ACYFARP: Accounting for Share-Based Compensation

Share Based Compensation

Is a pay structure in which an entity's employees receive equity shares in exchange for their services, or the entity incurs liabilities to the employees based on the price of its equity shares.

Equity-Settled Compensation and Cash-Settled Compensation

These are the two types of share-based compensation.

Equity-Settled Compensation

The entity issues shares to its employees in consideration for their services. (Ex: Share options)

Cash-Settled Compensation

The entity incurs a liability to its employees for services received and the liability is based on the value of the entity's shares. (Ex: Share appreciation rights)

Share Options

Are granted to officers and key employees which allow them to purchase shares of the company during a specified period at a specified price provided certain conditions are met.

Share Options

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. These are considered as additional compensation on the part of officers and key employees.

Fair Value Method and Intrinsic Value Method

The two methods of measuring share options.

Fair Value Method

Under this method, the compensation is equal to the fair value of the share options at date of grant. PFRS 2 requires the use of this method.

Intrinsic Value Method

Under this method, the compensation is equal to the intrinsic value of the share options.

Intrinsic Value of Share Options

Market Value of the Share - Option (Exercise) Price

Intrinsic Value Method

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 or loss. This method shall be used only if the fair value of the share option cannot be estimated reliably.

Share Options - Vest Immediately

The entity shall recognize the compensation as expense in full with corresponding increase in equity on the date of grant.

Share Options - Do Not Vest Until the Employee Completes a Specified Service Period

The entity shall recognize the compensation as expense over the service (or vesting) period.

Vesting Period

Is the period during which all specified vesting conditions of a share-based payment arrangement are to be satisfied.

Vesting Period

Is from the grant date to the date on which the share options can be first exercised.

True

(True or False) In the absence of a vesting period, it is presumed that the share options vest immediately.

Recognition of Compensation Expense

Journal Entry:

(Debit) Compensation Expense

(Credit) Share Options Outstanding

Exercise of Share Options

Journal Entry:

(Debit) Cash

(Debit) Share Options Outstanding

(Credit) Ordinary Share Capital

(Credit) Share Premium (Equal to the Exercise or Option Price)

Share Premium from Share Options

Cash Received from Exercise of Share Options (Number of Shares Issued x Exercise Price per Share) + Share Options Outstanding - Total Par Value of Shares Issued

True

(True or False) In accounting for share options, compensation expense is determined using the cumulative approach.

Share Options - Not Exercised and Has Expired

Journal Entry:

(Debit) Share Options Outstanding

(Credit) Share Premium

Vesting Condition

A condition that determines whether the entity receives the services that entitle the counterparty to receive cash or equity instruments of the entity, under a share-based payment arrangement.

Service Condition

A form of vesting condition in which the employee is required to serve for a set period of time.

Performance Condition

A type of vesting condition that necessitates the fulfillment of both a service condition and defined performance target(s) while the service is being rendered.

Non-Market Condition Performance Target

A target that is related to the company's operations (i.e., increase in earnings and/or productivity).

Market Condition Performance Target

A target that is related to the price of the entity's shares (i.e., increase in share price).

Treatment of Vesting Conditions

Vesting conditions, other than market conditions, are taken into account when estimating the number of equity instruments that are expected to vest. The estimate is subsequently revised in light of new information. The changes are accounted for prospectively (compensation expenses already recognized in prior years are not restated).

Treatment of Vesting Conditions

If share options do not vest because the condition, other than a market condition, is not satisfied at the end of the vesting period, the compensation recognized in prior periods shall be reversed.

Vesting Condition - Not Satisfied

Journal Entry:

(Debit) Share Options Outstanding

(Credit) Gain on Reversal

Treatment of Vesting Conditions

Market conditions are taken into account when estimating the fair value of the equity instruments granted. The estimated fair value is not subsequently revised. Compensation is recognized even if the market condition is not satisfied and the grant does not vest, as long as the employees satisfy all other conditions such as completing the required service period.

Modification of Vesting Conditions

If the entity modified the vesting condition on which equity instruments were granted, the entity must account for the equity instruments granted using the original vesting condition and vesting term as of the grant date.

Modification of Vesting Conditions

If the modification is favorable or beneficial to the employees and increases the fair value of the equity instruments granted (i.e., the entity reduced the exercise price of the share options), the entity must include the increase in fair value as additional compensation. 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).

Modification of Vesting Conditions

The entity shall continue to recognize compensation based on the original condition as if the modification had never occurred under the following cases:

a. The modification is not favorable or beneficial to the employees (i.e., the entity increases the exercise price of the share options).

b. The modification reduces the fair value of the equity instruments.

