Share-based Payment (PFRS 2)

PFRS 2 answers one question about awards settled in the entity's own shares: what is measured, and when is it measured? The equity-settled answer is "grant-date fair value, once". The cash-settled answer is "fair value, at every reporting date". Nearly every examination item turns on keeping those two apart.

Core concept

Equity-settled against cash-settled

	Equity-settled	Cash-settled
Settlement	In the entity's own equity instruments	In cash or other assets, based on the share price
Credit entry	Equity (share options outstanding)	Liability
Measurement date	Grant date, and never remeasured	Each reporting date, and at settlement date
Change in fair value after grant	Ignored	Recognised in profit or loss
Typical instrument	Share options, share awards	Share appreciation rights payable in cash

For an equity-settled transaction, the entity measures the goods or services received at their fair value. Where that fair value cannot be estimated reliably, and always in transactions with employees, it measures indirectly by reference to the fair value of the equity instruments granted, at grant date. Employee services are presumed not to be reliably measurable, so employee awards are always measured at grant-date fair value.

That grant-date fair value is never revisited. A collapse in the share price after grant date changes nothing about the expense on an equity-settled award.

The vesting period, and what may be trued up

The expense is recognised over the vesting period, the period during which the employee must satisfy the vesting conditions. If the award vests immediately, the expense is recognised in full at grant date.

The cumulative expense at any reporting date is:

Cumulative expense = number of instruments expected to vest x grant-date fair value per instrument x (expired portion of the vesting period)

and the expense for the period is the increase in that cumulative figure. Whether an input may be revised is the crux:

Condition	Example	In grant-date fair value?	Trued up?
Service condition	Remain employed three years	No	Yes, revise the number expected to vest
Non-market performance condition	Revenue growth, an earnings target, an initial public offering	No	Yes, revise the number expected to vest
Market condition	Share price must reach P50; total shareholder return target	Yes	No
Non-vesting condition	Employee must contribute to a savings plan	Yes	No

The rule that follows is the one to memorise. Where an award fails only because a market or non-vesting condition was not met, the entity still recognises the full expense, provided all service and non-market performance conditions were satisfied. The market condition was already priced into the grant-date fair value, so no reversal is permitted.

Conversely, if the employee simply leaves before the service condition is met, the award never vests, and all expense previously recognised for that employee is reversed through the true-up.

Cash-settled awards

A share appreciation right settled in cash creates a liability, measured at the fair value of the right. The liability is remeasured at each reporting date and at the date of settlement, and all changes go to profit or loss.

During the vesting period, the liability recognised is the fair value of the right at the reporting date, multiplied by the expired fraction of the vesting period, multiplied by the number of rights expected to vest.

Modifications, cancellations, and settlements

• A modification that increases the fair value of the award, or the number of instruments granted, gives rise to an incremental fair value recognised over the remaining vesting period. A modification that reduces fair value is ignored: the entity continues to recognise the original grant-date amount.
• A cancellation or settlement during the vesting period is accounted for as an acceleration of vesting: the amount that would otherwise have been recognised over the remainder of the vesting period is recognised immediately.

How this appears in the exam

• A three-year option grant with changing forfeiture estimates. Compute the cumulative expense each year and take the difference.
• An award whose share price target is missed, but whose employees all stayed. The expense stands, because the target was a market condition.
• Share appreciation rights with fair values quoted at two successive year-ends. Compute the liability, then the expense as the movement.
• A grant where the entity's share price falls sharply after grant date, and the item asks whether the expense changes. For an equity-settled award it does not.

Common traps

• Remeasuring an equity-settled award. Grant-date fair value is fixed for the life of the award.
• Truing up for a market condition. Market and non-vesting conditions are already inside the grant-date fair value, so failing them produces no reversal.
• Using the intrinsic value of an option. Fair value is used. Intrinsic value is a fallback permitted only in the rare case where fair value cannot be estimated reliably.
• Recognising the cash-settled expense at grant-date fair value. The liability follows the current fair value, at every reporting date and at settlement.
• Spreading the expense of an award that vests immediately. There is no vesting period, so the whole expense hits at grant date.

Worked examples

Example 1: equity-settled options with changing estimates

On 1 January 20x1, Batangas Corporation grants 200 share options to each of its 100 employees, conditional on remaining in service for three years. The fair value of one option at grant date is P30. The options actually vest on 31 December 20x3.

Forfeiture experience:

• End of 20x1: the entity expects 90 employees to vest.
• End of 20x2: the estimate is revised to 88.
• End of 20x3: 86 employees actually remain and their options vest.

Total grant-date fair value per employee = 200 options x P30 = P6,000.

20x1. Cumulative expense = 90 x 200 x P30 x 1/3 = P180,000

Expense for 20x1 = P180,000

20x2. Cumulative expense = 88 x 200 x P30 x 2/3 = P352,000

Expense for 20x2 = P352,000 - P180,000 = P172,000

20x3. Cumulative expense = 86 x 200 x P30 x 3/3 = P516,000

Expense for 20x3 = P516,000 - P352,000 = P164,000

Total recognised over three years = P180,000 + P172,000 + P164,000 = P516,000, exactly 86 employees x 200 options x P30. The credit each year is to equity. The P30 grant-date fair value never moved; only the number expected to vest was revised, because staying employed is a service condition.

Example 2: a market condition that fails

Assume the same grant, except that vesting also requires the share price to reach P50 by 31 December 20x3. That target is reflected in the grant-date fair value, which is why the option was valued at P30 rather than higher.

All 86 employees remain for three years, but the share price closes 20x3 at P41, so the options do not vest and lapse worthless.

The entity still recognises the full P516,000 of cumulative expense. The share price target is a market condition, priced into the P30 grant-date fair value at inception. No reversal is permitted, and the credit remains in equity.

Contrast this with a non-market performance condition, say cumulative revenue of P1 billion over three years. Had that target been missed, the number of instruments expected to vest would fall to nil, and the entire cumulative expense would be reversed.

Example 3: cash-settled share appreciation rights

On 1 January 20x1, Batangas grants 100 share appreciation rights to each of 50 employees, payable in cash, conditional on two years of service. All 50 employees are expected to, and do, remain.

The fair value of one right is P20 at 31 December 20x1 and P28 at 31 December 20x2, when the rights vest.

20x1. Liability = 50 x 100 x P20 x 1/2 = P50,000

Expense for 20x1 = P50,000

20x2. Liability = 50 x 100 x P28 x 2/2 = P140,000

Expense for 20x2 = P140,000 - P50,000 = P90,000

The credit is to a liability, not to equity, and the liability is remeasured to the current fair value at each reporting date. Had these been equity-settled options, the P28 would have been irrelevant, and the total expense would have been fixed by the grant-date fair value.

Quick review

• Equity-settled: measure at the fair value of the goods or services received, or, for employees, at the grant-date fair value of the instruments granted. Never remeasured. Credit equity.
• Cash-settled: recognise a liability at fair value, remeasured at every reporting date and at settlement, with all changes in profit or loss.
• Recognise over the vesting period; recognise in full at grant date if the award vests immediately.
• Cumulative expense = instruments expected to vest x grant-date fair value x expired fraction of the vesting period. The period's expense is the movement in the cumulative amount.
• True up for service and non-market performance conditions. Do not true up for market or non-vesting conditions: they are already inside the grant-date fair value, so a failed market condition produces no reversal.
• A modification that increases fair value adds an incremental expense; one that decreases it is ignored. A cancellation accelerates the remaining expense into the current period.