FINANCIAL ACCOUNTING AND REPORTING

FAR22 Share-based Payments

22.1. Scope of PFRS 2........................................................................................................... 1

22.2. Share Options as Equity-settled Share-based Payments...........................1

22.3. Share Appreciation Rights as Cash-settled Share-based Payments......2

22.4. Share-based Payments with Cash Alternatives.............................................3

22.5. Required Disclosures................................................................................................ 4

FAR22 Share-based Payments
22.1. Scope of PFRS 2
• An entity shall apply this PFRS in accounting for all share-based payment transactions, whether or not
the entity can identify specifically some or all of the goods or services received, including:
a. equity-settled share-based payment transactions
b. cash-settled share-based payment transactions, and
c. transactions in which the entity receives or acquires goods or services and the terms of the
arrangement provide either the entity or the supplier of those goods or services with a choice of
whether the entity settles the transaction in cash (or other assets) or by issuing equity instruments

• An entity shall recognize the goods or services received or acquired in a share-based payment
transaction when it obtains the goods or as the services are received. The entity shall recognize a
corresponding increase in:
a. Equity if the goods or services were received in an equity-settled share-based payment transaction
b. Liability if the goods or services were acquired in a cash-settled share-based payment transaction

• When the goods or services received or acquired in a share-based payment transaction do not qualify for
recognition as assets, they shall be recognized as expenses.

22.2. Share Options as Equity-settled Share-based Payments

For equity-settled share-based payment transactions, the entity shall measure
the goods or services received, and the corresponding increase in equity,
directly, at the:
Measurement 1. Fair value of the goods or services received
2. Fair value of the equity instruments on the date of grant
3. Intrinsic value of the equity instruments (excess of the market value of the
share over the option price)

If the equity instruments granted vest immediately, the counterparty is not

required to complete a specified period of service before becoming
unconditionally entitled to those equity instruments. In this case, on grant date
the entity shall recognize the services received in full, with a corresponding
increase in equity.
Vesting period
If the equity instruments granted do not vest until the counterparty completes
a specified period of service, the entity shall presume that the services to be
rendered by the counterparty as consideration for those equity instruments will
be received in the future, during the vesting period. The entity shall account for
those services as they are rendered by the counterparty during the vesting period,
with a corresponding increase in equity.

Estimated number of employees entitled to share options xxx

Multiply: Estimated number of options per employee xxx
Multiply: Estimated fair value of each option on grant date xxx
Total fair value of options to be granted to employees xxx
Basic formula
Multiply: Fraction of time of vesting period %
Cumulative compensation expense (share options outstanding) xxx
Compensation expense recognized in prior periods (xxx)
Compensation expense – current period xxx

Entry made throughout vesting period:

Compensation expense xxx
Share options outstanding xxx

Thus, the cumulative compensation expense also represents the total share options
Journal entries
outstanding at the end of each period.

Upon settlement:
Share options outstanding xxx
Equity accounts xxx

FAR22 SHARE-BASED PAYMENTS 1

 Case Study 1
At the beginning of year 1, Entity A grants share options to each of its 100 employees working in the sales
department. The share options will vest at the end of year 3, provided that the employees remain in the entity's
employ, and provided that the volume of sales of a particular product increases by at least an average of 5 percent
per year. If the volume of sales of the product increases by an average of between 5 percent and 10 percent per year,
each employee will receive 100 share options. If the volume of sales increases by an average of between 11 percent
and 15 percent each year, each employee will receive 200 share options. If the volume of sales increases by an
average of 16 percent or more, each employee will receive 300 share options.

On grant date, Entity A estimates that the share options have a fair value of P20 per option. Entity A also estimates
that the volume of sales of the product will increase by an average of between 11 percent and 15 percent, per year,
and therefore expects that, for each employee who remains in service until the end of year 3,200 share options will
vest. The entity also estimates, on the basis of a weighted average probability, that 20 percent of employees will leave
before the end of year 3.

