Share Based Payment

PFRS 2

SHARE-BASED TRANSACTION

- May fall under the following:

o Equity settled – share based payment transactions in which the entity receives goods or
services as consideration for equity instruments of the entity (including or share options)
o Cash Settled – share based payment transactions in which entity acquires goods or
services by incurring liabilities to the supplier of those goods or services for amount that
are based on the price (or value) of the entity’s shares or other equity instruments of the
entity. (Share appreciation rights)
o 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 either the entity settles the transaction in cash (or other assets) or by issuing
equity instruments.

SHARE OPTIONS

- A stock or a share options – is a contract that gives the holder the right, but not obligation to
subscribe to the entity’s shares at a fixed or determinable price for a specified period.
- Share options are generally granted to officers and employees of an enterprise as part of a
compensation plan and as a compensation for services rendered. They typically extended to
selected key officers or managers within the corporation.

ACCOUNTING FOR EQUITY SETTLED SHARE BASED TRANSACTION

- For equity-settled share based payment transactions

1. The entity shall measure the goods or services received and corresponding increase in
equity, directly at the fair value of the goods or services received, unless that fair value
cannot be estimated reliably.
2. If the entity cannot estimate reliably the fair value of the goods or services received, the
entity shall measure their value and the corresponding increase in equity, indirectly, by
reference to fair value of the equity instruments granted.

SHARE BASED PAYMENTS TO NON-EMPLOYEES

- When the goods and services are received from parties other than employees, in exchange for
equity instruments issued the goods and services shall be measured directly at their fair values
- Thus an asset or services acquired from a non employee by issuing shares is recorded at the fair
value of the assets or services received; the fair value of the shares issued is used only if the fair
value of the assets or services received is not reliably determinable.
SHARE BASED PAYMENTS TO EMPLOYEES

- If the good and services are received from employees in exchange for equity instruments issued,
the goods and services shall be measured indirectly at the fair value of the equity instruments
issued.
- The fair value of the option (which is the value assigned to the services received) is recorded as
expense during the period of in which the services are to be received by the entity in
consideration for the options.
o If the equity instrument granted (share option) vest immediately, the entity shall
presume that the services on account of the options granted have been received
already. As such, the related compensation expense shall be recognized immediately
equal to the value options.
o If the options granted do not vest immediately, i.e., the employees or officers are still
required to satisfy some vesting conditions, the value of the share options is spread as
compensation expense over vesting period.

VESTING CONDITIONS

Share options granted by an enterprise vest based on one or combination of the following vesting
conditions:

1. Service Conditions
2. Performance Conditions
a. Non-market Conditions
b. Market conditions

SHARE OPTIONS THAT VEST BASED ON SEVICE CONDITIONS

- If the share options granted vest based on the completion of a specified period of service, the
amount of compensation expense shall, be spread over the required service period called
VESTING PERIOD.
- The amount of compensation expense shall be based on the fair value of the options at the date
of grant.

o On the date of grant – only memo entry is made by the company. On this date the fair
value of the option is determined. This fair value is not subsequently adjusted.
o At the end of the year an entry should be made to record the estimated compensation
expense resulting from the option grant.
ENTRY
Compensation expense
Share options Outstanding
o The best estimate of number of options expected to vest made at each year end of the
vesting period.
o After the vesting period there shall be no adjustment to compensation expense.
 o Any amount previously credited to equity shall remain in equity.

 When Options are exercised:

Cash(Strike price X no. of options exercised)

Share options Outstanding
Ordinary share capital
Share premium – ordinary

 When Options Expire

Share options Outstanding

Paid in capital from unexercised share options

SHARE OPTIONS THAT VEST BASED ON PERFORMANCE CONDITIONS

- A grant of option might be conditional upon satisfying specified certain vesting conditions, other
than remaining on entity’s employ for a minimum number of years.
- There might be performance condition such as achieving a specified growth rate in terms of
profits or gross revenue or reaching a specified increase in market price of the entity’s shares.

o Accounting for performance based share options depends on whether the options are
based on market performance features or non-market performance features.
 Non Market based performance conditions – include vesting based on achieving
specific growth rate in revenue or in profits, achieving a specific increase in
earnings per share, or vesting based on financial targets.
 Market Based performance conditions – are achieving a specific share price of
the entitys equity instruments and achieving specified target share price relative
to an index or market prices.

o Irrespective of whether the performance condition is market based or non market

based, the fair value of options used to measure compensation expense is determined at
the date of options are granted.
o The determined fair value at the date of grant shall be charge to compensation expense
over vesting period.