SHARE-BASED COMPENSATION 1) FAIR VALUE METHOD- Compensation is equal to
the fair value of the share options on the date of
SHARE-BASED COMPENSATION
 is a compensation arrangement established by the
entity whereby the entity’s employees shall
receive equity shares in exchange for their
services or the entity incurs liabilities to the
employees in amounts based on the price of its
equity shares.
 Compensation plans are a common feature of
employee remuneration for directors, senior
executives and other key employees.
 The compensation plans are usually tied to
performance in a strategy that uses compensation
to motivate the recipients.
2 CATEGORIES
1. EQUITY SETTLED (Share Options) - the entity
issues equity shares in consideration for services
received, for example, share options.
2. CASH SETTLED (Share Appreciation Rights) - the
entity incurs a liability for services received and
the liability is based on the entity’s equity
shares, for example, share appreciation rights.
 PFRS2, paragraph 30, provides that for a
cash settled share-based compensation, the
entity shall measure the services received and
the liability incurred at the fair value of the
liability.
 Until the liability is settled, the entity shall
remeasure the fair value of the liability at
each reporting date and at the date of
settlement with any changes in fair value
recognized in profit or loss for the period.
 The best example of a cash settled share-
based compensation is the grant of share
appreciation right to employees.
SHARE OPTIONS- EQUITY SETTLED
o Granted to officers and key employees to
enable them to acquire shares of the entity
during a specified period upon fulfillment of
certain conditions at a specified price.
o Granted to officers and key employees as part of
their remuneration package, in addition to a cash
salary and other employment benefits.
Measurement of Compensation
grant. (Mandated by PFRS2)
2) INTRINSIC VALE METHOD- Compensation is
equal to the intrinsic value of the share options.
Intrinsic Value- Excess of the market value of the
share over the option price.
NOTE!
Paragraph 24 of PFRS 2 provides that
the intrinsic value method can be used only if the
fair value of the share option cannot be measured
reliably.
Recognition of Compensation
a) If the shares vest immediately, the employee is
not required to complete a specified period of
service before unconditionally entitled to the share
options.
The entity shall recognize the
compensation as expense in full with
corresponding increase in equity on the date of
grant.
VESTING PERIOD- From the date of grant to the
date on which the share options can be first
exercises.
ILLUSTRATION (No Vesting Period)
On January 1, 2021, share options are granted
to employees to purchase 100,000 ordinary shares of P50
par value at P60 per share.
On this date, the fair value of each share option is P20
or a total fair value of P2,000,000 (100,000 share
options multiplied by P20).
The options are exercisable immediately. The
employees exercised all their share options on December
31, 2021.
Since the share options are exercised immediately, the
compensation is recognized in full on January 1, 2021.
2021
Jan.1 Salaries – share options 2,000,000
Share options outstanding 2,000,000
To recognize grant of 100,000 share options
at P20 per share
Dec.31 Cash (100,000 x 60) 6,000,000
Share options outstanding 2,000,000
Ordinary share capital 5,000,000
 Share premium 3,000,000 subsequently exercised, the share options outstanding
To record the exercise of share options account shall be adjusted and credited to share premium.

NOTE: Ordinary Share capital = 100,0000 shares x

P50.00 ILLUSTRATION (Some Employees Left)

On January 1, 2021, an entity granted 100 share

b) If the shares do not vest immediately until the
employee completes a specified service period,
the compensation is recognized as expense over
the service period or vesting period.
This is on the theory that the share options
are in recognition for services rendered between
the date of grant and the exercise date.
ILLUSTRATION (With Vesting Period)
On January 1, 2021, share options are granted
to officers to purchase 100,000 ordinary shares of P50
par value at P60 per share.
The fair value of each share option is P15. The
officers are entitled to the share options only after
completing two years of service.
The options can be exercised starting January 1,
2023 and expire one year after. All share options are
exercised on December 31, 2023.
Total compensation or fair value of share 1,500,000
options (100,000 x 15)
Annual compensation 1,500,000/ 2 years 750,000
options each to 500 employees, conditional upon the
employee’s remaining in the entity’s employ during the
vesting period.
The par value per share is P100 and the option price
is P120.
The share options vest at the end of a three-year
period. On grant date, each share option has a fair value
of P30.
On December 31, 2021, 30 employees have left, and
it is expected that based on a weighted average
probability, a further 30 employees will leave during the
vesting period.
By December 31, 2022, 28 employees have left, and
the entity expects that a further 25 employees will leave
during 2023.
By December 31, 2023, 22 employees have left,
and therefore, 420 employees shall receive share options
at the end of 2023.
All of the share options were exercised on December
31, 2023.
The compensation expense for each year of the three-
year vesting period is computed as follows:

