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Share-Based Payment (PFRS 2)

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Definition
A share-based payment is a transaction in which the entity receives or acquires goods
or services either as consideration for its equity instruments or by incurring liabilities for
amounts based on the price of the entity's shares or other equity instruments of the
entity.

Scope
IFRS 2 encompasses the issuance of shares, or rights to shares, in return for
services and goods.
Items included in the scope of IFRS 2 are

share appreciation rights,

employee share purchase plans,

employee share ownership plans,

share option plans, and

plans where the issuance of shares (or rights to shares) may depend on
market or non-market related conditions.

IFRS 2 applies to all entities, no exemption for private or smaller entities.


Subsidiaries using their parent's or fellow subsidiary's equity as consideration for
goods or services.
Two exemptions to the general scope principle.

The issuance of shares in a business combination should be accounted for


under IFRS 3 Business Combinations.
IFRS 2 does not address share-based payments within the scope of
paragraphs 8-10 of IAS 32 Financial Instruments: Disclosure and
Presentation, or paragraphs 5-7 of IAS 39 Financial Instruments: Recognition
and Measurement.
IFRS 2 does not apply to
Share-based payment transactions other than for the acquisition of goods
and services; and
Share dividends, the purchase of treasury shares, and the issuance of
additional shares.

Measurement
1. Equity settled the entity issues equity instruments in consideration for services
rendered.
Share options
2. Cash settled the entity incurs a liability for services received and the liability is
based on the entitys equity instruments.
Share appreciation rights

Share Options
1. Rights or privileges granted to officers and key employees of a corporation to
acquire shares during a specified period upon fulfillment of certain conditions at a
specified price.
2. Measurement of compensation
Fair value method
Compensation is equal to the fair value of the share options on
the date of grant.
Fair value is computed using stochastic calculus.
Fair value may be computed using option valuation models.
Examples of option valuation models are Black-Scholes Model,
Garman & Kholhagen Model, Reiner & Rubinstein Model,
Trinomial Model, Binomial Options Pricing Model and the BlackScholes Merton Model.
Required method in PFRS 2.
Intrinsic value method
The compensation is equal to the intrinsic value of the share
options.
The intrinsic value is the excess of the market value of the share
over the option price.
The intrinsic value can be used only if the fair value of the
share option cannot be estimated reliably.
The entity shall measure the share options at their intrinsic value
initially and subsequently at each reporting date and at the date of
final settlement, with any change in intrinsic value recognized in
profit and loss.
3. Option price is usually less than the market price.
4. Considered additional compensation given to officers and employees.

Recognition of Compensation
PFRS 2 provides the following rules for the recognition of compensation expense:
2

If the shares vest immediately, the employee is not required to complete a


specified period of service for him to be entitled to the shares option. In this
case, the entity shall recognize the compensation expense in full with
corresponding increase in equity.
If the shares do not vest until the employee completes a specified period of
service, the compensation is recognized as expense over the service period or
vesting period (from the date of grant to the date on which the options can first be
exercised).

Pro-forma Entries
Recognition
Exercise

Expiration

Salaries share options


Shares options outstanding

xxx

Cash
Shares options outstanding
Share capital
Share premium

xxx
xxx

Share options outstanding


Share premium - expired share options

xxx

xxx

xxx
xxx
xxx

Share Appreciation Right


1. The entity shall measure the services acquired and the liability incurred at the fair
value of the liability.
2. Until the liability is settled, the entity shall re-measure the fair value of the liability
at each reporting date and at the date of settlement.
3. Share appreciation right entitles an employees to receive cash which is equal to
the excess of the market value of the entitys stock over a predetermined price
for a stated number of shares.
4. Share appreciation right is viewed as compensation to be allocated over the
vesting period or service period. The service period or vesting period is the
period over which the employee must render service to be entitled to the share
appreciation right.
Pro-forma Entries
Recognition

Salaries expense
Salaries payable

xxx
xxx
3

Payment

Salaries payable
Cash

xxx
xxx

Share and Cash Alternative


This form of compensation gives the employee the right to choose either of two
alternatives: shares of stock or cash payment equal to the market value of shares of
stock. PFRS 2 requires that this compound financial instrument shall be accounted for
separately as liability and equity.

The equity component shall be computed as follows:


Fair value of share alternative
Fair value of liability on grant date
Equity component

P xxx
xxx
Pxxx

Pro-forma Entries
Recognition of
liability and equity
component

Settlement
If Cash
alternative

If Equity
alternative

Salaries
Share options outstanding

xxx

Salaries expense
Salaries payable

xxx

Salaries payable
Share options outstanding
Cash
Share premium

xxx
xxx

Salaries payable
Share options outstanding
Share capital
Share premium

xxx
xxx

xxx
xxx

xxx
xxx

xxx
xxx

Disclosures

the nature and extent of share-based payment arrangements that existed during
the period;
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how the fair value of the goods or services received, or the fair value of the equity
instruments granted, during the period was determined; and
the effect of share-based payment transactions on the entity's profit or loss for
the period and on its financial position.

July 2009