CHAPTER 31 PFRS 2 SHARE-BASED PAYMENT TECHNICAL KNOWLEDGE To define a share-based compensation plan. To understand the recognition and measurement of share options. , To understand a cash settled share-based payment transaction. To know the recognition and measurement of share appreciation right. 631 Scanned with CamScannerSHARE-BASED COMPENSATION i Jan is a compensation A share-based compensation P* tio arrangement established by the entity whereby ghe entity’s employees shall receive equity shares in on aeclona eir services or the entity incurs liabilities to the employees in amounts based on the price of its shares. Compensation plans are a common feature oF rtd remuneration for directors, senior executives and other key employees. The compensation plans are usually tied to performance in a strategy that uses compensation. to motivate the recipients. Share-based compensation plans are classified into equity settled and cash settled. . a. Equity settled - The entity issues equity instruments in consideration for services received, for example, share options. b. Cash settled — The entity incurs a liability for services received and the liability is based on the entity's equity instruments, for example, share appreciation rights. Share options Share options are granted to officers and k r ey employees to enable them to acquire shares of the entity dura a specified period upon fulfillment of certain conditions at a specified price. Typically, share options are i 2 ; 1 Branted to offic d ke; employees as part of their remuneration package, sn aration to a cash salary and other employment benefits, Thus, these options are conceived ag additional compensation on * employees, the part of senior officers and other key 632 Scanned with CamScannerMeasurement of compensation The compensation resulting from sh ions i 0 hare following two methods, namely: aie a. Fair value method This means that the compensation is equal to the fair value of the share options on the date of grant. b. Intrinsic value method This means that the compensation is equal to the intrinsic value of the share options. The 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 value method can be used only if the fair value of the share option cannot be estimated reliably. 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 inmediately. 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 period or vesting period, meaning, from the date of grant to the date on which the options can first be exercised. the share options are in a ry that This is on the theory dered between the date of recognition for services ren| grant and the exercise date. 633 Scanned with CamScannerIllustration — with vesting period re granted to officers ¢, - i a On January 1, 2019, share opis of P50 par value at Pgo purchase 100,000 ordinary shares ©! per share. The fair value of each share option is P15. Paeacraeers are entitled to the share options only after completing years of service. The options can be exercised starting January 1, 2021 and expire one year after. All share options are exercised on December 31, 2021. ‘Total compensation or fair value of share options (100,000 x 15) - 1,500,000 Annual compensation - (1,500,000/2) 750,000 2019 Dec. 31 Salaries — share options 750,000 Share options outstanding 750,000 2020 Dec. 81 Salaries — share options 750,000 Share options outstanding 750,000 2021 Dec, 31 Cash (100,000 x 60) 6,000,000 Share options outstanding 1,500,000 Ordinary share capital (100,000 x 50) 5,000,000 Share premium 2,500,000 Noté that before the exere; options outstandin, share premium, ise of the share options, the share & account is reported as component of Thus, if the share options ar i » e d, the share see not subsequently exercise outstandin, a d credited to share point '® account shall be adjusted an 634 Scanned with CamScanner[lustration — no vesting Period On January 1, 2019, share opti purchase 100,000 ordinary shares of porented to employees to i fi ‘50 par value at P60 hare. On this date, th qi Pi ue at per g Bat he fair value of the each share option is The options are exercisable immedi: t : . lately. Th exercised all their share options on December 81, premelbyess Since the options are exercisable immedia , i j tely, th is recognized in full on January 1, 2019, Ly, the compensation Salaries — share options (100,000 x 20) 2,000,000 Share options outstanding 2,000,000 Exercise of the share options on December 31, 2019 Cash (100,000 x 60) — 6,000,000 Share options outstanding 2,000,000 Ordinary share capital (100,000 x 50) 5,000,000 Share premium . 3,000,000 Acceleration of vesting ‘ ) a PERS 2, paragraph 28, provides that if an entity cancels or settles a grant of share options during the vesting period, the entity shall account for the cancelation or settlement as an acceleration: of vesting. a. The entity shall recognize immediately the compensation expense that otherwise’ would have been recognized for services yeceived over the remainder of the vesting period. le to the employee on the cancelation nee grant shall be accounted for as the terest, meaning, deduction from b. Any payment or settlement of the 6} repurchase of equity in' equity. i ayment exceeds the fair value of ee pe 7 Macess shall be recognized as an expense. 635 Scanned with CamScannerIllustration i bt 000 share optio On January 1, 2019, an entity granted 50, ng to the employees. The option price is ‘P60 and the par value of each share is P50. The vesting period is 4 years. The fair value of the share options or total compensation expense to the vesting date on December 31, 2022 has been calculated at P4,000,000. The entity has decided to settle the award early on December 31, 2021. The compensation expense charged in the income statement since the date of grant is as follows: 2019 1,000,000 2020 1,050,000 If the share options are canceled or settled during the vesting period, it is as if the vesting date had been brought forward and the balance of the fair value not yet expensed is recognized immediately. Total compensation expense . 