CHAPTER 29

SMEs - EQUITY
Share-based payment
Specialized activities
Hyperinflation

TECHNICAL KNOWLEDGE

To know the measurement of equity.

To understand the recognition of original issue of shares.

To know the measurement of equity settled share-based payment transactions.

To know the measurement of cash settled share-based payment transactions.

To identify the specialized activities of an SME.

To define hyperinflation.

EQUITY
Equity is the residual interest in the assets of an entity after deducting all of its
liabilities.
Equity is computed as:
a. Investments by owners of the entity.
b. Plus additions to those investments earned through profitable operations
and retained for use in the operations.
c. Minus reductions in owners' investments as a result of unprofitable
operations and distributions to owners.
Measurement of equity shares
Equity instruments are measured at fair value of the cash or other resources
received or receivable, net of direct issue cost.
If payment is deferred and the time value of money is material, the initial
measurement shall be on a present value basis.
Transaction costs of an equity transaction shall be deducted from equity.
Comparison with full PFRS
The PFRS for SMEs and full PFRS are practically the same with respect to:
a. Recording of equity instrument
b. Treasury shares
c. Compound financial instrument
d. Equity swap or extinguishment of financial liability by issuing equity
instrument
e. Dividends
f. Other related equity matters

SHARE-BASED PAYMENT TRANSACTIONS

a. Equity-settled share-based payment transactions
The entity acquires goods of or the services entity.as consideration for equity
instruments
b. Cash-settled share based payment transactions
The entity acquires goods or services by incurring liabilities to the supplier of
goods or services for amounts that are based on the price of the entity's equity
Share options
Share options are granted to officers and key employees to enable them to
acquire shares of the entity during a specified period upon fulfillment of certain
'conditions at a specified price.
These options are conceived as additional compensation on the part of officers
and key employees.
The compensation must be measured at the fair value of the share options at the
date of grant.
Share options are considered as equity settled share-based payment
transactions.
Recognition of compensation

a. If the share options vest immediately, the employee is not required to

complete a specified period of service before unconditionally entitled to
the share options.
In this case, on grant date, the entity shall recognize the compensation as
expense in full with corresponding increase in equity.

b. If the share options do not vest until the employee completes a specified
service period, the compensation is recognized as expense over the
service or vesting period.

Share appreciation right

A share appreciation right entitles an employee to receive cash which is equal to
the excess of the market value o/ the entity's share over a predetermined price
for a stated number of shares.
In other words, a share appreciation right entitles the employee to a cash
payment equal to the increase in the price of a given number of shares during a
definite period.
Like a share option, a share appreciation right is viewed as compensation for
services rendered.
Unlike a share option, a share appreciation right creates a liability because a
share appreciation right is actually an obligation on the part of the entity to pay
cash in the future on exercise date.
A share appreciation right is cash settled share-based payment transaction.

Measurement of compensation
The compensation is based on the fair value of the liability at the reporting date
and shall be remeasured at every year-end until it is finally settled.
Any changes in fair value are included in profit or loss.
The fair value of liability is equal to the excess of the market value of share over
a predetermined price for a given number of shares during a definite vesting
period.
Recognition of compensation
a. If the share appreciation right vests immediately, the compensation is
recognized as expense immediately on the date of grant.
b. If the share appreciation right does not vest until the employee completes
a definite Vesting period, the compensation is recognized as expense over
the service or vesting period.

Share-based transaction with cash alternative

Share-based payment transaction may give either the entity or the counterparty
a choice of settling the transacti071 in cash or by transfer of equity instrument.
As a rule, the entity shall account for the transaction as a cash settled share-
based payment transaction.
However, the entity shall account for the transaction as equity settled share-
based payment when:
a. The entity has a past practice of settling by issuing equity instrument.
b. The option has no commercial substance because the cash settlement
amount bears no relationship to and is likely to be lower than the fair value
of the equity instrument.

