PFRS 2 SHARE-BASED

COMPENSATION
BY: PROF JEFFERSON A. RAMOS, CPA, MBA
Review OBJECTIVES
- DEFINE A SHARE BASED COMPENSATION PLAN
- TO UNDERSTAND THE RECOGNITION AND ITS MEASUREMENT
- TO DISTINGUISH THE FV METHOD AND INTRINSIC METHOD
- TO KNOW THE RECOGNITION OF AN ACCELERATION OF VESTING
SHARE-BASED PLAN
A share-based compensation plan is a compensation arrangement established by the entity
whereby the entity’s employees shall receive shares of capital in exchange for their services or
the entity incurs liabilities to the employees in amounts based on the price of its shares.
On the other hand, Share based payment is also a payment for goods or services in either;
- Shares
- Share Options (SO)
- Cash payment based on share price
(Common way of awarding employee performance)
NOTE: The higher the share price the higher the cash payment.
Scope of PFRS 2
Under PFRS 2 sets out the measurement principles and specific requirements for accounting of
the following:
1. EQUITY Settled – entity issues instruments in consideration for services
2. CASH Settled- entity incurs a liability for services received/cash payment based on share price.

FAMILIAR TO TERMINOLOGIES
Equity Settled (Share Options) – Co issues shares in return for the goods or services.
Cash Settled (Share Appreciation rights) – Co pays cash in return for the goods or services.
(What will be the entry?)
TERMINOLOGY (KEY FOCUS)
1. Grant Dateterms of scheme (no. of employees, no. of years, no. of options) GD is today
2. Vesting Date Employees entitled to the share based payment
3. Exercise Date Employees receive the share based payment
4. Vesting period the difference in the period between the grant date and the vesting period
FV Concern
Equity Settled

Cash Settled
Recognition and its Accounting
Treatment
1. If the share options vest immediately, the employee is not required to complete a specified
period of service before unconditionally entitled to the share options.

2. If the share options do not vest until the employee completes a specified service period, the
compensation is recognized as expense over the vesting period.

NOTE: Spread the FV of the share based payment over the vesting period based on the number
of employees expected to exercise the option
No Vesting Period
Let say On January 1, 2022, share options are granted to Mr. Kepweng (an employee of Mang
Inasar) to purchase 100,000 ordinary shares of 50 par value at 60 per share.
On this date, the fair value of each share option is 20. The options are exercisable immediately.
Mr. Kepweng exercised all his share options on December 31, 2022.
With Vesting Period
On January 1, 2022, share options are granted to Ms. Kepweng (an Officer of Mang Tinapay) to
purchase 100,000 ordinary shares of 40 par value at 50 per share.
On this date, the fair value of each share option is 12. Ms. Kepweng is entitled to the share
options only after 2 years of service.
The options can be exercised starting January 1, 2022 and expire one year after.
All share options are exercised on December 31, 2024.
Compensation Expense Some employees
left
On January 1, 2022, Nalawag Company granted 100 share options each to 500 employees,
conditional upon the employee’s remaining in the entity’s employ during the vesting period.
The share options vest at the end of a three year period. On grant date, each share option has a
fair value of 30.
The par value per share is 100 and the option price is 120. On December 31, 2023, 30 employees
have left and it is expected that on the basis of a weighted average probability, a further 30
employees will leave before end of the 3 year period.
On December 31, 2024, only 20 employees actually left and all of the share options are
exercised on such date.
Questions: 
1. What is the Compensation expense for Year 1?
2. What is the Compensation expense for Year 2?
3. What is the Compensation expense for Year 3?
4. What is the share premium upon exercise of the share options on December 31, 2024?
Illustrative 1– FV Equity Settled
La K. Tyan granted 10,000 equity settled share based payments to its 20 directors on January 1,
2020. The Options vest on December 31, 2022. It is anticipated that none of the directors will
leave over the three year period. The fair value of the option is as follows:
January 1, 2020 10
December 31, 2020 15.50
December 31, 2021 15.80
December 31, 2022 15.20
Prepare the extracts to be shown in the profit or loss and the statement of financial position
for each of the three years ended December 31 2020 to December 31, 2022.
Illustrative 2- Options expected to be
exercised
On January 1, 2020, Napintas Corporation granted 20,000 share options to each of its ten (10)
directors. The conditions attached to the share option scheme is that the directors must remain
an employee of Napintas for three years. The FV of each equity settled share based payment at
the grant date was 60.
At December 31, 2020, it was estimated that four (4) directors would leave before the end of the
three years.
At December 31, 2021, due to COVID impact in the Economy, it was estimated that one (1)
director would leave before the end of the three years.
Prepare the extracts to be shown in the profit or loss and the statement of financial position
for each of the three years ended December 31 2020 to December 31, 2021.
Illustrative 3 – Intrinsic value Method
On January 1, 2020, an entity granted 10,000 share options to employees. The share options
vest on December 31, 2021 provided the employees remain in service until then.
The fair value of the share option cannot be estimated relaibly. The par value per ordinary share
is 100. The option price is 125 and the market value of the Ordinary share is also 125 at the
grant date.
All share options vested on December 31, 2021 and no employees left the entity. The share
options can be exercised starting January 1, 2022 and expire two years after. All share options
are exercised on December 31, 2022.
The share market prices are 150 on December 31, 2020, 180 on December 31, 2021 and 200 on
December 31, 2022.
 END
THANK YOU! KINIG KITS PO TAYO SA PART 2 OF PFRS 2-CASH
SETTLED 

