiguous (
There is no definition of ‘value’ in the Act; however, based on the dictionary meaning (Oxford English Dictionary
… the material or monetary worth of something; the amount at which something may be estimated in terms of a medium of exchange, as money or goods, or some other similar standard … [or] … the relative worth, usefulness, or importance of a thing or (occas.) a person; the estimation in which a thing is held according to its real or supposed desirability or utility.
Other definitions include ‘the worth of a thing in money or goods at a certain time; market price’ (Webster’s New World College Dictionary
Seeing that Section 30(6)(e) of the Act deals with the disclosure of directors’ remuneration and, specifically, with share incentives, ‘value’ is possibly used in a technical (accounting) sense in this context. International Financial Reporting Standards (IFRS), however, do not define ‘value’. IFRS (and the accompanying illustrative examples) usually do not even use the standalone term ‘value’, but specify the type of ‘value’ (
Terminology used in International Financial Reporting Standards to specify a type of value (listed alphabetically).
| Actuarial present value | Carrying value | Economic value |
| Embedded value | Entity-specific value | Expected value |
| Fair value | Intrinsic value | Market value |
| Monetary value | Net asset value | Net realisable value |
| Nominal value | Par value | Present value |
| Redemption value | Residual value | Scrap value |
| Settlement value | Surrender value | Time value |
| Value in use | – | – |
When IFRS use the term ‘value’, without specifying which value, it is understood in its ordinary sense, namely the monetary worth of something. An example is when IFRS 16
Some examples where ‘value’ is used as a standalone term in International Financial Reporting Standards.
| Extract of wording used (own emphasis added) | Meaning of ‘value’ in this context |
|---|---|
| ‘the net realisable value or recoverable amount … translated at the exchange rate at the date when that |
Net realisable value or recoverable amount, as specified earlier in the sentence. |
| ‘profits and losses on disposal of investments and changes in |
Actuarial present value, since this is what this standard specifies as the measurement basis of these types of items. |
| ‘measure their |
Fair value, as stated further in the same sentence. |
| ‘recognise an additional expense for the excess |
Depending on applicability, the difference between the cash paid and the fair value of the equity instruments that would have been issued or the difference between the fair value of the equity instruments and the cash that would have been paid, as specified. |
| ‘Option |
Fair value, as this entire section sets out to explain how to calculate fair value in this context. |
IFRS, International Financial Reporting Standards.
Since the literal meaning of the term ‘value’ is too vague to understand what is meant in Section 30(6)(e) and IFRS do not clarify it either (from a technical sense), it is necessary to establish the context of the word within the statute.
The purpose of legislation provides context to determine the scope and intended effect of the law (Thornton
… this Act must be interpreted and applied in a manner that gives effect to the purposes set out in section 7 … [and] to the extent appropriate, a court interpreting or applying this Act may consider foreign company law.
Section 5 does not provide much assistance with interpreting Section 30(6)(e) either. Section 7 of the Act is considered to establish the purpose of the Act, but the purpose is too general in nature and not helpful in determining what could be meant by ‘value’ in Section 30(6)(e). The explanatory summary of the
Section 30(6)(e) was first introduced in the 2008 Act and there were no previous versions of this specific section. The Companies Act that applied before the 2008 Act became effective, was
… gains made on the exercise of share options, the gain being the difference between the price paid for the shares and the market price of the shares on the date of exercise, and that date being the date on which the director takes ownership of the shares and is entitled to dispose of them.
The original 1973 Act also required the disclosure of directors’ emoluments, but ‘emoluments’ were only later defined when Section 2A was added by the
The provisions relating to directors’ remuneration disclosure, and specifically to SBPs, were clearly narrower and much more specific in the 1973 Act: it only related to share options, whereas in the 2008 Act it has been broadened to refer to ‘any option or right’ and it specifically required disclosure of the gain on exercise of the options. It was also more prescriptive, as it required the gains to be disclosed in table format. There was, however, no requirement to make the disclosure per director, as is the case in the 2008 Act. The use of the word ‘value’ in the new Act can be interpreted in various ways, from variations of gross values like a fair value on certain dates to net values like gains realised on exercise of share options.
