SHARE-BASED PAYMENT (SBP)

1. FRS 2 SHARE-BASED PAYMENT(SBP)

2. FRS 2 :SBP • Issued 6/9/04 • PLC Effective 1/1/05; Other 1/1/06

3. Introduction What is Share-Based Payment? Where gds (i.e. inventories, consumables , PPE , non finl asset etc) & services (i.e. provided by external and employees, call option given for services rendered) paid EITHER through: (i) Issue. equity instrument OR (ii) Cash payment based on price of share

4. Continue Equity ~ Shares & Share Options (to buy specified no of shares at specified pr.) Eg. Bonus payment other than cash, via issuing shares such as Nyee Share Options Scheme (ESOS) This method of remuneration pay. to directors executives & other staff may motivate to improve co’s perform as amt received based on changes in share price….> long term value creatn.

5. Continue The offering of shares & share options requires cost to be assigned to them and charged as expenses

6. Opposition to FRS 2 (1) It caused NO outflow of resources when shares or share options were offered…..So why assigned cost to it? (2) Create dilution of shareholders stake…Cost instead borne by s/holders rather than co. HOWEVER, FRS requires, cost of giving shares and share options should be charged as expense, otherwise income will be inflated.

7. Exclusion from FRS 2 • Transaction with Nyees and Ordinary Shareholders (e.g making right issue to all s/h which include some co Nyee) • Those dealt with in FRS 3 and FRS 139

8. Continue…Recogn share-based payment External Parties Share based payment for gds&servicesfrm recorded at FV and corresponding amt of equity or liability, dependg cash or equity settlement. Recogd: All risks and rewards of gds&services transferred to entity Nyees FV of Nyee services difficult to det., hence measure FV of equity given (i.e. at grant date) when req. performance level or set achiecved i.e. Cost of Nyee services = FV of Equity Dr FV of Equity (P&L) Cr Equity (B/Sheet- shares issued)

9. Continue 3 important dates to a/c wrt ESOS: (i) Grant date (ii) Vesting period (iii) Exercise date(options) ~ Date when Holders of the options acquire the shares

10. Continue…. Grant date ~ (i) Entity & Counterparty agree with SBP (ii) Entity confers right to its equity instru., cash or other asset when vestg cond. met (iii) At approval if subject to approval process E.g. 3/3/x8 XYZ offered its staff options to buy 1K shares subject to approval of Nyee Compensation Committee. Approval granted 1/5/x8. Then, the grant date is 1/5/x8 NOT 3/3/x8.

11. Cost of Equity at Grant date (1) The FV of the equity (share or share options) (2) Costs spread over vesting period. (3) If options X exercised, this cost X reduced

12. Vesting period & Vesting Cond. Vesting period • Time frame during which the specified vestgconds of SBP are satisfied. • Eg: Period of service; Period of performance level assessed to qualify for SBP reward Vesting cond • Cond need to be fulfilled to receive SBP • Eg:Completn of specific service or achieving req perform. target

13. Other scope of FRS • Issuance of shares, • Rights to shares for provision of gds & services • Share appreciation rights • Nyee share purchase/Ownership plans • ESOS based on mkt or non-mkt condi • Subsidiary use of parent’s or grp members shares as consideration for gds & services obtained

14. 3 types of share-based payment transactions (1) Equity-settled payments Entity issue own eq. instru. or other members of grp companies as considertn for gds & services received (2) Cash settled Entity or member of grp pays cash calculated by reference to price of its own equity for gds & services (3) Choice of equity-settled or cash-settled Either Supplier of gds & services or entity may choose (dependg on their agreed terms of arrangement) settlement in a form of cash or equity instruments

15. Recognition • Gds & services ~ Recogd when received for qualifying assets At the same time, for ASSETS: (a) To recogd in equity if settlement equity basis. (b) If cash-settlement to recognise liability Non Asset ~ recognised as expense For services recogn date, x obvious..can be grant date or vestg period

16. Continue Eg: Entity purchase a building, settlement by issue of equity shares Entity will recogd asset and increase equity. If inventory is purchased instead, initially recognised it as inventory, whenthey are sold recognised as expense

17. Equity Settled Transactns…Measurement • Gds & Services received frm xtrnal party (other than Nyees) measured at FV of gds and services, equity accordingly. Ifprevious value x det reliably, both items used FV of equity at grant date….but this seldom

18. Example • 1/7/x8, Glitter Bhd acquired plant of FV RM100K, agree to settle with vendor by issue of share optn for 50K of co’s shares. Options exercisable 31/12/x9 at RM4 /share. FV of share optn on 1/7/x8 was RM2.10 Required • How Glitter Bhd record the acquisitn of plant?

19. Continue… Answer 1/7/x8 plant recorded at RM100K and equity instru RM100K. If there is changes in FV of share optn b4 exercise date NO adj. on PPE a/c If FV of plant x det reliably, Plant initially measured as FV of equity shares, RM2.10 X 50K = RM105,000

20. Services provided by Nyee (i) SBP ~ Part of Nyee remuneration package… (ii) FV of Nyee service should be FV of eq. instru granted, bec diff measure FV of service (iii) FV of equity is measured at grant date (iv) If equity instruments vest immediately, expense & equity recogd immediately on grant date. If SBP needs approval , Nyee service has start, to estimate the grant date FV of equity at b/sheet date (bec grant date = approval date) and subsequently adjust

21. Continue…Nyee Services….VestgCondtn • If Nyee remains in service and a certain perform level achieved, entity should estimate most likely outcome of the performance cond. • Treatment of vestg cond. varies, depend on whether or not any of the conditions relates to mkt price of entity’s equity instru.

22. Continue • If vestgcond depend on mktcondn, No revision made to estimates during vesting period or amt vested as it’ll be included in det FV of the option at grant date (assuming garnt date = approval date which may be after Nyee has begun service ).Mktcond means exercise price, vesting or exercisability of equity instru depends on mkt price of entity’s equity instru. • If vestgcond DON’T depend on mktcondn, Entity should revise the estimates in subsequent Period.

23. Continue…Nyee service • Eg 1/1/x8, MNO granted 100 shares options to 80 Nyees, conditional Nyee stay in Nyment for 3 yrs. FV of share optn was RM5. ABC estimates 10% of these Nyees would leave Nyment. Required Calculate amt recog as expenses and amt disclosed as equity in bal sheet

24. Continue…

25. Continue… • Eg. From previous eg, in yr x9, 10 Nyees left the co. MNO estimated that 90% of remaining Nyees to whom optn granted would remain. In year x9 another 10 left the co. Required Calculate amt recog as expenses and amt disclosed as equity in bal sheet

26. Continue If the co have known earlier that at the end of x9, that 10 employees will leave the company, the total expense for the two years would’ve been RM21K First compute total service expense for 3 years, then deduct from accumulated amt. DO NOT NEED to a/c for 90% because u already know for sure end of yr 3 how many employees have remained

27. Det FV of Equity Instru • Where available, based on mkt prices (a) FV can be determined where mkt price x available Use Valuation techniques, when X active mkt. FRS 2 x specified which pricing models to use but provided factors to consider …Common models Black Scholes model, Binomial model and Monte Carlo model.

28. Continue.. • FV CAN’T be determined Only when eqinstru FV x be measured reliably on measurement date... • Measure the FV of eqinstru granted at intrinsic value (Diff bet FV of shares and amt to settle with vendor). Instrinsic value det at end of each actg period until eqinstru settled. Changes in intrinsic value taken to P&L • Recoggds&services at expected no of optns that’ll ultimately be vest or exercised. Entity is required to revise est. in subsequent period if no of optns that will vest differ from previous est.