COURSE FAR 3: INTERMEDIATE ACCOUNTING III

DEVELOPER This module is prepared by Mr. Jerry D. Mariano. He is a faculty member of Tarlac
AND THEIR State University College of Business and Accountancy-Accountancy Department. He is
BACKGROUND a Certified Public Accountant. He teaches financial accounting and tax courses.
COURSE This course is the culmination of financial accounting courses. This will cover
DESCRIPTION constructive accounting and special topics in financial accounting. This course shall
thoroughly cover recognition, measurement and valuation, presentation and
disclosure requirements for special topics such as post-employment benefits,
accounting for income tax, share-based compensation and noncurrent asset held for
sale, discontinued operation and accounting changes.
COURSE 1. Employee Benefits (Postemployment Benefits& Other Employee Benefits)
OUTLINE 2. Accounting for Income Tax
3. Share-based Payments/Compensation
4. Noncurrent Held for Sale, Discontinued Operation and Accounting Changes
CHAPTER # 3
TITLE Share-Based Payment (Share Options & Share Appreciation Right)
RATIONALE This module covers the topic about accounting for share-based payment-Share
Options and Share Appreciation Rights. The highlights of this topic include the equity
settlement versus the cash settlement, measurement of share-based, recognition of
compensation expense, acceleration, modification and cancelation of terms and the
cash and share alternative.
This module provides knowledge and understanding to business students regarding
compensation arrangement set by the company based on the share-based payment.
INSTRUCTION This module helps to understand the concept and rules of accounting for employee
TO THE USERS benefits (postemployment). In this module, illustrations and sample problems are also
provided in an informative and comprehensive manner to be able to understand
better the topics. To evaluate what the students have learned, this module provides
work exercises (activity) at the closure activities section. To ensure that learning
objectives are attained at the end of the semester, the learner/students are evaluated
based on attendance, portfolio journal (activity), formative assessment and
summative assessment. See evaluation for the details. For further readings, see
assignment/agreement section.
PRE-TEST
LEARNING 1. Define and explain the concepts behind share-based compensation plan,
OBJECTIVES 2. Identify and record the transactions affecting share appreciation and share options
3. Solve and compute for the valuation of fair value method and intrinsic value
method of measuring share options, to account for the share-based transaction with
cash and share alternative
4. Classify and report the effect of each transaction in relation with share-based
compensation
CONTENT The share-based payment topic (Share options and share appreciation right are
PREPARATORY actually in the law subject partnership and corporation. In this module, the share-
ACTIVITIES based payment application is extensively discussed.
DEVELOPMENTAL ACTIVITIES
 Share-based Compensation-Share Options
A share-based compensation plan is a compensation arrangement established by the entity whereby
the entity’s employees shall receive shares of capital in exchange for their services or the entity incurs
liabilities to the employees in amounts based on the price of its shares.

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Compensation plans are a common feature of employee remuneration for directors, senior executives
and other key employees.
PFRS 2 measurement of share –based compensation:
1. Equity settled-share options
2. Cash settled-share appreciation rights
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. Typically, granted as
part of remuneration package, in addition to a cash salary and other employment benefits.
Measurement of compensation
a. FV Method
-this means compensation is equal to compensation to the FV of the SO on the date of grant.
-mandated by the PFRS 2.

b. Intrinsic Vale Method

-this means that compensation is equal to the intrinsic value of the SO. It is the “excess of the market
value of the share over the option price.” It can only be used if the FV of the share option cannot be
estimated reliably.

Recognition of Compensation
a. If the SO vest immediately, the employee is not required to complete a specified period of
service before unconditionally entitled to the SO. In this case, on grant date, the entity shall
recognize the compensation as expense in full with corresponding increase in equity.
b. If the SO 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. This is on the
theory that the share options are in recognition for services rendered between the date of
grant and the exercise date.

Journal Entries:
To recognize the compensation as expense (either as full expense for immediate recognition as stated in
letter (a) or (b) if there is vesting period, allocate the compensation expense over the vesting period-
from the date of grant to the date the options can first be exercised)
Salaries-share options X
Share options outstanding (SOO) X

To record the exercise of share options

Cash X
Share options outstanding X
Ordinary share capital X
Share premium X

Note: If the SO are not subsequently exercised, the share options outstanding account shall be adjusted
and credited to share premium.

