Share Based Payment

SHARE – BASED
PAYMENT
Submitted by:
Rachelle P. Nayles
Allizon Mae V. Obligacion
Akilah Jillian P. Oliver
Tristan Jude E. Osea

Jonie Jane C. Pacamarra
September 2018

SHARE-BASED PAYMENT
PROBLEM NO. 1: Share Options Fair Value Method
Background
On January 1, 2009, an entity grants 100 share options to each of its 500 employees.
Each grant is conditional upon the employee working for the entity over the next three years.
The entity estimates that the fair value of each option id CU15.
(a) On the basis of weighted average probability, the entity estimates that 20 percent of
employees will leave during the three-year period and therefore, forfeit their rights to share
options.
Application of Requirements
Scenario 1:
If everything turns out as exactly

exa ctly as expected, compute for the following:
1. Compensation expense for 2009
a. 200, 000 c. 600, 000
b. 400, 000 d. 0
a. 200, 000 c. 600, 000
b. 400, 000 d. 0
a. 200, 000 c. 600, 000
b. 400, 000 d. 0
Scenario 2:
During 2009, 20 employees leave. The entity revises its estimate of total employee departures
over the three-year period from 20 percent (100 employees) to 15 percent (75 employees).
During 2010, a further 22 employees leave. The entity revises its estimate of total employee
departures over the three-year period from 15 percent (75 employees) to 12 percent (60
employees).
During 2011, a further 15 employees leave.
Compute for the following:

a. 212,500 c. 200,000
b. 637,500 d. 0
a. 660,000 c. 227,500
b. 440,000 d. 0


a. 664,500 c. 0
b. 224,500 d. 227,500
SUGGESTED SOLUTIONS:
Scenario 1
Nos. 1. 3.
2009 2010 2011

Total Employees 500 500 500
Expected Number leaving 100 100 100
With vested benefit 400 400 400
× Share Options 100 100 100
Total Option Shares 40,000 40,000 40,000
× Fair Value Options 15 15 15
Total value/Revised Value 600,000 600,000 600,000
60 0,000
× Ratio of actual
a ctual years/vesting
1/3 2/3 3/3
period
Cumulative Remuneration Costs 200,000 400,000 600,000
Less: Prior Year Costs - 200,000 400,000
Current Year Remuneration 200,000 200,000 200,000
Costs (A) (A) (A)
Under PFRS 2 (Share-based Payment) for transactions with employees and others
providing similar services, the entity measures the fair value of the equity instruments
granted, because it is typically not possible to estimate reliably the fair value of employee
services received. It is measured at
a t the fair value of the equity instruments granted (such as
transactions with employees),
emp loyees), fair value is estimated at grant date .
The entity should recognize the cost of services rendered by the employees equal to
fair value of the equity instruments granted and amortized over the vesting period. However,
if an employee left the
the company during the vesting period, the amount recognized during the
vesting period would be reversed ; this is because the service condition was not considered
when estimating the fair value of the shares option at grant date.

Scenario 2
Nos. 1. 3.
2009 2010 2011
Expected Number leaving 75 60 57 (actual)
42,500 44,000 44,300
Total value/Revised
value/Revised Value 637,500 660,000 664,500
× Ratio of actual years/vesting
ye ars/vesting
1/3 2/3 3/3
period
Cumulative Remuneration Costs 212,500 440,000
440 ,000 664,500
Less: Prior Year Costs - 212,500 440,000
Current Year Remuneration 212,500 227,500
224,500 (B)
(B)
Costs (A) (C)
The same standard follows with the second scenario, it differs only to the
number of vested beneficiaries because in each year the departure employees differ.
PROBLEM NO. 2: Grant with a performance condition, in which the length of the vesting
period varies
Background
On January 1, 2009,
20 09, the entity grants 100 share options each to 500 employees for the
purchase of P50 par ordinary share at P60 per share, conditional upon the employees’
remaining in the entity’s employ during the vesting period. The share options will vest at
the end of 2009 if the entity’s earnings increase by more than 18 percent; at the end of 2010
if theperiod;
year
entity’s earnings increase by more than an average of 13 percent per year ov
over
er the two-
and at the end of 2011 if the entity’s earnings increase by more than an a
average
verage
of 10 percent per year over the three-year period. The share options has a fair value of CU30
per share at the start
start of 2009. No dividends are expected to be paid over the three-year
period.
By the end of 2009, the entity’s earnings have increased by 14 percent, and 30
employees have left. The entity expects
expects that earnings will continue to increase at a simil
similar
ar
rate in 2010, and therefore expects that
that the shares will vest at the end of 2010. The entity
expects on the basis of a weighted average probability, that a further 30 employees will leave
during 2010, and therefore expects that 440 employees will vest in 100 share options each at
the end of 2010.

