PFRS 2 Share-based Payments

Scope of PFRS 2

1. Equity-settled share-based payment transaction – is a transaction whereby an entity acquires goods

or services and instead of paying in cash the entity issues its own shares of stocks or share options; or

2. Cash-settled share-based payment transaction – is a transaction 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; or

3. Choice between equity-settled and cash-settled

Equity instrument is a contract that evidences a residual interest in the assets of an entity

after deducting all of its liabilities.

Core principle

An entity shall recognize in profit or loss and financial position the effects of share-based payment
transactions, including expenses associated with transactions in which share optionsare granted to
employees.

Recognition

Goods and services received in share-based payment transactions are recognized when the goods are
received or as the services are received. Goods or services received that do not qualify as assets are
recognized as expenses.

The entity shall recognize:

A corresponding increase in equity if the goods or services were received in an equity-settled share-
based payment transaction, or

A liability if the goods or services were acquired in a cash-settled share-based payment transaction

Equity-settled share-based payment transactions (REMEMBER PAS 16 MODES OF

ACQUISITION OF PPE THROUGH ISSUANCE OF SHARES IT IS AN EXAMPLE OF

TRANSACTIONS WITH NON-EMPLOYEES)

Measurement date is the date at which the fair value of the equity instruments granted is measured for
the purposes of PFRS 2.

•For transactions with non-employees, the measurement date is the date when the entity receives the
good or service.

•For transactions with employees and others providing similar services, the measurement date is grant
date.

Grant date is the date at which the entity and the counterparty agree to a share-based payment
arrangement, being when the entity and the counterparty have a shared understanding of the terms
and conditions of the arrangement.

•Intrinsic value is the difference between the fair value of the shares to which the counterparty has the
conditional or unconditional right to subscribe or the right to receive and the subscription price (if any)
that the counterparty is required to pay for those shares.

•Share-based compensation plans

•Share-based compensation plan is an arrangement whereby an employee is given compensation in

return for services rendered in the form of the entity’s equity instruments or cash based on the fair
value of the entity’s equity instruments or a choice of settlement between equity instrument and cash.
Examples:

•Employee share options (equity-settled)

•Employee share appreciation rights (cash settled)

•Compensation plans with a choice of settlement between (1) and (2) above

Employee share option plans – equity settled

•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 may not require any subscription price, meaning shares will be issued to the employees in
consideration merely for services rendered.

Measurement of compensation

Since employee share option plan is a transaction with an employee, the following order of priority shall
be used to measure the services received (salaries expense):

•Fair value of equity instruments granted at grant date

•Intrinsic value

Recognition of equity-settled share-based compensation plans

•If the share options granted vest immediately, salaries expense shall be recognized in full with a
corresponding increase in equity at grant date.

•If the share options granted do not vest until the employee completes a specified period of service, the
entity shall recognize the related compensation expense as the services are rendered by the employee
over the vesting period.

In the absence of evidence to the contrary, it shall be presumed that the share options vest
immediately.

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 acquired and the liability incurred on cash-settled share-based payment
transactions are measured at the fair value of the liability.

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

Employee share appreciation rights (SARs) – cash-settled

•A share appreciation right is a form of compensation given to an employee whereby the employee is
entitled to future cash payment (rather than an equity instrument), based on the increase in the entity’s
share price from a specified level over a specified period of time.

Measurement of compensation
The liability for the future cash payment on share appreciation rights shall be 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.

Recognition of cash-settled share-based compensation plans

•If the share appreciation rights granted vest immediately, the entity shall recognize the related
compensation expense on the services received in full with a corresponding increase in liability at grant
date.

•If the share options granted do not vest until the employee completes a specified period of service, the
entity shall recognize the services received, and a liability to pay for them, as the employee renders
service during that period.

Share-based payment transactions with cash alternatives

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

•For transactions with non-employees, the equity component is computed as the difference between
the fair value of goods or services received and the fair value of the debt component at the date the
goods or services are received.

Share-based payment transactions with cash alternatives

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

•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.

•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.

Share-based payment transactions with cash alternatives

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

•In such case, the entity shall determine whether it has a present obligation to settle in cash and shall
account for the share-based payment transaction accordingly.
•If the entity has a present obligation to settle in cash, it shall account for the transaction as a cash-
settled share-based payment transaction.

•If the entity has no present obligation to settle in cash, it shall account for the transaction as an equity-
settled share-based payment transaction.