Share-based compensation

- Refers to a compensation arrangement where employees receive equity shares or cash

based on the entity's share price in exchange for their services.
- These plans are commonly used for directors, senior executives, and key employees and
are often tied to performance to motivate recipients.

There are two types of share-based compensation plans:

-Equity-settled plans involve issuing equity instruments, like share options, to employees as
compensation.
-Cash-settled plans create a liability for services received, based on the entity's equity
instruments.

Share options are a specific form of share-based compensation where officers and key
employees are granted the right to acquire shares within a specified period at a predetermined
price.
These options are part of the overall remuneration package for senior officers and key
employees.
Overall, share-based compensation plans, including share options, incentivize and reward
employees for their contributions to the entity's success.

The measurement and recognition of compensation for share options can be summarized as
follows:

Measurement of Compensation:
- Fair Value Method: Compensation is measured as the fair value of the share options on the
grant date.
- Intrinsic Value Method: Compensation is measured as the intrinsic value of the share options,
which is the excess of the market value of the share over the option price. This method is used
when the fair value of the share option cannot be reliably estimated.

Recognition of Compensation:
- Immediate Vesting: If the share options vest immediately, the compensation is recognized as
an expense in full on the grant date.
- Service Period Vesting: If the share options do not vest until the employee completes a
specified service period, the compensation is recognized as an expense over the service period.
The expense is recognized from the grant date to the date when the options can first be exercised,
reflecting the services rendered during that period.

The recognition approach is based on the principle that share options are granted as
compensation for services provided between the grant date and the exercise date. By recognizing
the compensation over the service period, it aligns with the concept that the options are earned
gradually as the employee fulfills the specified service requirements.

ILLUSTRATION - WITH VESTING PERIOD

On January 1, 2022, share options are granted to officers to purchase 100,000 ordinary shares of
P50 par value at P60 per share. The fair value of each share option is P15. The officers are
entitled to the share options only after completing two years of service. The options can be
exercised starting January 1, 2024, and expire one year after. All share options are exercised on
December 31, 2024.

Summary:

- Total compensation or fair value of share options: P1,500,000

- Annual compensation: P750,000
- 2022: Salaries-share options: P750,000, Share options outstanding: P750,000
- 2023: Salaries-share options: P750,000, Share options outstanding: P750,000
- 2024: Cash (100,000 x P60): P6,000,000, Share options outstanding: P1,500,000, Ordinary
share capital (100,000 x P50): P5,000,000, Share premium: P2,500,000

Note that before the exercise of the share options, the share options outstanding account is
reported as a component of share premium. If the share options are not subsequently exercised,
the share options outstanding account will be adjusted and credited to share premium.
In summary, share options were granted to officers with a specified exercise price and fair value.
The officers were entitled to the share options after completing a specified service period. When
the share options were exercised, cash was received and the share options outstanding account
was adjusted, resulting in an increase in ordinary share capital and share premium.