PFRS 2

SHARE BASED PAYMENTS

Nature

A share-based payment is a transaction in which the entity receives goods or services either as
consideration for its equity instruments or by incurring liabilities for amounts based on the price of the
entity's shares or other equity instruments of the entity. The accounting requirements for the share-based
payment depend on how the transaction will be settled, that is, by the issuance of (a) equity, (b) cash, or (c)
equity or cash.

The concept of share-based payments is broader than employee share options. IFRS 2 encompasses
the issuance of shares, or rights to shares, in return for services and goods. Examples of items included in the
scope of IFRS 2 are share appreciation rights, employee share purchase plans, employee share ownership
plans, share option plans and plans where the issuance of shares (or rights to shares) may depend on market
or non-market related conditions.

IFRS 2 applies to all entities. There is no exemption for private or smaller entities. Furthermore, subsidiaries
using their parent's or fellow subsidiary's equity as consideration for goods or services are within the scope
of the Standard.

There are two exemptions to the general scope principle:

• First, the issuance of shares in a business combination should be accounted for under IFRS 3
Business Combinations. However, care should be taken to distinguish share-based payments related to the
acquisition from those related to continuing employee services

• Second, IFRS 2 does not address share-based payments within the scope of paragraphs 8-10 of IAS
32 Financial Instruments: Presentation, or paragraphs 5-7 of IAS 39 Financial Instruments: Recognition and
Measurement. Therefore, IAS 32 and IAS 39 should be applied for commodity-based derivative contracts
that may be settled in shares or rights to shares.

IFRS 2 does not apply to share-based payment transactions other than for the acquisition of goods and
services. Share dividends, the purchase of treasury shares, and the issuance of additional shares are therefore
outside its scope.
Recognition

Goods or services acquired in share-based payment transactions are recognized when the goods are
received or as the services are received. Good 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.

b. a liability if the goods or services are acquired in a cash-settled share-based payment transaction.

Illustration – Recognition of employee share option grant

Company grants a total of 100 share options to 10 members of its executive management team (10 options
each) on 1 January 20X5. These options vest at the end of a three-year period. The company has determined
that each option has a fair value at the date of grant equal to 15. The company expects that all 100 options
will vest and therefore records the following entry at 30 June 20X5 - the end of its first six-month interim
reporting period.

Dr. Share option expense 250

Cr. Equity 250

[(100 × 15) ÷ 6 periods] = 250 per period

If all 100 shares vest, the above entry would be made at the end of each 6-month reporting period. However,
if one member of the executive management team leaves during the second half of 20X6, therefore
forfeiting the entire amount of 10 options, the following entry at 31 December 20X6 would be made:

Dr. Share option expense 150

Cr. Equity 150

[(90 × 15) ÷ 6 periods = 225 per period. [225 × 4] – [250+250+250] = 150

Measurement

Depending on the type of share-based payment, fair value may be determined by the value of the shares
or rights to shares given up, or by the value of the goods or services received:
  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.
 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.
 Measurement guidance. For goods or services measured by reference to the fair value of the equity
instruments granted, IFRS 2 specifies that, in general, vesting conditions are not taken into account
when estimating the fair value of the shares or options at the relevant measurement date (as specified
above). Instead, vesting conditions are taken into account by adjusting the number of equity
instruments included in the measurement of the transaction amount so that, ultimately, the amount
recognized for goods or services received as consideration for the equity instruments granted is based
on the number of equity instruments that eventually vest.

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 order or priority:

1. Fair Value of equity instruments granted at grant date

2. Intrinsic Value

The compensation expense (salaries expense) on the employee share option plan

Equity-settled share-based payment transaction

Non-employees Employees and Others providing similar services
Order of priority in measurement: Order of priority in measurement:
1. Fair value of goods or services received 1. Fair value of equity instruments granted
2. Fair value of equity instruments granted 2. Intrinsic value
Note: Annual Improvements to IFRSs 2010–2012 Cycle amends the definitions of 'vesting condition' and
'market condition' and adds definitions for 'performance condition' and 'service condition' (which were
previously part of the definition of 'vesting condition'). The amendments are effective for annual periods
beginning on or after 1 July 2014.

Modifications, cancellations, and settlements

The determination of whether a change in terms and conditions has an effect on the amount
recognized depends on whether the fair value of the new instruments is greater than the fair value of the
original instruments (both determined at the modification date).

Modification of the terms on which equity instruments were granted may have an effect on the
expense that will be recorded. IFRS 2 clarifies that the guidance on modifications also applies to instruments
modified after their vesting date. If the fair value of the new instruments is more than the fair value of the
old instruments (e.g. by reduction of the exercise price or issuance of additional instruments), the
incremental amount is recognized over the remaining vesting period in a manner similar to the original
amount. If the modification occurs after the vesting period, the incremental amount is recognized
immediately. If the fair value of the new instruments is less than the fair value of the old instruments, the
original fair value of the equity instruments granted should be expensed as if the modification never
occurred.

