PFRS 2: Share-based Payment

● A corporation may issue its own shares in exchange for noncash consideration
(noncash assets or services).
● Corporation Code of the Philippines prohibits the issuance of shares in exchange
for promisorry notes or future services.
● Consideration (noncash assets or services) must be received or rendered first
before shares are issued.
● Consideration (noncash assets or services) must not be less than the par value .

SHARE-BASED PAYMENT TRANSACTIONS

● a transaction in which the entity acquires goods or services and pays for them by
issuing its own equity instruments or cash based on the value of its own equity
instrument.

A Share-Based Payment Transaction can be:

● Equity-settled- an entity receives goods or services and pays for them by issuing
its shares of stocks or share options.
● Cash-settled- an entity receives good or services and incurs an obligation to pay
at an amount that is based on the FAIR VALUE of its own equity instruments.
● Choice between ES and CS- an entity receives goods or services and either the
entity or the counterparty is given a CHOICE in the form of ES or CS.

Equity instrument- a contract that evidenes a residual interest in the assets of an entity
after deducting all of its liabilities.

PFRS 2 applies to all entities, including subsidiaries using their parent's or fellow
subsidiary's equity instruments as consideration EXCEPT:
● Transactions with owners (including employees who are also shareholders) e.g.,
issuance of dividends, granting of stock rights in relation to an owner's
preemptive right, and treasury share transactions.
● Business combinations
● Issuance of shares AS SETTLEMENT OF FORWARD CONTRACTS,
FUTURES, AND OTHER DERIVATIVE INSTRUMENTS.

RECOGNITION
● recognized when goods and services are received.
 ● goods and services received that DO NOT qualify as assets are recognized as
EXPENSES.

The entity recognizes:

● If goods and services received as ES, there's an increase in equity.
● If goods and services received as CS, a liability is recognized.

EQUITY-SETTLED SHARE BASED PAYMENT TRANSACTIONS

(order of priority)

With non-employees:
● fair value of goods and services received
● fair value of equity instruments granted (if not determinable)

With employees and others providing similar services:

-often not possible to estimate reliably
● fair value of equity instruments granted
● intrinsic value (if not determinable)

Grant date- date at which the parties agreed to, and have shared unserstanding of the
terms and conditions of, a share-based payment arrangement. Date when appoval is
obtained.

Intrinsic value- diffrenece between the fair value of the shares which the counterpary
has the right to subscribe or receive and the subscription price that the counterparty is
required to pay.

Example: 50 (FV) - 30 (Exercise price) = 20 (Intrinsic Value)

SHARE-BASED COMPENSATION PLANS

-in exchange for services, an employee is compensated in the form of the entity's equity
instrument.
-given to key employees at bonuses or additional compensation.

Examples of share-based compensation:

● employee share options (ES)
● • employee share appreciation rights (CS)
● compensation plans with a choice of settlement between the above examples
EMPLOYEE SHARE OPTION PLANS
-Share option is 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.
-do not require any subscription price.
-shares will be issued solely in exchange for employee services.
-an equity-settled share-based payment transaction with employees.

MEASUREMENT (OFP):
● FV of equity instruments granted at grant date
● Instrinsic Value

Compensation expense (salaries expense) are recognized as follows:

● If the share options granted VEST IMMEDIATELY, salaries expense is
recognized in FULL, with a corresponding increase in equity, at the GRANT
DATE.
● If theshare options granted DO NOT VEST until the employee completes a
specified period of service, the entity recognizes salaries expense as the employee
renders service OVER THE VESTING PERIOD.

Note: in the absence of evidence to the contrary, it presumed that share options vest
immediately.

CHANGES IN SERVICE CONDITION

Service Condition
- the employee needs to remain in the entity's employ for a specified period of time to be
entitled to receive or subscribe to the shares.
-Adjustments for employees leaving the entity's employ before the share options vest are
accounted for PROSPECTIVELY.
-Salarues expense recognized in the previous periods are not restated.