By the end of 2010, the entity’s earnings have only increased by 10 percent and
therefore the shares do not vest at the end of 2010, 28 employees have left during the year.
The entity expects that a further 25 employees will leave during 2011, and the entity’s
earnings will increase by at least 6 percent, thereby achieving the average of 20 percent per
year.
By the end of 2011, 23 employees have left and the entity’s earnings had increased by
8 percent resulting
resulting in an average increase
increase of 10.67 percent per year.
year. At the beginning
beginning of
2012, the share options were exercised.
e xercised.
Answer the following:

following:
1. What is the journal entry at the beginning of 2009?

a. Memo entry: the entity grants 100 share options each to 500 employees,
conditional upon the employees’ remaining in the entity’s employ during the
vesting period.
b. Debit Salaries expense, P440,000; Credit Stock options outstanding P440,000
c. Debit Salaries expense, P1,320,000; Credit Salaries payable
payab le P1,320,000
d. No journal entry or memo entry is needed.

a. 660,000 c. 394,000
b. 440,000 d. 1,320,000
a. 1,251,000 c. 394,000
b. 834,000 d. 591,000

a. 0 c. 6,000
b. 1,257,000 d. 423,000
5. What is the journal entry to record the exercise of all the stock options?
a. Debits: Cash P2,514,000 and stock options outstanding P1,257,000; Credits:
Ordinary shares P2,095,000 and share premium excess over par P1,676,000
b. Debits: Cash P2,514,000 and stock options outstanding P834,000; Credits:
Ordinary shares P2,095,000 and share premium excess over par P1,253,000
c. Debits: Cash P2,514,000 and stock options outstanding P423,000; Credits:
Ordinary shares P2,095,000 and share premium excess over par P842,000
d. Debits: Cash P2,514,000; Credits: Ordinary shares P2,095,000 and share
premium excess over par P419,000
1. No Journal Entry is made at the beginning of 2009 because under Paragraph 7 of
PFRS 2 the entity shall recognize compensation expense when it obt ins tthe
he goods
or s the services re received . The compensation is recognized as expense over the

vesting period.

2. Number of Employees 500

Employees who left in 2009 (30)
Employees expected to leave (30)
Employees entitled to share option 440
Multiply by share options per employee 100
Total share options 44,000
Multiply
Total by fair valueexpense
Compensation 30
1,320,000
Compensation Expense for 2009 (1320000/3) 440,000

440,000
3. Number of employees 500

Employees expected to leave (25)
Multiply by fair value 30
Total Compensation expense 1,251,000
Cumulative Compensation (1,251,000/3*2) 834,000
Less: Compensation recognized in 2009 (440,000)
Compensation expense 2010 394,000
394,000
4. Number of employees 500

Multiply
Total by options
share share options per employee 100
41,900
Multiply by fair value 30
Total Compensation expense 1,257,000
Less: Cumulative compensation (834,000)
Compensation expense 2011 423,000
5. December 31, 2011

Cash (41,900 x 60) 2,514,000
Share option Outstanding 1,257,000
Ordinary Share Capital (41,900 x 50) 2,095,000
Share Premium 1,676,000

Note:
Paragraph 15 of PFRS 2 states that if the equity instruments granted do not
vest until
until the counterparty completes a specified period of service, the entity shall
presume that the services to be rendered by the counterparty as consideration for
those equity instruments will be received in the future, during the vesting period. The
entity shall account for those services as they are
a re rendered by the counterparty during
the vesting period, with a corresponding increase in equity.
PROBLEM NO. 3: Performance Condition, Nonmarket condition, of equity instruments

varies
On January 1, 2009, Diamond Company granted share options to each of its 200
employees. The share options will vest at the
the end of 2011, provided
provided that the employees
employees
remain in the entity’s employ and if the sales increase at least by an average of 5% per year.
If the sales increase by an average of at least 5% per year,

y ear, each employee shall receive
50 share options. If the sales increase by an average of at lleast
east 10% per year, each employ
employeeee
shall receive 100 share options. If the sales increase by an average of at least 15% per year,
each employee shall receive 150 share options.
The fair value of each share options
options is P30. No employees have left during
during the three-
year vesting period. The sales over the vesting
vesting period increase
increased
d as follows:
2009 8%
2010 10%
2011 18%
a. 100,000 c. 200,000
b. 300,000 d. 400,000
a. 100,000 c. 200,000
b. 300,000 d. 400,000
a. 100,000 c. 200,000
b. 300,000 d. 400,000

Multiply by fair value of share option 30
Total Compensation 300,000

Compensation expense for 2009 (300,000/3) 100,000 (A)
*The employees are entitled to 50 share options each because the sale increased by at
least 8%.

Compensation expense for 2010 (300,000/3*2) 200,000
Less: Compensation recognized in 2009 (100,000)
Compensation Expense for 2010 100,000 (A)
100,000
*The employees are entitled to 50 share options each because the sale increased by an
average of 9% over the last 2 years.

Compensation Expense for 2011 400,000 (D)
(D)
The employees are entitled to 100 share options each because the sale increased by a
ann
average of 12% over the last 3 years.
Paragraph 19 of PFRS 2 states that vesting conditions , other than market conditions,
shall not be
be taken into account when estimating the fair value of the shares or share options
at the measurement date .

PROBLEM NO. 4: Grant with a performance condition, in which the exercise price varies
Background
At the beginning

beginning of 2009, an entity grants to a senior
senior executive 30,000 share
share options,
conditional upon the executive’s remaining in the entity’s employ until the end of 2011. The
exercise price
price is CU40. However, the exercise
exercise price drops
drops to CU30 if the entity’s earnings
increase by at least an average of 10% per year over

o ver the three-year period.
On the grant date, the entity estimates that the fair value of the share options, with
an exercise price of CU30,
CU30, is CU16 per option. If the exercise price is CU40, the entity
estimates that the share options have a fair value of CU12 per option.
During 2009, the entity’s earnings increased by 12 percent, and the entity expects that
the earnings will
will continue to increase at this rate
rate over the next two
two years. The entity
therefore expects that the earnings target will be achieved, and hence the share options will
have an exercise price of CU30.
During 2010, the entity’s earnings increased by 13 percent, and the entity continues
to expect that the earnings target will
w ill be achieved.
During 2011, the entity’s earnings increased by only 3 percent, and therefore the
earnings target was not achieved. The executive completes three years’ service, and therefore
satisfies the service
service condition. Because the earnings
earnings target was not achieved,
achieved, the 30,000
vested share options have an exercise price of CU40.