Share options sometimes have conditions:

1. No. of share options may vary it depends on the increase in sales or performance of the
employee/s
2. Exercise price may change it depends on the increase in sales or performance of the employee/s

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 3. Vesting period
4. FV of share options

Note: The employee/s who completed the service period may or may not exercise the share options.
And it is also possible that during the vesting period some employees will leave the entity.

Illustration- with condition and share options vary

On January 1, 2019, an entity granted SO to each of the 300 employees working in the sales
department.
The FV option of each SO on grant date is P20.
Conditions:
1. The SO vest at the end of a three-year period provided that the employees remain in the entity’s
employ and
2. Provided the volume of sales will increase by an average of 10% per year.
2.1 if the sales increase by an average of 10%, each employee will receive 200 share
options
2.2 if the sales increase by an average of 15% per year, each employee will receive 300
share options.
During 2019, sales increased by 10%;

During 2020, the sales increased by 20% resulting in an average of 15% for the two years (10% +
20%=15%)

By the end 2021, the sales increased by an average of 16%. 20 employees left the entity.

Computation of compensation expense.

2019
Compensation expense (300 employees x 200 SO xP20 FV/3 years x 1 st year) 400,000
Salaries-SO 400,000
SOO 400,000
2020
Cumulative compensation (300 employees x 300 SO x P20/3yrs x 2nd year) 1,200,000
Compensation expense-2019 (400,000)
Compensation expense-2020 800,000
Salaries-SO 800,000
SOO 800,000
2021
Cumulative compensation (300 employees-20 employees x 300 SO x P20/3yrs x 3rd year) 1,680,000
Cumulative compensation-2020 (1,200,000)
Compensation expense-2021 480,000
Salaries-SO 480,000
SOO 480,000

Illustration-with condition and exercise price varies

On January 1, 2019, an entity granted a senior executive 20,000 share options conditional upon the
executive’s remaining in the entity’s employ until December 31, 2021.
Par value per share is P50 Exercise price is P100

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Exercise price drops to P80 if the entity’s earnings increase by at least an average of 10% per year over
the three-year period. On grant date, the entity estimates that the fair value of the share option is P30 if
the exercise price is P80.

If the exercise price is P100, the fair value of the share option is P25.

During 2019 and 2020, the earnings increased by 12% and 11% respectively. However, during 2021, the
earnings increased only by 4%.

Computation:

2019
Compensation expense (20,000 SO x P30 FV/3yrs x 1st yr) 200,000
Salaries-SO 200,000
SOO 200,000
2020
Cumulative compensation (20,000 x P30/3yrs x 2 nd yr) 400,000
Compensation expense-2019 (200,000)
Compensation expense-2020 200,000
Salaries-SO 200,000
SOO 200,000
2021
Cumulative compensation (20,000 x P25) 500,000
Cumulative compensation-2020 400,000
Compensation expense-2021 100,000
Salaries-SO 100,000
SOO 100,000

*(12%+11%+4%=27%/3=9%). Therefore, exercise price is P100 and the FV of the SO is P25.

Illustration-Intrinsic value
On January 1, 2019, an entity granted 10,000 share options to employees.

FV of the SO cannot be estimated reliably.

Par value per ordinary share is P100.
Option price (OP) is P125 and MV of the ordinary share at grant date is also P125.
Share Options can be exercised starting January 1, 2021

Market prices:
December 31, 2019-P150
December 31, 2020-P180
December 31, 2021-P200

Condition:
1. Vesting period, 2 years (the employees to remain In service until December 31, 2020)
All SO vested on Dec. 31, 2020 and no employees left the entity.

Computation:

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2019
Compensation expense (P150 MV 2020 – P125 OP x 10,000 SO/2yrs x 1 st yr) 125,000

2020
Cumulative expense (P180 MV 2021 - P125 OP x 10,000 SO/2yrs x 2 nd yr) 550,000
Compensation recognized in 2019 125,000
Compensation expense in2020 425,000

2021
Additional compensation in 2021 (P200 MV 2021-P180 MV 2020 x 10,000 SO) 200,000
Note: the increase in intrinsic value after the vesting period is recognized as additional compensation
immediately.

Acceleration of vesting
If the entity cancels or settles a grant of SO during the vesting period, the entity shall account for the
cancelation or settlement as an acceleration of vesting.
a. Recognized immediately the remainder of compensation expense.
b. Pay the employee on the cancelation or settlement of the grant and account it as repurchase of
equity interest, meaning deduction from equity. If the payment exceeds the FV of the SO, the
excess shall be recognized as an expense.

