INTRINSIC VALUE METHOD

PFRS 2, PARAGRAPH 24, provides that if the fair value of the share options cannot be
estimated reliably, the entity shall measure the share options at their intrinsic value initially and
subsequently at each reporting date and at the date of final settlement, with any change in
intrinsic value recognized in profit and loss.

PFRS 2, PARAGRAPH 24, provides that the intrinsic value method can be used only if the fair
value of the share option cannot be estimated reliably.
Market value of share P xxx
Option price xxx
----------------
Value of Share Option P xxx
==========

Note:
* Share option outstanding will be adjusted to FMV of shares up to end of vesting period.

* After vesting period to exercise date, the value of share options outstanding will be adjusted to
FMV at Exercise date. Thus, increase in intrinsic value after the vesting period is recognized as
additional compensation immediately.

* Increase in intrinsic value after the vesting period can be computed by deducting from the
Market value at exercise date or market value after the vesting period , the Market value at the
end vesting period, thus:
Market value at exercise date or MV after the vesting period P xxx
Market value at the end of vesting period xxx
------------------
Increase in Intrinsic Value P xxx
===========

ILLUSTRATION

On January 1, 2029, an entity granted 5,000 share options to employees. The share options
vest on December 31, 2030 provided that employees remain in service until then.

The fair value of the share option cannot be estimated reliably. The par value per ordinary share
is P50.

The option price is P125 and the market value of the ordinary share is also P125 at the date of
grant.

All share options vested on December 31, 2030 and no employees left the entity.

The share options can be exercised starting January 1, 2031 and expire two years after. All
share options are exercised on December 31, 2031.

The share market prices are P150 on December 31, 2029, P180 on December 31, 2030 and
P200 on December 31, 2031.
December 31, 2029

Market value – December 31, 2029 P 150

Option price 125
--------------------
Excess 25
Multiply by share option 5,000
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Total Compensation for the year 2029 P 125,000
============
Compensation to be accrued for 2029
125,000 x 1/2 P 62,500
============
Salaries- share options 62,500
Share option outstanding 62,500

December 31, 2030

Market value-December 31, 2030 P 180
Option price 125
-------------------
Excess (Intrinsic value of each option) P 55
Multiply by share options 5,000
--------------------
Total Compensation expense for 2030 P 275,000
Less: Accrual 2029 62,500
--------------------
Compensation to be accrued for 2030 P 212,500
-------------------
Salaries-share options 212,500
Share options outstanding 212,500
December 31, 2031

Increase in Intrinsic Value

Market value – December 31, 2031 P 200
Market value –December 31, 2030 180
--------------------
Increase in intrinsic value 20
Multiply by share options 5,000
--------------------
Additional compensation in 2029 P 100,000
============

Salaries – share options 100,000

Share options outstanding 100,000

Exercise Date
Cash (5,000 x P125) 625,000
Share option outstanding (275,000+200,000) 375,000
Ordinary share capital (5,000 x P100) 500,000
Share premium
[ 375,000 +(625,000-500,00)= 600,000] 500,000

Exercise A:

Camil Conmpany adopted a share option plan that granted options to key executives to
purchase 10,000 ordinary shares with par value of P100.

The options were granted on January 1, 2029 and were exercisable two years after the date of
grant if the grantee was still an employee of the entity.

The options expired three years from the date of grant. The option price was set at P300 and
the market price at the date of the grant was also P300 per share.

The fair value of the share options cannot be estimated reliably.

The share market prices are P450 on December 31, 2029, P500 on December 31, 2030 and
P550 on December 31, 2031. All of the options were exercised on December 31, 2031.

Required: Journal entries to record the above transactions.