a. 240,000 c. 480,000
b. 160,000 d. 0
a. 0 c. 160,000
b. 320,000 d. 80,000
a. 360,000 c. 0
b. 40,000 d. 320,000
1. Share options 30,000

Multiply by Fair value 16
Compensation Expense for 2009 (480,000/3) 160,000 (B)

*The condition is achieved so the exercise price is CU30 and the fair value of the option
is CU16.
2. Share options 30000

Cumulative
Less: compensation
Recognized (480,000/3*2)
compensation 320,000
(160,000)
Compensation Expense 2010 160,000 (C)
The condition is achieved so the exercise price is CU30 and the fair value of the
t he option
is CU16. (12%+13%=15%/2 years= 12.5%
12.5%))
3. Share options 30,000

Compensation Expense 2010 40,000 (B)
(B)
The earnings target of at least an average of 10% over three years is not achieved in
years=9.33%))
2011. (12%+13%+3%=28%/3 years=9.33%
Therefore, the exercise

exercise price is CU40 and the fair value ooff the option is CU12
Paragraph 19 of PFRS 2 states that vesting conditions , other than market conditions,
shall not be taken into account when estimating the fair value of the shares or share options
at the measurement date.
PROBLEM NO. 5: Grant with a market condition

Background
On January 1, 2009, Panda Co. grants to a senior executive 5,000 share options,
conditional upon the executive remaining in the entity’s employ until the end of 2011.
However, the share options cannot be exercised unless the share price has increased from
P50 at the beginning of 2009 to above P65 at the end of year 201
2011.
1. If the share price is above
P65 at the end of 2011, the share options can be exercised at any time during the next seven
years, i.e. by the end of year 10.
The entity applies a binomial option pricing model, which takes into account the
possibility that the share price will exceed P65 at the end of 2011( and hence, the share
options become exercisable) and the possibility
possibility that the share price will not exceed P65 at the

end of the year 3 (and hence, the options

options will be forfeited).
forfeited). It estimates the fair value of the
share options with this market condition to be P24 per option.

a. 120,000 c. 80,000
b. 40,000 d. 0
a. 120,000 c. 80,000
b. 40,000 d. 0
a. 120,000 c. 80,000
b. 40,000 d. 0
Year Calculations Compensation Expense

Expense
1 (5,000 options) (P24 F.V.)(1/3) P40,000 (B)
(B)
2 (5,000 options) (P24 F.V.)(1/3) P40,000 (B)
(B)
3 (5,000 options) (P24 F.V.)(1/3) P40,000 (B)
P40,000
Paragraph 21 of PFRS 2 states that Market conditions , such as a target share price
upon which vesting (or exercisability) is conditioned, shall be taken into account when
estimating the fair value of the equity instruments granted. Therefore, for grants of equity
instruments with market conditions, the entity
e ntity shall recognize the goods or services received
from a counterparty who satisfies all other vesting conditions (e.g.
(e.g. services received from an
employee who remains in service for the specified period of service), irrespective of whether
that market condition is satisfied .
PROBLEM NO. 6: Grant with a market condition, in which the length of the vesting period
varies
Background
On January 1, 2009, an entity grants 10,000 share options with a ten-year

ten -year life to each
of ten senior executives.
executives. The share options will ves
vestt and become exercisable immediatel
immediately y if
and when the entity’s share price increases from CU50 to CU70, provided that the executive
remains in service until the share price target is achieved.
The entity applies a binomial option pricing model, which takes into account the
possibility
possibility that the share price target will be achieved during the ten-year life of the options,
and the possibility that the target will not be
b e achieved.

The entity estimates that the fair value of the share options at grant date is CU25 per
option. From the option pricing model, the entity determines that the mode of the distribution
of possible vesting dates is five years. In other words, of all the possible outcomes, the most
likely outcome of the market condition is that the share price target will be achieved at the
end of 2013.
Therefore, the entity

entity estimates that the expected vesting
vesting period is 5 years. The entity
also estimates that two executives will have left by the end of 2013, and therefore, expects
that 80,000 share options (10,000 share options x 8 executives) will vest at the end of 2013.
Throughout the years 2009-2012, the entity continues to estimate that a total of two
executives will
will leave at end of 2013. However, in total three
three executives leave, one in each of
2011, 2012, 2013. The share price
price target is achieved at the end
end of 2014. Another executive
leaves during 2014, before the share price target is achieved.

a. 0 c. 150,000
b. 400,000 d. 2,000,000
a. 2,000,000 c. 800,000
b. 400,000 d. 150,000
a. 1,200,000 c. 400,000
b. 800,000 d. 2,000,000
a. 1,400,000 c. 200,000
b. 400,000 d. 1,750,000
a. 1,750,000 c. 400,000
b. 150,000 d. 350,000
Year Share Options Fair Value Total Value/Revised

Value/Revised Value
2009 80,000 × 25 2,000,000
2010 80,000 × 25 2,000,000
2011 80,000 × 25 2,000,000
2012 80,000 × 25 2,000,000
2013 70,000 × 25 1,750,000