By the end of year 1, seven employees have left and the entity still expects that a total of 20 employees will leave by
the end of year 3. Product sales have increased by 12 percent and the entity expects this rate of increase to continue
over the next 2 years.

By the end of year 2, a further five employees have left. The entity now expects only three more employees will leave
during year 3. Product sales have increased by 20 percent, resulting in an average of 16 percent over the two years to
date. The entity now expects that sales will average 16 percent or more over the three-year period, and hence
expects each sales employee to receive 300 share options at the end of year 3.

By the end of year 3, a further two employees have left. The entity's sales have increased by an average of 16 percent
over the three years. All share options were exercised at the end of year 3.

Required
a. Journalize the following the transactions above and compute for the compensation expense and share options
outstanding per year,
b. Assume that the entity decided to settle the share options at the end of year 2 (i.e. acceleration of vesting), what
would be the compensation expense for that period?
c. Assume that instead of the exercise of the share options, the entity paid the employees a total of P400,000 at the
end of year 3, what would be the compensation expense for that period?

22.3. Share Appreciation Rights as Cash-settled Share-based Payments

For cash-settled share-based payment transactions, the entity shall measure the
goods or services acquired and the liability incurred at the fair value of the
Measurement liability. Until the liability is settled, the entity shall remeasure the fair value of
the liability at the end of each reporting period and at the date of settlement,
with any changes in fair value recognized in profit or loss for the period.

Some share appreciation rights vest immediately, and the employees are therefore
not required to complete a specified period of service to become entitled to the
cash payment. Thus, the entity shall recognize immediately the services received
and a liability to pay for them.

If the share appreciation rights do not vest until the employees have completed a
Vesting period specified period of service, the entity shall recognize the services received, and a
liability to pay for them, as the employees render service during that period.

The liability shall be measured, initially and at the end of each reporting period
until settled, at the fair value of the share appreciation rights, by applying an
option
pricing model.

Estimated number of employees entitled to share appreciation rights xxx

Multiply: Estimated number of SARs per employee xxx
Multiply: Estimated fair value* of each SAR at every year-end xxx
Total estimated cash settlement xxx
Basic formula
Multiply: Fraction of time of vesting period %
Cumulative compensation expense (outstanding liability) xxx
Compensation expense recognized in prior periods (xxx)
Compensation expense – current period xxx
 Entry made throughout vesting period:
Compensation expense xxx
Liability (i.e. salaries payable) xxx

Thus, the cumulative compensation expense also represents the total outstanding
Journal entries
liability at the end of each period.

Upon settlement:
Liability xxx
Cash xxx

ees, on condition that the employees remain in its employ for the next three years.

ave during years 2 and 3. During year 2, 40 employees have left, and the entity estimates that a further 25 will leave during year 3.

xercised their SARs at the end of year 4 and the remaining 113 employees exercised their SARs at the end of year 5.
bility exists as shown below. At the end of year 3, all SARs held by the remaining employees vested. The intrinsic values of the SARs at the date of exerci

Year Fair Value Intrinsic Value

1 P14.40
2 15.50
3 18.20 P15.00
4 21.40 20.00
5 25.00

Required
Compute the amounts of compensation expense and liability that the entity should report every year.

22.4. Share-based Payments with Cash Alternatives

For share-based payment transactions in which the terms of the arrangement
provide either the entity or the counterparty with the choice of whether the entity
settles the transaction in cash (or other assets) or by issuing equity instruments, the
entity shall account for that transaction, or the components of that transaction, as
Measurement
a cash-settled share-based payment transaction if, and to the extent that, the
entity has incurred a liability to settle in cash or other assets, or as an equity-settled
share- based payment transaction if, and to the extent that, no such liability has
been incurred.

The entity has granted a compound financial instrument, which includes a debt
component (i.e. 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).
Counterparty’s
choice
The entity shall measure the equity component of the compound financial
instrument as the difference between the fair value of the goods or services
received and the fair value of the debt component, at the date when the goods or
services are received.

