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FINANCIAL ACCOUNTING AND REPORTING

SHARE BASED COMPENSATION – PFRS 2

I. Key Terms and Definitions:

Cash-settled share-based payment transaction

A share-based payment transaction in which the entity acquires goods or services by incurring a
liability to transfer cash or other assets to the supplier of those goods or services for amounts that are
based on the price (or value) of the entity’s shares or other equity instruments of the entity.

Equity-settled share-based payment transaction

The entity receives goods or services as consideration for equity instruments of the entity including
shares or share options.

Intrinsic value

The difference between the fair value of the shares to which the counterparty has the (conditional or
unconditional) right to subscribe or which it has the right to receive, and the price (if any) the
counterparty is (or will be) required to pay for those shares.

Share option

A contract that gives the holder the right, but not the obligation, to subscribe to the entity’s shares at
a fixed or determinable price for a specified period of time. Share options granted to officers and
employees are recognized as compensation expense.

Vest

To become an entitlement. Under a share-based payment arrangement, a counterparty’s right to

receive cash, other assets or equity instruments of the entity vests when the counterparty’s
entitlement is no longer conditional on the satisfaction of any vesting conditions.

Vesting conditions

The conditions that determine whether the entity receives the services that entitle the counterparty to
receive cash, other assets or equity instruments of the entity, under a share-based payment
arrangement.

a. Service conditions require the counterparty to complete a specified period of service.

b. Performance conditions require the counterparty to complete a specified period of service and
specified performance targets to be met.

Vesting period

The period during which all the specified vesting conditions of a share-based payment
arrangement are to be satisfied.

II. Measurement of Compensation for Share Options

1. Fair Value Method – The compensation expense shall be computed by using the fair value of
the share options at grant date multiplied by the number of options that actually vest and
allocate as expense over the vesting period. But if the share options vest immediately and are
granted for past services, compensation expense is recognized immediately.

2. Intrinsic Value Method – Alternative method used if the fair value of the share option cannot be
estimated reliably. The intrinsic value is measured at the end of each reporting period and the
date the share options are exercised with the corresponding expensed recognized on those
dates. Unlike the fair value method, compensation expense is recognized beyond the vesting
period.

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III. Share Appreciation Rights

1. A cash bonus plan given to officers and employees that entitles the grantees payment equal to
the appreciation of the market value of the shares over a predetermined price based on a stated
number of shares on the date of exercise.
2. If the share appreciation right is granted for past services, compensation expense shall be
recognized immediately, otherwise it shall be allocated during the vesting period by using the
appreciation at end of the reporting period as an estimate of the value on the date of exercise.
. Changes in value of the liability shall be only recognized in profit or loss including decreases in
value and recorded as a “gain on reversal” of share appreciation right.

IV. If the share based payment transaction is granted for past services and exercisable
immediately, the fair value at the date of grant shall be recognized in full.

V. Modifications to the terms and conditions on which equity instruments were granted

(a) The entity shall account for the cancellation or settlement as an acceleration of vesting, and
shall therefore recognize immediately the amount that otherwise would have been recognized for
services received over the remainder of the vesting period.

(b) The conversion to a payment made to the employee on the cancellation or settlement of the
grant shall be accounted for as the repurchase of the equity interest. The excess of the payment
made from the fair value recognized in equity shall be recognized as an expense.

VI. Share-based payment transactions in which the terms of the arrangement provide the
counterparty with a choice of settlement

(a) For transactions with parties other than employees, in which the fair value of the goods or
services received is measured directly, the entity shall measure the equity component of the
compound financial instrument as the difference between the fair value of the goods or
services received and the fair value of the debt component, at the date when the goods or
services are received.

(b) For other transactions, including transactions with employees, the entity shall measure the fair
value of the compound financial instrument at the measurement date, taking into account the
terms and conditions on which the rights to cash or equity instruments were granted. In other
words, the compound financial instrument shall be measured using the fair value of the share
alternative at grant date.

(c) At the date of settlement, the entity shall remeasure the liability to its fair value. If the entity issues
equity instruments on settlement rather than paying cash, the liability shall be transferred direct to
equity, as the consideration for the equity instruments issued.