CASH-SETTLED SHARE-BASED PAYMENT TRANSACTIONS

-goods or services received, and the related liability, are measured at the FAIR VALUE
OF THE LIABILITY.
-the related liability is REMEASURED TO FAIR VALUE at the end of each reporting
period and on the settlement date.
-Fair value changes are recognized in PROFIT OR LOSS.
-the most common form or CS is SHARE APPRECIATION RIGHTS (SARs) granted
to an EMPLOYEE.

EMPLOYEE SHARE APPERCIATION RIGHTS (SARs)

-a form of compensation given to an employee whereby the employee is entitlesd to
FUTURE CASH PAYMENT (rather than equity instrument), based on the increase in
the entity's sgare price from a specified levelover a specified period of time.
-another form of SHARE APPRECIATION RIGHT is when an employee is granted a
right to receive FUTURE CASH PAYMENT by a grant to a right of shares that are
redeemable, either mandatorily, or at the employee's option.
-FV of SARs is derived by applying an option pricing model, taking into account the
terms and conditions on which the SARs were granted, and the extent to which the
employees have rendered service to date.

RECOGNITION:
-similar to the employee share options if:

● SARs VEST IMMEDIATELY, salaries expense is recognized in full, with a

corresponding increase in liability, at grant date.
● SARs DO NOT VEST IMMEDIATELY, salaries expense is recognized OVER
THE VESTING PERIOD as the employee renders service.

CHOICE BETWEEN ES AND CS

-accounted for depending on which party is given the right of choice of settlement.
● the counterparty has the right of choice of settlement; or
● the entity has the right of choice of settlement

COUNTER PARTY HAS THE RIGHT OF CHOICE

-the entity has granted a compound instrument (half liab, half equity).
-if the counter party is a NON-EMPLOYEE, the equity component is computed as the
difference between (a) the FV of goods or services received and (b) the FV of the debt
component at the date the goods and services are received. (This resembles the basic
accounting equation: A-L=E).
-if the counterparty is an EMPLOYEE OR OTHES PROVIDING SIMILAR
SERVICES, the entity measure the FV of the compound instrument and its component
as follows:
 ● FV of one settlement alternative is THE SAME as the other, the FV of the equity
instrument is ZERO. FV of the compound financial instrument is the same as the
FV of the debt component.
● FV of the settlement alternatives DIFFER, the FV of the equity component will
be GREATER THAN ZERO. The FV of the compound financial instrument will
be GREATER than the FV of the debt component.

Each component of the compound instrument is accounted for SEPARATELY:

● the value assigned to the EQUITY ALTERNATIVE on GRANT DATE is
recognized as salaries expense and an increase over the vesting period.
● the value assigned to the CASH ALTERNATIVE is recognzied as salaries
expense, and a liability, that is REMEASURED at each year-end expense and on
settlement, as the services are received.
Note: changes in FV are recognized in P/L.

On SETTLEMENT DATE, the LIABILITY component is REMEASURED TO FV.

If the counterparty elects settlement in the form of:
● Equity Instrument- the liability is transferred directly to liability.
● Cash- cash settlement is applied as settlement of the liability.

Note: the previously recognized equity component REMAINS WITHIN EQUITY,

regardless of the settlement option chose. However, a transfer within equity may be
made.

ENTITY HAS THE RIGHT OF CHOICE

-the entity has not granted a compound instrument.
-the entity accounts for the transaction as EITHER CS OR ES.
● if the entity has a present obligation to pay cash, the entity is accounted for as CS.
Equity alternative is ignored.
● if the entity has NO present obligation to pay cash, the trasnaction is accounted
for as ES. Cash alternative is ignored.

On the SETTLEMENT DATE, if the entity elects settlements in the form of:
● Equity Instruments- no further accounting is required other than a transfer within
equity.
● Cash- accounted for as a repurchase of an equity interest.
Note: If the entity elects the settlement alternative WITH THE HIGHER FV as the
settlement date, an ADDITIONAL EXPENSE is recognized for the difference between
the selected alternative and the foregone alternative.

PFRS 8: OPERATING SEGMENTS

● One response to the constantly changing business environment is diversification of

operations.
● Diversification of operations, either by engaging in different business activities or
dong business in different geographical areas, creates operating segments within
an entity.

