PFRS 2

Share-Based Payment
Learning Objectives:
 Define a share-based payment transaction.
 State the measurement basis for share-based payment
transactions with (a) non-employees and (b)
employees.
 Compute for the salaries expense on share-based
compensation plans.
 State the accounting for share-based transactions with
cash alternatives.
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
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 options are
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. A corresponding increase in equity if the goods or services were
received in an equity-settled share-based payment transaction,
or
b. A liability if the goods or services were acquired in a cash-settled
share-based payment transaction.
Equity-Settled Share-based Payment Transactions

Equity settled share based-payment transaction with:

Non-employees Employees and Other
providing similar services
Order of priority in Order of priority in
measurement: measurement:
1. Fair value of goods or 1. Fair value of equity
services received instruments granted
2. Fair value of equity 2. Intrinsic value
instruments granted
Equity instrument granted is the right (conditional or
unconditional) to an equity instrument of the entity conferred by the
entity on another party under a share-based payment arrangement.

Measurement date is the date at which the fair value of the equity
instruments granted is measured for the purposes of PFRS 2.
a. For transactions with non-employees, the measurement date
is the date when the entity receives the good or service.
b. 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. 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 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. E.g., a share option with fair value of ₱50 and
exercise price ₱30 has an intrinsic value of ₱20 (i.e., ₱50 - ₱30).
Illustration 1
On January 1, 2021, ABC Co. agreed to issue 10,000 shares
with par value per share of ₱100 to XYZ, Inc. in exchange
for a building to be constructed by XYZ for ABC.
Construction commenced during the year and the building
was completed prior year-end. Ownership over the newly
constructed building was transferred to ABC Co. on
December 31, 2021 but the contract price was settled on
January 31, 2022. ABC Co. uses the cost model for its
property, plant, and equipment.
Illustration 1
The fair value of the newly constructed building were
₱1,500,000 on December 31, 2021 and ₱1,600,000 on
January 31, 2022. The quoted prices of ABC’s share were
₱110 on December 31, 2021 and ₱120 on January 31, 2022.

Required: Provide the journal entries on December 31,

2021 and January 31, 2022.
Illustration 1

Date Debit Credit

Dec. 31, 2021 Building 1,500,000
Subscribed capital (10,000 x ₱100) 1,000,000
Share premium 500,000
Illustration 1

Date Debit Credit

Dec. 31, 2021 Building 1,500,000
Subscribed capital (10,000 x ₱100) 1,000,000
Share premium 500,000

Jan. 31, 2022 Subscribed capital 1,000,000

Share capital 1,000,000
Illustration 2
On January 1, 2021, ABC Co. contracted Ms. Pia (employee
of ABC, the secretary of ABC’s president) to be the endorser
of ABC’s new product. ABC shall issue 10,000 shares with
par value per share of ₱10 in consideration for the services
received. All of the required services on the contract have
been rendered on March 1, 2021. On January 1, 2021 the fair
value of modeling services is ₱950,000; ABC’s share ₱90.
On March 1, 2021 the fair value of modeling services is
₱1,000,000; ABC’s share ₱98.
Required: Journal entries on January 1 & March 1, 2021.
Illustration 2

Date Debit Credit

Jan. 1, 2021 No entry
Illustration 2

Date Debit Credit

Jan. 1, 2021 No entry

Mar. 1, 2021 Advertising Expense (10,000 x ₱90) 900,000

Share capital (10,000 x ₱10) 100,000
Share premium 800,000
Share-Based Compensation Plan
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:
a. Employee share options (equity-settled)
b. Employee share appreciation rights (cash settled)
c. Compensation plans with a choice of settlement between (1) and
(2) above
Share-based compensations are given to key employees as bonuses
or additional compensation.
The benefit 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 owners of the entity.
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):
1. Fair value of equity instruments granted at grant date
2. Intrinsic value
Recognition of equity-settled share-based
compensation plans
1. If the share options granted vest immediately, salaries expense
shall be recognized in full with a corresponding increase in
equity at grant date.
2. 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.
Illustration 3
On January 1, 2021, ABC Co. grants 10,000 share options to
its key employees. The share options entitle the employees
to purchase ABC’s shares at a subscription price of ₱110 per
share. ABC’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. The key employees
exercised the share options on July 1, 2021.