The entity shall determine whether it has a present obligation to settle in cash and
Entity’s choice account for the share-based payment transaction accordingly. The entity has a
present obligation to settle in cash if the choice of settlement in equity
instruments
has no commercial substance (e.g. because the entity is legally prohibited from
 issuing shares), or the entity has a past practice or a stated policy of settling in
cash, or generally settles in cash whenever the counterparty asks for cash
settlement.

If the entity has a present obligation to settle in cash, it shall account for the
transaction in accordance with the requirements applying to cash-settled share-
based payment transactions.

If no such obligation exists, the entity shall account for the transaction in
accordance with the requirements applying to equity-settled share-based
payment transactions. Upon settlement:
a. if the entity elects to settle in cash, the cash payment shall be accounted for as
the 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 shall recognize an additional expense for the
excess value given, i.e. the difference between the cash paid and the fair value
of the equity instruments that would otherwise have been issued, or the
difference between the fair value of the equity instruments issued and the
amount of cash that would otherwise have been paid, whichever is applicable.

Case Study 3
An entity grants to an employee the right to choose either 1,000 phantom shares (i.e., a right to a cash payment equal
to the value of 1,000 shares) or 1,200 shares with a par value of P10 per share. The grant is conditional upon the
completion of three years' service. If the employee chooses the share alternative, the shares must be held for three
years after vesting date. At grant date, the entity's share price is P50 per share. At the end of years 1, 2 and 3, the
share price is P52, P55 and P60 respectively. The entity does not expect to pay dividends in the next three years.
After taking into account the effects of the post-vesting transfer restrictions, the entity estimates that the grant date
fair value of the share alternative is P48 per share.

Required
Journalize the transactions for the three-year vesting period and compute for the compensation expense each period.

22.5. Required Disclosures

 An entity shall disclose information that enables users of the financial statements to understand:
a. the nature and extent of share-based payment arrangements that existed during the period.
b. how the fair value of the goods or services received, or the fair value of the equity instruments
granted, during the period was determined.
c. the effect of share-based payment transactions on the entity’s profit or loss for the period and on its
financial position.

Quizzer – Problem 1
1. Ignominy Company has granted share options to its employees. The total compensation expense to the vesting
date of December 31, 2020 has been calculated at P6,000,000. The entity has decided to settle the award early on
December 31, 2019. The compensation expense charged since the date of grant on January 1, 2017 was
P1,500,000 for 2017 and P1,300,000 for 2018. The compensation expense that would have been charged for 2019 is
P1,200,000.

Question 1: What is the compensation expense for 2019?

A. P3,200,000
B. P2,000,000
C. P1,200,000
D. None

Question 2: What is the compensation expense for 2019, assuming the share options are not exercised but instead,
the entity paid the employees P5,000,000 on December 31, 2019?
A. P5,000,000
B. P2,200,000
C. P3,200,000
D. None
2. On January 1, 2019, Ignoble Company granted 100 share options each to 500 employees, conditional upon the
employee's remaining in the entity's employ during the vesting period. The share options vest at the end of a
three- year period. On grant date, each share option has a fair value of P30. The par value per share is P100 and
the option price is P120.

On December 31, 2020, 30 employees have left and it is expected that on the basis of a weighted average probability,
a further 30 employees will leave before the end of the three-year period. On December 31, 2021, only 20 employees
actually left and all of the share options are exercised on such date.

What is the compensation expense that should be recognized for 2021?

A. P500,000
B. P880,000
C. P380,000
D. P470,000

3. On January 1, 2019, Judicious 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 P60 and the par
value per share is P50. At the date of grant, the entity concluded that the fair value of the share options cannot be
measured reliably.

The share options have a life of 4 years. The share prices are P62 on December 31, 2019, P66 on December 31, 2020,
P75 on December 31, 2021 and P85 on December 31, 2022. All share options were exercised on December 31, 2022.

What is the compensation expense for 2022?

