 PFRS 2

Share-Based Payment

Introduction

A corporation may issue its own shares in exchange for noncash consideration, such as noncash assets
or services. However, the Corporation Code of the Philippines prohibits the issuance of shares in
exchange for promissory notes or future services. Meaning, the consideration must be received first, if
in the form of services, the services must have been rendered first, before shares are issued.
Furthermore, the value of the consideration received must not be less than the par value or issued value
of the shares. Transactions involving the issuance of shares in exchange for noncash consideration are
accounted for under PFRS 2.

Share-based Payment Transactions

Share-based payment transaction is a transaction in which the 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.
A share-based payment transaction can be:

1. Equity-settled share-based payment transaction – one in which the 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 – one which the entity receives goods or services
and incurs an obligation to pay cash at an amount that is based on the fair value of its own
equity instruments; or

3. Choice between equity-settled and cash-settled – one which the 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 fair value 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’s 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 derivative instruments
(PAS 32 and PFRS 9 Financial Instruments).
Recognition

Goods or services acquired 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 recognizes:

a. A corresponding increase in equity if the goods or services are received in an equity-settled

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

Equity-settled Share-based Payment Transactions

Goods or services received from equity-settled share-based payment transactions with non-employees
are measured at the fair value of the goods or services received, or if this is not determinable, at the fair
value of the equity instruments granted.

For transactions with employees and others providing similar services, the fair value of the services
received is often not possible to estimate reliably. Accordingly, PFRS 2 requires those services to be
measured at the fair value of the equity instruments granted, or if this is not determinable, at the
intrinsic value of the entity’s shares of stocks.

 Employees and others providing similar services refer to “individuals who render personal
services to the entity and either

a. The individuals are regarded as employees for legal or tax purposes;

b. The individuals work for the entity under its direction in the same way as individuals who are
regarded as employees for legal or tax purposes; or

c. The services rendered are similar to those rendered by employees”.

 Equity instrument granted is “the right (conditional or unconditional) to an equity instrument of

 Fair value is measured at the measurement date.

a. For transactions with non-employees, the measurement date is the date when the entity
receives the goods or services.

b. For transactions with employees and others providing similar services, the measurement date is
the grant date.
  Grant date is the date at which the entity and the counterparty agree to, and have shared
understanding of the terms and conditions of, a share-based payment arrangement. If the
agreement is subject to further approval (e.g., by shareholders), grant date is the date when
that approval is obtained.

 Intrinsic value is the difference between the fair value of the shares which the counterparty has
the right to subscribe or receive and the subscription price (if any) that the counterparty is
required to pay. For example, a share option with fair value of ₱50 and an exercise price of ₱30
has an intrinsic value of ₱20 (i.e., ₱50 - ₱30).

Illustration:

Entity A agrees to issue 1,000 of its shares of stocks as consideration for services that it has received.

Case 1: Transaction with Non-employee

The counterparty is a non-employee. The fair value of the services received is ₱50,000 while the fair
value of the shares is ₱40 per share.

Accounting: The services are measured at ₱50,000, the fair value of the services received. If this amount
cannot be determined reliably, the services will be measured by reference to the fair value of the shares
or ₱40,000 (₱40 x 1,000 shares).

Case 2: Transaction with Employee

The counterparty is an employee. The fair value of the shares is ₱40 per share.

Accounting: The services are measured at ₱40,000, the fair value of the equity instruments granted. If
this amount cannot be determined reliably, the services will be measured at the intrinsic value.
Assuming the subscription price is ₱30 per share, the intrinsic value is ₱10,000 [(₱40 - ₱30) x 1,000
shares].

Share-based Compensation Plans

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

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 from 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
owners of the entity.

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.

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 of 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 is recognized as
follows:

a. 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.

b. If the share options granted do not vest until the employee completes as specified period of
service, the entity recognizes salaries expense as the employee renders service over the vesting
period.

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

Illustration:

On January 1, 20x1, Entity A grants 10,000 share options to its key employees. The share options entitle
the employees to purchase Entity A’s shares at a subscription price of ₱110 per share. Entity A’s shares
have a par value ₱100 per share and a fair value on grant date of ₱120 per share. The share options
have fair value of ₱15 per share option.