Remuneration Cost Schedule:
Total Value/Revised
Value/Revised Prior Current
Year Ratio Cumulative
Value Years Year
2009 2,000,000 1/5 400,000 None 400,000 (B)
2010 2,000,000 2/5 800,000 400,000 400,000 (B)
2011 2,000,000 3/5 1,200,000 800,000 400,000 (C)
2012 2,000,000 4/5 1,600,000 1,200,000 400,000 (B)
2013 1,750,000 5/5 1,750,000 1,600,000 150,000 (B)
Under PFRS 2, par. 15b: “If an employee is granted share options conditional upon
the achievement of a performance condition and remaining in the entity’s employ until the
performance condition is satisfied, and the length of the vesting period varies depending on
when that performance condition is satisfied, the entity shall presumed that the services to
be rendered by the employee as consideration for the share options will be received in the
future, over the expected vesting period at grant date based on the most likely outcome of
o f the
performance condition.
If the performance condition is a market condition , the estimate of the length of the
expected vesting period shall be consistent with the assumptions used in estimating the fair
value of the options granted and shall not be subsequently revised.
If the performance condition is not a market condition , the entity shall revise its
estimate of the length of the vesting period, if necessary , if subsequent information indicates
that the vesting period differs from previous estimates.
PROBLEM NO. 7: Grant of share options that are subsequently repri

repriced
ced
Background
On January 1, 2009, GARCIA Co. grants 100 share options to each of its 400
employees. Each grant is conditional upon the employee
employee remaining in service over the nnext
ext
three years. The entity estimates
estimates that the fair value of each opt
options
ions is P15. On the basis of
weighted average probability, the entity estimates that 100 employees will leave during the
three-year period and therefore, forfeit their rights to the share options.
During 2009, 40 employees left and that by the end of year 2009, the entity’s sha re
prices has dropped and the entity reprices its share options, and that the repriced share
options vest at the end of 2011. The entity estimates that a further 70 employees will leave
during 2010 and 2011.
During 2010, a further 35 employees leave, and the entity estimates that
that a further 30
employees will leave during 2011.

During 2011, a total of 28 employees leave. The share options vested at the end of
2011.
The entity estimates that at the date of repricing, the fair value of each of the original
share options granted (i.e. before taking into account the repricing) is P6, and that the fair
value of each repriced share option is P10.

a. 0 c. 145,000
b. 435,000 d. 195,000
a. 209,000 c. 118,000
b. 442,500 d. 159,000
a. 354,000 c. 564,300
b. 180,600 d. 210,300
2009 2010 2011

Actual Number who hadhad left (40) (75) (103)
Expected Number leaving (70) (30)
Total Option Shares 29,000 29,500 29,700
Total value/Revised
value/Revised Value 435,000 442,500 445,500
× Ratio of actual years/vesting period 1/3 2/3 3/3
145,000 295,000 445,500
Adjustment- result
result of revision
revision (Sched. A) - 59,000 118,800
Cumulative Remuneration Costs 145,000 354,000 564,300
Less: Prior year/s - 145,000 354,000
145,000 209,000 210,300
Remuneration Costs- Current Year
(C) (A) (D)
Schedule A
2010 29,500 share options x (10 – 6
6 x ½) = 59,000
2011 29,700 share options x (10 – 6) = 118,800
Under PFRS 2, par. 27: “The entity shall recognize, as a minimum, the services
received measures at the grant date fair value of the equity instruments granted, unless
those equity instruments do not vest because of failure to satisfy a vesting condition (other
than a market condition) that was specified at the grant date. This applies irrespective of any
modifications to the terms and conditions on which the equity instruments were granted, or

a cancellation or settlement of that grant of equity instruments. In addition, the entity shall
recognize the effects of modifications that increase the total fair value of the share-based
employ ee.”
payment arrangement or the otherwise beneficial to the employee.”
If the modification increases the fair value of the equity instruments granted (e.g. By
reducing the exercise price), measured immediately before and after the modification, the
entity shall include the incremental fair value granted in the measurement of the amount
recognized for services received as consideration for the equity instrument granted. The
incremental fair value granted is the difference between the fair value of the modified equity
instrument and that of the original equity instrument, both estimated as the date of the
modification. If the modification occurs during the vesting period, the incremental fair value
granted is included int the measurement
m easurement of the amount recognized for services received over
the period from the modification dated until the date
da te when the modified equity instruments
vest, in addition to the amount based on the grant date, fair value of the original equity
instruments, which is recognized over the remainder of the original vesting period. If the
modification occurs after the vesting date, the incremental fair value granted is recognized
immediately, or over the vesting period if the employee is required to complete an additional
period of service before becoming unconditionally entitled to those modified equity
instruments.
PROBLEM NO. 8: Intrinsic Value
Tamara Company adopted a share option plan that granted options to key executives
to purchase 15,000 ordinary
ordinary shares with
with P100 par value. The options were granted on
January 1, 2009, and were exercisable two years after grant date if the grantee was still an
employee of the
the company. The options expired three years from date of grant. The option
price was set at P130 and the market price at the date of gr
grant
ant was also P130 per share. The
fair value of the share options cannot be estimated reliably.
The share market prices are P145 on December 31, 2009, P150 on December 31, 2010,
and P155 on December 31, 2011. All of the options
options were exercised
exercised on December 31, 2011.
Based on the above and the result of the audit, determine the following:

a. 225,000 c. 187,500
b. 112,500 d. 75,000
a. 12,500 c. 187,500
b. 100,000 d. 25,000
a. 112,500 c. 75,000
b. 225,000 d. 25,000

