T2- IFRS 2 – Share base payment – Case 1

Share-based transaction with a cash alternative

On 1 January 20x3, Alpha Corporation grants its chief executive officer an award of either a cash
payment that is equal to 150,000 shares of Alpha Corporation (the cash alternative), or 500,000 share
options with an exercise price of $2.50 (the equity alternative). The exercise price is the same as the
market price of Alpha Corporation on the date of the grant. The choice lies with the chief executive
officer at the vesting date. The grant, which has a vesting period of three years, will expire three years
after the grant date.
The fair value of the share options (the equity alternative) at 1 January 20x3 is estimated at $1.00 per
option using an option valuation model. The fair values of the two components of the compound
financial instrument are estimated at measurement date as follows:
Fair value of equity alternative (500,000 x $1.00) $500,000
Less fair value of debt component (150,000 shares x $2.50) $(375,000)
Fair value of equity component $125,000
The share prices of Alpha Corporation at the end of 20x3 and 20x4 are $2.80 and $3.20 respectively.
Assume the following share prices at the end of 20x5:
Situation 1: The share price of Alpha Corporation at the end of 20x5 is $3.50.
Situation 2: The share price of Alpha Corporation at the end of 20x5 is $4.00.

Calculate and prepare journal entries.