CONCEPTUAL FRAMEWORK

&
ACCOUNTING STANDARDS
2019 Edition

Lecture Aid
By: Zeus Vernon B. Millan

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PFRS 2 Share-based Payments

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.
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Standards (by: Zeus Vernon B. Millan)
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

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Standards (by: Zeus Vernon B. Millan)
• Equity instrument is a contract that evidences a
residual interest in the assets of an entity after
deducting all of its liabilities.

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Standards (by: Zeus Vernon B. Millan)
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.

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Standards (by: Zeus Vernon B. Millan)
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.

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Standards (by: Zeus Vernon B. Millan)
Equity-settled share-based payment transactions

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Standards (by: Zeus Vernon B. Millan)
• 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.
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Standards (by: Zeus Vernon B. Millan)
• 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.

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Standards (by: Zeus Vernon B. Millan)
Share-based compensation plans

• 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

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Standards (by: Zeus Vernon B. Millan)
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.

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Standards (by: Zeus Vernon B. Millan)
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

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Standards (by: Zeus Vernon B. Millan)
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.
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Standards (by: Zeus Vernon B. Millan)
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.
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Standards (by: Zeus Vernon B. Millan)
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.

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Standards (by: Zeus Vernon B. Millan)
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.

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Standards (by: Zeus Vernon B. Millan)
Recognition of cash-settled share-based
compensation plans

a. If the share appreciation rights granted vest immediately, the

entity shall recognize the related compensation expense on the
services received in full with a corresponding increase in
liability at grant date.

b. If the share options granted do not vest until the employee

completes a specified period of service, the entity shall recognize
the services received, and a liability to pay for them, as the
employee renders service during that period.

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Standards (by: Zeus Vernon B. Millan)
Share-based payment transactions with cash
alternatives
• 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 the fair value of goods or
services received and the fair value of the debt component at the
date the goods or services are received.

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Standards (by: Zeus Vernon B. Millan)
Share-based payment transactions with cash
alternatives (Continuation)
• 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.

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Standards (by: Zeus Vernon B. Millan)
Share-based payment transactions with cash
alternatives (Continuation)
• If the 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.
• If the entity has a present obligation to settle in cash, it shall account for
the transaction as a cash-settled share-based payment transaction.
• If the entity has no present obligation to settle in cash, it shall account
for the transaction as an equity-settled share-based payment
transaction.

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 APPLICATION OF
CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION

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 QUESTIONS????
 REACTIONS!!!!!

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 END
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