SHARE-BASED COMPENSATION-SHARE OPTIONS

Definition of Share-Share Based Compensation plan

Is a compensation arrangement established by the entity whereby the entity’s employees shall
receive shares capital in exchange for their services or the entity incurs liability to the
employees in amounts based on the price of its shares .

PFRS 2 sets out the measurement principles and specific requirements for accounting of the
following share-based compensation.

Equity settled (Share options)

the entity issues equity instruments in consideration for services received. Share options are
granted to officers and key employees to enable them to acquire shares of the entity during a
specified period upon fulfillment of certain conditions at specified price.

Cash settled (Share Appreciation Rights)

The entity incurs a liability for services received and the liability is based on the entity’s equity
instruments.

Measurement of compensation
Fair value method
This means that the compensation is equal to the fair value of the share options at the date of
grant. This is the method mandated by PFRS 2.

Intrinsic value method

This means that the compensation is equal to the intrinsic value of the share options.

The intrinsic value is the excess of the market value of the share over the option price.
Paragraph 24 of PFRS2 provides that the intrinsic value method can be used only if the fair
value of the share option cannot be estimated reliably.

Recognition of Compensation
* If the share options vest immediately, the employees is not required to complete specified
period of service before unconditionally entitled to the share options.In this case, on grant date,
the entity share recognize the compensation as expense in full with corresponding increase in
equity.

*If the share options do not vest until the employee completes a specified period, the
entity shall recognize the compensation as expense over the service period or vesting period.

NO VESTING PERIOD WITH VESTING PERIOD (3 years)

Date of Grant Salaries-Share options xxx No entry

Share options outstanding xxx

End of year 1 Accrue salaries-share options

Salaries - share option xxx
Share options outstanding Xxx
Total Share options x 1/3 = xxx

End of year 2 Accrue salaries-share options

Salaries-share option xxx
Share option outstanding Xxx
Total share option x 2/3 xxx
Less: Accrual year 1 xxx
Accrual-year 2 xxx

End of year 3 Accrue salaries-share options

Salaries-share options xxx
Share options outstanding Xxx
Total share options (3/3) xxx
Les : Accrual-Year 1 and 2) xxx
Accrual-year 3 xxx

Exercise date Cash (equivalent no. of shares Cash (#of shares granted x FMW of
exercised x FMV of shares of stock xxx shares of stock at grant date) xxx
at grant date)
Share options outstanding xxx Share options outstanding xxx
Ordinary share capital Ordinary share capital
(equivalent no. of share exercised x (equivalent no. of shares exercised x par
par value) xxx value) xxx
Share premium xxx Share premium xxx
Note: Before the exercise of the share options, the share options outstanding account is reported as component of Share
Premium
‘
ILLUSTRATION

On January 1, 2019, share options are granted to officers to purchase 50,000 ordinary shares of P25 par value at P28 per share.

The fair value of each share option is P8. The options can be exercised starting January 1, 2019 and expire one year after.

NO VESTING PERIOD WITH VESTING PERIOD (4 years vesting period)

Jan 1 Salaries-share options (50,000 x 400,000
P8)
Share options outstanding 400,000

Dec 31,
Yr 1 Salaries-share options 100,000
Share options 100,000
outstanding
(50,000 x P8) x ¼ =
100,000)

Dec 31,
Yr 2 Salaries-share options 100,000
Share options 100,000
outstanding
(50,000 x P8) x 2/4 =
200,000
Accrual, yr 1
100,000
Accrual yr 2
100,000

Dec 31
yr 3 Salaries-share options 100,000
Share options 100,000
outstanding
(50,000 x P8) x ¾ =
300,000
Accrual Yr 1&2
200,000
Accrual Yr 3

Dec 31
Yr 4 Salaries-share options 100,000
Share options 100,000
outstanding
(50,000 x P8) x 4/4 =
400,000
Acrual yr 1,2,&3
300,000
Accrual yr 4
100,000

Exercise date, Year 5

Assumption 1: All share options were exercised
Year 5 Cash (50,000 x P28) 1,400,00 Cash (50,000 x P28) 1,400,00
0 0
Share option outstanding 400,000 Share options outstanding 400,000
Ordinary share capital
(50,000xP25) 1,250,000 Ordinary share capital 1,250,000
Share premium [400,000
+(1,400,000-1,250,000)=
550,000]] 550,000 Share premium 550,000
Assumption 2 :30% were exercised or equivalent to 15,000 shares purchased (50,000 x 30%)
Cash (15,000 x P28) 420,000 Cash 420,000
Share option outstanding
(400,000 x 30% or
400,000/50,000 x P15,000 =
120,000)) 120,000 Share options outstanding 120,000
Ordinary share capital
(15,000 x P25) 375,000 Ordinary share capital 375,000
Share premium [120,000
+(420,000-375,000)= 165,000) 165,000 Share premium 165,000

Exercises A

On January 1 2019, to supplement salaries of executives Pau Company issued share options to executives to purchase 20,000
ordinary shares of P200 par value at P240 per share.

Requirements: Entry to record the above transactions using below independent assumptions.

a. Share options are exercisable immediately, the employees exercised all their options.

b. options covering 15,000 shares were exercised on June 30, 2019. Balance expired.

c. The share options are exercisable starting January 1, 2021 and expire after one year. Options covering 10,000 shares are
exercised on January 30, 2021 while 8,000 share are exercised on February and options covering remaining shares expired.

d. The share options are exercisable starting January 1, 2020 and expire after one year, All options were exercised on September 1,
2021.