Comparison with full PFRS

Under PFRS for SMEs, the share options must be measured at fair value on the
date of grant.
The intrinsic value of share options is not mentioned as an alternative.
Under full PFRS, the share options shall be measured at fair value on the date of
grant.
However, if the fair value of the share options cannot be measured reliably, the
intrinsic value of the share options is used.
The intrinsic value is the excess of the market price of the share over the option
price.

SPECIALIZED ACTIVITIES
The specialized activities under the PFRS for SMEs are:
a. Agriculture
 b. Exploration and evaluation of mineral resources
c. Service concession

Agriculture
Agriculture is the management by an entity of the biological transformation and
harvest of biological assets for sale or for conversion into agricultural produce or
into additional biological assets.
Biological assets are living animals and living plants.
Agricultural produce is the harvested product of the entity's biological asset.
Measurement
Biological asset is measured at fair value less cost of disposal when such fair
value is readily determinable without undue cost or effort.
If the fair value is not readily determinable without undue cost or effort, the
biological asset is measured at cost less accumulated depreciation and any
accumulated impairment loss.
Agricultural produce is measured at fair value less cost of disposal at the point of
harvest.
Such measurement at that date is the initial cost of the agricultural produce as
part of inventory.
PFRS for SMEs and full PFRS practically have the same principles for the
recognition and measurement of biological assets and agricultural produce.

Exploration and evaluation of mineral resources

Under PFRS for SMEs, an entity that is engaged in exploration and evaluation of
mineral resources may incur exploration expenditure.
The SME must develop an accounting policy for the recognition of exploration
and evaluation asset.
The exploration expenditure may be classified as tangible asset or intangible
asset.
If the exploration expenditure is classified as tangible asset, it is accounted for as
an item of property, plant and equipment.
The tangible asset is initially measured at cost and subsequently measured using
either cost model or revaluation model.
If the exploration expenditure is an intangible asset, it is measured initially at cost
and subsequently measured using cost model only.
Comparison with full PFRS
Under PFRS for SMEs and full PFRS, an entity must develop an accounting
policy for recognition of an exploration and evaluation asset.
If an entity's accounting policy results in the recognition of an exploration and
evaluation asset, such asset shall be measured initially at cost.
Under full PFRS, the exploration and evaluation asset whether classified as
tangible asset or intangible asset shall be measured subsequently using cost
model or revaluation model.
Under PFRS for SMEs, the tangible exploration and evaluation asset shall be
subsequently measured using cost model or revaluation model.
However, the intangible exploration and evaluation asset of an SME shall be
measured subsequently using cost model only.

Service concession
A service concession is an arrangement whereby a government or other public
sector enters into a contract with a private operator to develop, operate and
maintain an infrastructure.
The infrastructure may take the form of road, prison, hospital, expressway,
airport, bridge and telecommünication network.
The infrastructure asset is not an item of property, plant and equipment of the
private operator because control over the infrastructure asset lies with the
government or grantor.
Instead, the private operator Shall recognize the fair value of the infrastructure
asset as either financial asset or intangible asset.
Full PFRS and PFRS for SMEs have the similar provisions on the recognition
and measurement of a service concession.
As a financial asset
A financial asset shall be recognized by the private operator when the operator
has a guaranteed contractual right to receive a specified amount of cash over the
life of the arrangement.
Under PFRS for SMEs, the operator shall initially measure the asset at fair
value. However, the asset is subsequently measured at amortized cost.
Under full PFRS, the financial asset is subsequently measured at:
a. Amortized cost
b. Fair value through profit or loss
c. Fair value through other comprehensive income
As an intangible asset
An intangible asset shall be recognized by the private operator when the
operator has received a right or a license to charge users for the public service
and the revenue receivable is not agreed upon in advance but is dependent on
the use of the asset by the public.

Hyperinflation
Hyperinflation is indicated by characteristics of the economic environment of a
country.
The PFRS for SMEs does not establish an absolute rate at which hyperinflation
is deemed to arise.
Hyperinflationary condition is a matter of judgment.
One of the significant indicators of hyperinflation is when the cumulative inflation
rate over 3 years is approachi,ng or exceeds 100%.
Moreover, the general population prefers to keep its wealth in nonmonetary
assets or in relatively stable foreign currency.
PFRS for SMEs and full PFRS are the same in all aspects of accounting for an
entity whose functional currency is the currency of a hyperinflationary economy.