Examples of SBPs to employees and directors that are commonly used are, share options (a right to purchase shares at a predetermined exercise price), share appreciation rights (a right to receive a cash payment equal to the increase in value of shares from the grant date to the exercise date), phantom shares (a right to receive cash equal to the value of shares) and contingent or restricted shares (where the shares are granted for free) (Massie, Collier & Crotty
IFRS 2 classifications of typical share-based payments to directors.
| Type of share-based payment | Equity-settled | Cash-settled |
|---|---|---|
| Options | X | – |
| Share appreciation rights | – | X |
| Contingent or restricted shares | X | – |
| Phantom shares | – | X |
Possible interpretations of ‘value’.
| Possible interpretations of ‘value’ | Options/Share appreciation rights | Shares/phantom shares | Notes |
|---|---|---|---|
| Fair value on grant date. | X | X | Determine fair value in terms of IFRS 2, i.e. of the equity instruments granted (if equity-settled) or of the rights (if cash-settled). |
| Fair value on reporting date. | X |
X |
For cash-settled share-based payments, this will be the value at which they are recognised in terms of IFRS 2. |
| Fair value on vesting date. | X | X | Vesting date is exercise date for shares or phantom shares. |
| Value on exercise (similar to the gain on exercise as required for options only by the 1973 Act). | X | X | If equity-settled, calculate the gain as the difference between the market price (fair value) of the shares at exercise date and the exercise price, if any (else = 0). If cash-settled, this equals the actual amount paid. |
| IFRS 2 expense. | X | X | If equity-settled, this equals the grant date fair value annualised over the vesting period. If cash-settled, the expense is the movement between the opening and closing balance of the liability raised (the liability is annually measured at the fair value at reporting date). |
| Intrinsic value on reporting date (i.e. the value of the instruments if they were to be exercised at the reporting date). | X |
X |
If equity-settled, the intrinsic value is the difference between the market price (fair value) of the shares at the reporting date and the exercise price, if any (else = 0). If cash-settled, this equals the actual amount payable if reporting date were the exercise date. |
IFRS, International Financial Reporting Standards.
Another possible interpretation of ‘value’ could include the fair value of the underlying shares (in the case of share options), although it is unlikely that this could be regarded as a ‘right’, as required by Section 30(6)(e). Similarly, it is unlikely that companies would interpret ‘value’ in the context of Section 30(6)(e) as meaning the amount payable to exercise the right (i.e. the exercise price). These two ‘values’ are rather the two items needed to calculate the gain on exercise that was required to be disclosed by the 1973 Act.
The author is of the opinion that the term ‘value’ in the context of Section 30(6)(e) does not imply a net value like a gain on exercise or an annualised value like the IFRS 2 expense, otherwise the legislature would surely have provided clarification on how to calculate such a value, as was the case in the 1973 Act that provided details on how to calculate the gain. Surely if the term ‘value’ in Section 30(6)(e) was intended to still mean ‘gain on exercise’, the legislature would not have changed the wording in the Act completely from what it was in the 1973 Act. In the light of the ordinary meaning of ‘value’, it would make more sense for ‘value’ to be interpreted as a gross value, such as ‘fair value’. However, if the intention was for a ‘fair value’ to be disclosed, it is uncertain why the legislature did not use those specific words, as was the case in the other 14 places in the Act where specific mention is made of ‘fair value’ (
In an attempt to determine the most likely meaning of the term ‘value’ in Section 30(6)(e), other regulatory frameworks requiring disclosure of SBP to directors were consulted to establish which ‘values’ these sources require to be disclosed, regardless of whether it should be disclosed per director or in total. It is possible that the legislature intended for the same ‘value’ to be disclosed. These other sources include IFRS 2 and IAS 24
Below follows a discussion of the disclosure requirements of these other regulatory frameworks in an attempt to establish the possible meaning of the term ‘value’ that is used in Section 30(6)(e). Consequently, disclosure requirements of narrative or qualitative information, or of quantitative information that is not currency values, such as for example the number of options granted or exercised, are excluded here.