Case 1: Share options vest immediately

If the share options vest immediately, Entity A will recognize salaries expense of ₱150,000 (10,000 share
options x ₱15 fair value per share option) on January 1, 20x1.

Case 2: Share options do not vest immediately

Changes in Service Condition

Service condition means, to be entitled to receive or subscribe to the shares embodied in the share
options, the employee needs to remain in the entity’s employ for a specified period of time.

Adjustments for employees leaving the entity’s employ before the share options vest are accounted for
prospectively. Salaries expense recognized in previous periods are not restated.

Illustration:

On January 1, 20x1, Entity A grants 100 shares options to each of its 100 key employees conditional
upon each employee remaining in Entity A’s employ over the next 3 years. The fair value of each share
option is ₱15.

On the basis of a weighted average probability, Entity A estimates on January 1, 20x1 that about 20
employees (i.e., 20% or 20 out of the 100 employees) will be leave during the three-year period and
therefore forfeit their rights to the share options.

During 20x1, 7 employees left. Entity A revises its estimate to a total of 25% employee departure over
the vesting period.

During 20x2, 9 employees left. Entity A revises its estimate to a total of 28% employee departure over
the vesting period.

During 20x3, 8 employees left. Therefore, the actual employee departure over the past three years is
24% [(7+9+8) ÷100].

 Entity A recognizes salaries expense over the vesting period as follows:

Notes:

 The initial estimate of 20% on January 1, 20x1 is ignored because salaries expense are
recognized at year-end.

 On the vesting date (Dec. 31, 20x3), the actual employee departures are used in computing for
salaries expense.

 The total salaries expense recognized over the vesting period equals the grant date fair value of
the share options that have actually vested. This amount is only allocated over the vesting
period. Analyze the reconciliation below:

 10,000 x 76% = 7,600 share options that have actually vested x ₱15 = 114,000 total salaries
expense;
  37,500 + 34,500 + 42,000 = 114,000 total salaries expense

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 the related liability, are measured at the 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.

Employee Share Appreciation Rights (SARs)

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

Another form of a share compensation 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 the employee’s option.

Measurement of Compensation

The liability for the future cash payment on share appreciation rights is 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.

The fair value of the share appreciation rights is derived by applying 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.

The compensation expense (salaries expense) on the SARs is recognized similar to employee share
options, that is, if the SARs vest immediately, salaries expense is recognized in full, with a corresponding
increase in liability, at grant date; if the SARs do not vest immediately, salaries expense is recognized
over the vesting period as the employee renders service.

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

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 – 3,400 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:

a. The counterparty has the right of choice of settlement; or

b. 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
in equity instruments rather than in cash).

As discussed earlier, the accounting for a share-based payment transaction depends on whether the
counterparty is a non-employee or an employee or others providing similar services.

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 and (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 the goods or services acquired from a non-employee have a fair value of ₱100 (asset)
while the cash alternative has a fair value of ₱80 (liability), the equity component is ₱20.

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 instrument 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 instrument is accounted for separately, similar to a purely equity-
settled or a purely cash-settled share-based payment transaction. Meaning,

a. The value assigned to the equity alternative on grant date (if any) is recognized as salaries
expense and an increase in equity over the vesting period; and

b. The value assigned to the cash alternative is recognized as salaries expense, and a liability, that
is remeasured at each year-end and on settlement, as the services are received. Changes in fair
value are recognized in profit or loss.

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 the
issuance of the shares.

b. Cash – the cash payment is applied as settlement of the liability.

The previously recognized equity component remains within equity, regardless of the settlement option
chosen. However, a transfer within equity may be made. For example, by transferring any balance in the
“Share premium – share options outstanding” account to the “Share premium” general account.

Entity has the Right of Choice

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.

Accordingly, the entity accounts for the transaction as either equity-settled or cash-settled share-based
payment transaction, depending on whether 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

Upon 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 equity instruments that would
otherwise have been issued, or

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