Presentation
When an entity's functional currency is the currency of a hyperinflationary
economy, the financial statements are stated in terms of the measuring unit
current at the end of reporting period.
The gain or loss on the net monetary position is included in profit or loss and
separately disclosed.

QUESTIONS
1. Define equity.
2. Explain the measurement of equity shares.
3. Explain an equity settled share-based payment transaction.
4. Explain a cash settled share-based payment transaction.
5. Define share options.
 6. Explain the measurement of share options.
7. Explain the recognition of compensation expense in relation to share
options.
8. What is a share appreciation right?
9. Explain the measurement of compensation expense in relation to share
appreciation right.
10. Compare PFRS for SMEs and full PFRS with respect to share options.
11. Explain the measurement of biological asset and agricultural produce.
12. What is the classification of exploration expenditure incurred by an SME?
13. What is a service concession?
14. Explain the treatment of the infrastructure asset in a service concession.
15. What is the significant indicator of a hyperinflationary economy?

PROBLEMS
Problem 29-1 Multiple choice (IFRS)
1. What is the formula in computing equity?

a. Investments by owners plus retained earnings minus distribution to

owners
b. Investments by owners plus accumulated losses
c. Investments by owners minus retained earnings
d. Investment by owners plus distribution to owners

2. What is the measurement of equity shares issued?

a. Fair value of cash received or receivable

b. Fair value of cash or receivable plus direct issue cost
c. Fair value of cash received or receivable less direct issue cost
d. Fair value of shares issued less direct issue cost

3. An entity shall account for the transaction cost of an equity transaction

as

a. An expense immediately
b. A deduction from equity
c. An addition to equity
d. A deduction from retained earnings

4. An entity shall reduce equity for

a. Amount earned through profitable operations and retained for use in

operations
b. Share split
c. Amount of distributions to owners
d. Amount of bonus issue
 5. When an entity distributes an asset other than cash as dividend to the
owners, the entity shall

a. Not recognize a liability

b. Recognize a liability equal to fair value of asset.
c. Recognize a liability equal to carrying amount of asset.
d. Do nothing.

Problem 29-2 Multiple choice (IFRS)

1. An entity shall recognize the goods or services received in a share-based
payment transaction

a. Only when the share-based payment is cash-settled.

b. When the entity receives the goods or services.
c. Only when the vesting period ends.
d. Only on the date that the equity instruments are granted.

2. If share options granted to employees under a share-based payment

transaction vest immediately

a. The entity should defer recognition of the services rendered by the

employees.
b. The entity should record a liability.
c. The employees are unconditionally entitled to the share-based
payments.
d. The entity should account for the services when these are rendered by
the employees during the vesting period.

3. For equity-settled share-based payment transactions, an entity shall

measure the goods or services received

a. Always at the fair value of goods and services received.

b. Always at the fair value of the equity instruments issued.
c. At the cost of goods and services provided by employees.
d. At the fair value of the goods or services received unless that fair value
cannot be estimated reliably.

4. For transactions for employee services as in share options, the fair value
of the equity instruments is measured

a. On the grant date.

b. On the exercise date.
c. At the end of the vesting period or exercise period, whichever is later.
d. At the date when the entity knows how many instruments will vest.
5. For transactions with parties other than employees, the measurement date
is

a. The grant date

b. The exercise date.
c. When the entity obtains the goods or the counterparty renders service.
d. When the warranty period for the goods or services expires.

6. On vesting date, the entity should

a. Never adjust the number of equity instruments that ultimately vest.

b. Revise the estimate to equal the number of equity instruments that
ultimately vest for vesting conditions based on employee service and
based on employee service and based on marker performance.
c. Revise the estimate to equal the number of equity instruments that
ultimately vest for vesting conditions based on employee service and
based on market performance.
d. Revise the estimate to equal the number of equity instruments that
ultimately vest for all vesting conditions.