(d) If the entity pays in cash on settlement rather than issuing equity instruments, that payment shall
be applied to settle the liability in full. Any equity component previously recognized shall remain
within equity. By electing to receive cash on settlement, the counterparty forfeited the right to
receive equity instruments. However, this requirement does not preclude the entity from
recognizing a transfer within equity, ie a transfer from one component of equity to another.

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CLASSROOM NOTES

SHARE OPTIONS

 If the fair value is at grant date is given, use the fair value method. If there is no fair value
at grant date use the intrinsic value (market value less option price) at each balance
sheet date and date of exercise of the share options.

 If the share options are exercisable immediately and/or granted for past services meaning
they are “vested” the total fair value shall be recognized as expense in the period of
granted. If the share options require vesting conditions namely a service condition and/or
a performance condition, the total fair value of the share options shall be allocated as
expense over the vesting period.

 When allocating the total expense under the fair value method over the vesting period
and the number of potential options that may vest or the number of actual options that
vest shall be applied similarly to a change in accounting estimate by computing for the
annual compensation expense by comparing the cumulative expense based on the
current estimate or the total value of the expense in the final year minus the cumulative
amount of expense from the previous year. See example below using Problem 1 in 6691:

Total Comp. Current Year

Expense Comp. Expense
2019 (500 x 100) x 30 / 3 500,000 500,000
2020 (440 x 100) x 30 / 3 x 2 880,000 * 380,000
2021 (450 x 100) x 30 1,350,000 **470,000

* 880,000 – 500,000 = 380,000

** 1,350,000 – 880,000 = 470,000

 The same shall be applied to share options using the intrinsic value method. See
example below using problem 3 in 6691:

Total Comp. Current Year

Expense Comp. Expense
2019 60,000 x (62 – 60) / 3 40,000 40,000
2020 60,000 x (66 – 60) / 3 x 2 240,000 * 200,000
2021 60,000 x (75 – 60) 900,000 **660,000
2022 60,000 x (85 – 60) 1,500,000 ***600,000

* 240,000 – 40,000 = 200,000

** 900,000 – 240,000 = 660,000
*** 1,500,000 – 900,000 = 600,000

 The difference between the exercise price of the share options plus the share options
outstanding account balance that will be debited and the par value of the shares issued
shall be the share premium from issuance.

 The conversion of share options to a cash payment and the acceleration of the vesting
period by cancelling the remaining years of the vesting period is accounted for similarly.
The difference between the cash payment and the balance of share options outstanding
account shall be recognized as compensation expense while the difference of the total
fair value of the share options and the share options outstanding account shall be
recognized as compensation expense.

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SHARE APPRECIATION RIGHTS

 Accounting for share appreciation rights is similar to accounting for share options under
the intrinsic value method since the appreciation value is also the difference between the
market value at date of exercise and a predetermined price.

 If the share appreciation rights are vested the total expense shall be recognized in the
period of grant and adjusted for changes in the value of the payment over the allowed
exercise period. If the share appreciation rights require vesting conditions, the expense
shall be allocated based on the share appreciation rights expected to vest and eventual
actual number that vest by using the current available market value as basis of the
appreciation at each balance sheet date. The following examples under problem 4 (with
vesting conditions) and problem 5 (vested)

PROBLEM 4 Total Comp. Current Year

Expense Comp. Expense
2019 50,000 x (124 – 100) / 3 400,000 400,000
2020 50,000 x (151 – 100) / 3 x 2 1,700,000 *1,300,000
2021 50,000 x (151 – 100) 2,550,000 **850,000

* 1,700,000 – 400,000 = 1,300,000

** 2,550,000 – 1,700,000 = 850,000

PROBLEM 5

2019 Compensation expense / liability (50,000 x (115 – 100)) 750,000

Liability for appreciation rights (50,000 x (115 – 100)) 750,000

Less: Payment on December 31, 2009 (50,000 x (110 – 100)) 500,000
Gain on reversal of share appreciation rights 250,000

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