Case 1: Share options vest immediately.

Illustration 3
Case 1: Share options vest immediately.
Date Debit Credit
Jan. 1, 2021 Salaries Expense (10,000 x ₱15) 150,000
Share premium – options outstanding 150,000
Illustration 3
Case 1: Share options vest immediately.
Date Debit Credit
Jan. 1, 2021 Salaries Expense (10,000 x ₱15) 150,000
Share premium – options outstanding 150,000

Jul. 1, 2021 Cash (10,000 x ₱110) 1,100,000

Share capital (10,000 x ₱100) 1,000 ,000
Share premium 100,000
Illustration 3
Case 1: Share options vest immediately.
Date Debit Credit
Jan. 1, 2021 Salaries Expense (10,000 x ₱15) 150,000
Share premium – options outstanding 150,000

Jul. 1, 2021 Cash (10,000 x ₱110) 1,100,000

Share capital (10,000 x ₱100) 1,000 ,000
Share premium 100,000

Share premium – options outstanding 150,000

Share premium 150,000
Illustration 3
On January 1, 2021, ABC Co. grants 10,000 share options to
its key employees. The share options entitle the employees
to purchase ABC’s shares at a subscription price of ₱110 per
share. ABC’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. The key employees
exercised the share options on July 1, 2021.
Case 2: Share options do not vest immediately. If the
share options vest in 3 years, ABC Co. recognizes salaries
expense over the 3-year vesting period.
Illustration 3
Case 2: Share options do not vest immediately. If the
share options vest in 3 years, ABC Co. recognizes salaries
expense over the 3-year vesting period.
Dec. 31 2021 2022 2023
Total share options expected to vest 10,000 10,000 10,000
x FV per share option at grant date 15 15 15
Fair value of share option at grant date 150,000 150,000 150,000
x Vesting period 1/3 2/3 3/3
Cumulative salaries expense 50,000 100,000 150,000
- Salaries expense in previous period - (50,000) (100,000)
Salaries expense for the year 50,000 50,000 50,000
Illustration 3
Case 2: Share options do not vest immediately. If the
share options vest in 3 years, ABC Co. recognizes salaries
expense over the 3-year vesting period.

Alternative computation:
Date Salaries Expense
Jan. 1, 2021 --
Dec. 31, 2021 (10,000 x ₱15 x 1/3) 50,000
Dec. 31, 2022 (10,000 x ₱15 x 2/3) -50,000 50,000
Dec. 31, 2023 (10,000 x ₱15 x 3/3) -50,000 -50,000 50,000
Illustration 3
Case 2: Share options do not vest immediately.
Date Debit Credit
Jan. 1, 2021 (Granted 100 share options to 100 key employees on Jan. 1,
2021. Fair value per share option on Jan. 1, 2021 is ₱15)

Dec. 31, 2021 Salaries expense – share options 50,000

Share premium – options outstanding 50,000

Dec. 31, 2022 Salaries expense – share options 50,000

Share premium – options outstanding 50,000

Dec. 31, 2023 Salaries expense – share options 50,000

Share premium – options outstanding 50,000
Changes in service condition
Service condition means, to be entitle to received 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 employs before the
share options vest are accounted for prospectively. Salaries
expense recognized in previous periods are not restated.
Illustration 4
On January 1, 2021, ABC Co. grants 100 share options to its
100 key employees conditional upon each employee
remaining in ABC’s employ over the next 3 years. The fair
value of each share option is ₱15.
On the basis of a weighted average probability. ABC
estimates on January 1, 2021 that about 20 employees (i.e.
20% of 100 employees) will leave during the three-year
period and therefore forfeit their rights to the share options.
Illustration 4
During 2021, 7 employees left. ABC revises its estimate to a
total of 25% employee departure over the vesting period.