Nos. 1 2
2009 2010
Market Value 145 150
Option Price (130) (130)
Intrinsic Value 15 20
Multiply by Share Options 15,000 15,000
Total Compensation 235,000 300,000
Multiply by Ratio 1/2 2/2
Cumulative Compensation 112,500 150,000
Compensation recognized in prior year - (112,500)
Compensation expense – current
current year 112,500 (B) 187,500 (C)
Under PFRS 2, 2 , one method of measuring compensation is the Intrinsic Value me

method
thod
which means the compensation is equal to the intrinsic value of the share options. Intrinsic
Value is the “excess of the market value of the share over the option price” .
Paragraph 24 of PFRS 2 provides that the intrinsic

intrinsic value method can be used only if
only if
the fair value of the share option cannot be estimated reliably. In addition, share options are
recognized 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.
No. 3
2011
Market Value – 2011 155
Market Value – 2010 (150)
Increase in Intrinsic Value 5
Multiply by share options 15,000
Additional compensation
compensation in 2011 75,000 (C)
The increase in intrinsic value fter the vesting period is recognized as additional
compensation immediately . In this problem, the vesting period is only 2 years but options
were exercised 3 years after grant date.

PROBLEM NO. 9:
On January 1, 2009, Drenz Co. grants 100 cash share appreciation rights (SARs) to
each of its 600 employees, on condition that the employees remain in its employ for the next
ne xt
three years.
During 2009, 36 employees leave. The entity estimates

estimates that a further 60 employees
will leave during 2010 and 2011.
During 2010, 42 employees leave and the entity estimates that a further 27 will leave
during 2011.
During 2011, 21 employees leave. At the end of 2011, 150 employees exercise their
SARs, another 230 employees exercise their SARs at the end of 2012 and the remaining
employees exercise their
their SARs at the end of 2013.
20 13.
The entity estimates the fair value of the SARs at the end of each year in which a
liability exists as shown below. At the end of 2011, all SARs held by the remaining employees
vest. The intrinsic values of the SARs at the date of exercise
exercise (which equal the cash paid out)
at the end of years 2011, 2012, and
a nd 2013 are also shown below.
Year Fair Value Intrinsic Value

2009 15
2010 18
2011 21 15
2012 24 20
2013 25

a. 252,000 c. 342,000
b. 756.000 d. 225,000
a. 594,000 c. 891,000
b. 342,000 d. 737,100
a. 143,100 c. 368,100
b. 225,000 d. 737,100
a. 446,700 c. 290,400
b. 460,000 d. 13,300

a. 302,500
b. 460,000 c. 290,400
d. 12,100

Nos. 1- 5
2009 2010 2011 2012 2013
Number of employees 600 600 600 351 121
Less:
Employees who left

left this
this year (36) (42) (21)
Employees who left previous (36) (78)
years
(60) (27)
Employees expected to leave
(150) (230) (121)
Employees who exercised
their SARs
(Cumulative)
Employees entitled to share 504 495 351 121 0
option
Multiply by share option per 100 100 100 100 100
employee
Total share options 50,400 49,500 35,100 12,100 0
Multiply by fair value at 15 18 21 24 25
REPORTING DATE
Total Compensation 756,000 891,000 737,100 290,400 0
Multiply by: ratio 1/3 2/3 3/3 - -
Cumulative Compensation 252,000 594,000 737,100 290,400 0
Expense/Liability
Less: Cumulative - (252,000) (594,000) (737,100) (290,400)
Compensation prior year
Add: Additional
Additional compensation
expense
(150 x 100 x 15) 225,000
(230
(121 x 100 x 25)
20) 460,000 302,500
Compensation Expense 1) 252,000 2) 342,000 3) 368,100 4) 13,300 5) 12,100
(A) (B) (C) (D) (D)
According to PFRS 2, paragraph 30-33:

Cash-settled share-based payment results in a liability
a. Allocate grant date measurement over
over vesting period
period
b. Remeasure the fair value of the liability at the end of each reporting period
c. Remeasurement recognised in profit or loss
Given the need to measure the liability at its expected value, and (ultimately) at the
amount at which it will be settled, the measurement of the fair value of share appreciation

rights IS UPDATED TO FAIR VALUE AT THE REPORTING DATE rather DATE rather than (as is the
case with equity settled share-based payment arrangements) at the grant date.
da te.
If the share appreciation

app reciation rights do not vest , the entity
e ntity recognizes the services received,
and a liability to pay for them, as the employees render service during that period. The
liability is measured, initially and at the end of each reporting period until settled, at the
FAIR VALUE of
VALUE of the share appreciation
a ppreciation rights.
rights.
PROBLEM NO. 10: Share Options with Cash Alternative
Background
At the beginning of 2007, the entity grants 30,000 shares with a fair value of CU33
per share to a senior executive, conditional
conditional upon the com
completion
pletion of three years’ service. By
the end of 2008, the share price has dropped
dropped to P25 per share. At that date, the entity adds
a cash alternative to the grant, whereby the executive can choose whether to receive 30,000
shares or cash equal to the value of 30,000 shares on vesting date. The share price is P23 on
vesting date.

a. 330,000 c. 500,000
b. 660,000 d. 0
a. 330,000 c. 250,000
b. 270,000 d. 0
3. The balance of the liability component of the instrument as of December 31, 2008?
a. 230,000 c. 250,000
b. 500,000 d. 0
a. 330,000 c. 230,000
b. 270,000 d. 0
5. The balance of the liability component of the instrument as of December 31, 2009?
a. 230,000 c. 300,000
b. 690,000 d. 0
6. The balance of the equity component of the instrument as of December 31, 2009?
a. 80,000 c. 240,000
b. 160,000 d. 0