Illustration:
On January 1, 2019, an entity granted 50,000 SO to the employees.
Option price P60
Par Value/share 50
Vesting Period 4 years
Total compensation expense in 4 years 4,000,000
Compensation expense charged in income statement 2019 & 2020 1,000,000 & 1,050,000
*the entity decided to settle the award early on December 31, 2021.

Computation:
Compensation expense in 2021(4,000,000 Total compensation expense- 2,050,000 cumulative
compensation of 2019 & 2020) = 1,950,000

Salaries 1,950,000
SO outstanding 1,950,000

Cash (50,000 x P60) 3,000,000

SO outstanding 4,000,000
Share capital (50,000 x P50) 2,500,000
Share premium 4,500,000

Query

Suppose the SO are not exercised. Instead, the entity paid the employees P2,500,000 to cancel or settle
the SO.

Share options outstanding 2,050,000

*Salaries-SO 450,000
Cash 2,500,000

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 *any amount in excess FV already recognized is treated as expense.

IFRIC 11-Share-based payments in which the employees of a subsidiary are granted rights to the equity
instrument of the parent.
Measurement: FV of the SO at grant date
Use the account title Equity contribution from parent instead share options outstanding in the
computation of the compensation.

Journal Entries:
To record the compensation expense
Salaries-SO X
Equity contribution from parent. X

To record the exercise of the SO recognized by the parent entity

Cash X
Share capital X
Share premium X

Modification of condition
If an entity modify the vesting condition, the modification should be beneficial to employees like
increase in the FV of SO (favorable to employees but additional compensation expense to the entity.)
In this scenario we will recognize two compensations:
1. Compensation based on original condition 2. Compensation based on modification

However, if the condition is not beneficial to the employees, the entity shall continue to recognize the
compensation based on the original condition as if the modification had never occurred.
Example of modifications not beneficial to employees:
1. Reduces the FV of the equity instruments
2. Increasing the exercise price of the option

Illustration:
On January 1, 2019, an entity granted 100 share options to each of the 500 employees.

FV of SO on grant date P15

Vesting period 3 years

No of employees left the entity: No of employees expected to leave

2019: 40 70
2020: 35 30
2021: 45

Modification:
1. On January 1, 2020, the entity repriced the SO by lowering the exercise price. The
options still vest after three years.
2. Increase the FV of the SO of P6.

Computation:
2019
Compensation expense (500 E-40-70 x 100 SO x 15 FV / 3yrs x 1st yr) 195,000

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2020
Cumulative compensation-original (500-40-35-30 x 100 SO x 15 FV / 3yrs x 2 nd yr) 395,000
Compensation based on modification (395 employees x 100 SO x P6 FV/ 2yrs remaining) 118,500
Total cumulative compensation 513,500
Compensation expense for 2019 (195,000)
Compensation expense 2020 318,500

2021
Cumulative compensation-original (500-40-35-45 x 100 SO x 15 FV/ 3 yrs x 3 rd yr) 570,000
Compensation based on modification (380 employees x 100 SO x P6 FV) 228,000
Total cumulative compensation-December 31, 2021 798,000
Compensation expense for 2019 +2020 (195,000+ 318,500) (513,500)
Compensation expense for 2021 284,500

Additional Illustration:
A-In connection with a share option plan for the benefit of key employees, Ward Company intends to
distribute treasury shares when the options are exercised. These shares were previously brought at P42
per share. 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 during a 2-year period 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.
1. What amount should be reported as compensation expense for 2019? 400,000
FV of SO (100,000 x 12) = 1,200,000/3years x 1 st yr 400,000

2. 2019 Salaries 400,000

SO outstanding 400,000

2020 Salaries 400,000

SO outstanding 400,000

2021 Salaries 400,000

SO outstanding 400,000

2022 Cash 3,800,000

SO outstanding 1,200,000
Treasury shares 4,200,000
Share premium 800,000

Option price (100k x 38) 3,800,000

SO outstanding 1,200,000
Total consideration 5,000,000
Cost of Treasury shares (100K x 42) 4,200,000
Share premium 800,000

