ACCOUNTING FOR SHARE-BASED COMPENSATION – IFRS 2 B.

Any payment made to the employee on the

Definition: cancelation or settlement of the grant shall be
 A share-based compensation plan is a pay structure accounted for as the repurchase of equity
in which an entity’s employees receive EQUITY interest, meaning deduction from equity or
SHARES in exchange for their services, or the entity share options outstanding.
incurs LIABILITIES to the employees based on the Note: If the payment exceeds the fair value of the
price of its equity shares. share option, the excess shall be recognized as
TYPES: an expense.
 EQUITY-SETTLED Journal Entries:
o The entity issues shares to its 1. Compensation Expense xx
employees in consideration for their Share Options Outstanding xx
services. To recognize the compensation expense for the period
o Example: SO (SHARE OPTIONS)
 CASH-SETTLED 2. Cash* xx
o The entity incurs liability to its Share Options Outstanding xx
employees for services received and Ordinary share capital xx
the liability is based on the value of Share Premium
the entity’s shares. xx
o Example: SARs (Share Appreciation *It is equal to the EXERCISE PRICE of the Share Options (It
Rights) is also known as OPTION PRICE)
A. ACCOUNTING FOR SO (SHARE OPTION) NOTE: Share Option Outstanding is a Share Premium
- SOs are granted to officers and key employees Account.
which allows them to purchase shares of the B. ACCOUNTING FOR SARs (SHARE APPRECIATION
company for a specified period at a specified RIGHTS)
price (commonly known as exercise price) -Unlike in share option, the entity shall recognize a
provided certain conditions are met. liability because a share appreciation right is actually an
2 Methods of Measuring the compensation for SOs: obligation on the part of the entity to pay cash in the
1. Fair Value Method – compensation is equal to the FV of future on exercise date.
the share options AT THE GRANT DATE. Measurement of compensation arising from share
- This method requires by the PRFS 2 appreciation right:
2. Intrinsic Value Method – compensation is equal to the  The compensation is based on the fair value of the
intrinsic value of the SOs. liability at the end of reporting period and shall be
- This can only be used if the FV of the remeasured at every year-end until it finally settled.
SOs at the date of grant cannot be Any changes in fair value are included in profit or
measure reliably. loss.
- FORMULA: M – X = Intrinsic Value  During the vesting period from the date of grant to
M = Market Value of the shares the exercise date, if there are increases or decreases
X = Exercise Price in the market value of the shares, the liability for the
When to Recognize? compensation shall be adjusted.
Vest immediately - the employees is not required to Note: The fair value of the liability is equal to the “excess of
complete a specified period of service before the market value of share over a predetermined
unconditionally entitled to option. On grant date, price for a given number of shares over a specified
the entity shall recognize the compensation vesting period.”
expense in full w/ corresponding increase in When to recognize?
equity. Vest immediately - On grant date, the entity shall
Do not vest immediately - the compensation is recognized recognize the compensation expense in full.
as expense over the service period or vesting Do not vest immediately - the compensation is recognized
period, meaning, from the date of grant to the as expense over the service period or vesting
date which the options can first be exercised. period.
Note: If the problem is silent regarding the vesting period, Modification from Cash-Settled to Equity-Settled
it is presumed to be vest immediately. If the entity modifies a cash settled share-based
Acceleration of vesting - If an entity cancels or settles a payment (SARs) to an equity settled share-based
grant of share options during the vesting period, payment (SO), the following procedure shall be
the entity shall account for the cancelation or applied:
settlement as an acceleration of vesting.  The share options shall be measured based on
The accounting procedures are: its fair value on the date of modification.
A. The entity shall recognize immediately the o This shall be recognized in equity.
compensation expense that otherwise would  The liability for SARs shall be cancelled on the
have been recognized for services received over date of modification.
the remainder of the vesting period.
  The difference between the carrying amount of
the liability for SARs and the fair value of the
share options on the date of modification shall
be recognized in profit or loss.
o Liability for SARs > fair value of share
options = gain on remeasurement
o JE:
Liab for SARs xx
SO Outstanding
xx
Gain on remeasurement
xx
o Liability for SARs < fair value of share
options = additional compensation
o JE:
Liab for SARs xx
Compensation Exp xx
SO Outstanding
xx
C. CASH AND SHARE ALTERNATIVE
1. Cash alternative – cash payments equal to the market
value of a certain number of shares subject to
certain conditions.
2. Share alternative – equity shares give to employees
The accounting for this type of shares depends on “which
party has the choice of settlement”.
 If the entity has the choice of settlement, there is no
accounting problem. The entity shall account for the
instrument initially either as a liability or equity, or
both.
 If the employee has the right to choose the
settlement, the entity is deemed to have issued a
compound financial instrument. Thus, the compound
financial instrument is accounted for as partly
liability which is the cash alternative and partly
equity which is the share alternative. The equity
component is usually the fair value of the whole
compound financial instrument minus the fair value
of the liability component. The equity component is
always the residual amount.