Learning Resource 7, Share-based Compensation Lesson 2, Share Appreciation Right

Learning Resource 7 : Share-based Compensation

Lesson 2
SHARE APPRECIATION RIGHT

Learning Outcomes:

At the end of this lesson, the students shall be able to:

a. Explain the various concepts pertaining to the following:
 cash-settled share-based payment transaction;
 share appreciation right;
 recognition and measurement of share appreciation right;
 accounting for share-based transaction with cash alternative and share
alternative; and
 account for a modification from cash-settled share-based payment to equity-
settled share-based payment.
b. Demonstrate understanding of the concepts by applying them in solving related
problems;
c. Analyze crucial situations besetting the rigor in solving related problems; and
d. Check on the accuracy of solutions through the concepts and principles applicable
to the concept of share-based compensation pertaining to share appreciation right.

Activity 1
Discussion of Accounting Principles
(Please refer to the prescribed textbook, Chapter 25, Intermediate Accounting,
Volume 2, 2020 edition, by Valix, Peralta & Valix)

1. Cash Settled Transaction

 Share appreciation right
 Measurement of compensation
 Recognition of compensation
 Modification from cash-settled to equity settled
 Cash and share alternative
 Final accounting

Activity 2
Application Exercises

Illustrations and sample computations are available in your textbook. Please refer to it as
well.

Activity 3
Evaluation Exercises

General Instructions: You are required to provide solutions/answers to the following

exercises. Supporting computations which are presented in good form shall be part of all
solutions. Answers/solutions to these exercises are to be submitted to the Professor through
her e-mail address or may be sent to her office/home, whichever is convenient. Please take
note of the deadline of submission which will be communicated to all concerned students.

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Learning Resource 7, Share-based Compensation Lesson 2, Share Appreciation Right

A. Theoretical Exercises (Individual Task)

Choose the correct answer by writing the corresponding letter-answer and a convincing
justification that it is indeed the correct answer via applicable appropriate accounting
principles discussed in Activity 1.

1. The payment for services in cash and based on the price of the entity’s ordinary shares
is what type of share-based payment transaction?
a. Asset-settled share-based payment transaction
b. Liability-settled share-based payment transaction
c. Cash-settled share-based payment transaction
d. Equity-settled share-based payment transaction

2. A cash-settled share-based payment transaction increases

a. A current asset c. Equity
b. A noncurrent asset d. A liability

3. Compensation cost for a share-based payment to employees that is classified as liability

is measured at
a. The change is fair value for each reporting period
b. The total fair value at grant date
c. The present value of cash payment
d. The total cash outlay for the period

4. What is the measurement date for share-based payment to employees that is classified
as liability?
a. The service inception date c. The settlement date
b. The grant date d. The end of reporting period

5. For share appreciation rights, the measurements date for computing compensation is
the
a. Date the rights mature c. Date of grant
b. Date the share reaches a predetermined amount d. Date of exercise

6. In accounting for share appreciation rights, compensation expense is generally

a. Not recognized
b. Recognized on the date of grant
c. Allocated over the service period of employees
d. Recognized on the date of exercise

7. Which statement is true regarding share appreciation right?

a. Any change in estimated total compensation is recorded as a prior period error.
b. The total amount of compensation is not known until the date the share appreciation
right is exercised.
c. The liability is adjusted only to reflect each additional year of service.
d. The share appreciation rights is not recognized.

8. For cash-settled share-based payment transaction, any change in fair value of liability is
a. Included in profit or loss
b. Included in retained earnings
c. Treated as component of other comprehensive income
d. Not recognizes

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Learning Resource 7, Share-based Compensation Lesson 2, Share Appreciation Right

9. If share-based payment transaction provides the employees have the right to choose
the settlement whether in cash or shares, the entity is deemed to have issued.
a. A compound financial instrument
b. An equity instrument
c. A liability instrument
d. Either an equity instrument or liability instrument but not both

10. If the entity has the choice of settlement in a cash and share alternative, the entity shall
account for the instrument initially as
a. Equity only c. Partly equity and partly liability
b. Liability only d. Either equity or liability but not both

B. Practical Exercises

I. Group Task

Solve the following problems by group with supporting computations presented in good form.

1. On January 1, 2020, CALABARZON Company offered the top management share

appreciation rights with the following terms:

Predetermined price Ᵽ50 per share

Number of shares 20,000 shares
Service period 3 years
Expiration date December 31, 2022

The share appreciation is to be paid upon exercise. The share appreciation rights were
exercised on December 31, 2022

The share prices are as follows:

January 1, 2020 50
December 31, 2020 56
December 31, 2021 68
December 31, 2022 71

Required:
Prepare journal entries in connection with the share appreciation rights.

2. On January 1, 2020, DAET Company offered the chief executive officer share
appreciation rights. The terms are predetermined price Ᵽ100, 10,000 share, vesting
period 3 years and expiration date December 31, 2022.

The share appreciation is to be paid on the date of exercise. The share appreciation
rights were exercised on December 31, 2022.
Share price
January 1, 2020 100
December 31, 2020 95
December 31, 2021 112
December 31, 2022 125

Required:
Prepare journal entries in connection with the share appreciation rights.

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Learning Resource 7, Share-based Compensation Lesson 2, Share Appreciation Right

3. ALBAY Company granted 200 share appreciation rights to each of the 500 employees
on January 1, 2020. The rights are due to vest on December 31, 2023 with payment
being made on December 31, 2023 and expire on December 31, 2024. Only 80% of the
awards vested.

