FRS 2

Share-based Payments

What is Share-based Payments

Share-based payment simply means that payment for goods and
services are made by either issuing equity instruments of the entity (or
that of members in a group), or making cash payment based on the
share price.
The standard distinguishes share-based payments made to:
Third parties for goods and services; and
Employees
There are specific dates or time periods that are relevant for
recognition and measurement of share-based payments for services.
They are:
Grant date,
Vesting period and
Exercise date (for options).

Grant Date
Grant date is the date when
the entity and counterparty
agree to the share-based
payment and the entity
confers on the counterparty
the right to the equity
instruments of the entity, cash
or other asset provided the
vesting conditions are met.

Vesting Period
Vesting period is the period during
which the specified vesting
conditions are satisfied. It can be
a specific time such as when the
employee has fulfilled the terms
stipulated, such as period of
service or performance level.
Vesting Conditions
Vesting conditions are the
conditions that the counterparty
has to fulfill in order to receive the
share-based payment. These
include completing a specified
period of service or achieved a
specified performance level.

3 Types
The standard recognises three types of share-based payment
transactions. They are:
Equity-settled
An entity issues its own equity instruments, or
those of another member of the same group, as
consideration for goods and services received.
Cash-settled
An entity or another member of the
same group pays cash calculated
by reference to the price of equity
instrument as consideration for
goods and services received.

Choice of equity-settled or cashsettled

The supplier of goods and services
or the entity receiving those goods
or services may choose whether
the entity settles in cash or by
issuing equity instruments

Recognition
Goods or services received in a share-based payment transaction are
recognised when they are received.
At the same time, the entity will recognise an increase in equity if it is an
equity-settled share-based payment. If it is a cash-settled payment
transaction, then a liability is recognised.

Equity-Settled Transactions
The accounting treatment for goods and services received from nonemployees and employees is different.
Non-employees
Goods and services received (other than provided by employees) are
measured at the fair value of the goods and services and equity is
increased correspondingly. In situations where the fair value of the
goods or services cannot be determined reliably, the goods or services
and the increase in the equity are measured at the fair value of the
equity instruments granted.

Services Provided by Employees

The entity should measure the fair value of employee service at the fair
value of the equity instruments granted. This is because it is generally
difficult to measure reliably the fair value of the services rendered. The
fair value of equity instruments is measured at grant date. If the equity
instruments vest immediately, then the expense and equity are
recognised immediately on grant date.

Vesting Conditions

The treatment of vesting conditions varies depending on whether

or not any of the conditions relates to the market price of the
entitys equity instrument. If the performance condition is a market
condition, no revision is made to the estimates during the vesting
period or amount vested as it will be included in determining the
fair value of the option at grant date.
Market conditions means that the exercise price, vesting or
exercisability of the equity instrument depends on the market
price of the entitys equity instrument.

If the performance condition is not a market condition, then the entity

should revise the estimates in subsequent periods.
Example 1 Example 1 page 45 of text book
Example 2 Example 3 page 47 of text book
On 1.1.x1, management of DEF granted an option for 3,000 shares to
an employee on condition that he stays in employment of DEF for three
years and the option cannot be exercised till the share price has
increased to RM20 per share by the end of the third year. The fair
value of the option on 1.1.x1 was RM5 each and was estimated to rise
to RM6.50 each by 31.12.x3. The fair value is determined taking into
consideration that the share price will rise to more than RM20 each.
Required:
Calculate the amount recognised as expenses and amount disclosed
as equity in the statement of financial position.

Answer:
The expenses are recognised and measured irrespective of the market
condition.
3,000 options x RM5 x 1/3 = RM5,000
DR P/L
RM5,000
CR Equity
RM5,000
For each of three years
Market conditions are not taken into consideration in recognising the
expenses. If the fair value of the option changes no adjustment is made
to the amount of expenses recognised. On the other hand if performance
conditions change, then the entity should revise the estimates in
subsequent periods.
Examples 5 and 6 pages 48 49 of text book

Post-vesting Period
After vesting date, the entity is not to make any adjustments to the
goods or services received or corresponding increase in equity. Even if
the options are not exercised, no adjustments are made to total equity.

