MODULE 16 Share-based Payment

LEARNING OBJECTIVES:
1. Define a share-based payment transaction.
2. State the measurement basis for share-based payment transactions with (a) non-
employees and (b) employees.
3. Compute for the salaries expense on share-based compensation plans.
4. State the accounting for share-based transactions with cash alternatives.

OVERVIEW
PFRS 2 Share-based Payment requires an entity to recognise share-based payment transac-
tions (such as granted shares, share options, or share appreciation rights) in its financial state-
ments, including transactions with employees or other parties to be settled in cash, other assets,
or equity instruments of the entity. Specific requirements are included for equity-settled and
cash-settled share-based payment transactions, as well as those where the entity or supplier
has a choice of cash or equity instruments.

Acquiring new knowledge

Asynchronous - links to more information: www.farhatlectures.com; http://www.ifrsbox.com
A synchronous discussion for this lesson will be scheduled on October 13, 2022 (Tuesday 7:30
– 8:30 AM)

Share-based payment
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.

Scope
The concept of share-based payments is broader than employee share options. PFRS 2 en-
compasses the issuance of shares, or rights to shares, in return for services and goods.

Examples of items included in the scope of PFRS 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 condi-
tions.

PFRS 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:

o First, the issuance of shares in a business combination should be accounted for
under PFRS 3 Business Combinations. However, care should be taken to distinguish
share-based payments related to the acquisition from those related to continuing
employee services
 o Second, PFRS 2 does not address share-based payments within the scope of para-
graphs 8-10 of PAS 32 Financial Instruments: Presentation, or paragraphs 5-7
of PAS 39 Financial Instruments: Recognition and Measurement. Therefore, PAS 32 and
PAS 39 should be applied for commodity-based derivative contracts that may be settled
in shares or rights to shares.

PFRS 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 and measurement

The issuance of shares or rights to shares requires an increase in a component of equity. PFRS
2 requires the offsetting debit entry to be expensed when the payment for goods or services
does not represent an asset. The expense should be recognised as the goods or services are
consumed. For example, the issuance of shares or rights to shares to purchase inventory would
be presented as an increase in inventory and would be expensed only once the inventory is sold
or impaired.

The issuance of fully vested shares, or rights to shares, is presumed to relate to past service,
requiring the full amount of the grant-date fair value to be expensed immediately.

The issuance of shares to employees with, say, a three-year vesting period is considered to
relate to services over the vesting period. Therefore, the fair value of the share-based payment,
determined at the grant date, should be expensed over the vesting period.

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.

Compensation expense 250

Share premium – options 250
(100 x 15) /6 = 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:

Compensation expense 150

Share premium 150
( 90 x 15) /6 = 225 per period; (225 x 4) – (250+250+250) = 150

Measurement guidance
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:
o 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 instru-
ments granted be used.
o 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 in-
struments granted, because it is typically not possible to estimate reliably the fair value
of employee services received.
o 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.
o 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, PFRS 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 measure-
ment 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 recognised for goods or services received as consideration for the
equity instruments granted is based on the number of equity instruments that eventually vest.

More measurement guidance. PFRS 2 requires the fair value of equity instruments granted to
be based on market prices, if available, and to take into account the terms and conditions upon
which those equity instruments were granted. In the absence of market prices, fair value is
estimated using a valuation technique to estimate what the price of those equity instruments
would have been on the measurement date in an arm's length transaction between knowledge-
able, willing parties. The standard does not specify which particular model should be used.
o If fair value cannot be reliably measured. PFRS 2 requires the share-based payment
transaction to be measured at fair value for both listed and unlisted entities.
o PFRS 2 permits the use of intrinsic value (that is, fair value of the shares less exercise
price) in those "rare cases" in which the fair value of the equity instruments cannot be
reliably measured. However this is not simply measured at the date of grant. An entity
would have to remeasure intrinsic value at each reporting date until final settlement.

Performance conditions. PFRS 2 makes a distinction between the handling of market based
performance conditions from non-market performance conditions. Market conditions are those
related to the market price of an entity's equity, such as achieving a specified share price or a
specified target based on a comparison of the entity's share price with an index of share prices
of other entities. Market based performance conditions are included in the grant-date fair value
measurement (similarly, non-vesting conditions are taken into account in the measurement).
However, the fair value of the equity instruments is not adjusted to take into consideration non-
market based performance features - these are instead taken into account by adjusting the
number of equity instruments included in the measurement of the share-based payment trans-
action, and are adjusted each period until such time as the equity instruments vest.

