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HKAS 1.51 HK Listco Ltd Year ended 31 December 2023 R17.07 26 C(DR)R.6(2)(c) R17.07(1)(c) R17.07(1)(c)(iii) 27 The information set out in the table under "Share option scheme" sub-section of "Equity-linked agreements" in the illustrative directors' report is required to be disclosed in relation to share options and awards granted and to be granted to: a) each of the directors, chief executive or substantial shareholders of the listed issuer, or their respective associates; b) each participant with options and awards granted and to be granted in excess of the 1% individual limit; c) each related entity participant or service provider with options and awards granted and to be granted in any 12-month period exceeding 0.1% of the relevant class of shares in issue; and d) other employee participants, related entity participants and service providers by category. In this illustration, it is assumed that HK Listco only has share options granted to directors and employee participants, and the grants do not exceed the 1% individual limit. Section 6(2)(c) of C(DR)R requires the disclosure of any monetary or other consideration that an entity "has received or will receive" under the equity-linked agreements subsisting at the end of the year. In respect of share options and warrants, the consideration that an entity "has received or will receive" typically comprises two components a) the premium paid (or payable) when the option or warrant was issued; and b) the strike price i.e. the amount that the option/warrant holders would pay if they choose to exercise their rights to subscribe for shares. In respect of share option schemes which fall under HKFRS 2, the premium paid or payable (i.e. component (a)) comprises the fair value of the goods or services that will be received from the grantee in exchange for the grant, in addition to any other consideration provided by the grantee (often any other consideration is just a nominal amount). Therefore, to satisfy the CO disclosure requirement, an entity needs to disclose the grant date fair value of any unexercised options as the best estimate that the entity has of the "other consideration" that has been or will be provided by the grantee. This information will be available in the accounting records but will generally not already be disclosed in the financial statements. This is because the grant date fair value information is only discloseable under HKFRS 2 in the year of the grant, whereas the CO requirement is to disclose the amount of consideration that has been or will be received in respect of any equity-linked arrangements that are subsisting at the year end. This is in addition to disclosing how much would be received if those options were exercised. 28 Rule 17.07(1)(c)(v) of the MBLRS requires disclosures in annual reports the grant date fair value of the share options and awards granted during the financial year, and the accounting standard and policy adopted by each participant or category of participants. The latter disclosure has been illustrated in note 1(x)(iii) and 29(c) to the illustrative financial statements as part of the disclosures required also by HKFRS 2. In addition, note to Rule 17.07(1)(c) requires listed issuers to calculate the fair value of share options and awards in accordance with the accounting standards and policies adopted for preparing its financial statements, and disclose the methodology and assumptions used, including but not limited to: (1) In the case of share options, a description of the option pricing model and details of the significant assumptions and inputs used in that pricing model, such as the expected volatility, expected dividends and the risk-free interest rate. The issuer should include an explanation of how these significant assumptions and inputs have been determined. (2) In the case of share awards, a description of the basis for fair value measurement and information on whether and how the features of the awards (for example, the expected dividends) have been incorporated in fair value measurement. In this illustration, it is assumed that HK Listco granted options to only one category of participants during the financial year. If a listed issuer grants share options or awards to different participants or categories of participants, consideration should be given to whether the disclosures should be disaggregated by each participant or category of participants to meet the requirements in Rule 17.07(1)(c). 29 In this illustration, it is assumed that there is no performance target under HK Listco's share option scheme. If a listed issuer grants share options and awards with performance targets, these targets should be disclosed. C(DR)R.3 30 R1.01 PN5(3.1) The example disclosure under "Share option scheme" sub-section of "Equity-linked agreements" in the illustrative directors' report illustrates the information required to be disclosed to meet both the requirements of the C(DR)R and the MBLRs. Unlisted companies need only comply with the requirements of the C(DR)R which, in addition to the disclosure requirements in section 6 of the C(DR)R relating to "equity-linked agreements" (see footnote 22), include the disclosure requirements in section 3 of the C(DR)R relating to arrangements "whose objects are, or one of whose objects is, to enable directors of the company to acquire benefits by means of the acquisition of shares on, or debentures of, the company or any other body corporate". Therefore, if the directors are a party to the equity-linked agreements disclosable under section 6 of the C(DR)R or other arrangements involving debentures, and these agreements have arisen under arrangements "whose objects are, or one of whose objects is, to enable directors of the company to acquire benefits by means of acquisitions in the shares of the company or any other body corporate" disclosable under section 3 of the C(DR)R, then the company (whether listed or not) will need to disclose a statement explaining the effect of these arrangements and the names of the directors who held shares or debentures acquired under those arrangements to satisfy the requirements in both sections. Although not required, a negative statement explaining that no such arrangement exists is best practice. 31 "Substantial shareholders" are persons (including holders of depositary receipts other than depositaries) who are entitled to exercise, or control the exercise of, 10% or more of the voting power at any general meeting of the company. Note that this definition is modified for the purposes of Rule 14A, Equity securities - Connected Transactions of the MBLRs by Rule 14A.29. "Other persons" are persons who are required pursuant to Part XV of the Securities and Futures Ordinance to notify the company of their interests and short positions in the company's shares and underlying shares, but who are not substantial shareholders, directors or chief executives of the company. 20 © 2023 KPMG, a Hong Kong partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited ("KPMG International"), a private English company limited by guarantee. All rights reserved.