A. P900,000
B. P600,000
C. P660,000
D. None

4. On January 1, 2019, Junket Company offered its top management share appreciation right with the following
terms: Predetermined price P100 per share
Number of shares 50,000 shares
Service period 3 years
Exercise date January 1, 2022

The quoted prices per share are P100, P124, P151 and P151 on January 1, 2019, December 31, 2019, December
31, 2020 and December 31, 2021, respectively. What amount should be charged to compensation expense for
2021 as a result of the share appreciation right?
A. P2,550,000
B. P1,300,000
C. P850,000
D. None

5. On January 1, 2019, Kinfolk Company granted its president 50,000 share appreciation rights for past services. These
rights are exercisable immediately and expire on December 31, 2020. On exercise date, the president is entitled to
receive cash for the excess of the share market price over the share market price on the grant date. The president
did not exercise any of the rights during 2019. The market price of the share was P100 on January 1, 2019 and
P115 on December 31, 2019. The grantee exercised the rights on December 31, 2020 when the market price was
P110. As a result of the share appreciation rights, what amount should be recognized as gain on reversal of share
appreciation rights in 2020?
A. P750,000
B. P500,000
C. P250,000
D. None

6. Antonia Company grants 150 share options to each of its 500 employees on January 2, 2019 and exercisable
starting December 31, 2022 for a 2-year period. Each grant is conditional upon the employee working for the
entity over the next three years. Antonia estimates that the fair value of each option is P40. On the basis of
weighted average probability, the entity estimates that 20% of the employees will leave during the three-year
period and forfeit their rights to the share options. During the year 2019, 20 employees left, and Antonia Company
still believes that 20% is a fair estimate of employee departures. During 2020, a further 22 employees left. Due to
the low turn-over as of December 31, 2020, Antonia revises its estimates of employee departures over the three-
year period from 20% to 15%. During 2021, a further 18 employees left. What is the compensation expense to be
recognized by Antonia Company for the share options in 2021?
A. P800,000
B. P900,000
C. P940,000
D. P1,700,000
7. In connection with the share option for the benefit of the key employees, Hairy Company intends to distribute
treasury shares when the options are exercised. These shares were bought in 2016 at P42 per share. On January
1, 2019, Hairy granted stock options for 10,000 shares at P38 per share as additional compensation for services to
be rendered over the next three years. The options are exercisable during a four-year period beginning January 1,
2022, by grantees still employed by the company. Market price of Hairy’s stock was P47 per share at the date of
grant. No stock options were terminated during 2019. What amount should be reported as compensation expense
pertaining to the option in Hairy’s December 31, 2019 income statement?
A. None
B. P30,000
C. P40,000
D. P90,000

8. On January 1, 2019, PC Company grants to an employee the right to choose either 10,000 shares, i.e. a right to a
cash payment equal to the value of 10,000 shares, or 12,000 shares. The grant is conditional upon the employee
remaining in the company’s employ for 3 years. If the employee chooses the share alternative, the shares must be
held for 3 years after vesting date. On January 1, 2019, the company’s share price is P50. At the end of the years
2019, 2020 and 2021, the share price is P52, P56 and P62, respectively. After taking into account the post-vesting
transfer restrictions, the grant date fair value of the share alternative is P49. The company’s shares have a
nominal value of P10.

Question 1: What is the total amount of expense should the company recognize in 2019?
A. P173,333
B. P202,666
C. P229,333
D. P276,000

Question 2: What is the total amount of expense should the company recognize in 2020?
A. P173,333
B. P202,666
C. P229,333
D. P276,000

Question 3: What is the value of the cash alternative as of December 31, 2020?
A. None
B. P200,000
C. P373,333
D. P560,000

9. On January 1, 2019, Color Company granted 80,000 cash shares appreciation rights to the executives on condition
that the executives remain in its employ for the next three years. The entity estimates that the fair value of the
share appreciation rights at the end of each year in which a liability exists are as follows:
Year Fair Value
2018 P15
2019 P18
2020 P20