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B-On January 1, 2019, an entity granted 60,000 share options to employees. The share options vest at
the end of three years provided the employees remain in service until then. The option price is P60 and
the par value is P50. At the grant date, the entity concluded that the fair value of the share options
cannot be measured reliably. The share options have a life of 4 years which means that the share
options can be exercised within one year after vesting. The share prices are P62 on December 31, 2019,
P66 on December 31, 2020, P75 on December 31, 2021 and P85 on December 31, 2022. All share
options were exercised on December 31, 2022.
1. What is the compensation expense for 2022? 600,000
85-75=10 x 60,000= 600,000 additional compensation expense

2019 2020 2021

60,000 60,000 60,000
2 6 15
120,000 360,000 900,000
x 1/3 x 2/3 x 3/3
40,000 240,000 900,000
(40,000) (240,000)
200,000 660,000

Plus Additional compensation of P600,000

on 2022

2. What amount was credited to share premium upon exercise of the share options on December 31,
2022? 2,100,000
Cash (60,000 x 60) 3,600,000
SO outstanding 1,500,000
SC (60,000 x 50) 3,000,000
SP 2,100,000

 Share-Based Compensation- Share Appreciation Right (SAR)

To understand a cash settled share-based payment transaction
To know the recognition and measurement of SAR
To account share-based transaction with cash alternative and share alternative

Share appreciation right entitles an employee to receive cash which is equal to the excess of the market
value of the entity’s share over a predetermined price for a stated number of shares. In other words,
the employee entitles to a cash payment equal to the increase in the price of a given number of shares
over a given period.

Unlike in a SO, the entity shall recognize liability or obligation to pay cash in the future on exercise date
(on this date will be known if the entity has an obligation to pay cash)

Note: the entity will not issue shares or stock in SAR. If you see no. of shares in the problem, the shares
will be used only as a medium to be able to know the changes or appreciation of the market value of the
right at each reporting date.

Measurement: FV of the liability or the entity shall remeasure the FV of the liability at each reporting

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date with any changes in FV recognized in profit or loss for the period.

1. FV of liability= MV of share –predetermined price for a given number of shares over the
vesting period

Note: If the given problem has an intrinsic value of the share appreciation right, it is actually the
equivalent amount to be paid out to the employees on the date of exercise.

Recognition of compensation (SAR)

a. Vest immediately, the compensation is recognized on the date of grant
b. Does not vest immediately, the employee needs to complete the vesting period.

Illustration:
An entity granted SAR to the general manager on January 1, 2019. The employee is entitled to receive
cash equal to the appreciation in share price over the market value on January 1, 2019.

Vesting period 4 years

No. of shares 20,000
Exercise date January 1, 2023

The quote prices of the entity’s share are:

January 1, 2019 (predetermined price) 200
December 31, 2019 210
December 31, 2020 220
December 31, 2021 240
December 31, 2022 250

Computation:
December 31, 2019
Compensation Expense (210-200 x 20,000/4yrs x 1 st yr) 50,000
Salaries 50,000
Accrued salaries payable 50,000

December 31, 2020

Accrued compensation (220-200 x 20,000/ 4yrs x 2 nd yr) 200,000
Accrued compensation-2019 (50,000)
Compensation expense for 2020 150,000

Salaries 150,000
Accrued salaries payable 150,000

December 31, 2021

Accrued compensation (240-200 x 20,000/ 4 yrs x 3 rd yr) 600,000
Accrued compensation as of 2020 (200,000)
Compensation expense 2021 400,000

Salaries 400,000
Accrued salaries payable 400,000

December 31, 2022

Accrued compensation (250-200 x 20,000) 1,000,000

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 Accrued compensation as of 2021 (600,000)
Compensation expense for 2022 400,000

January 1, 2023
To settle the share appreciate right
Accrued salaries payable 1,000,000
Cash 1,000,000

Suppose the market value drops to P200 on December 31, 2022, the entity has no obligation
because there is no appreciation or increase in market value on exercise date.

Accrued salaries payable 600,000

Gain on reversal of share appreciation right 600,000

Illustration:
On January 1, 2019, Module Company granted 100 SARs to each of the 500 employees:
Vesting period 3 years
Employees left the entity --

No of employees exercised their SARs:

December 31, 2021 100
December 31, 2022 250
December 31, 2023 150

FV and Instrinsic Value of SARs:

FV IV
December 31, 2019 15
December 31, 2020 18
December 31, 2021 20 15
December 31, 2022 21 20
December 31, 2023 25

Computation:
December 31, 2019
Compensation expense (500 x 100 x 15 /3yrs x 1st yr) 250,000
Salaries 250,000
Accrued salaries payable 250,000

