SHARE-BASED COMPENSATION (SHARE OPTIONS)

 Share-based compensation plan – a compensation arrangement established by the entity

whereby the entity’s employees shall receive shares of capital in exchange for their
services or the entity incurs liabilities to the employees in amounts based on the price of
its shares.
 PFRS 2 (Share-based payment) sets out the measurement principles and specific
requirements for accounting of the following share-based compensation:
o Equity settled – entity issues equity instruments in consideration for services
received, for example, share options.
o Cash settled – entity incurs liability for services received and the liability is
based on the entity’s equity instruments, for example, share appreciation rights
 Share Options – 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 a specified
price.
o Measurement:
a. Fair Value Method
- Compensation is equal to the fair value of the share options on the date of
grant
- Method mandated by the Philippine Financial Reporting Standard 2.
b. Intrinsic Value Method
- Compensation is equal to the intrinsic value of the shares
- - Paragraph 24 of PFRS 2 provides this can only be used if the fair value
of the share option cannot be used.
Intrinsic Value = Market Price – Option Price
o Recognition:
a. If the share options vest immediately, the entity shall recognize the services
received in full, with a corresponding increase in equity.
b. If the share options DO NOT vest immediately until the counterparty
completes a specified period of service, the entity shall account for those
services as they are rendered by the counterparty during the vesting period,
with a corresponding increase in equity.
o Definition of Terms:
a. Grant date – the date at which the entity and another party (including an
employee) 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. At the grant date, the entity confers on the counterparty
the right to cash, other assets, or equity instruments of the entity, provided the
specified vesting conditions, if any, are met. If that agreement is subject to an
approval process, grant date is the date when that approval is obtained.
b. Measurement date – the date at which the fair value of the equity
instruments granted is measured.
- For transactions with employees and others providing similar services, the
measurement date is the grant date;
SHARE-BASED COMPENSATION (SHARE OPTIONS)

- For transactions with parties other than employees, the measurement date
is the date the entity obtains the good or the counterparty renders service.
c. Performance condition – a vesting condition that requires:
- the counterparty to complete a specified period of service; the service
requirement can be explicit or implicit; and
- specified performance target(s) to be met while the counterparty is
rendering the service required.
d. Vest – means to become an entitlement. Under a share-based payment
arrangement, a counterparty’s right to receive cash, other assets or equity
instruments of the entity vests when the counterparty’s entitlement is no
longer conditional on the satisfaction of any vesting conditions.
e. Vesting period – the period during which all the specified vesting conditions
of a share-based payment arrangement are to be satisfied.
f. Vesting condition – a condition that determines whether the entity receives
the services that entitle the counterparty to receive cash, other assets or equity
instruments of the entity, under a share-based payment arrangement.
g. Service condition – a vesting condition that requires the counterparty to
complete a specified period of service during which services are provided to
the entity.
h. Market condition – a performance condition upon which the exercise price,
vesting or exercisability of an equity instrument depends that is related to the
market price (or value) of the entity’s equity instruments (or the equity
instruments of another entity in the same group)
i. Non-market condition – a performance condition upon which the exercise
price, vesting or exercisability of an equity instrument depends that is not
related to the market price (or value) of the entity’s equity instruments such
those based on growth in profit or earnings per share.
BASIC FORMULA:
Year 1 Year 2 Year 3
Number of employees XX XX XX
Less: Employees who left XX XX XX
Employees expected to leave XX XX XX
Total employees entitled for the benefit XX XX XX
Multiply by: Share options per employee XX XX XX
Total share options XX XX XX
Multiply by: Fair value or intrinsic value XX XX XX
Total value of the compensation XX XX XX
Multiply by: Ratio (e.g. 3 yrs vesting period) 1/3 2/3 3/3
Cumulative salaries expense XX XX XX
Less: Cumulative compensation in previous years -- XX XX
Salaries expense during the year XX XX XX
SHARE-BASED COMPENSATION (SHARE OPTIONS)

Sample problem (with service condition)

On January 1, 2019, Budotz Company granted 100 share options to 500 employees, conditional
upon the employees remaining in the entity’s employ during the vesting period. The fair value of
each share option is Php 4.
Case No. 1: Assume that share options vest immediately.
Case No. 2: Assume that instead the share options will vest over a three-year period and:
a. By the period of 2019, 30 employees have left and based on a weighted average
probability, a further 20 employees will leave during the vesting period.
b. By the end of 2020, only 7 employees have left and a further 10 will leave during 2021.
By the end of 2021, 15 employees left the company.
SOLUTION:
CASE NO. 1
The appropriate journal entry is:
01.01.2019 Salaries Expense 200, 000
Share options outstanding 200, 000
The salaries expense is computed as follows:
Total employees entitled for the benefit 500
Multiply by: share options per employees 100
Total share options 50, 000
Multiply by: fair value 4
Total fair value of the compensation 200, 000

CASE NO. 2
The appropriate journal entries for the three-year period are:
01.01.2019 Memo Entry (Granted options to 100 share options to 500 employees conditional
upon the employees remaining in the entity’s employ during the vesting period.)
12.31.2019 Salaries expense 60, 000
Share options outstanding 60, 000
12.31.2020 Salaries expense 60, 800
Share options outstanding 60, 800
12.31.2021 Salaries expense 58, 400
Share options outstanding 58, 400
SHARE-BASED COMPENSATION (SHARE OPTIONS)

SOLUTION:

2019 2020 2021

No. of stock options 100 100 100
Multiply by: employees entitled 450 453 448
Total 45, 000 45, 300 44, 800
Multiply by: Fair value 4 4 4
Total fair value of the compensation 180, 000 181, 200 179, 200
Multiply by: Ratio 1/3 2/3 3/3
Cumulative salaries expense 60, 000 120, 800 179, 200
Less: Cumulative compensation in previous years - 60, 000 120, 800
Salaries expense during the year 60, 000 60, 800 58, 400

2019 2020 2021

No. of employees 500 500 500
Less: Employees who left 30 37 52
Employees expected to leave 20 10
Employees entitled 450 453 448