CORE PRINCIPLE
● PFRS 8 requires an entity to disclose information needed in evaluating the nature
and financial effects of the business activities in which it engages and the
economic environments in which it operates.
● the required disclosures under PFRS 8 aims to help users of financial statements:
1. Better understand the entity's perfomance.
2. Better assess the entity's prospects for future net cash flows.
3. Make more informed judgements about the entity as a whole.

SCOPE
● PFRS 8 applies to the separate or individual financial statements of an entity, and
to the consolidated finacial statements of a group with a parent, that is publicly
listed or in the process of enlisting.
● If it contains both consolidated and separate FS, segment information is required
only in the consolidated FS.
● non-publicly listed entities are not required to disclose segment information. If
they choose, PFRS 8 applies.

OPERATING SEGMENTS
An operating segment is A COMPONENT OF AN ENTITY:
● that engages in BUSINESS ACTIVITIES from which it may earn revenues and
incur expenses.
 ● whose operating results are regularly reviewed by the entity's CHIEF
OPERATING DECISION MAKER to make decisions about esources to be
alocated to the segment and assess its performance, and
● for which DISCRETE FINANCIAL INFORMATION is available.

Note: A component of an entity comprises operations and cash flows that can be
clearly distinguished, operationally and for financial reporting purposes, from the rest
of the entity.

● To qualify as an operating segment, one must be a PROFIT CENTER, used

INTERNALLY by management for decision making, and on which SEPARATE
FINANCIAL INFORMATION is available.
● A start-up operation can be an operating segment even if it is yet to earn.
● post-employment benefit plan and revenues that are only incidental are not
operating segments.
● CHIEF OPERATING DECISION refers to a function that includes allocating
resources and asessing the performance of operating segments.

REPORTABLE SEGMENTS
An operating segment is reportable if it:
● is used by MANAGEMENT in internal reporting or results from
AGGREGATING two or more segments, and
● qualifies under the QUANTITATIVE THRESHOLDS.

MANAGEMENT APPROACH
● PFRS 8 adopts a MANAGEMENT APPROACH to indetify reportable
segments.
● operating segment are identified on the basis of INTERNAL REPORTS that are
regularly reviewed by the entity's chief operating decision maker.

AGGREGATION CRITERIA
● Two or more segment may be aggregated into a single operating segment if
aggregation is consistent with the core principle of PFRS 8.
● the segments have SIMILAR ECONOMIC CHARACTERITICS, and
segments are SIMILAR in each of the following respects:
1. nature of the products and services
2. nature of the production processes
 3. type of class of customer for their products and services
4. the methods used to distribute their products or provide their services, and
5. nature of the regulatory environment

QUANTITATIVE THRESHOLDS
An operating segment is responsible it it meets any of the following:
● its REVENUE, external and intersegment sales, is 10% OR MORE of the total
revenue,
● its PROFIT OR LOS IS 10% OR MORE of the GREATER, in absolute
amount, of the:
1. total PROFIT of all operating segments that reported a profit, and
2. total LOSS of all operating segments that reported a loss.
3. its ASSETS are 10% OR MORE of the total assets of all reporting segments.

REPORTING OF NON-REPORTABLE SEGMENTS

● combined and disclosed in an ALL OTHER SEGMENTS category.

LIMIT ON EXTRENAL REVENUE

● If total EXTRENAL revenues of the identified reportable segments are LESS
THAN 75% of the entity's total EXTRNAL revenue, additional operating
segments are included as reportable, even if they do not meet the quantitative
threshold, until at leats 75% of the entity's external revenue is included in
reportable segments.
● Additional reportable segments are identified based on managements judgement.

REPORTING OF INTEREST REVENUE AND INTEREST EXPENSE

● reported separately for each reportable segment unless the segmen's revenue is
primarily from interest and internal decision-making is based on net interest
revenue.

INFORMATION ABOUT MAJOR CUSTOMERS

● an entity discloses the extent of its reliance on its major customers.
● a MAJOR CUSTOMER is a single EXTERNAL customer who has provided
10% OR MORE of the entity's revenues.
● if an entity has major customers, it discloses that fact, along with the total amount
of revenues from each major customer, and the identity of the segments.
 ● the entity NEED NOT discloses the identity of a major customer or the amount of
revenues that each segments reports from that customer.
● a group of customer under common control are considered as single customers
(subsidiaries of a common parent or various government agencies).