Compensation expense relating to the plan is to be recorded over a three-year period beginning January 1, 2019.
What amount of compensation expense should Color Company recognize for the year ended December 31, 2020?
A. None
B. P400,000
C. P560,000
D. P960,000

Quizzer – Theory 1
1. Which of the following transactions involving the issuance of shares does not come within the definition of a
"share- based" payment under PFRS 2?
A. Employee share purchase plans
B. Employee share option plans
C. Share-based payment relating to an acquisition of a subsidiary
D. Share appreciation rights

2. These are transactions in which the entity receives goods or services as consideration for equity instruments of
the entity, including shares and share options.
A. Equity settled share-based payment C. Equity payment transactions
transactions D. Cash payment transactions
B. Cash settled share-based payment transactions

3. What is the date on which the fair value of the equity instrument granted is measured?
A. Measurement date C. Exercise date
B. Grant date D. End of reporting period
4. For equity share-based payment transactions, the entity shall measure the goods or services received and the
corresponding increase in equity
I. Directly, at the fair value of the goods or services received.
II. Indirectly, by reference to the fair value of the equity instruments granted, if the fair value of the goods or
services received cannot be estimated reliably.
A. I only B. II only C. Both I and II D. Neither I nor II

5. The entity has issued a range of share options to employees. What type of share-based payment transaction does
this represent?
A. Asset-settled share-based payment transaction C. Cash-settled share-based payment transaction
B. Equity-settled share-based payment transaction D. Liability-settled share-based payment transaction

6. Which of the following statements in relation to share options granted to employees in exchange for their services
is true?
I. The services received shall be measured at the fair value of the employees' services.
II. Fair value shall be measured at the date the options vest.
A. I only B. II only C. Both I and II D. Neither I nor II

7. It is the difference between the fair value of the shares to which the counterparty has the right to subscribe and
the price the counterparty is required to pay for those shares.
A. Fair value B. Intrinsic value C. Market value D. Book value

8. It is the date on which the entity and another party 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.
A. Grant date C. Exercise date
B. Measurement date D. End of reporting period

9. For transactions with employees and others providing similar services, the fair value of the equity instrument
granted is measured on
A. Exercise date C. End of reporting period
B. Grant date D. Beginning of the year of grant

10. It 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.
A. Share option C. Share appreciation right
B. Share warrant D. Share split

11. These are transactions in which the entity acquires goods or services by incurring liabilities to the supplier of
those goods or services for amounts that are based on the price of the entity's shares and other equity
instruments.
A. Equity transactions C. Purchase transactions
B. Cash payment transactions D. Cash settled share-based payment transactions

12. A cash-settled share-based payment transaction shall give rise to an increase in

A. A current asset C. Equity
B. A noncurrent asset D. A liability

13. For cash settled share-based payment transactions, an entity shall measure the goods or services received and the
liability incurred at the
A. Fair value of the goods and services received
B. Fair value of the liability
C. Either the fair value of the goods or services received or the fair value of the liability
D. Neither the fair value of the goods or services received nor the fair value of the liability

14. In accordance with PFRS 2, how should an entity recognize the change in the fair value of the liability in respect of
a cash-settled share-based payment transaction?
A. Should not recognize in the financial statements but disclose in the notes thereto
B. Should recognize in the statement of changes in equity
C. Should recognize in other comprehensive income
D. Should recognize in profit or loss

15. Which of the following statements in relation to a cash-settled share based payment transaction is true?
I. The fair value of the liability shall be remeasured at the end of each reporting period.
II. The fair value of the liability shall be remeasured at the date of settlement.
A. I only B. II only C. Both I and II D. Neither I nor I

16. If share-based payment transaction provides that the employees have the right to choose the settlement whether
in cash or shares, the entity is deemed to have issued
A. A compound financial instrument C. A liability instrument
B. An equity instrument D. Either an equity instrument or liability instrument

FAR22 SHARE-BASED PAYMENTS 2