The compensation expense of P330,000 in 2009 is allocated between liabilities and
equity, to bring in the final third of the liability based on the fair value of the shares as at
the date of the modification.
modification.
2007 2008 2009 LIAB

No. of shares 30,000 30,000 30,000 30,000
x Fair Value 33 33 33 23
Total Fair Value 990,000 990,000 990,000 690,000
x Ratio 1/3 2/3 3/3 3/3
Cumulative compensation expense 330,000 660,000 990,000 690,000 (5)
(5)
Less cum. Comp prev. year - 330,000 660,000
Compensation Expense 330,000 330,000 330,000
(1) (2)
Less: adjust liability to fair value
(25-23)x 30,000 60,000
Compensation expense 270, 000
2008(4)
Cumulative compensation expense 660,000
Reclassify equity to liabilities
(30,000 x 25 x 2/3) 500,000 (3)
Rem. Equity, 12/31/08 160,000
Adjustment [330,000-(25/33x330,000)] 80,000 (6)
Equity, 12/31/09 [(33-25)x30,000x3/3] 240,000
For nos. 1, 2 and 4
PFRS 2, paragraph 7 provides that the entity shall recognize the goods or services
received or acquired in a share-based payment transaction when it obtains the goods or as
the services are received. This is why the 30,000
30 ,000 shares are pro-rated to three years which it
covers.
For nos. 3 and 5
Par. 38, of PFRS 2 states that the entity shall recognize the goods and services
acquired and the liability incurred at the fair value of the liability. Until the liability is
settled, the entity shall remeasure the fair value of the liability at each reporting date and at
the date of settlement .
For no. 6
PFRS 2, par. 35, states that the equity component is measured as the difference
between the fair value of the goods and services received and the debt component.

PROBLEM NO. 11:

11:
On January 1, 2008, ZEUS Co. granted to an employee the right to choose either
shares or cash payment. The choices are as follows:
 Share alternative – equal
equal to 36,000 shares with par value of P40.
P40 .
 Cash alternative – cash
cash payment equal to the market value of 30,000 shares
The grant is conditional upon the completion

completion of three years of servic
service.
e. On grant date,
on January 1, 2008, the share price is 50. The share prices for the three-year vesti
vesting
ng period
are P52 on December 21, 2008, P55 on December 31, 2009 and P60 on December 31, 2010.
After taking into
into account the effect
effect of vesting restrictions, ZEUS Company has estimated
estimated the
fair value of the share alternative is P48.
1. What is the total fair value of the equity component on January 1, 2008 as a result of
the share and cash alternative?
a. 228,000 c. 72,000
b. 76,000 d. 60,000
2. What is the compensation expense for the year 2008?
2008 ?
a. 520,000 c. 444,000
b. 596,000 d. 656,000
2009 ?
a. 580,000 c. 596,000
b. 656,000 d. 504,000
2010 ?
a. 700,000 c. 624,000
b. 776,000 d. 928,000
5. If the employee has chosen the cash alternative, the cash payment on December 31,
2010 is equal to
a. 1,800,000 c. 228,000
b. 700,000 d. 1,440,000
6. If the employee has chosen the share alternative, the share premium or additional
paid in capital shall be recognized at
at
a. 1,200,000 c. 1,800,000
b. 588,000 d. 1,440,000
1. Fair value of Share alternative (36,000 shs x P48) 1,728,000*

Fair value of liability on grant date, January 1, 2008
(30,000 shs x P50) 1,500,000
Equity Component 288,000 (A)
288,000 (A)
Under PFRS 2, Paragraph

P aragraph 38, the compound financial instrument shall be accounted
for separately as liability and equity.

If the employee has the right to choose the settlement, the entity is deemed to have
issued a compound financial instrument. Thus, the compound financial instrument is
accounted for as partly liability (Cash Alternative) and partly equity (Share Alternative).
The equity component is usually the fair value of the whole compound financial
instrument minus the fair value of the liability component. The equity component is lw ys
the residual amount.
*The fair value of the share alternative of P1,728,000 is actually the fair value of the
whole compound financial instrument.
instrument .
2. - 4.
2008 2009 2010
Share basis 30,000 30,000 30,000
Market Value (52) (55) (60)
Total Liability 1,560,000 1,650,000 1,800,000
Period 1/3 2/3 3/3
Accrued Liability
Liability – current year 520,000 1,100,000 1,800,000
Accrued Liability
Liability - prior year - 520,000 1,100,000
Liability Component 520,000 580,000 700,000
Equity Component* 76,000 76,000 76,000
Compensation expense 596,000(B) 656,000 (B) 776,000 (B)
*Equity Component = 288,000/3 = 76,000
5. If the employee has chosen Cash Alternative,

Alternative,
Accrued salaries
salaries payable 1,800,000
Share options Outstanding 228,000
Cash 1,800,000
Share Premium 288,000
6. If the employee has chosen Share Alternative,

Alternative,
Accrued salaries
salaries payable 1,800,000
Share options Outstanding 228,000
Share Capital (36,000 x 40) 1,440,000
PROBLEM NO. 12:

12:
On January 1, 2007, Josh Company granted share options to 10 of its key employees
entitling them
them to acquire P100 par value shares of the company at P110 per share. The share
options will vest on December 31, 2009, provided that the employees remain in the company’s
employ and provided that revenues reach P100 million, the employees will receive 1,000

options each. If revenues reach P150 million, the employees wiwill

ll receive 2,000 options each.
If revenues reach P200 million, the employees will receive 3,000 options each.
The market value of the option on the date of grant is

is P30. The company has a steady
pattern of 25% increase in revenue every year over the last 5 years and expects the same
pattern during the vesting period.
In addition, the following information were deemed relevant for the computation of
the compensation expense for each year:
Estimated number of
Date employees who will leave Actual revenue earned
the company
Dec. 31, 2007 2 P80 million
Dec. 31, 2008 2 P120 million
Dec. 31, 2009 3* P200 million
*Actual number of employees who left the company.
1. What is the compensation expense to be recognized in 2007?
2 007?
a. 80,000 c. 180,000
b. 100,000 d. 300,000
2 008?
a. 80,000 c. 240,000
b. 100,000 d. 300,000
2 009?
a. 630,000 c. 320,000
b. 500,000 d. 310,000
4. If the actual employees receiving their options exercise all their options in 2010, how
much is credited to share premium from the related issuance of share?
a. 210,000 c. 840,000
b. 630,000 d. 900,000
Nos. 1-3
2007 2008 2009
Key employees 10 10 10
Est. no. of employees who will leave 2 2 3
8 8 7
No. of shares per employee 1,000 2,000 3,000
Total number of shares 8,000 16,000 21,000
x Fair Value 30 30 30
Total Fair Value 240,000 480,000 630,000
x Ratio 1/3 2/3 3/3
Cumulative compensation expense 80,000 320,000 630,000
Less cum. Comp prev. year - 80,000 320,000
Compensation Expense 80,000 (A) 240,000 (C) 310,000 (D)

PFRS 2, paragraph 7 provides that the entity shall recognize the goods or services
received or acquired in a share-based payment transaction when it obtains the goods or as
the services are received.
No. 4
Cash (21,000 x110) 2,310,000
Share Option Outstanding

Ordinary 630,000
Share capital (21,000 x 100) 2,100,000
PROBLEM NO. 13:

13:
On January 1, 2007, DRENZ Company granted share options to 10 of its key

employees entitling them to acquire P100 par value shares of the company at P110 per share
conditional upon the employees’ remaining in the company’s employ during the vesting
period. The 10,000 share options shall vest at the end of 2007 if the company’s revenues
reach P90M; or at the end of 2008 if the company’s revenues reach P100M; or at the end of
2008 if the revenues reach P110M.
patternThe market
of 25% value in
increase of the option
revenue on the
every date
year of grant
over is P30.
the last Theand
5 years company hasthe
expects a steady
same
pattern during the vesting
vesting period. The company also expects
expects that no employee shall leave
leave
the company during the vesting period.
Revenues actually earned and recorded by the company during 2007 through 2009
follow:
2007 P80 million

2008 P90 million
2009 P110 million

2 007?
a. 50,000 c. 150,000
b. 100,000 d. 300,000
a. 50,000 c. 150,000
b. 100,000 d. 300,000
2 009?
a. 50,000 c. 150,000
b. 100,000 d. 300,000
4. If the employees exercised all their options in 2010, how much premium from the
related issuance of shares?
a. 100,000 c. 400,000
b. 300,000 d. 500,000

2007 2008 2009
Share Options 10,000 10,000 10,000
Multiply by: Fair value at GRANT
30 30 30
DATE
Total Compensation 300,000 300,000 300,000
Multiply by: ratio ½ 2/3 3/3
Cumulative Compensation
150,000 200,000 300,000
Expense/Liability
Less: Cumulative Compensation prior
- (150,000) (200,000)
year
1) 150,000 2) 50,000 3) 100,000
Compensation Expense
(C) (A) (D)
In PFRS 2, paragraph 15b,
 Compensation expense should be allocated throughout the service period.

 The value of the option is its FAIR VALUE AT GRANT DATE DATE
 If transaction has non-market condition,
condition, where the performance target is not
directly based on the share price of the entity, such conditions is taken into account
when estimating the number of options that will vest at the end of the vesting
period.
No. 4
Cash (10,000 x 110) 1,100,000
Share premium-share options (10,000 x 30) 300,000
Share capital -Ordinary (10,000 x 10) 1,000,000
Share Premium - Ordinary 400,000
Share options accounting treatment under PFRS 2,
During exercise period:

IF EXERCISED:
EXERCISED:
Dr. Cash (exercise price* number of shares exercised) xx
Dr. Share premium-share options (fair value of options exercised) xx
Cr. share capital ordinary (par value*number of shares exercised) xx
Cr. share premium-Ordinary (balancing figure) xx

PROBLEM NO. 14:

14:
The shareholder’s equity section of MARJ Co. showed the following data on December
31, 2006:
Ordinary Shares, P3 par, 150,000
15 0,000 shares authorized,
P375,000
125,000 shares issued and outstanding
Share Premium P3,525,000
Ordinary Share Options Outstanding P75,000
Accumulated Profit P240,000
The share options were granted to key executives and provided them the right to
acquire 15,000 shares of Ordinary share at P35 per share. The share was selling
selling at P40 at
the time the options were granted.
granted. The following transactions
transactions occurred during 2007:
3/30 Key executives exercised 2,250 options outstanding at December 31, 2005.
2005. The
market price per share was P44 at
a t this time.
4/1 The company issued bonds of 1,000,000 at 105, giving each P1,000 bond a
detachable warrant enabling the holder to purchase 2 shares of share at P40 for 1-year
period. Market values immediately following
following issuance of the bonds were P4 per warrant and
P998 per P1,000 bond without the warrant.
6/30 The company issues rights to shareholders (1 right on each share, exercisable
within a 30-day period) permitting holders to acquire 1 share of P40 with every 10rights
submitted. Share were selling
selling for P43 this time. All, but 3,000 rights were exercised
exercised on July
31, and the additional shares were issued.
9/30 All warrants issued
issued with the bonds
bonds on April
April 1 were exercised.
11/30 The market price per share dropped to P33 and opt options
ions came due. Since the
market price was below the option price, no remaining options were exercised.
1. What is the credit to the Share Premium account related to the issuance of ordinary
shares through the exercise of options on 3/30?
a. 83,250 b. 72,000 c. 4,500 d. 0
2. What amount should have been allocated to the share wa warrants
rrants outstanding account
as a result of issuance of the bonds with the detachable warrants?
a. 52,000 b. 4,192 c. 4,000 d. 0
3. What amount should be credited to the Share Premium account as a result of the
issuance of shares through the rights exercised by stockholders on 6/30?
a. 534,275 b. 497,000 c. 462,500 d. 459,725
4. What is the credited to the Share Premium account from the exercise of warrants
which were originally attached to the bonds?
a. 126,000 b. 74,000 c. 52,000 d. 0
5. What is the adjusted balance of the Ordinary share options outstanding?
a. 75,000 b. 63,750 c. 11,250 d. 0