2021 2021
Dec.31 Salaries – share options 750,000 Number of employees 500
Share options outstanding 750,000 Employees who left in 2021 (30)
To recognize grant of 100,000 share options Employees expected to leave (30)
Employees entitled to share options 440
2022 Multiply by share options per employee 100
Dec.31 Salaries – share options 750,000 Total share options 44,000
Share options outstanding 750,000 Multiply by fair value 30
To recognize grant of 100,000 share options Total compensation 1,320,000
Compensation expense for 2021
2023 (1,320,000/3) 440,000
Dec.31 Cash (100,000 x 60) 6,000,000
Share options outstanding 1,500,000 Salaries – share options 440,000
Ordinary share capital 5,000,000 Share options outstanding 440,000
Share premium 2,500,000 To recognize grant of 100,000 share options
To record the exercise of share options
NOTE: Ordinary Share capital = 100,0000 shares x
P50.00 2022
Number of employees 500
NOTE: Before the exercise of share options, the share Employees who left in 2021 (30)
option outstanding account is reported as component of Employees who left in 2022 (28)
share premium. Thus, if the share options are not Employees expected to leave (25)
Employees entitled to share options 417
 Multiply by share options per employee 100 price for a given number of shares over a definite
Total share options 41,700 vesting period.
Multiply by fair value 30  The compensation in a share appreciation right is
Total compensation 1,251,000 the cash paid by the entity. Such amount becomes
known only on exercise date or settlement date
not on the date of grant.
Cumulative compensation – 12.31.2022 834,000
(1,251,000 divided by 3 times 2 years) Recognition of Compensation
Compensation recognized in 2021 (440,000)
Compensation expense in 2022 394,000 a) If the share appreciation right vests immediately,
the compensation is recognized immediately on
grant date.
Salaries – share options 394,000 b) If the share appreciation right does not vest until
Share options outstanding 394,000 the employee completes a definite vesting period,
To recognize grant of 100,000 share options the compensation is recognized over the vesting
period.
Exercise of share options on December 31, 2023
2023 ILLUSTARTION
Dec.31 Cash (42,000 x 120) 5,000,000
An entity granted a share appreciation right to the
Share options outstanding 1,260,000
general manager on January 1, 2021. After a four-year
Ordinary share capital 4,200,000
service period, the employee is entitled to receive cash
Share premium 2,100,000
To record the exercise of share options equal to the appreciation in share price over the market
value on January 1, 2021.

SHARE APPRECIATION RIGHTS- CASH SETTLED Thus, the market value on January 1, 2021 is the
predetermined price for purposes of determining the
o A Share appreciation right entitles an employee compensation. The share appreciation right had the
to receive cash which is equal to the excess of the following terms:
market value of the entity’s share over a
predetermined price for a stated number of a. Service period – January 1, 2021 to December
shares. 31, 2024
o A Share appreciation right entitles the employee b. Number of shares – 20,000 shares
to a cash payment equal to the increase in the c. Exercise date – January 1, 2025
price of a given number of shares over a given
period. QUOTED PRICE PER SHARE
o Like a share option, a Share appreciation right is January 1, 2021 200.00
viewed as compensation for services rendered. December 31, 2021 210.00
o Unlike in a share option, the entity shall recognize December 31, 2022 220.00
a liability because a share appreciation right is December 31, 2023 240.00
actually an obligation on the part of the entity to December 31, 2024 250.00
pay cash in the future on exercise or settlement
date. Market Value – 12.31.2021 210.00
o A Share appreciation right creates a liability. Predetermined price on January 1, 2021 200.00
Excess 10.00
Multiply by number of shares 20,000
Measurement of Compensation Total compensation 200,000
Compensation for 2021 (200,000/4 50,000.00
 The compensation is based on the fair value of the years)
liability at the reporting date and shall be
remeasured at every year-end until it is finally 2021
settled. Any changes in fair value are included in Dec.31 Salaries 50,000
profit or loss. Accrued Salaries Payable 50,000
 The fair value of liability is equal to the excess of To record salaries payable arising from share
the market value of share over a predetermined appreciation rights
Market Value – 12.31.2022 220.00 2025
Predetermined price on January 1, 2021 200.00 Jan.1 Accrued Salaries Payable 1,000,000
Excess 20.00 Cash 1,000,000
Multiply by number of shares 20,000 To record settlement of share appreciation
Cumulative compensation 400,000 right

Accrued compensation on December 31, 200,000.00

2022 (400,000.00/4 years) x 2 years
Accrued compensation on December 31, (50,000.00)
2021
Compensation Expense for 2022 150,000.00

2022
Dec.31 Salaries 150,000
Accrued Salaries Payable 150,000
To record salaries payable arising from share
appreciation rights

Market Value – 12.31.2023 240.00

Predetermined price on January 1, 2021 200.00
Excess 40.00
Multiply by number of shares 20,000
Cumulative compensation 800,000

Accrued compensation on December 600,000.00

31, 2023 (800,000.00/4 years) x 3
years
Accrued compensation on December (200,000.00)
31, 2022
Compensation Expense for 2023 400,000.00

2023
Dec.31 Salaries 400,000
Accrued Salaries Payable 400,000
To record salaries payable arising from share
appreciation rights

Market Value – 12.31.2024 250.00

Predetermined price on January 1, 2021 200.00
Excess 50.00
Multiply by number of shares 20,000
Cumulative compensation 1,000,000
Accrued compensation on December 31, (600,000)
2023
Compensation Expense for 2024 400,000.00

2024
Dec.31 Accrued Salaries Payable 400,000
Salaries 400,000
To adjust salaries payable arising from share
appreciation rights due to changes in market
value