Modifications, Cancellations and

Settlements
Benefits the employee
An entity may modify the terms and conditions
and hereby increase the fair value of those
options. Modifications are treated as
incremental instruments in their own rights.
If modifications increase the fair value of the
equity instruments granted, such as reduction
of exercise price, the incremental fair value
should be added to the amount being
recognised.

Post-vesting period modifications are

recognised immediately.
If the modifications occur during the
vesting period, the incremental value will
be recognised over the remaining vesting
period (or extended period).

Does not benefit

the employee

Modifications that do
not increase the total
fair value of the sharebased payment or is
not beneficial to the
employee (or service
provider) are ignored.

If a modification
reduces the benefit to
the employee, the
entity will continue to
recognise the amount
of the original equity
instruments granted.

Determining the Fair Value

of the Equity Instruments
Fair value can be determined
For many shares and most share options there may not
be an active market, and in which case management
should use valuation techniques. FRS 2 does not indicate
the pricing models to use though it gives the factors that
should be considered in estimating the price. Common
models used are Black-Scholes model, the Binomial
model or the Monte-Carlo model.

Fair value cannot be determined

In the absence of a reliable measure of fair value, the entity
should:
Measure the fair value of the equity instruments granted
at their intrinsic value. Intrinsic value is the difference
between the fair value of the shares and what the
counterparty (the supplier of goods and services) is
required to pay. The entity measure the equity
instrument initially at the intrinsic value issues when the
goods are received or services rendered. At the end of
each reporting date the intrinsic value is recomputed till
settlement date.
Changes in intrinsic value are taken to the income
statement.
Example 12 page 55 of text book

Cash-Settled Transactions
Cash settled transactions requires recognition of liabilities:
The goods and services and liability are measured at fair
value.
The liability is remeasured at the fair value at the end of
each year.
Changes in fair value are recognised in the income
statement.
An example of cash-settled share-based transaction is share
appreciation rights given to employees. In this case, the
employees will receive cash payments equal to the increase in the
share price of a specified number of the equity shares.
Examples 13 and 14 pages 57 58 of text book

Share-Based Payment Transactions

with Cash Alternatives
Choice with counter-party
Compound instrument
Goods of goods and services
from third-party:

Equity component
= Fair value of goods and services Fair value of debt component

Choice with counter-party employee

Equity component = Fair value of - Fair value of
equity alternative,
debt component
based on fair value
of instruments granted
Examples
A company gives the employees a choice to receive their bonus payments
either in the form of the companys shares or cash equal to the share price.
They are to receive 10,000 shares, valued at RM5 each or cash payments
equivalent to the shares offered.
Required: What is the amount of equity component?
Answer: The company will record a liability of RM50,000. The equity
component is nil, being the difference between the fair value of 10,000
shares (RM50,000) and the fair value of the cash alternative (RM50,000).
Example 17 page 61 of text book

The Entity Chooses

the Settlement Method
Where the entity chooses the mode of settlement, it should
determine if it has a present obligation to settle in cash; and account
for the transaction accordingly. Instances when the entity in
substance has an obligation to settle in cash are:

The choice of settlement in equity instrument has no commercial

substance (e.g. Entity is prohibited from issuing equity),
The entity has a past practice or stated policy to settle in cash,
Generally settles in cash when the counterparty requests for cash
settlement.

Where the entity has no obligation to settle in cash, it may settle in

equity. Then it will account for the transaction as an equity-settled
payment. Accounting treatment differs if the settlement is in cash
or equity.
Settle in Cash
The payment is treated as a repurchase of equity. Equity
component is deducted. If the amount paid is more than the
amount recognised in equity then the entity will recognise an
expense being the difference between the cash paid and the fair
value of equity that would otherwise be issued.
Settle in Equity
Transfer the amount recognised in the equity component to
share capital and share premium.