Disclosure
Required disclosures include:
o the nature and extent of share-based payment arrangements that existed during the
period
o how the fair value of the goods or services received, or the fair value of the equity instru-
ments granted, during the period was determined
o the effect of share-based payment transactions on the entity's profit or loss for the period
and on its financial position.
MODULE # 16 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
SHARE-BASED PAYMENT

PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. In connection with a share option plan for the benefit of key employees, Josh Company intends to
distribute treasury shares when the option are exercise. These shares were bought in 2022 at 42 per share.
On January 1, 2023, Josh granted share options of 100,000 shares at an option price of 38 per share as
additional compensation for services to be rendered over the next three years. The options are exercisable
during a two year period beginning January 1, 2026, by grantee still employed by Josh. Market price of
Josh’s share was 47 at the grant date. The fair value of the option is 12 on grant date. No share options
were terminated during 2023. In Josh’s 2023 income statement, what amount should be reported as
compensation expense pertaining to the options?
a. 600,000
b. 400,000
c. 300,000
d. 450,000
2. On January 1, 2022, Jerome Company granted 60,000 share options to employees. The share options will
vest at the end of three years provided the employees remain in service until then. The option price is 60
and the par value is 50. At the date of grant the company concluded that the fair value of the share
options cannot be measured reliably. The share options can be exercise within one year after the vesting
period.

The share prices are 62 on December 31, 2022, 66 on December 31, 2023, 75 on December 31, 2024 and
85 on December 31, 2025. All share options were exercise on December 31, 2025.

What is the compensation expense for the year 2022?

a. 200,000
b. 600,000
c. 660,000
d. 40,000

What is the compensation expense for the year 2023?

a. 900,000
b. 600,000
c. 660,000
d. 200,000

What is the compensation expense for the year 2024?

a. 900,000
b. 600,000
c. 660,000
d. 0
 What is the compensation expense for the year 2025?
a. 900,000
b. 600,000
c. 660,000
d. 0
3. On January 1, 2022, Jerome Company granted 100 share options each, to 500 employees, conditional
upon the employee’s remaining in the company during the vesting period. The share options vest at the
end of the three-year period. On grant date, each share option has a fair value of 30. The par value is 100
and the option price is 120.

On December 31, 2023, 30 employees have left and it is expected that on the basis of weighted average
probability, a further 30 employees will leave before the end of the three year period. On December 31,
2024, only 20 employees actually left and all the share options are exercise on that date.

How much is the compensation expense that should be recognized for the year 2022?
a. 500,000
b. 880,000
c. 380,000
d. 470,000

How much is the compensation expense that should be recognized for the year 2023?
a. 500,000
b. 880,000
c. 380,000
d. 470,000

How much is the compensation expense that should be recognized for the year 2024?
a. 500,000
b. 880,000
c. 380,000
d. 470,000
4. On January 1, 2023, Kimberly Company granted Angel, its president, 20,000 stock
appreciation rights for past services. These rights are exercisable immediately and
expire on January 1, 2025. On exercise, Angel is entitled to receive cash for the
excess of the stock’s market price on the exercise date over the market price on the
grant date. Angel did not exercise any of the rights during 2023. The market price of
Kimberly’s stock was P30 on January 1, 2023 and P45 on December 31, 2023. As a
result of the stock appreciation rights,

Kimberly should recognize compensation expense for 2023 of

a. 0
b. 100,000
c. 300,000
d. 600,000
5. Angel Company granted 25,000 share appreciation rights which entitled key employees to
receive cash equal to the difference between P15 and the market price of each share on the date
of each right is exercised. The service period is for three years, and the right are exercisable in
fourth year. The market price of the share is P20 and P23 at the end of first and second year,
respectively.

What amount should be recognized as liability under the share appreciation rights at the end of
second year?
a. 190,000
b. 155,000
c. 133,000
d. 100,000

6. Kaila Company granted 202 share appreciation rights to each of the 1,200 employees in January
2023. The entity estimated that 90% of the awards will vest on December 31, 2025. The fair
value of each right on December 31, 2023 is P22. Service period is 3 years.

What is the accrued liability on December 31, 2023?

a. 4,799,520
b. 4,000,000
c. 1,200,000
d. 1, 599,840