4,000,000 Cumulative compensation recognized in 2019 and 2020 (1,000,000 + 1,050,000) (2,050,000) Compensation expense in 2021 1,950,000 Journal entry to recognize the compensation for 2021 Salaries ; 1,950,000 Share options outstanding 1,950,000 Suppose the share options are not exercised. Instead, the entity paid the employees P2,500,000 on December 31, 2020 to cancel or settle the share options, Journal entry to record the cash payment Share options outstanding Salaries 050,000 Cash x 2,500,000 the fair value of the share options Any amount in excess of recognized is treated as expense, already 636 Scanned with CamScannerShare appreciation right A share appreciation right cash which is equal to the entity’s share over a pr of shares on settlemen: entitles an employee to receive excess of the market value of the edetermined price for a stated number 4 or exercise date. In other words, a share a; employee to a cash payment of a given.number of shares Ppreciation right entitles the equal to the increase in the price over a given period. Like a share option, a share appreciation right is viewed as compensation for services rendered. Unlike in a share option, the entity shall recognize 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. Simply stated, a share appreciation righi creates a liability. 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 over a definite vesting period. Recognition of compensation tion right vests immediately, the : -ecial ieee snetelar ee gnized immediately. compensation is recot ‘on right does not vest until the a definite vesting period, the nized over the vesting period. b. If the share appreciati employee completes compensation is recog! 637 Scanned with CamScanner‘Illustration An entity ‘granted a share appreciation right to the genera} manager on January 1, 2019. period, the employee is entitled to After a two-year service emp : e appreciation in share price over receive cash equal to th the market value on January 1, 2019. Thus, the market value on January 1, 2019 is the predetermined price for purposes of determining the compensation. The share appreciation right had the following terms: a. Service period - January 1, 2019 to December 31, 2020 ‘b. Number of shares — 20,000 shares c. Exercise-date — January 1, 2021 The quoted prices of the entity's share are: January. 1, 2019 200 December $1, 2019 210 December 31, 2020 "240 i 638 . Scanned with CamScannerJournal entries 2019 - Dec. 31 Salaries 100,000 Accrued salari X aries payable 100,000 Market value on Decemb h ) er 81, 2019 210 Predetermined price on January 1, 2019 200 Excess aa Multiply by numberof shares 20,000 Total cor i mpensation 200,000 Compensation for 2019 (200,000/2 years) 100,000 2020 ‘ Dec. 31 Salaries i 700,000 Accrued salaries payable 700,000 Market value on December 81, 2020 240 Predetermined price 200 Excess 7 . 40 Multiply by number of shares 20,000 Cumulative compensation 800,000 ‘Accrued compensation on December 31,2020 800,000 . erred compensationon December 31, 3019 (100,000) Compensation expense for 2020 700,000 2021 Jan. 1 Accrued salaries payable 800,000 coo Query ustration, the market value of . ing il Suppose in, the preceding to P200 on December 31, 2020. the share unfortunately drops ned price is also P200, the entity has no obligation because there is no appreciation or increase in market value on exercise date. In this case, the accrued compensation on Decembens ly 2019 of P100,000 shall be reversed on December 31, . ‘ + 100,000 Acer ies payable tether rl 100,000 aero eof share appreciation right 639 Since the predetermil Scanned with CamScannerPROBLEMS problem 31-1 (IFRS) Jrish Company granted 10,000 sh; i | I ‘are options to eacl i five directors on January 1, 2019. The options: neat See The fair value of each o) is anticipated that a’ January 1, 2023. pee on January 1, 2019 is P50 and it of the share options will vest on What amount should be reported i for 2019? P as compensation expense 750,000 ~ 500,000 625,000 125,000 peop Problem 31-2 (AICPA Adapted) In connection with a share option plan for the benefit of key employees, Ward Company. intends. to distribute equity shares when the options are exercised. The par value per share is P30. On January 1, 2019, the entity granted share options of 100,000 shares at an option price of P38 per share as additional compensation for services to be rendered over the next three years. The options are exercisable beginning January 1, 2022, by grantee still employed by the entity. Market price of share was P47 at the grant date. The fair value of the share option is P12 on grant date. All.share options were exercised during 2022. What amount should be reported a8 compensation expense for 2019? 600,000 . 400,000 300,000 . 450,000 Beep B 641 Scanned with CamScannerProblem 31-3 (AICPA Adapted) ; On January 1, 2019, Oak Company granted She ions to certain key employees as additional compens se ofP. . The options were for 100,000 ordinary shares of P ou par value at an option price of P15 per share. ary 1, 2019 was P20. The Market price of this share on Sonne ae 1, 2019 is PB, fair value of each share option on J ‘ el i iately beginning January - The options were exercisable immediate! 