Chapter 24

Chapter 24
SHARE-BASED COMPENSATION
Share Options
DISCUSSION
Share-based payment transaction - entity acquires goods or services and pays for them by
issuing its own equity instruments or cash based on the value of its own equity instruments.
- Can be:
1. Equity settled share-based payment transaction – entity receives goods or services
and pays for them by issuing its shares of stocks or share options; or
2. Cash settled share-based payment transaction – entity receives goods or services
and incurs an obligation to pay cash at an amount that is based on the FV of its own
equity instruments; or
3. Choice between equity settled and cash-settled – entity receives goods or services
and either the entity or the counterparty is given a choice of settlement in the form of
equity instruments or cash based on the FV of equity instruments.
Equity instrument is “ a contract that evidences a residual interest in the assets of an entity
after deducting all of its liabilities.
PFRS 2 applies to all entities, including subsidiaries using their parent’s or fellow subsidiary
equity instruments as consideration for goods or services, and to all share based payment
arrangements except the following:
a. Transactions with owners (including employees who are also shareholders) acting in
their capacity as owners, e.g. issuance of dividends, granting of stock rights in relation to
an owner’s preemptive right and treasury share transactions.
b. Business combinations (PFRS 3 Business Combinations)
c. Issuance of shares as settlement of forward contracts, futures, and other derivatives
instruments (PAS 32 and PFRS 9 Financial Instruments)
Goods or services received that do not qualify as assets are recognized as expenses.
The entity recognizes:

a. a corresponding increase in equity if the goods or services are received in an equity-settled
share based payment transaction, or a
b. liability if the goods or services are acquired in a cash settled share-based payment
transaction
Share-based compensation plan - arrangement whereby, in exchange for services, an
employee is compensated in the form of (or based on) the entity’s equity instrument.
Example of share-based compensation:

a. Employee share options (equity settled)
b. Employee share appreciation rights (Cash settled)
c. Compensation plans with a choice of settlement between (a) and (b) above.
Share based compensation is given to the key employees of the company to encourage the
employees to stay longer in the company and for them to be motivated to do their best because
they are not just employees but they will be co owner of the company.
Employee share option plans

Share option is 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.
Some share options given to employees do not require any subscription price, meaning the
shares will be issued solely in exchange for employee services. This means that if they were
given the share option plan, they will have an opportunity to buy the company’s share at a
certain price lower than the fair value within a certain period. In this case, the employee shall
have a fund also to buy the share.
Measurement of compensation
Employee share option plans are equity-settled share-based payment transactions with
employees. Accordingly, the services received are measured using the following in order of
priority:
1. fair value of equity instruments granted at grant date
- Mandated by the PFRS 2
2. Intrinsic value
- Equal to the intrinsic value of the share options
- PFRS 2, par 24 provides that the intrinsic value method can be used only if the fair value
of the share option cannot be estimated reliably
The compensation expense (salaries expense) on the employee share option plan is
recognized as follows:
1. If the share options granted vest immediately, meaning the employee is entitled to
the shares without the need to satisfy any condition, salaries expense is recognized in
full, with a corresponding increase in equity at grant date.
2. If the share options granted do not vest until the employee completes a specified
period of service, the entity recognizes salaries expense as the employee renders service
over the vesting period.
✓ The vesting period is “the period during which all specified vesting conditions
of a share-based payment arrangement are to be satisfied.
✓ In the absence of the evidence to the contrary, it is presumed that share
options vest immediately
Vesting condition is “a condition that determines 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.
- Either:
a. Service condition – a condition that requires the employee to render service over a
specified period of time in order to be entitled to receive or subscribe to the shares
embodied in the share options
b. Performance condition – a condition that requires
i. the employee to render service over a specified period of time (i.e. service
condition); and
ii. specified performance target(s) to be met while the employee is rendering the
required service.
Acceleration of Vesting
- PFRS 2, par 28 - 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.
- The entity shall recognize immediately the compensation expense that
otherwise would have been recognized for services received over the remainder of the
vesting period.
- Any payment made to the employee on the cancelation or settlement of the
grant shall be accounted for as the repurchase of equity interest, meaning, deduction
from equity
Query
If share options are not exercised:
● Any cash paid up to the FV of the options or cumulative compensation already
recognized is deducted from equity or charged to share options outstanding
● Any amount in excess of the FV already recognized is treated as expense
IFRIC 11 - Share-based payment transactions in which the employees of a subsidiary are

granted rights to the equity instrument of the parent shall also be accounted for as equity-
settled.
SUMMARY OF THE DISCUSSION
• A share-based payment transaction is either:

(a) equity settled, (b) cash settled, or (c) provides a choice of settlement between (a) and
(b)
• A share-based transaction with non-employee is measured using the following order of
priority
1. fair value of the goods or services received 2. Fair value of the equity instrument
granted
• A share-based payment transaction with an employee or others providing similar services is
measured using the following order of priority
1. Fair value of the equity instrument granted 2. Intrinsic value
• Measurement date is the date at which the fair value of the equity instruments granted is
measured:
a. For transactions with non-employees, the measurement date is the date the goods or
services are obtained b. For transactions with employees and others providing similar
services, the measurement date is the grant date.
• The compensation expense on share based compensation plans are recognized
a. In full at grant date if they vest immediately; or b. over the vesting period if there are
vesting conditions

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Chapter 24 - SHARE BASED COMPENSATION

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The entity recognizes:

Example of share-based compensation:

Employee share option plans

IFRIC 11 - Share-based payment transactions in which the employees of a subsidiary are

SUMMARY OF THE DISCUSSION

• A share-based payment transaction is either:

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