IAS 24 requires disclosure of the SBP compensation to all key management personnel, including directors, in total (not per individual), that is, the current year IFRS 2 expense. This is a possible interpretation of the term ‘value’ in the context of Section 30(6)(e), but there are other more likely interpretations, as discussed below.
The disclosure requirements of IFRS 2 are set out in
IFRS 2 disclosure requirements and applicability to Section 30(6)(e).
| Disclosure requirement | Possible interpretation of ‘value’ in the context of Section 30(6)(e)? |
|---|---|
| Weighted average exercise price of various categories of share options, such as those granted or exercised during the year, |
No, unlikely. |
| The range of exercise prices for outstanding options. | No, unlikely. |
| Weighted average share price, i.e. the market price (fair value) at exercise date for options exercised during the period. | No, unlikely. |
| For equity-settled instruments: the weighted average fair value on measurement date (i.e. grant date) of options or other equity instruments granted during the year. | Yes, possibly (grant date fair value). |
| Incremental fair value granted as a result of modifications of equity-settled SBPs. | No, unlikely. |
| Total IFRS 2 expense. | Yes, possibly. |
| Total carrying amount at reporting date of liabilities recognised in respect of cash-settled SBPs. | No, unlikely. |
| Total intrinsic value at reporting date of vested SBP-liabilities (i.e. cash-settled only). | No, unlikely. |
SBPs, share-based payments.
The JSE listing requirements require disclosure of the exercise price of each option or right outstanding at the beginning of the year, awarded during the year, exercised during the year and outstanding at reporting date. In addition, the price at which shares were issued or allotted (but not yet fully paid for) in terms of a share purchase or option plan (i.e. the exercise price) must also be disclosed.
It is unlikely that ‘value’ in the context of Section 30(6)(e) should be interpreted as the exercise price, as the amount payable to exercise the right does not constitute the value of the right. The wording of the JSE listing requirements also seems to imply that the disclosure requirements are different from those required by the Act: ‘in addition to complying with IFRS, Section 30 of the Act and paragraph 3.84 of the Listings Requirements, issuers are required to disclose the following information’ (JSE Limited
The author is of the opinion that ‘value’ in Section 30(6)(e) of the Act should be interpreted to have the same meaning as that specified in King III. The introduction of the Act was the reason for a newer version of the King code (i.e. King III) and it seems as if the purpose of King III and the Act is to require disclosure of the same directors’ remuneration values:
Companies should provide full disclosure of each individual executive and non-executive directors’ remuneration,
King III, read together with the remuneration practice note (IoDSA
Although the IFRS 2 expense is not the most likely interpretation of the term ‘value’ in the context of Section 30(6)(e), as discussed, it is not ruled out as a useful value to disclose. According to Urson (
From a preliminary inspection of companies’ annual financial statements, it seems that companies are disclosing the following values per director (Dippenaar & Steenkamp
Grant date fair value (required by King III, read together with the remuneration practice note).
Gain on exercise of share options only (previously required by the 1973 Act, although not required per director).
Value of all share incentives exercised during the year (seemingly an extension of the 1973 Act’s requirement from options only to all share incentives).
Sufficient information to calculate the value of all share incentives exercised.
IFRS 2 expense (required by IAS 24 and IFRS 2, but not per director).
A combination of the above.
Since only the grant date fair value is required to be disclosed per director, it is assumed that these other values noted are disclosed either voluntarily or in an attempt to comply with the Act. The uncertainty regarding which ‘value’ is required to be disclosed by Section 30(6)(e) and the inconsistent interpretations applied by companies lead to incomparability between similar companies.