Share price
January 1, 2020 (Predetermined price) 150
December 21, 2020, 2021 and 2022 180
December 31, 2023 210
December 31, 2024 190

The share appreciation rights were exercised on December 31, 2024.

Required:
Prepare journal entries from 2020 to 2024 in connection with the share appreciation
rights.

4. On January 1, 2020, MASBATE Company granted the chief executive officer 50,000
share appreciation rights for past services. These rights are exercisable immediately and
expire on December 31, 2021.

On exercises, the CEO is entitled to receive cash for the excess of the share market
price on exercise date over the share market price on grant date. The market price of
the share was Ᵽ100 on January 1, 2020 and Ᵽ115 on December 31, 2020.

The CEO did not exercise any of the rights during 2020. The CEO exercised the rights
on December 31, 2021 when the market price was Ᵽ110.

Required:
Prepare journal entries for 2020 and 2021 in connection with the share appreciation
rights.

5. On January 1, 2020, AURORA Company granted 100,000 share appreciation rights to

employees. The vesting period is 4 years. The agreement required the entity to pay cash
based on the excess market price over the predetermined price of Ᵽ100.

The market prices per share for December 31, 2020, 2021, 2022 and 2023 are Ᵽ140,
Ᵽ160, Ᵽ130 and Ᵽ150 respectively. On December 31, 2021, the entity modified the
agreement and cancelled the 100,000 share appreciation rights.

Instead, the entity granted 100,000 share options provided that the employees remain
with the entity for the next two years.

On December 31, 2021, the fair value of the share option is Ᵽ80. The options are
exercisable at the end of the remaining two-year period. The option price is Ᵽ130 and
the par value is Ᵽ100. All share options were exercised on December 31, 2023.

Required:
Prepare all journal entries for 2020, 2021, 2022 and 2023.

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Learning Resource 7, Share-based Compensation Lesson 2, Share Appreciation Right

6. On January 1, 2020, NCR Company purchased inventory of Ᵽ1,000,000. The entity has
offered the supplier a choice of settlement alternatives.

a. To receive 10,000 shares with par value of Ᵽ50, valued at Ᵽ1,100,000 at the date of
purchase.

b. To receive a cash payment equal to the fair value of 8,000 phantom shares on
December 31, 2020, with an estimated fair value of Ᵽ900,000 at the date of
purchase.

Required:
1. Prepare journal entry on January 1, 2020 to record the purchase of inventory.
2. Prepare journal entry December 31, 2020, assuming the suppliers has chosen the
cash alternative and the market value of the share is Ᵽ120 on this date.
3. Prepare journal entry on December 31, 2020, assuming the supplier has chosen the
share alternative.

II. Individual Task

Solve the following problems with solutions presented in good form; and choose the correct
answer (re: letter-answer) from the given probable answers.

1. On January 1, 2020, CAMARINES Company granted to employees a share-based

payment with cash and share alternative. The provisions include the right to cash
payment equal to the value of 10,000 phantom shares or 15,000 ordinary shares with a
par value of Ᵽ40.

The grant is conditional upon the completion of three years’ service. If the employees
choose the share alternative, the shares must be held for three years after the vesting
date.

After taking into account the effect of vesting restrictions, the entity estimated that the
fair value of the share alternative on grant date is Ᵽ45.

On January 1, 2023, the employees selected the share alternative.

1. What is the equity component on January 1, 2020 arising from the share-based
payment with cash and share alternative?
a. 675,000 b. 600,000 c. 225,000 d. 75,000

2. What is the compensation expense for 2022?

a. 720,000 b. 355,000 c. 280,000 d. 305,000

3. What amount of the share premium should be recorded from the issuance of shares
on January 1, 2023?
a. 195,000 b. 120,000 c. 480,000 d. 375,000

2. On January 1, 2020, CAVITE Company purchased an equipment with a cash price of

Ᵽ2,000,000. The supplier can choose how the purchase is to be settled. The choices
are 20,000 shares par value of Ᵽ50 in one year’s time, or a cash payment equal to the
market value of 15,000 phantom shares on December 31, 2020.

At grant date on January 1, 2020, the market price of each share is Ᵽ80 and on the date
of settlement on December 31, 2020, the market price of each share is Ᵽ100.

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Learning Resource 7, Share-based Compensation Lesson 2, Share Appreciation Right

1. What is the equity component arising from the purchase of equipment with share and
cash alternative?
a. 500,000 b. 400,000 c. 800,000 d. 0

2. What amount of interest expense should be recognized on December 31, 2020 if the
supplier has chosen the cash alternative?
a. 600,000 b. 400,000 c. 300,000 d. 0

3. What amount should be recognized as share premium on December 31, 2020 if the
supplier has chosen the share alternative?
a. 2,000,000 b. 1,000,000 c. 200,000 d. 800,000

3. On January 1, 2020, SORSOGON Company established a share appreciation rights

plan for the executives. The plan entitled them to receive cash at any time during the
next four years for the difference between the market price of the ordinary share and a
pre-established price of Ᵽ20 on 60,000 share appreciation rights or SARs.

On December 31, 2022, 20,000 SARs are exercised by executives.

Market price
January 1, 2020 25 per share
December 31, 2020 28 per share
December 31, 2021 35 per share
December 31, 2022 30 per share

1. What amount of compensation expense should be recognized for 2020?

a. 480,000 b. 120,000 c. 300,000 d. 180,000

2. What amount of compensation expense should be recognized for 2021?

a. 900,000 b. 420,000 c. 105,000 d. 225,000

3. What amount should be recognized as accrued liability for share appreciation rights
on December 31, 2022?
a. 600,000 b. 300,000 c. 400,000 d. 200,000

*****

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