During 2022, 9 employees left. ABC revises its estimate to a

total of 28% employee departure over the vesting period.

During 2023, 8 employees left. Therefore, the actual

employee departure over the past years is 24%
(7+9+8)/100.
Illustration 4

Dec. 31 2021 2022 2023

Total share options expected to vest 10,000 10,000 10,000
x % estimate of total employee departure 75% 72% 76%
Estimated share option 7,500 7,200 7,600
x FV per share option at grant date 15 15 15
Fair value of share option at grant date 112,500 108,000 114,000
x Vesting period 1/3 2/3 3/3
Cumulative salaries expense 37,500 72,000 114,000
- Salaries expense in previous period - (37,500) (72,000)
Salaries expense for the year 37,500 34,500 42,000
Illustration 4

Alternative computation:
Date Salaries Expense
Jan. 1, 2021 --
Dec. 31, 2021 (10,000 x 75% x ₱15 x 1/3) 37,500
Dec. 31, 2022 (10,000 x 72% x ₱15 x 2/3) -37,500 34,500
Dec. 31, 2023 (10,000 x 76% x ₱15 x 3/3) -37,500 -34,500 42,000
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.
 E.g. Share appreciation rights (SARs) granted to an employee
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.
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.
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.
a. The compensation expense (salaries expense) on the SARs is
recognized similar to employee share options, that is , if the SAR
vest immediately, salaries expense is recognized in full, with a
corresponding increase in liability at grant date.

b. If the SARs do not vest immediately, salaries expense is

recognized over the vesting period as the employee renders
services.
Illustration 5
On January 1, 2021, ABC Co. 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 in shown below:
Date No. of SARs expected to vest Fair value of each SAR
Jan. 1, 2021 1,000 10
Dec. 31, 2021 900 12
Dec. 31, 2022 800 15
Dec. 31, 2023 750 16
Illustration 5
Date No. of SARs expected to vest Fair value of each SAR
Jan. 1, 2021 1,000 10
Dec. 31, 2021 900 12
Dec. 31, 2022 800 15
Dec. 31, 2023 750 16
Date Salaries Expense
Jan. 1, 2021 --
Dec. 31, 2021 (900 x ₱12 x 1/3) 3,600
Dec. 31, 2022 (800 x ₱15 x 2/3) - 3,600 4,400
Dec. 31, 2023 (750 x ₱16 x 3/3) - 3,600 -4,400 4,000
Illustration 5
Date Debit Credit
Jan. 1, 2021 (Granted 1,000 cash share appreciation rights “SARs” to
employees with the condition that the employees remain in
service for the next 3 years)

Dec. 31, 2021 Salaries expense 3,600

Salaries payable 3,600
Illustration 5
Date Debit Credit
Jan. 1, 2021 (Granted 1,000 cash share appreciation rights “SARs” to
employees with the condition that the employees remain in
service for the next 3 years)

Dec. 31, 2021 Salaries expense 3,600

Salaries payable 3,600

Dec. 31, 2022 Salaries expense 4,400

Salaries payable 4,400
Illustration 5
Date Debit Credit
Jan. 1, 2021 (Granted 1,000 cash share appreciation rights “SARs” to
employees with the condition that the employees remain in
service for the next 3 years)