December 31, 2020

Accrued liability (500 x 100 x 18/3 yrs x 2 nd yr) 600,000
Accrued liability of 2019 (250,000)
Compensation expense for 2020 350,000
December 31, 2021
Accrued liability (500 – 100 x 100 x 20/3yrs x 3) 800,000
Accrued liability as of 2020 (600,000)
Compensation expense 200,000

Salaries 200,000
Accrued salaries payable 200,000

Salaries 150,000

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 Cash 150,000
(100 EMP X 100 X P15 IV)

Note: total compensation expense for 2021 is P350,000

200,000, compensation right not yet exercise; 150,000, compensation right already exercised

December 31, 2022

Accrued liability (400-250 x 100 x 21) 315,000
Accrued liability as of 2021 (800,000)
Decrease in accrued liability (485,000)

Accrued salaries payable 485,000

Salaries 485,000

Salaries 500,000
Cash 500,000
(250 emp x 100 x 20)

Net compensation for 2022 is (15,000)

500,000 compensation exercised-reversal of accrued liability of rights not yet exercised
(485,000)

December 31, 2023

Accrued liability (150 x 100 x 25) 375,000
Accrued liability as of 2022 315,000
Net compensation expense for 2023 60,000

Salaries 60,000
Accrued salaries payable 315,000
Cash 375,000

Cash and share alternative

An employee may have the right to choose between:
a. Cash alternative -cash payment b. share alternative- equity shares given to the
employee

If the entity has the choice of settlement, there is no accounting problem, but if the employee has the
right to choose the settlement the entity has deemed to issue a compound financial instrument. The
compound instrument is accounted as partly liability which is the cash alternative and partly equity
which is the share alternative.
Equity component=FV of the whole instrument- FV of the liability

Illustration:
On January 1, 2019, an entity granted to an employee the right to choose either:
a. Share alternative-12,000 shares
b. Cash alternative-cash payment equal to phantom shares of 10,000

Vesting period 3 years

Par value of the share at the date of grant P25
Share price at the date of grant 51
FV of the share alternative per share 48

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Share prices market value:
December 31, 2019 54
December 31, 2020 60
December 31, 2021 65

Computation:
FV of share alternative (12,000 x P48) 576,000
FV of liability on grant date (10,000 shares x 51) 510,000
Equity component 66,000

*576,000 total value of the whole compound financial instrument.

Journal entries:
December 31, 2019
Salaries (66,000/3) 22,000
Share options outstanding 22,000

Salaries 180,000
Accrued salaries payable 180,000
(10,000 x 54/3yrs)

December 31, 2020

Salaries (66,000/3 x 1st yr) 22,000
Share options outstanding 22,000

Salaries 220,000
Accrued salaries payable 220,000
(10,000 x 60/3yrs x 2nd yr-180,000)

December 31, 2021

Salaries (66,000/3 x 1st yr) 22,000
Share options outstanding 22,000

Salaries 250,000
Accrued salaries payable 250,000
(10,000 x 65/3yrs x 3rd yr-400,000)

Final Accounting
If the employee has chosen the cash alternative:

Accrued salaries payable 650,000

Share options outstanding 66,000
Cash (12,000 shares x 25) 650,000
Share premium 66,000

If the employee has chosen the equity alternative:

Accrued salaries payable 650,000

Share options outstanding 66,000
Share capital (12,000 shares x 25) 300,000

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 Share premium 416,000

Underscore that the entity issued 12,000 shares and not 10,000 phantom shares which serve as
the basis only in computing the liability.

Additional information: If the entity purchased an asset on account and the supplier has the
choice of settlement, the instrument issued is a compound financial instrument. The fair value
of the asset received will be used as the component of whole instrument.
FV of the asset received- fair value of liability= Equity component

And if the fair value of the asset received cannot be measured directly, the asset is recorded at
the fair value of the shares to be issued.