jarcpa
CASH SETTLED TRANSACTION
A cash settled transaction is a share based payment transaction whereby an entity incurs a
liability for services received and the liability is based on the entity’s equity instruments.
Under this transaction, the entity shall measure the services acquired and the liability incurred
at the FV of the liability.
Until the liability is settled, the entity shall remeasure the FV of the liability at each reporting
date and at the date of settlement with any changes in FV recognized in the profit or loss for the
period.
Share appreciation right
A share appreciation right entitles an employee to receive cash which is equal to the excess of
the market value of the entity’s share over a predetermined price for a stated number of shares.
Note: Share appreciation rights creates a liability
A share appreciation right is viewed as compensation for services rendered.
Measurement
The compensation is based on the fair value of the liability at the reporting date and shall be
remeasured at year end until it is finally settled.
The FV of liability is equal to the excess of the market value of the share over a predetermined
price for a given number of shares over a definite vesting period.
Basically, the compensation in a share appreciation right is the cash paid by the entity.
This amount becomes known only on exercise date, not on the date of grant.
Recognition
1. If the share appreciation right vests immediately, the compensation is recognized immediately
on the date of grant.

2. If the share appreciation right does not vest until the employee completes a definite vesting
period, the compensation is recognized over the service or vesting period.
Example 5 – Cash Settled
An entity granted a share appreciation right to the general manager on January 1, 2020.
After a four year service period, the employee is entitled to receive cash equal to the appreciation in share price over the market value on
January 1, 2020.
The share appreciation right had the following terms:
A. service period (January 1, 2020 to December 31, 2023)
B. number of shares (20,000 shares)
C. exercise date (January 1, 2024)
The quoted prices of the entity’s share are:
January 1, 2020 200
Dec 31, 2020 210
Dec 31, 2021 220
Dec 31 2022 240
Dec 31 2023 250
Acceleration of Vesting
PFRS 2, provides that if an entity cancels or settles a grant of share options during the vesting
period, the entity shall account for the cancellation or settlement as an acceleration of vesting.

1. The entity shall recognize immediately the compensation expense (otherwise would have
been recognized for services received over the remainder of the vesting period.
2. Any payment made to the employee on the cancelation or settlement of the grant shall be
accounted for as the repurchase of equity interest (deduction from equity)
Note: If the payment exceeds the FV of the share option, the excess shall be recognized as an
expense.
Modification from cash-settled to equity
settled
Under PFRS 2, Modifications shall be accounted for as follows:
1. The equity settled share based payment transaction is measured based on FV of such equity instruments
granted on the modification date and is recognized in equity.
2. The liability for the cash settled share based payment transaction as of modification date is
derecognized.
3. The difference between the CA of the liability and the amount of equity is recognized immediately in
profit or loss.
Entry
Sal exp Debit
ASP Credit
Modification
Debit ASP and Salaries credit SOO
Measurement Guidance
General fair value measurement principle. In principle, transactions in which goods or services are
received as consideration for equity instruments of the entity should be measured at the fair value of the
goods or services received. Only if the fair value of the goods or services cannot be measured reliably
would the fair value of the equity instruments granted be used (Intrinsic Method).
Measuring employee share options. For transactions with employees and others providing similar services,
the entity is required to measure the fair value of the equity instruments granted, because it is typically not
possible to estimate reliably the fair value of employee services received.
When to measure fair value - options. For transactions measured at the fair value of the equity
instruments granted (such as transactions with employees), fair value should be estimated at grant date.
When to measure fair value - goods and services. For transactions measured at the fair value of the goods
or services received, fair value should be estimated at the date of receipt of those goods or services.
Disclosure
Required disclosures include:
the nature and extent of share-based payment arrangements that existed during the period
how the fair value of the goods or services received, or the fair value of the equity instruments
granted, during the period was determined
the effect of share-based payment transactions on the entity's profit or loss for the period and
on its financial position.