PFRS 16: LEASES

● prescribes the accounting and disclosure requirements for leases.

● LEASE is a contract, or part of a contract, that conveys the right to use an asset
(the underlying asset) for a period of time in exchange for considerations.

Parties to a lease contract:

● Lessee- the entity that obtains the right to use an underlying asset for a period of
tume in exchange for considerations
● Lessor- the entity that provides the right to use an underlying asset for a period of
time in exchange for considerations.

IDENTIFYING A LEASE
● An entity has the RIGHT TO CONTROL THE USE of an indentified asset if it
has both the following throughout the period of use:
● the RIGHT TO OBTAIN SUBSTANTIALLY ALL OF THE ECONOMIC
BENEFITS from the use of the IDENTIFIED ASSET, and
● the RIGHT TO DIRECT THE USE of the identified asset.

Three essential elements of a lease:

1. identified asset
2. right to obtain substantially all of the economic benefits
3. right to direct the use

IDENTIFIED ASSET
An asset can be an identified asset by being explicitly stated in the contract or by being
implicitly specified at the time the asset is made available for use by the customer. If the
specific asset whichthe lessee intends to lease is:
● readily available at the inception of the contract, the asset is explicitly identified.
 ● not yet available at the inception of the contract but the lessor promises to have it
ready for the lessee's use at the commencement of the lease, the asset is implicitly
identified.

PORTIONS OF ASSETS
● A portion of an asset is an identified asset if it is physically distinct (e.g., a floor of
a building).
● If not physically distinct, the portion is not an identified asset, unless it represents
substantially all of the capacity of the asset thereby providing the customer the
right to obtain substantially all of the economic benefits from the asset.

SUBSTANTIVE SUBSTITUTION RIGHTS

● An asset is not an identified asset if the supplier has the substantive right to
substitute it throughout the period of use.
● The right to substitute an asset is substantive if the supplier can exercise it
throughout the contract period and exercising the right benefits the supplier
economically.
● It is not substantive if the supplier cannot exercise it throughout the contract
period, such as when substitution is made only on a particular date or only during
repairs and maintenance.

RIGHT TO OBTAIN ECONOMIC BENEFITS FROM USE

● A customer controls the use of an identified asset if it has the right to obtain
substantially all of the economic benefits from the asset throughout the period of
use.
● When assessing the right to obtain substantially all the economic benefits from the
use of an asset, an entity considers only the economic benefits within the defined
scope of its rights.

RIGHT TO DIRECT THE USE

A customer has the right to direct the use of an identified asset throughout the period of
use if:
● the customer has the right to direct how and for what purpose the asset is used
throughout the period of use; or
● the asset's use is predetermined and the supplier is precluded from changing that
predetermined use.
PROTECTIVE RIGHTS
● Protective rights include contractual restrictions designed to protect the supplier's
interest in the asset or its personnel, or to ensure compliance with laws or
regulations.

A contract may:
(i) specify the maximum amount of use of an asset or limit where or when the customer
can use the asset,
(ii) require a customer to follow particular operating procedures, or
(iii) require a customer to inform the supplier of changes on how an asset will be used.

Note: Protective rights typically define the scope of the customer's right of use but do
not, in isolation, prevent the customer from having the right to direct the use of an
asset.

LEASE TERM
● non-cancellable period of a lease, plus any lease extensions, if reasonably certain
to be exercised.
● begins at the commencement date and includes any rent-free periods.

GENERAL RECOGNITION
● a lessee recognizes a lease liability and a right-of-use at the commencement date.