1, 2019 and expire on December 31, 2020. On December 31, 2019, all share options were exercised. What amount of compensation expense should be reported in 2019? a. 800,000 b. 500,000 c. 200,000 d. 125,000 ‘ Problem 31-4 (IAA) 1 On June 30, 2019, Newman Company granted compensatory share options for 30,000 P20 par value ordinary shares to certain key employees. The market price of the share on that date was P36 and the option price was P30. An option pricing model measured the total compensation expense to be P5,400,000. . The options are exercisable beginning January 1, 2022, provided the key employees are still in entity's employ at the time the options are exercised. T! i ire on Seno 30, 2028, ‘he options expire © On January 15, 2022, when the market pri e was P42, all 30,000 options were exercised. of the cha What is the compensation expense for 2019? a. 2,160,000 b. 1,080,000 c.. 5,400,000 d. 2,700,000 Scanned with CamScannerProblem 31-5 (AICPA Adapted) resident, 20,000 share appreci eany, Granted Dean, the These rights are exerci eeiation rights for past services. eee a eee to receive cash for the excess A rice on t] i market price on thelgeat io he exercise date over. the Dean did not exercise any of the rij i : : rights during 2019. Th market price of Morey’s share was P30 on Janusty . 2019 and P45 on December 31, 2019, , As a result of the share appreciation rights, what amount should be recognized as compensation expense for 2019? a. 0 b. 100,000 c. 300,000 d. 600,000 Problem 31-6 (AICPA Adapted) Wolf Company granted 30,000: share appreciation rights which entitled key employees to receive cash equal to the difference between P20 and the market price of the share on the date each right is exercised. The service period is 2019 through 2021, and the rights are exercisable in 2022. The market price of the share was P25 and P28 on December 31, 2019 and 2020, respectively. 1. What is the compensation expense for 2019? a. 25,000 b. 40,000 ce. 50,000 d. 30,000 2 What is the compensation expense for 2020? a, 120,000 b. 150,000 ec. 110;000 d. 160,000 648 Scanned with CamScannerProblem 31-7 Multiple choice (PFRS 2) 1. Share options are what type of share-based payment, transaction? Asset-settled share-based payment transaction Equity-settled share-based payment transaction Cash-settled share-based payment transaction — Liability-settled share-based payment transaction Bo sp 2. The total compensation expense in a share option plan is measured at a. Fair value of share options on date of grant b. Fair value of share options on date of exercisé c. Intrinsic valué of share options on date of grant d. Intrinsic value of share options on date of exercise 3. It is the difference between the fair value of the shares to which the counterparty has the right to subscribe and the price the counterparty is required to pay for those shares. a. Fair value b. Intrinsic value c. Market value d. Book value 4. The date on which total compensation expense is computed in a‘share option plan is the \ a. Date of grant b. Date of exercise c. Date when the market price coincides with the option price Date when the market price exceeds the option price 644 Scanned with CamScanner5: When issuing share options to employees, which of the following factors is most relevant j ini ‘i ant in de oo accounting treatment? : in determining the The par value of the shares issued ‘The market value of the shares issued The authorized number of shares Whether the share options are issued in liew'of salary poop 6. For transactions with employees, the fair value of the share options is measured on a. Exercise date b. Grant date c. End of reporting period d. Beginning of the year of grant . It is a contract that gives the employees the right, but not the obligation, to subscribe to the entity’s shares at a fixed or determinable price for a specified period of time. Share option Share warrant Share avpreciation right Share split Be op 8. In what circumstances is compensation expense immediately recognized under a share option plan? a. In all circumstances. , / b. In circumstances when the options are exercisable within two years for services rendered ‘over the next two years. c. In circumstan' prior service and the opt: exercisable.. d. In no circumstances immediately recognized. ces when the options are granted for ions are immediately is compensation expense 645 Scanned with CamScanner9. 10. Compensation expense resulting from a share option plan is generally . a. Recognized in the period of exercise. b. Recognized in the period of the grant. oo c. Allocated to the periods benefited by the employee’s required, service. , ; d. Allocated over the periods of the employee’s service life to retirement. If there is an acceleration of vesting, any payment made to the émployees on the cancelation or settlement of the grant shall be a. Accounted. for as repurchase of equity interest. b. Recognized in retained earnings. c. Recognized as component of other comprehensive income. ‘ d. Accounted for as repurchase of equity interest and any excess payment over the balance of share options outstanding shall be recognized as expense. Scanned with CamScannerProblem 31-8 Multiple choice (FRS) 1, Share appreciation rights payment transaction? Bhts are what type of share-based Asest settled share-based Payment transaction an ity settled share-based payment transaction ash settled share-based payment transaction , Equity settled share-based paythent transaction Boop 5 A cash settled share-based payment transaction increases which of the following? A current asset A noncurrent asset Equity A liability Be rp 3. What is the measurement date for a share-based payment to employees that is classified asa liability? a. The service inception date b. The grant date © c. The settlement date d. The end of reporting period 4. For’share appreciation rights, the measurement date for computing compensation is the Date the rights mature - Date the share reaches a predetermined amount Date of grant ‘ Date of exercise peop 5. In accounting for share appreciation rights, compensation expense is generally Not recognized : i ‘on the date of gran! er Rc ae the service period of employees Recognized on the date of exercise poop 647 Scanned with CamScanner