Acceleration of Vesting

Occurs when an entity cancels or settles share options during the vesting (or service) period. The compensation expense that would have been recognized for services received during the remainder of the vesting period will be recognized immediately by the entity. Any payment made to the employees in connection with the grant's cancellation or settlement must be recorded as a repurchase of equity instrument, meaning, a deduction from equity. If the payment exceeds the fair value of the share option, the difference must be recorded as an expense.

Cash-Settled Share-Based Payment

A type of share-based payment transaction where an entity incurs a liability for services received and the liability is based on the equity shares of the entity. (Ex: Share Appreciation Rights)

Share Appreciation Rights

Entitles an employee to receive cash for a specified number of shares equivalent to the excess of the market value of the entity's share over a pre-determined price.

Liability for Share Appreciation Rights

Market Value of the Entity's Share - Predetermined Price

Share Appreciation Rights

Creates an obligation (or liability) on the part of the entity to pay cash in the future on exercise date.

Measurement of SARs Compensation

The compensation arising from SARs is measured using the fair value of the liability as of the reporting date and must be remeasured at every year-end until it is paid. Any changes in fair value shall be included in profit or loss.

Fair Value of Liability from SARs

Excess of the market value of the entity's share over a predetermined price for a stated number of shares over a definite period.

Share Appreciation Rights - Vest Immediately

The compensation is recognized immediately on the date of grant.

Share Appreciation Rights - Do Not Vest Until the Employee Completes a Specified Service Period

The compensation is recognized over the vesting (or service) period.

True

(True or False) A decrease in compensation is recognized as gain on reversal of SARs.

Modification from Cash-Settled to Equity-Settled Compensation

The act of modifying a cash-settled share-based payment (or SARs) to an equity-settled share-based payment (or share options).

Modification from Cash-Settled to Equity-Settled Compensation

The following procedures shall be applied:

a. The share options shall be measured based on its fair value on the date of modification. (This shall be recognized as liability)

b. The liability for SARs shall be cancelled on the date of modification.

c. 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.

* Liability for SARs > Fair Value of Share Options (Gain on Remeasurement)

* Liability for SARs < Fair Value of Share Options (Additional Compensation)

Cash Alternative - Share Based Compensation

Cash payment shall be equal to the market value of a certain number of shares subject to certain conditions.

Share Alternative - Share Based Compensation

Equity shares will be issued to the employees.

Cash and Share Alternative - Issuing Entity has the Choice of Settlement

The entity shall account for the alternative either as liability or equity, but not both.

Cash and Share Alternative - Employee has the Choice of Settlement

The entity shall account for the alternative as compound financial instrument.

Compound Financial Instrument

Is a financial instrument that contains both a liability (the cash alternative) and an equity element (the share alternative) from the perspective of the issuer. The consideration received from the issuance of the instrument (the fair value of the share alternative) shall be allocated between the liability and equity components using the residual approach.

Residual Approach

Under this approach, the fair value of the liability must be determined first. The residual amount (or the amount left after deducting the fair value of the liability component from the total consideration received) is assigned or allocated to the equity component.

Share Option is based on Treasury Shares

Share Premium = Cash Received from Share Options (Number of Shares Issued x Exercise Price per Share) + Share Options Outstanding - Cost of Treasury Shares Issued (Number of Treasury Shares Issued x Cost per Treasury Share)

True

(True or False) The net increase in shareholders' equity as a result of the grant and exercise of options is equal to the cash received (debited cash).

True

(True or False) If only a portion of the total share options were exercised by the employees, to get the debited share options outstanding, simply total all the share options outstanding in the current year and previous years and then multiply the sum with the ratio of the number of share options exercised relative to the total number of share options granted.

True

(True or False) The increase in market price after the vesting period is recognized as expense in full until the share options are exercised.

Compensation Expense on Share Appreciation Rights if a Portion is Already Exercised

[(Number of Remaining Unexercised Share Appreciation Rights x Fair Value of Share Appreciation Right) - Accrued Compensation Liability, Previous Year] + [(Number of Share Appreciation Rights x Intrinsic Value of Share Appreciation Rights]

Initial Acquisition Cost - Share Based Payment

Initial Cost of Asset

Equity Component - Share Based Payment

Initial Cost of Asset - FV of Liability on Grant Date (Cash Value of Shares to be Paid or FV of Shares at Grant Date x Number of Shares to be Based On)

Interest Expense - Cash Alternative

FV of Liability on Settlement Date (FV of Shares on Settlement Date x No. of Shares Based On - FV of Liability on Grant Date (FV of Shares on Grant Date x No. of Shares Based On)

Share Premium - Share Alternative

FV of Liability on Grant Date + Equity Component on Grant Date - Par Value of Shares to be Issued