The following example illustrates the differences in numbers that companies might disclose in their annual financial statements, depending on their interpretation of the term ‘value’ in Section 30(6)(e). These differences could be significant in bull or bear market conditions. For purposes of the illustration, a share option plan is used, where the directors have the option to purchase shares in future (during the exercise period), but at an exercise price equal to the share price on the grant date of the options. Share appreciation rights would be similar, except that the directors cannot purchase physical shares, but benefit by receiving cash for the increase in share price from grant date up to exercise date. In respect of plans where shares or phantom shares are granted, the vesting date and exercise date is the same; therefore, these types of plans were not selected to illustrate the full effect of the differences in interpretations of the term ‘value’.
Assume that Company X grants 100 share options to each of its 10 directors on 01 July 20´1. Company X has a 31 December reporting date. Each grant is conditional upon the director remaining in the service of Company X for another 3 years. In other words, the share options will vest on 30 June 20´4. The share options can be exercised at an exercise price of 15 rand (R) at any time during the 6 years post vesting date, i.e. by 30 June 20´10.
The relevant fair values of the shares and share options, throughout the life of the share options, are presented in
Fair values of shares and options throughout the life of the options.
| Date | Fair value per share | Fair value per option |
|---|---|---|
| 1 July 20×1 | R15.00 | R2.00 |
| 31 December 20×1 | R15.10 | R2.80 |
| 31 December 20×2 | R15.80 | R2.55 |
| 31 December 20×3 | R16.20 | R2.90 |
| 30 June 20×4 | R15.50 | R3.00 |
| 31 December 20×4 | R17.00 | R2.70 |
| 31 December 20×5 | R17.10 | R2.85 |
| 31 December 20×6 | R17.50 | R2.60 |
| 31 December 20×7 | R16.40 | R1.80 |
| 30 June 20×8 | R16.00 | R1.60 |
| 31 December 20×8 | R16.50 | R1.55 |
| 31 December 20×9 | R16.90 | R1.70 |
| 30 June 20×10 | R17.20 | R2.20 |
| 31 December 20×10 | R18.00 | N/A |
N/A, not applicable
On the basis of a weighted average probability, Company X estimated on grant date that two of the directors would leave during the 3-year period and therefore forfeit their rights to the share options. This turned out to be true and eight directors’ share options vested on 30 June 20´4. Five directors exercised their share options on 30 June 20x8, while the other three directors’ options expired on 30 June 20x10, since they were not exercised by that date. Company X could disclose the following amounts, per director, per year (in
Disclosures of share-based payment ‘value’, per director, in the 20x1 to 20x9 financial statements of Company X.
| Reporting date | Fair value on grant date | Fair value on vesting date | Fair value at reporting date | Gain on exercise | IFRS 2 expense | Intrinsic value on reporting date |
|---|---|---|---|---|---|---|
| 20×1 | R200 |
– | R280 |
– | R33 |
R10 |
| 20×2 | – | – | R255 |
– | R67 |
R80 |
| 20×3 | – | – | R290 |
– | R67 |
R120 |
| 20×4 | – | R300 |
R270 |
– | R33 |
R200 |
| 20×5 | – | – | R285 |
– | – | R210 |
| 20×6 | – | – | R260 |
– | – | R250 |
| 20×7 | – | – | R180 |
– | – | R140 |
| 20×8 | – | – | R155 |
R100 |
– | R150 |
| 20×9 | – | – | R170 |
– | – | R190 |
, This disclosure can also vary in practice. Some could disclose this value in respect of each of the 10 directors that received a grant, while others could disclose it for each director that the company expects will remain in service until the vesting date (i.e. only eight directors).
, This would be disclosed in respect of each of the eight directors in which the rights vested.
, This value is disclosed for each of the three directors that had not exercised their rights at that date.
, The gain is disclosed for each of the five directors that exercised their rights during the year.
