Chapter 13:

SHARE-BASED
PAYMENTS
(PART 2)
Cash-settled share-based payment transaction
A cash-settled share based payment
transaction is one whereby an entity
acquires goods or services and incurs an
obligation to pay cash at an amount that is
based on the fair value of the entity’s own
equity instruments.
 Employee share appreciation rights (SARs)
• A share appreciation right is a form of compensation
given to an employee entitling him/her to future cash
payment based on the increase in the entity’s share price
from a specified level within a certain period of time.
• Another form of a share appreciation right is when an
employee is granted a right to receive future cash
payment by a grant to a right to shares that are
redeemable, either mandatorily ( e.g,, upon cessation of
employment ) or at athe employee’s option.
 Measurement of Compensation
• The liability for the future cash payment on a share
appreciation right is measure initially, t the end of each
reporting period and on settlement date at the fair value
of the share appreciation rights. Changes in fair value
are recognized in profit or loss.
• The fair value of the share appreciation rights is
computed using an option pricing model, taking into
account the terms and conditions on which the share
appreciation rights were granted and the extent to which
the employees have rendered service to date.
Illustration 1: Share Appreciation rights
On january 1, 20x1, Entity A grants 1000 share appreciation rights (SARs)
to employees with the condition that the employees remain in service
within the next
Date
3 years.Information on thetoSARs
No. of SARs expected vest is Fair
as follows;
Value of each SAR

Jan. 1, 20x1 1000 10

Dec. 31, 20x1 900 12

Dec. 31, 20x2 800 15

Dec. 31, 20x3 750 16

 The salaries expense are computed as follows;
Date Salaries Expense
Jan. 1,20x1 -
Dec. 31,20x1 ( 900 x ₱12 x 1/3 ) 3,600

Dec. 31,20x2 ( 800 x ₱15 x 2/3 ) 4,400

Dec. 31,20x3 ( 750 x ₱16 x 3/3 ) 4,000

The pertinent entries are as follows:

Jan. 1,20x1 Memo Entry
(* Granted 1,000 share appreciation
rights to employees with the condition
but the employees remain in service over
the next 3 years *)

Dec. 31,20x1 Salaries Expense ( 900 x 12 x 1/3) 3, 600

Accrued salaries payable 3, 600
 Salaries Expense ( 800 x 15 x 2/3) 4,400
Dec. 31,20x2 Accrued Salaries Payable 4,400

Salaries Expense ( 750 x 16 x 3/3 ) 4,000

Dec. 31,20x3 Accrued Salaries Payable 4,000

Accrued Salaries Payable 12,000

Dec. 31,20x3 Cash 12,000

 Remember the following:

Employee share options plans Employee share appreciation rights (SARs)

 Share options are not measured. The expenses  SARs are subsequently remeasured. Changes in
recognized over the vesting period are based on fair value are recognized in profit or loss.
the fair value of the share options at grant date.

 Settled through the issuance of equity  Settled through cash payment.

instruments.
Illustration 2: Share appreciatio rights - Staggered Exercise
On January 1, 20x1, ABC Co. granted 100 share appreciation
rights to each pf its 300 employees, on condition that the
employees remain in its employ over the next 3 years.
• During 20x1, 21 employees left and ABC estimated that
additional 36 employees will leave in 20x2 and 20x3.
• During 20x1, 24 employees left and ABC estimated that
additional 15 employees left will leave in 20x3.
• During 20x3, 13 employees left.
Intrinsic Value
PFRS 2 provides that SARs are to be measure at the fair value of the sahre
appreciation rights by applying an option pricing model.
Illustration: SARs- Intinsic Value
On January 1, 20x1 Abc Co. granted its president 15,000 SARs with the condition
that the employee remains in ABC’s employe over the next 3 years. The SARs are
exercisable for 2 years beginning December 31, 20x3. On exercise, the employee
is entitled to receive cash for the excess of the market value of the share on the
exercise date over the market value on the grant date. The fair value of the SAR is
indeterminable. The market prices per share are as follows:
Januray 1, 20x1 20
December 31, 20x1 30
December 31, 20x2 40
December 31, 20x3 50
The employee exercised the SARs on December 31, 20x3
Jan. 1, 20x1
MEMO ENTRY

