Compensation arrangement established by the

entity whereby:
a. the entity’s employees shall receive
shares of capital in exchange for their
services or
b. the entity incurs liabilities to the
employees in amounts based on the price of
its shares
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common remuneration tied to performance
(incentives for motivation)
directors, senior executives, key employees

Share-based Compensation Plan

Two Types (PFRS 2):
a. Equity settled – entity issues equity
instruments in consideration for services
received (ex. share options)

b. Cash settled – entity incurs a liability for

services received and the liability is
based on the entity’s equity instruments
(ex. share appreciation rights)

Share-based Compensation Plan

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

Part of a remuneration package, in addition to

a cash salary and other employment benefits
(additional compensation)

Two questions to be answered:

1. How much is the compensation measured?
2. When is the compensation recognized?

SHARE OPTIONS
Measurement of Compensation:
a. Fair value method-compensation equal
to fair value of share options on date of
grant
method mandated by PFRS 2
b. Intrinsic value method-compensation
equal to intrinsic value of share options
if FV of share option not available

Intrinsic value
excess of the market value of share over the option price

SHARE OPTIONS
Recognition of Compensation:
a. If share options vest immediately –
employee not required to complete a
specified period of service
full recognition of compensation expense on grant date

b. If share options do not vest until

completion of service period-employee
required to complete a specified period of
service
recognize compensation expense over service or vesting period

Share options are in recognition for services rendered between the

date of grant and the exercise date

SHARE OPTIONS
Journal Entries

Reporting period
Salaries – share options xxx
Share options outstanding xxx

Exercise date
Cash xxx
Share options outstanding xxx
Share capital xxx
Share premium xxx

SHARE OPTIONS
Illustrations: (refer to the book)
a. No vesting period

b. With vesting period

c. Some employees left

d. With condition and share options vary

e. With condition and exercise price varies

SHARE OPTIONS
PRACTICE (1):
On January 1, 2015, Kai Company granted 200 share options to 300
employees, conditional upon the employees remaining in the
entity’s employ during the vesting period. The share options will
vest over a three-year period. The fair value of each share option
is P50. The par value per share is P100 and the exercise price is
P120.

By the end of 2015, 20 employees have left and based on a

weighted average probability, a further 10 employees will leave
during the vesting period.

By the end of 2016, only 8 employees have left and a further 32

employees will leave during 2017.

By the end of 2017, only 25 employees left the company .

Compute for the compensation expense for 2015, 2016 and 2017 as a
result of share options.

SHARE OPTIONS
PRACTICE (2):
On January 1, 2015, Mikael Company granted 10,000 share options
to the Chief Executive Officer, conditional upon the executive’s
remaining in the entity’s employ until the end of 2017. The par
value per share is P50 and the exercise price is P120. However, if
earnings increase by at least an average of 10% per share over
the three-year period, the exercise price is P90.
On January 1, 2015, the entity estimated that fair value of share
option is P45 if the exercise price is P90. If the exercise price is
P120, the fair value of the share option is P40. The earnings of
the entity increased over the three-year period as follows: 10%,
11%, 3%.
The share options were exercise on December 31, 2017.

Prepare all necessary journal entries.

SHARE OPTIONS
Illustration: INTRINSIC VALUE METHOD
On January 1, 2013, an entity granted 10,000 share options to
employees. The share options vest on December 31, 2014
provided the employees remain in service until then.
The fair value of the share option cannot be estimated reliably. The
par value per ordinary share is P100. The option price is P125
and the market value of the ordinary share is also P125 at the
date of grant. All share options vested on December 31, 2014
and no employee left the entity.
The share options can be exercised starting January 1, 2015 and
expire two years after. All share options are exercised on
December 31, 2015. The share market prices are P150 on
December 31, 2013, P180 on December 31, 2014 and P200 on
December 31, 2015.

Prepare all necessary journal entries.