6. What is the balance of the Ordinary share warrants outstanding?

a. 52,000 b. 22,000 c. 10,000 d. 0
Journal Entries
a) 3/30
Cash (2250 x 35) 78,750
Share Premium- Share Option (75000x2250/15000) 11,250
Ordinary Shares (2250 x 3) 6,750
Share Premium – Excess over Par 83,250 (1)
b) 4/1
Cash (1000000 x 1.05) 1,050,000
Bonds Discount (1000000-998000) 2,000
Bonds Payable 1,000,000
Share Premium – Share Warrant 52,000 (2)
c) Memo Entry 6/30

Issued rights to shareholders permitting holders to acquire 1 share at P40 with
every 10 rights submitted – maximum
maximum of 12,725 shares (127,250 shares /10)
d) 7/31
Cash ((12,725 – 3,000/10) x 40) 497,000
Share Capital (12,425 x 3) 37,275
Share Premium - excess over par 459,725 (3)
e) 9/30
Cash (1000x2x40) 80,000
Share Premium – share warrant

Share Capital (1000x2x3) 52,000 6,000
Share Premium – excess over par 126,000 (4)
f) 11/30
Share Premium – Share Option (75,000-11,250) 63,750
Share Premium – Expired share option 63,750
Ordinary share options outstanding
Beginning Balance 75000

(a) (11250)
(f) (63750)
0 (5)

Ordinary Share Warrant outstanding
@issue date (b) 52000

(e) (52000)
0 (6)
(6)
 PFRS 2, paragraph 24, provides that if the fair value of the share options cannot be
estimated reliably , the entity shall measure the share options at their intrinsic value
initially and subsequently at each reporting date and at the date of final settleme
initially settlement,
nt,
with any change in intrinsic value recognized in profit or loss. For grant of share
options, the share-based payment arrangement is finally settled when the options are
exercised, are forfeited or lapsed.
 The intrinsic value is the excess of
of the market
marke t value of the share over the option price
 PAS 32 states that the components of a compound financial instruments shall be
accounted for separately . The equity component is assigned the residual amount after
deducting from the fair value of the instrument as a whole the amount separately
determined for the liability component.

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PROBLEM NO. 1: Share Options Fair Value Method

If everything turns out as exactly

During 2011, a further 15 employees leave.

Compute for the following:

1. Compensation expense for 2009

3. Compensation expense for 2011

2009 2010 2011

Answer the following:

1. What is the journal entry at the beginning of 2009?

2. Compensation expense for 2009

4. Compensation expense for 2011

or s the services re received . The compensation is recognized as expense over the

2. Number of Employees 500

Compensation Expense for 2009 (1320000/3) 440,000

3. Number of employees 500

4. Number of employees 500

5. December 31, 2011

the vesting period, with a corresponding increase in equity.

PROBLEM NO. 3: Performance Condition, Nonmarket condition, of equity instruments

If the sales increase by an average of at least 5% per year,

1. Number of Employees 200

2. Number of Employees 200

3. Number of Employees 200

At the beginning

increase by at least an average of 10% per year over

Compute for the following:

1. Compensation expense for 2009

1. Share options 30,000

Compensation Expense for 2009 (480,000/3) 160,000 (B)

2. Share options 30000

3. Share options 30,000

Therefore, the exercise

PROBLEM NO. 5: Grant with a market condition

end of the year 3 (and hence, the options

Compute for the following:

1. Compensation expense for 2009

Year Calculations Compensation Expense

On January 1, 2009, an entity grants 10,000 share options with a ten-year

Therefore, the entity

Compute for the following:

1. Compensation expense for 2009

b. 150,000 d. 350,000

Year Share Options Fair Value Total Value/Revised

Remuneration Cost Schedule:

PROBLEM NO. 7: Grant of share options that are subsequently repri

employees will leave during 2011.

Compute for the following:

2009 2010 2011

PROBLEM NO. 8: Intrinsic Value

1. Compensation expense for 2009

Under PFRS 2, 2 , one method of measuring compensation is the Intrinsic Value me

Paragraph 24 of PFRS 2 provides that the intrinsic

During 2009, 36 employees leave. The entity estimates

Year Fair Value Intrinsic Value

1. Compensation expense for 2009

Employees who left

According to PFRS 2, paragraph 30-33:

If the share appreciation

PROBLEM NO. 10: Share Options with Cash Alternative

1. Compensation expense for 2007

2007 2008 2009 LIAB

For nos. 1, 2 and 4