, The IFRS 2 expense is calculated based on the number of directors expected to meet the vesting conditions and is therefore disclosed in respect of each of the eight directors expected to remain in service until the vesting date.
The meaning of the term ‘value’, for the purposes of Section 30(6)(e) of the Act, is unclear and can be interpreted in various ways, from variations of ‘gross’ values such as fair value on certain dates or even annualised values such as the IFRS 2 expense, to ‘net’ values such as the gain realised on exercise of SBPs or the intrinsic value thereof before exercise. Not only is it unclear if a gross or net value is implied, but if a gross value should be disclosed, then the date on which it should be determined is also uncertain. Since the meaning is unclear and the legislature’s intention is unknown, the author attempted to use logical reasoning in order to determine the most likely meaning. The term ‘value’ is commonly understood as ‘the monetary worth’ of something. The author is of the opinion that it does not imply a net value like a gain on exercise of share options, as then surely the legislature would have used the existing wording in the 1973 Act. The fact that the wording was completely altered, shows that a different meaning should be ascribed to the term ‘value’ than gains on exercise of share options.
The author is of the opinion that a fair value should be disclosed, although it is uncertain why the legislature failed to use that exact term in Section 30(6)(e), seeing that ‘fair value’ is used 14 times in other sections of the Act. Fair value on grant date, reporting date, vesting date and exercise date would all be useful to disclose, but the author is of the opinion that it should be interpreted as the grant date fair value, as required by King III. It could even possibly be extended to also refer to the reporting date fair value and gain on exercise, which are stated as best practice in the King III practice note on remuneration.
The uncertainty regarding the meaning of ‘value’ in Section 30(6)(e) has significant consequences in terms of comparability of company annual financial statement disclosures and it is recommended that the wording of Section 30(6)(e) is amended to reflect the meaning intended by the legislature. It would be even more helpful if the Act could provide more detailed requirements of how particular components of remuneration should be calculated, as is the case in the United Kingdom in respect of quoted companies (United Kingdom
The level of disclosure of directors’ remuneration by companies is still a problem for shareholders and users of financial statements. In order to help address this problem and to assist companies with the preparation of their disclosures, especially those that need to be disclosed per director, as required by so many different sources, future research could include the development of an easy-to-use disclosure checklist.
Fair value could be determined using a variety of valuation techniques. The study is limited as it does not attempt to evaluate valuation techniques nor to prescribe the most appropriate valuation method to determine the fair value of share-based remuneration. A future research study could consider the appropriateness of different valuation methods available or applied by companies to value their share-based incentives.
The author declares that she has no financial or personal relationships that may have inappropriately influenced her in writing this article.
Calculations of values disclosed in
| Reporting date | Fair value on grant date | Fair value on vesting date | Fair value at reporting date | Gain on exercise | IFRS 2 expense | Intrinsic value on reporting date |
|---|---|---|---|---|---|---|
| 20×1 | R2 × 100 | – | R2.80 × 100 | – | 100 × R2 × 6/36 | (R15.10 – 15) × 100 |
| 20×2 | – | – | R2.55 × 100 | – | 100 × R2 × 12/36 | (R15.80 – 15) × 100 |
| 20×3 | – | – | R2.90 × 100 | – | 100 × R2 × 12/36 | (R16.20 – 15) × 100 |
| 20×4 | – | R3 × 100 | R2.70 × 100 | – | 100 × R2 × 6/36 | (R17.00 – 15) × 100 |
| 20×5 | – | – | R2.85 × 100 | – | – | (R17.10 – 15) × 100 |
| 20×6 | – | – | R2.60 × 100 | – | – | (R17.50 – 15) × 100 |
| 20×7 | – | – | R1.80 × 100 | – | – | (R16.40 – 15) × 100 |
| 20×8 | – | – | R1.55 × 100 | (R16 – 15) × 100 | – | (R16.50 – 15) × 100 |
| 20×9 | – | – | R1.70 × 100 | – | – | (R16.90 – 15) × 100 |