Additional Illustration:
A-On January 1, 2019, an entity offered management share appreciation rights equal to 50,000 shares
with a predetermined price of P100. The service period is 3 years and the exercise date is January 1,
2022. The quoted prices per share are P124 on December 31, 2019, P151 on December 31, 2020 and
P151 on December 31, 2021.
1. What amount should be charged to compensation expense for 2021? 850,000
2019 2020 2021
50,000 50,000 50,000
24 51 51
1,200,000 2,550,000 2,550,000
x 1/3 x 2/3 x 3/3
400,000 1,700,000 2,550,000
(400,000) (1,700,000)
1,300,000 850,000

2. What amount should be recognized as gain on reversal of share appreciation rights in 2021 if the
market price dropped to P120 on December 31, 2021? 700,000
Cumulative 2020 1,700,000
Cumulative 2021 (50,000 x 20) 1,000,000
Gain on reversal 700,000

B-On January 1, 2019, an entity granted the chief executive officer (CEO) 50,000 share appreciation
rights for past services. The rights are exercisable immediately and expire on December 31, 2020. On
exercise, the CEO is entitled to receive cash for the excess of the share market price on exercise date
over the market price on grant date. The CEO did not exercise any of the rights in 2019. The market
price of the share was P100 on January 1, 2019 and P115 on December 31, 2019. The CEO exercised the
rights on December 31, 2020 when the market price was P110.

1. What is the compensation expense for 2019? 750,000

50,000 x (115-100)= 750,000 The compensation is recognized as expensed entirely in 2019.

Salaries 750,000
Accrued salaries payable 750,000

2. What amount should be recognized as gain on reversal of share appreciation rights in 2020?
Accrued compensation -12/31/20 (50,000 x 10) 500,000
Accrued compensation -12/31/19 (750,000)
Dec in accrued compensation (250,000)

Accrued salaries payable 750,000

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Cash 500,000
Gain on reversal of share appreciation rights 250,000

CLOSURE ACTIVITIES
Share-Based Payments

The following work exercises intend to evaluate what the learners have learned in this topic. Write
your answers in your portfolio journal. Show your computation in good form.

Problem A
On January 1, 2019, Masipag Company granted 100 share options each to 500 employees, conditional
upon the employee’s remaining in the entity’s employ during the vesting period. The share options vest
at the end of a three-year period. On grant date, each share option has a fair value of P30. The par value
per share is P100 and the option price is P120. On December 31, 2020, 30 employees have left and it is
expected that on the basis of a weighted average probability, a further 30 employees will leave before
the end of the three-year period. On December 31, 2021, only 20 employees actually left and all of the
share options are exercised on such date.

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

Problem B
On January 1, 2019, Relax Company granted to a senior executive 30,000 share options, conditional
upon the executive’s remaining in the entity’s employ until December 31, 2021. The par value per share
is P50. The exercise price is P100. However, the exercise price drops to P80 if the entity’s earnings
increase by at least an average of 10% per year over the three-year period. On grant date, the entity
estimated that the fair value of the share option is P30 if the exercise price is P80. If the exercise price is
P100, the fair value of the share option is P25. During 2019 and 2020, the earnings increased by 11%
and 12% respectively. However, during 2021, the earnings increased only by 4%.

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

Problem C
On January 1, 2019, Alpha Company offered share appreciation rights with the following terms:

Predetermined price P100 per share

Number of shares 50,000 shares
Service period 3 years
Exercise date January 1, 2022

The share appreciation rights are exercised on January 1, 2022. The quoted prices per share are 100,
124, 151 and 151 on January 1, 2019, December 31, 2019, December 31, 2020 and December 31, 2021,
respectively.

3. What amount should be reported as compensation expense for 2021 as a result of the share
appreciation rights?

Problem D
On January 1, 2019, Planet Company purchased an equipment with a cash price of P2,000,000. The
supplier can choose how the purchase is to be settled.

The choices are 20,000 shares with par value of P50 in one years’ time, or a cash payment equal to the
market value of 15,000 phantom shares on December 31, 2019.

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At grant date on January 1, 2019, the market price of each share is P80 and on the date of settlement on
December 31, 2019, the market price of each share is P100.

4. What is the equity component arising from the purchase of equipment with share and cash
alternative?
5. What amount of interest expense should be recognized on December 31, 2019 if the supplier has
chosen the “cash alternative”?

Problem E
B Company has granted share options to its employees. The total compensation expense to the vesting
date of December 31, 2020 has been calculated at P6,000,000. The entity has decided to settle the
award early on December 31, 2019. The compensation expense charged since the date of grant on
January 1, 2017 was P1,500,000 for 2017 and P1,300,000 for 2018. The compensation expense that
would have been charged for 2019 is P1,200,000.
6.What is the compensation expense for 2019?
7. What is the compensation expense for 2019, if the share options are not exercised but instead the
entity paid P5,000,000 to the employees ?