Dec. 31, 2021 Salaries expense 3,600

Salaries payable 3,600

Dec. 31, 2022 Salaries expense 4,400

Salaries payable 4,400

Dec. 31, 2023 Salaries expense 4,000

Salaries payable 4,000
Salaries payable 12,000
Cash in bank 12,000
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.
 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.
Counterparty has the Right of Choice
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:
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.
Counterparty has the Right of Choice
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.
Entity has the Right of Choice
 Ifthe 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.
Entity has the Right of Choice
 Ifthe entity has a present obligation to settle in cash, it
shall account for the transaction as a cash-settled share-
based payment transaction.
 Ifthe entity has no present obligation to settle in cash, it
shall account for the transaction as an equity-settled
share-based payment transaction.
Application of
concepts
Problem 1: Multiple Choice
1. A share-based payment transaction is one in which an entity
receives goods or services and pay for them _____.
a. by issuing its own equity instrument
b. Through cash, but the amount is based on the fair value of the
entity’s equity instruments
c. Either a or b, as a choice given to either the entity or the
supplier of the goods or services
d. Any of these
Problem 1: Multiple Choice
1. A share-based payment transaction is one in which an entity
receives goods or services and pay for them _____.
a. by issuing its own equity instrument
b. Through cash, but the amount is based on the fair value of the
entity’s equity instruments
c. Either a or b, as a choice given to either the entity or the
supplier of the goods or services
d. Any of these
Problem 1: Multiple Choice
2. Which of the following is excluded from the scope of PFRS 2?
a. Employee share appreciation rights
b. Employee share option plan
c. transfer of equity instruments as consideration for a business
combination
d. Purchase of goods from an unrelated party in exchange for an
entity’s own shares of stocks
Problem 1: Multiple Choice
2. Which of the following is excluded from the scope of PFRS 2?
a. Employee share appreciation rights
b. Employee share option plan
c. transfer of equity instruments as consideration for a business
combination
d. Purchase of goods from an unrelated party in exchange for an
entity’s own shares of stocks
Problem 1: Multiple Choice
3. On February 1, 2021, Entity A offered its employees share options
subject to the offer being ratified in the shareholders’ general
meeting. The share option offer was approved in the shareholder’s
general meeting held on March 1, 2021. Entity A issued the share
options on April 1, 2021. The fair value of the share options vary
between these dates. For purposes of PFRS 2, the share options
should be valued at the fair value determined on _____.
a. February 1, 2021
b. March 1, 2021
c. April 1, 2021
d. Any of these
Problem 1: Multiple Choice
3. On February 1, 2021, Entity A offered its employees share options
subject to the offer being ratified in the shareholders’ general
meeting. The share option offer was approved in the shareholder’s
general meeting held on March 1, 2021. Entity A issued the share
options on April 1, 2021. The fair value of the share options vary
between these dates. For purposes of PFRS 2, the share options
should be valued at the fair value determined on _____.
a. February 1, 2021
b. March 1, 2021
c. April 1, 2021
d. Any of these
Problem 2
Use the following information for the next three questions:
On January 1, 2024, Entity A has granted 600 share options to each of
its 100 employees. The options vest in three year’s time. Each share
option has a fair value of ₱100 on grant date. Information on employee
departure is as follows:
• January 1, 2024: estimate employees leaving the entity during the
vesting period – 4%
• December 31, 2024: revision of estimate of employees leaving to 5%
before vesting date
• December 31, 2025: revision of estimate of employee leaving to 6%
before vesting date
• December 31, 2026: actual employees leaving 5%
Problem 2
Use the following information for the next three questions:
1. How much is the salaries expense in 2024?
a. 6,000,000
b. 2,000,000
c. 1,900,000
d. 1,920,000
Problem 2
Use the following information for the next three questions:
1. How much is the salaries expense in 2024?
a. 6,000,000
b. 2,000,000
c. 1,900,000
d. 1,920,000
Problem 2
Use the following information for the next three questions:
2. How much is the salaries expense in 2025?
a. 2,000,000
b. 1,880,000
c. 1,860,000
d. 0
Problem 2
Use the following information for the next three questions:
2. How much is the salaries expense in 2025?
a. 2,000,000
b. 1,880,000
c. 1,860,000
d. 0
Problem 2
Use the following information for the next three questions:
3. How much is the salaries expense in 2026?
a. 2,000,000
b. 1,940,000
c. 1,900,000
d. 0
Problem 2
Use the following information for the next three questions:
3. How much is the salaries expense in 2026?
a. 2,000,000
b. 1,940,000
c. 1,900,000
d. 0
Thank
You!