7. For share-based payment transaction offering a choice of settling the

transaction in cash or by transfer of equity instrument, the entity should
account for the transaction as

a. Cash-settled share-based payment.

b. Cash-settled share-based payment unless the entity has a past
practice of settling by issuing equity instrument.
c. Cash-settled share-based payment transaction unless the option to
settle in cash has no commercial substance.
d. Cash-settled share-based payment transaction unless the entity has a
practice of settling by issuing equity instrument or the option to settle in
cash has no commercial substance.

8. In measuring the fair value of shares and the related goods or services
received, an entity

a. Must always use observable market price of the entity's own shares.
b. Uses observable market price but only for nonemployee share-based
transaction.
c. Uses price established by the entity's directors for that type of share-
based transaction.
d. Uses observable market price and other measures according to a
measurement hierarchy.
 9. For modification of vesting condition in an equity-settled share-based
payment transaction for employee services, the entity should

a. Recognize the increase in fair value over the remaining vesting period
from the date of the modification.
b. Take the modified vesting condition into account only if it is beneficial
to employees and recognize the increase in fair value over the original
vesting period.
c. Take the modified vesting condition into account only if it is beneficial
to employees and recognize the increase in fair value over the
remaining vesting period from date of the modification.
d. Make no adjustment for compensation expense.

10. For a cash-settled share-based payment transaction for employee

services, the entity should

a. Recognize in profit or loss the cash paid out to the employees in the
final year.
b. Recognize in profit or loss the cash paid out to the employees over the
vesting period.
c. Recognize in profit or loss the estimate of the cash to be paid out to
the employees over the vesting period.
d. Recognize in profit or loss the grant date fair value of the liability over
the vesting period.

Problem 29-3 Multiple choice (IFRS)

1. Specialized activities of an SME include all of the following, except
a. Agriculture
b. Service concession
c. Exploration and evaluation of mineral resource
d. Insurance

2. Biological asset is measured at

a. Cost
b. Lower of cost and net realizable value
c. Net realizable value
d. Fair value less cost of disposal

3. Agricultural produce is measured at

a. Fair value
b. Fair value less cost of disposal at the point of harvest
c. Net realizable value
d. Net realizable value less normal profit margin
4. The exploration expenditure incurred by an SME in exploration and
evaluation activities may be classified as
a. Tangible asset
b. Intangible asset
c. Either tangible asset or intangible asset
d. Neither tangible asset nor intangible asset

5. An SME shall measure subsequently the intangible exploration and

evaluation asset using
a. Cost model only
b. Revaluation model only
c. Either cost model or fair value model
d. Either cost model or revaluation model

6. On the part of the private operator, the infrastructure asset in a service

concession shall be recognized as
a. Property, plant and equipment
b. Financial asset
c. Intangible asset
d. Either financial asset or intangible asset

7. The infrastructure asset in a service concession recognized as financial

asset by an SME is subsequently measured at
a. Amortized cost
b. Fair value through profit or loss
c. Fair value through OCI
d. Amortized cost, fair value through profit or loss or fair value through
OCI

8. Which is not addressed in IFRS for SMEs?

a. Earnings per share
b. Interim an segment reporting
c. Asset held for sale and discontinued operations.
d. All of these are not addressed in IFRS for SMEs.

9. Which accounting treatment is not allowed under IFRS for SMEs?

a. Weighted average method for inventory
b. Equity method for associates
c. Revaluation model for intangible assets
d. Temporary difference approach for deferred taxation

10. Which of the following is not a simplification of an accounting practice

allowed by IFRS for SMEs?
a. Goodwill and other indefinite life intangible assets are amortized over
the useful life.
b. SMEs do not have to derecognize a financial asset when the entity
transfers to another party substantially all of the risks and rewards of
the asset.
c. A simplified calculation is allowed if measurement of defined benefit
obligation involves undue cost or effort.
d. The cost model is permitted for investments in associates.