Problem F
C Company granted 10,000 share options to each of its five directors on January 1, 2019. The options
vest on January 1, 2023. The fair value of each option on January 1, 2019 is P50 and it is anticipated that
all of the share options will vest on January 1, 2023.

8. What will be the increase in expense and equity for the year ended December 31, 2019?

Problem G
On January 1, 2019, F Company granted its president 50,000 share appreciation rights for past services.
These rights are exercisable immediately and expire on December 31, 2020. On exercise date, the
president is entitled to receive cash for the excess of the share market price over the share market price
on the grant date. The president did not exercise any of the rights during 2019. The market price of the
share was P100 on January 1, 2019 and P115 on December 31, 2019. The grantee exercised the rights
on December 31, 2020 when the market price was P115.

9. As a result of the share appreciation rights, what amount should be recognized as gain on reversal of
share appreciation rights in 2020?

Problem H
On January 1, 2019, G Company granted to an employee the right to choose either shares or cash
payment. The choices are as follows:
 Share alternative – equal to 25,000 shares with par value of P30.
 Cash alternative – cash payment equal to the market value of 20,000 shares.
The grant is conditional upon the completion of three years of service. On grant date, on January 1,
2019, the share price is P51. The share prices for the three-year vesting period are P54 on December 31,
2019, P60 on December 31, 2020, and P65 on December 31, 2021. After taking into account the effect of
vesting restrictions, the entity has estimated that the fair value of the share alternative is P48.

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10. What is the compensation expense for 2019?
11. What is the compensation expense for 2020?
12. What is the share premium if employee chose the share alternative?
13. What is the share premium if employee chose the cash alternative?
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Philippians 4:13- I can do all this through him who gives me strength.
SYNTHESIS / GENERALIZATION
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. Typically, granted as
part of remuneration package, in addition to a cash salary and other employment benefits.

Measurement of compensation
a. FV Method
-this means compensation is equal to compensation to the FV of the SO on the date of grant.
-mandated by the PFRS 2.

b. Intrinsic Vale Method

-this means that compensation is equal to the intrinsic value of the SO. It is the “excess of the market
value of the share over the option price.” It can only be used if the FV of the share option cannot be
estimated reliably.
Recognition of Compensation

a. If the SO vest immediately, the employee is not required to complete a specified period of
service before unconditionally entitled to the SO. In this case, on grant date, the entity shall
recognize the compensation as expense in full with corresponding increase in equity.

b. If the SO 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. This is on the theory that the share
options are in recognition for services rendered between the date of grant and the exercise
date.

Share appreciation right entitles an employee to receive cash which is equal to the excess of the market
value of the entity’s share over a predetermined price for a stated number of shares. In other words,
the employee entitles to a cash payment equal to the increase in the price of a given number of shares
over a given period.

Unlike in a SO, the entity shall recognize liability or obligation to pay cash in the future on exercise date
(on this date will be known if the entity has an obligation to pay cash)

Note: the entity will not issue shares or stock in SAR. If you see no. of shares in the problem, the shares
will be used only as a medium to be able to know the changes or appreciation of the market value of the
right at each reporting date.

Measurement: FV of the liability or the entity shall remeasure the FV of the liability at each reporting
date with any changes in FV recognized in profit or loss for the period.

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FV of liability= MV of share –predetermined price for a given number of shares over the vesting period

Note: If the given problem has an intrinsic value of the share appreciation right, it is actually the
equivalent amount to be paid out to the employees on the date of exercise.

Recognition of compensation (SAR)

a. Vest immediately, the compensation is recognized on the date of grant
b. Does not vest immediately, the employee needs to complete the vesting period.

EVALUATION

The student/learner’s performance in the module is evaluated as follows:

20% Attendance (Active participation in the class)

20% Portfolio Journal (Answers to Portfolio Journal)
20% Formative Examination
40% Summative Examination (This topic is included in the Online/Offline Written
Midterm Examination)
ASSIGNMENT / The next topic is Noncurrent Asset Held for Sale, Discontinued Operation and
AGREEMENT Accounting Changes. Student is advised to read in advance the topic in the book of
Valix, Peralta, Financial Accounting 3, 2019 edition.
For further reading: Milan Financial Accounting 3, 2019 edition
REFERENCES Valix, Peralta, Financial Accounting Volumes 2, 2019 edition
Millan, Intermediate Accounting Part 2, 2019 edition

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