Dec. 31, 20x1 Salaries expense ( 15,000 x(30-20)1/3) 50,000

Accrued salaries payable 50, 000

Dec. 31, 20x2 Salaries expense ( 15,000 x(40-20)2/3)-50,000 150,000

Accrued salaries payable 150,000

Dec. 31, 20x3 Salaries expense ( 15,000 x(50-20)3/3)-50,000-150,000 250,000

Accrued salaries payable 250,000

Dec. 31, 20x3 Accrued salaries payable 450,000

Cash (15,000 x(50-20) 450,000
Choice between equity-settled and cash-settled
A share-based payment transaction that can be settled either
through equity instrument or cash is accounted for depending on which
party is given the right of choice of settlement;
a. the counterparty has the right of choice of settlement; or
b. the entity has the right of choice of settlement.
SETTLEMENT
On settlement date, the liability component is remeasured to fair
value. If the entity settles the transaction in the form of:
a. Equity instruments - the liability is transferred directly to equity as
consideration for issuance of the shares.
b. Cash- the cash payment is applied as settlement of the liability.
Illustration 1: Counterparty has the right of choice- Non-employee
On Jan. 1, 20x1, ABC Co.acquired equipment with a fair value of 120,000
from XYZ, Inc, on account. XYZ, Inc. has the following choices of settlement on
December 31,20x1.
a. 10,0000 ABC sahres (10par)
b. cash equal to the market value of 10,000 ABC shares on Dec. 31, 20x1.
ABC’s shares were quoted at 11 par per share on Jan. 1, 20x1.
 ABC has issued a compound instrument because the choice of settlement is
given to the counterparty. The fair value of the equity component is computed as
follows:
Fair value of equipment received (asset) 120,000
Fair value of debt component (liability) on 1/1/1x1 (10,000 sh. x11) (110,000)
Fir value of equity component (equity) 10,000
 Jan. Equipment 120,000
1, Accounts Payable 110,000
20x1 Share Premium-sh. options outstanding 40,000

SETTLEMENT
ABC’s shares were quoted at 14 per share on Dec. 31, 20x1.
 The liability component is remeasured to fair value as follows;
Fair value of debt componen, Dec 31, 20x1 (10,000sh.x 14) 140,000
Fair value of debt component, Jan 1, 20x1 (10,000sh.x 11) (110,000)
Loss on remeasurement of liability(increase in liability) 30,000
Loss on remeasurement of liability 30,000
Dec, 31, Accounts Paybale 30,000
20x1 to record the liability to fair value on
settlement date.
 Scenario 1 Scenario 2
XYZ chooses equity settlement XYZ chooses cash settelement.

Dec. 31, 20x1; Dec.31,20x1:

Accounts Payable 140,000 Accounts Payable 140,000
Share Capital(10,000X10par)100,000 Cash 140,000
Share Premium 40,000 to record the payment in cash
to record the issuance of equity instrument

Dec. 31,20x1; Dec.31. 20x1;

Share premium-share options outs. 10,000 Share premium-share options outs. 10,000
Share Premium 10,000 Share Premium 10,000
to transfer the equity component directly within to transfer the equity component directly within
equity. equity.
Illustration 2; Counterparty has the right of choice-Employee
On Jan. 1, 20x1, conditional upon the completion of a 3-year srvice period,
ABC Co. granted an employee, as compensation the right to choose either of the
following:
a. 1,000 phantom shares ( i.e., rigtht to a cash payment equal to the value of
1,000 shares); or
b. 1,200 shares
ABC’s share has a par value of 10 per share. The market per share are as
follows:
January 1,20x1 60
December 31, 20x1 72
December 31, 20x2 78
December 31, 20x3 81
ABC estimated that the grant date fair value of the share alternative is 56 per
share. The grant as settled on Dec. 31, 20x3.
Accounting:
The fair value of the debt and equity alternatives of the compound instrument on
Jan. 1, 20x1 are determined as follows:
Fair value of debr alternative (1,000sh. x 60) 60,000
Fair value of equity alternative ( 1,200 x 56) 67,200
The difference between that amount and fair value of the debt alternative is
attributed to the equity alternative;
Fair value of compound instrument (the grater amount) 67,200
Fair value of debt alternative (60,000)
Fair value of equity alternative at grant date 7,200
The salaries expense in 20x1 is compiuted as follows;
• Salaries expense related to the equity component:
(7,200 x 1/3 ) 2,400
• Salaries expense related to the liability component:
(1,000 phantom shares x 72 share price on Dec. 31, 20x1 x 1/3 )
24,000
Total salaries expense - 20x1
26,400
Journal Jan,
Entry:
1,20x1 MEMO ENTRY
Dec, 31, 20x1 Salaries Expense 26,400
Share premium- sh. options outs. 2,400
Salaries Payable 24,000
The salaries expense in 20x2 is computed as follows:
• Salaries expense related to the equity component:
(7,200 x 2/3 ) -2,400 2,400
• Salaries expense related to the liability component:
(1,000 sh. x 78 share price on Dec. 31, 20x2 x 2/3 )- 24,000 28,000
Total salaries expense - 20x2 30,400
Journal Entry:
Dec, 31, 20x2 Salaries Expense 30,400
Share premium- sh. options outs. 2,400
Salaries Payable 28,000
The salaries expense in 20x3 is computed as follows:
• Salaries expense related to the equity component:
(7,200 x 3/3 ) -2,400 -2,400 2,400
• Salaries expense related to the liability component:
(1,000 sh. x 81 x 3/3 )- 24,000 - 28,000 29,000
Total salaries expense - 20x3 31,400
Journal Entry:
Dec, 31, 20x3 Salaries Expense 31,400
Share premium- sh. options outs. 2,400
Salaries Payable 29,000
SETTLEMENT
The accounting for the final settlement depends on which
alternative the employee chooses.
Scenario 1 Scenario 2
Employee chooses equity settlement Employee chooses cash settelement.
Dec. 31, 20x3; Dec.31,20x3:
Salaries Payable 81,000 Salaries Payable 81,000
Share Capital(1,200 x10par) 12,000 Cash (1,000 sh. x 81) 81,000
Share Premium 69,000 to record the payment in cash
to record the issuance of equity instrument