The cancellation or settlement of equity instruments is accounted for as an acceleration of the

vesting period and therefore any amount unrecognized that would otherwise have been charged should be
recognized immediately. Any payments made with the cancellation or settlement (up to the fair value of the
equity instruments) should be accounted for as the repurchase of an equity interest. Any payment in excess
of the fair value of the equity instruments granted is recognized as an expense

New equity instruments granted may be identified as a replacement of cancelled equity instruments.
In those cases, the replacement equity instruments are accounted for as a modification. The fair value of the
replacement equity instruments is determined at grant date, while the fair value of the cancelled instruments
is determined at the date of cancellation, less any cash payments on cancellation that is accounted for as a
deduction from equity.

Share-based compensation plans

Share-based compensation plan is an arrangement whereby in exchange for services, an employee is

compensated in the form of (or based on) the entity's equity instrument. Examples 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 compensations are given to key employees as bonuses or additional compensation. The
benefits of a share-based compensation to the employer may include a possible reduction in employee
turnover because employees will have to remain in the entity's employ during the service period in order to
exercise the equity instrument granted. Employees will also be more motivated in contributing to the
achievement of the entity's goals because they are given an opportunity to become owner's of the entity.

Cash-settled share-based payment transactions

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 equity instruments.

The goods or services received, and related liability, are measured at fair value of the liability.

At the end of each reporting period and even on settlement date,the liability is remeasured to fair
value. Changes in fair value are recognized in profit or loss.

The most common form of a cash-settled share-based payment transaction is share appreciation
rights (SARs) granted to an employee.

Measurement of compensation

The liability for the future cash payment on share appreciation rights in measured, initially and at the
end of each reporting period until settled, at the fair value of the share appreciation rights. Changes in fair
value are recognized in profit or loss.

Employee share option plans Employee share appreciation rights (SARs)

* Share options are not remeasured. * SARs are remeasured at each year-end
Expenses recognized over the vesting and on settlement date. Changes in fair
period are based on the fair value of the value are recognized in profit or loss.
share options at grant date.
* Settled through the issuance of equity * Settled through payment in cash.
instruments.

Illustration - Share appreciation rights

On January 1, 20x1, Entity A grants 1, 000 share appreciation rights (SARs) to employees with the condition
that the employees remain in service within the next 3 years. Information on the SARs is

shown below:

Date No. Of SARs expected to vest Fair value of each SAR

Jan. 1. 20x1 1000 10
Dec. 31, 20x1 900 12
Dec. 31, 20x2 800 15
Dec. 31, 20x3 750 16

 Entity A recognizes salaries expense over the vesting period 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)- 3,600 4,400
Dec. 31, 20x3 (750 x 16 x 3/3)-3,600-4,400 4,000

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:

1. The counterparty has the right of choice of settlement: or

2. The entity has the right of choice of settlement.

Counterparty has the right of choice

If the counterparty has the right to choose settlement between cash (or other assets) or equity
instruments, the entity has granted a compound instrument.

A compound instrument is one which includes both a debt component (e.g., the counterparty's right
to demand payment in cash) and an equity component (i.e., the counterparty's right to demand settlement on
equity instruments rather than in cash).

Transactions with non-employees

For transactions with non-employees, the equity component is computed as the difference between: (a) the
fair value of goods or services received (b) the fair value of the debt component at the date the goods or
services are received.
  The computation resembles the basic accounting equation:
"Assets - Liabilities = Equity."
For example:
If goods or services acquired from a non-employee have fair value of P100 (Asset)
while the cash alternative has a fair value of P80 (Liability) , the equity component is P20.

P100 - P80 = P20

Transactions with employees

For transactions with employees and others providing similar services, the entity measures the fair value of
the compound instrument and its components as follows:

a. If the fair value of one settlement alternative is the same as the other, the fair value of the equity.
Component is zero, and hence the fair value of the compound financial instrument is the same as the fair
value of the debt component.

b. If the fair values of the settlement alternatives differ, the fair value of the equity component will be
greater than zero, in which case, the fair value of the compound financial instrument will be greater than the
fair value of the debt component.

Each component of the compound instruments is accounted separately:

a. Equity alternative on grant date

-Recognized as salaries expense and an increase in equity over the vesting period.

b. Cash alternative

- Recognized as salaries expense, and liability, that is remeasured at each year-end and on
settlement, as the services are received. Changes in fair values are recognized in profit or loss.

Settlement

a. Equity instruments b. Cash

Entity has the right of choice

If the entity has the right to choose settlement between cash (or other asset) or equity instruments, the entity
has not granted a compound instrument.

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. Settle in cash, the cash payment is accounted for as a repurchase of an equity interest, as a deduction
from equity, except as noted in (c) below.

b. 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. Settlement alternative with the higher fair value as at the date of settlement, entity recognizes an
additional expense for the:

¡. Excess of cash paid over the fair value of equity instruments that would otherwise have been issued, or

¡¡. Excess of fair value of the equity instruments issued and the amount of cash that would othewise have
been paid, whichever is applicable.

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.