Chapter 25:

SHARE BASED
COMPENSATION
Share Options
Definition
Share- based compensation plan

a compensation arrangement established by

the entity whereby the entity's employees
shall receive shares of capital in exchange
for their services or the entity incurs
liabilities to the employees in amounts
based on the price of its shares
Compensation Plans
are common features of employee
remuneration for directors, senior executives
and other key employees.
are usually tied to performance in a strategy
that uses compensation to motivate the
recipient.
Measurement
Principles and
Specific
Requirements for
Accounting
(Set out by Philippine Financial
Reporting Standard 2)
Measurement Principles and Specific
Requirements for Accounting
a. Equity settled

The entity issues equity instruments in

consideration for services received for example,
share options

b. Cash settled

The entity incurs a liability for services received

and the liability is based on the entity's equity
instruments,for example, share appreciation
rights.
Share Options
Share options are granted to officers and
key employees to enable them to acquire
shares of the entity during a specified period
upon fulfillment of certain conditions at a
specified price.

*These options are conceived as additional

compensation on the part of senior officers and
other key employees.
Measurement of
Compensation

Fair Value
&
Intrinsic Value Method
FAIR VALUE METHOD
This means that the compensation is
equal to the fair value of the share
options on the date of grant.

* This method is mandated by PFRS 2.

INTRINSIC VALUE METHOD
This means that 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.

* Paragraph 24 PFRS 2 provides that the

intrinsic value method can be used only if the
fair value of the share option cannot be
measured reliably.
Recognition of
Compensation
The following accounting procedures should
be observed in the recognition of
compensation expense:
a. If the share options vest immediately, the
employee is not required to complete a
specified period of service before
unconditionally entitled to the share options.
b. If the share options do not vest until the
employee completes a specified service
period, the compensation is recognized as
expense over the service period or vesting
period, meaning, from the date of grant to
the date on which the options can first be
exercised.
Acceleration of
Vesting
PFRS 2, paragraph 28, provides that if an
entity cancels or settles a grant of share
options during the vesting period, the
entity shall account for the cancelation or
settlement as an acceleration of vesting.
a. The entity shall recognize immediately the
compensation expense that otherwise would
have been recognized for services receive over
the remainder of the vesting period.
b. Any payment made to the employee on the
cancelation or settlement of the grant shall be
accounted for as the repurchase of equity
interest, meaning, deduction from equity.

If the payment exceeds the fair value of the share

option, the excess shall be recognized as an
expense.
Modification of
Condition
If an entity modified the vesting condition
on which equity instruments were
granted, the following procedures shall
be followed:
1. PFRS 2 Application Guidance, paragraph
B43, provides that the entity shall continue
to account for the equity instrument granted
based on the original condition and vesting
period at the date of grant.
If the modification is beneficial to employees if the
exercise price of the share option is reduces.

The increase in fair value is the difference between

the fair value of the modified equity instruments
and the fair value of the original equity
instruments both estimated at the date of
modification.
1. PFRS 2 Application Guidance,
paragraph B43... (cont.)
The increase in fair value is recognized as
compensation over the remaining vesting period or
from the date of modification until the date when the
modified equity instruments vest.

Therefore, the entity shall recognize two

compensations, namely:
a. Compensation based on original condition.
b. Compensation based on modification.
If an entity modified the vesting condition on
which equity instruments were granted, the
following procedures shall be followed:
2. However, paragraph B44 provides that
the entity shall continue to recognize
compensation based on the original
condition as if the modification had
never occurred under the following
circumstances:
a. The modification reduces the fair value of the equity
instruments.
b. The modification is apparently not beneficial to the
employees, for example, by increasing the exercise
price of the option.