Dec. 31,20x3; Dec.31. 20x3;

Share premium-share options outs. 7,200 Share premium-share options outs. 7,200
Share Premium 7,200 Share Premium 7,200
to transfer the equity component directly within equity. to transfer the equity component directly within equity.
Entity has the right of choice
If the entity has the right to choose settlement between cash (or other
assets)nor equity instruments, the entity has normgranted a compound
instrument. Accordingly, the entity accounts for the transaction as
either equity-settles or cash-settled share based payment transaction,
depending on whetjer the entity has a present obligation to pay cash.
a. If the entity has a present obligation to pay cash, the transaction is
accounted for as cash-settled, Consequently, the equity alternative is
simply ignored.
b. If the entity has no present obligation to pay cash,the transaction is
accounted for as equity-settled. Consequently, the cash alternative is
simply ignored.
SETTLEMENT
a. If the entity elects to settle in cash, the cash payment is
accounted for as a repurchase of an equity interest, i,e.,as a
deduction from equity;except as noted in (c) below;
b. If the entity elects to settle by issuing equity instruments,
no further accounting is required other than a transfer from one
component of equity to another, if necessary, except as noted in
(c) below;
c. If the entity elects the settlement alternative with the higher
fair value as at the date of settlement, the entity recognizes an
additional expense for the;
i. Excess of cash paid over the fair value of entity instruments that would
otherwise have been issued, or
ii. Excess of fair value of the quity instruments issued and the amount of cash that
would otherwise have been paid, whichever is applicable.

Deffered tax Implications

The salaries recognized under share-based transaction may not be equal to the
allowed tax deduction. In such case, a deferred tax asset arises. A deferred tax
asset is recognized if the entity has sifficient future taxable profits against whict it
can be offset. The recognition of the deferred tax asset is dealt with as follows:
a. If tax deduction is less than or equal to salaries expense, the associated tax
benefit is recognized in profit or loss.
b. If tax deduction exceeds salaries expense, the excess tax benefit is recognized in
equity.
Illustration:
On jan. 1, 20x1, ABC Co. issued employee share options with fair value of
500,000 and a vesting period of 3 years. ABC is subject to a tax rate of 30% and is
allowed a tax deduction for the intrinsic value of the share options.
Case 1: Tax deduction less than salaries expense
The intinsic value on Dec. 31, 20x1 is P400,000.

Accounting;
Salaries Expense for 20x1 Tax Deduction for 20x1
 500,000 grant date fair valuenx 1/3=  400,000 intrinsic value x1/3 =
166,667 133,333

Since the allowed tax deduction is less than the salaries expense,the benefit of the tax deduction is recognized in
profit or loss:
Tax deduction -20x1 133,333
Multiplied by: Tax rate 30%
Income tax benefit recognized in 20x1 profit or loss 40,000
 Case 2: Tax deduction more than Salaries Expense
The intrinsic value on Dec. 31, 20x1 is P600,000.

Accounting:
Salaries Expense for 20x1 Tax Deduction for 20x1
 500,000 grant date fair value x 1/3 =  600,000 intrinsic value x 1/3=
166,667 200,000

Since the tax deduction is greater than the salaries expense, there is excess tax
benefit. The tax benefit of the salaries expense is recognized in profit or loss,
while the excess tax benefit is recognized in equity.
Tax benefit of salaries expense Excess tax benefit
 166,667 x 30% = 50,000 recognized in  (200,000 - 166,667 ) x 30% = 10,000
profit or loss recognized in equity.
THANK YOU
FOR YOUR ATTENTION