MEASUREMENT
Lease liability (initial measurement):
● Present value of the lease payments that are not yet paid as at the commencement
date.
● The discount rate used is the interest rate implicit in the lease, if this is
determinable; if not, the lessee's incremental borrowing rate is used.
Lease liability (subsequent measurement):
● Amortized cost (but remeasured to reflect any reassessments or lease
modifications)

Right of use asset (initial measurement):

● At cost, which comprises the initial measurement of the lease liability plus any
lease payment made at the commencement date, and any initial direct costs and
decommissioning and restoration costs.
Right of use asset (Subsequent measurement):
● using the cost model, except that if the right of use asset relates to property that is
measured under the revaluation model or fair value model, the right of use asset is
also measured using that same model.
● Depreciation: If ownership transfers to the lessee at the end of the lease term, the
asset is depreciated over its useful life. If not, the asset is depreciated over the
SHORTER of the asset's useful life and the lease term.

RECOGNITION EXEMPTIONS
● A lessee may elect not to apply the 'general recognition' above for short-term
leases and leases for which the underlying asset is of low value.
● A short-term lease- lease term of 12 months or less.
● A "low-valued" asset is one which, if new, would be considered to have a
relatively low value (egw personal computer and small items of office furiture).
● For these types of leases, the lessee may elect to recognize the lease payments as
expense on a straight-line basis over the lease term, unless another basis is more
appropriate.

PRESENTATION
right of use assets and lease liabilities are presented either:
● separately from other assets and from other liabs
● together with other assets as if they were owned and together with other liabs ,
with disclosure of the line items

Note: right of use asstes that meet the definition of investment property are presented
as investment property.
Note: Depreciation and interest expense are presented separately.
offsetting is prohibited.

ACCOUNTING FOR LEASES BY LESSSOR

A lessor classifies each of its leases as either a finance lease or an operating lease.
● Finance lease (capital lease) is a lease that transfers substantially all the risks
and rewards incidental to ownership of an underlying asset.
● Operating lease is a lease that does not transfer substantially all the risks and
rewards incidental to ownership of an underlying asset.

INDICATORS OF A FINANCE LEASE

Any of the following would lead to a finance lease classification:
1. The lease transfers ownership of the asset to the lessee by the end of the lease
term.
2. The lessee has the option to purchase the asset at a price that is lower than the
asset's expected fair value at the date the option becomes exercisable (i.e.,
"bargain purchase option).
3. The lease term is for the major part (at least 75%') of the economic life of the
asset.
4. The present value of the lease payments amounts to at least substantially all (at
least 90%) of the fair value of the leased asset at the inception date.
5. The leased asset is of specialized nature that only the lessee can use it without
major modifications.

INCEPTION AND COMMENCEMENT OF LEASE

Inception date:
Inception date is the earlier of:
● the date of the lease agreement; and
● the date of commitment by the parties to the principal provisions of the lease.

Note: It is on this date that a lease is classified as either an operatingnor a finance

lease, and in the case of a finance lease, the amounts to be recognized on the
commencement date are determined.

Commencement date:
● Commencement date is the date on which a lessor makes an underlying asset
available for use by a lessee,

Note: It is on this date that a lease is initially recognized.

FINANCE LEASE
Under a finance lease, the lessor transfers substantially all the risks and rewards
incidental to ownership over the leased asset to the lessee. Thus, the lessor derecognizes
the leased asset and recognizes a finance lease receivable (also called net investment in
the lease)

MEASUREMENT OF NET INVESTMENT IN THE LEASE

Initial measurement:
 ● Present value of the lease payments that are not yet paid as at the commencement
date and of any unguaranteed residual value accruing to the lessor.
● The discount rate used is the interest rate implicit in the lease.
Subsequent measurement:
● Amortized cost
● The lessor does not recogize depreciation because the leased asset is already
derecognized.

OPERATING LEASE
● An operating lease is a lease that does not transfer substantially alI the risks and
rewards incidental to ownership of an underlying asset.
● The accounting for operating leases is straight-lorward.
● The lessor recognizes the lease payments as income on a straight line basis over
the lease term, unless another basis is more appropriate.
● The accounting for operating leases by lessor is the same as the recognition
exemptions available to a lessee for "short term" and "low value" leases.
● the leased asset remains the asset of the lessor thus, the lesso continues to
depreciate it.
● lessor does not recognize any finance lease receivable.

PRESENTATION
Underlying assets subject to operating leases are presented in the statement of financial
position according to their nature.