SHARE OPTIONS
Practice (3): INTRINSIC VALUE METHOD
At the beginning of year 1, an entity grants 1,000 share options to
50 employees. The share options will vest at the end of year 3,
provided the employees remain in service until then. The share
options have a life of 10 years. The exercise price is P60 and the
entity’s share price is also P60 at the date of grant.
At the date of grant, the entity concludes that it cannot estimate
reliably the fair value of the share options granted.
At the end of year 1, three employees have ceased employment and
the entity estimates that a further seven employees will leave
during years 2 and 3. Hence, the entity estimates that 80% of
the share options will vest.
Two employees leave during year 2, and the entity revises its
estimate of the number of share options that it expects will vest
to 86%.
Two employees leave during year 3. hence, 43,000 share options
vested at the end of year 3.

SHARE OPTIONS
Practice (3): INTRINSIC VALUE METHOD
Continuation….
The entity’s share price during years 1-10, and the number of share
options exercised during years 4-10, are set out below. Share
options that were exercised during a particular year were all
exercised at the end of that year.
No. of share options
Year Share price at yearend exercised at yearend
1 P63 0
2 65 0
3 75 0
4 88 6,000
5 85 8,000

Compute for the amounts to be recognized as compensation expense in

year 1 to 5.

SHARE OPTIONS
Acceleration of vesting: (PFRS 2)
an entity cancels or settles a grant of share options
during the vesting period

a. recognize immediately the compensation

expense

b. any payment made to the employee on the

cancelation or settlement of the grant account for
as repurchase of equity interest (deduction from
equity)

c. if the payment exceeds the fair value of the

share option, the excess shall be recognized as an
expense

SHARE OPTIONS
Illustration: ACCELERATION OF VESTING
On January 1, 2013, an entity granted 50,000 share options
to employees. The option price is P60 and the par value of
each share is P50. The vesting period is 4 years. The fair
value of the share options or total compensation expense
to the vesting date on December 31, 2016 has been
calculated at P4,000,000.

The entity has decided to settle the award early on December

31, 2015. The compensation expense charged in the
income statement since the date of grant on January 1,
2013 is as follows: 2013-P1,000,000; 2014-P1,050,000.

Prepare all necessary journal entries.

SHARE OPTIONS
Illustration: ACCELERATION OF VESTING
Using the previous illustration…

Supposed the share options are not exercised. Instead,

the entity paid the employees P2,500,000 on
December 31, 2015 to cancel or settle the share
options.

Prepare the necessary journal entries.

SHARE OPTIONS
IFRIC 11

employees of a subsidiary are granted rights to the

equity instrument of the parent
accounted for as EQUITY-SETTLED

an increase in equity is recognized as

contribution from the parent in the FS of the
subsidiary

SHARE OPTIONS
Illustration: IFRIC 11
On January 1, 2013, a parent entity granted 500 share
options to each of 100 employees of its subsidiary,
conditional upon the completion of two years of service
with the subsidiary.
The fair value of a share option is P50 on January 1, 2013.
At grant date, the subsidiary estimated that 80% of the
employees will complete the two-year service period.
At the end of the vesting period, 90% of the employees
completed the required two years of service.
The parent entity did not require the subsidiary to pay for the
shares needed to settle the grant of share options.
The share options were exercised in January 2015. The
exercise price is P120 and the par value is P100 per share.

SHARE OPTIONS
Modification of condition
Procedures to follow: (PFRS 2)
1. Continue to account for the equity instrument
granted based on original condition and vesting
period at the date of grant
2. If modification is beneficial to employees and
increase the FV of the equity instruments
granted, include the increase in fair value
beneficial, if exercise price of SO decreased
Increase in FV
recognized over the remaining vesting period

SHARE OPTIONS
Modification of condition
Procedures to follow: (PFRS 2)
3. However, 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 (ex. increasing exercise price of
the option)

SHARE OPTIONS
Illustration: MODIFICATION OF CONDITION
On January 1, 2015, an entity granted 100 share options to each of
the 500 employees. The options are exercisable after a three-
year vesting period. The fair value of each share option is P15 on
grant date.
On December 31,2015, 40 employees left the entity and based on
weighted average probability, 70 employees are expected to leave
by the end of the vesting period.
On January 1, 2016, the entity repriced the share options by
lowering the exercise price. The options still vest after three
years. The entity estimated that on the date of repricing the
increase in the fair value of the share option is P6.
During 2016, 35 employees left the entity and a further 30
employees are expected to leave in 2017.
During 2017, 45 employees actually left the entity.

SHARE OPTIONS