Accounting For Share Based Compensation-PROBLEMS

TOPIC 9: Share-based Compensation
Lecture 01 - Share Options

Reference: Intermediate Accounting 2 (2020 edition), Valix, Peralta, Valix
General jutsu:
SHARE-BASED COMPENSATION
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 the shares.
PFRS 2 sets out the measurement principles and specific requirements for accounting of the following share-based compensation:
a. Equity-settled - The entity uses 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 right.
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. Typically,
share options are granted to officers and key employees as part of their remuneration package, in addition to a cash salary and other employment benefits.
MEASUREMENT OF SHARE OPTIONS

a. Fair value method - the compensation is equal to the fair value of the share options at the date of grant, mandated by the PFRS 2.
b. Intrinsic value method - the compensation is equal to the intrinsic value of the share options. It is the excess of the market value of the share over the option price. Paragraph 24 of PFRS 2 provides
that this method can only be used if the fair value of the share option cannot be estimated reliably.
RECOGNITION OF COMPENSATION: SHARE OPTIONS

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 the 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 period or vesting period, meaning, from the
date of grant to the date on which the options can first be exercised.
On January 1, 2020, to supplement salaries of executives, Grazilda Company issued share options to executives to purchase 40,000 ordinary shares of P100 par value at P125 per share. On such date,
PROBLEM
the market value of ordinary share is P150 per share. The fair value of each option is P30.
The share options are exercisable starting January 1, 2022 and expire one year after. Options covering 35,000 shares are exercised on January 15, 2022. Options covering the remaining shares expired.
REQUIRED Provide journal entries in connection with the share options from January 1, 2020 to December 31, 2022.
2020
Dec 31 Salaries expense PHP 1,200,000.00
Share options outstanding (40,000 x 30) PHP 1,200,000.00
2022
Jan 15 Cash (35,000 x 125) PHP 4,375,000.00
Share options outstanding (35,000 x 30) PHP 1,050,000.00
Ordinary share capital PHP 3,500,000.00
Share premium PHP 1,925,000.00
Dec 31 Share options outstanding (5,000 x 30) PHP 150,000.00

Share premium - unexercised share options PHP 150,000.00
Pure Company adopted a share option plan that granted options to key executives to purchase 30,000 ordinary shares with P10 par value. The options were granted on January 1, 2020 and were
PROBLEM
exercisable two years after the date of grant if the grantee was still an employee of the entity.
The options expire three years from the date of grant. The option price was set at P30 and the market price at the date of the grant was also P30 a share. The fair value of the share options cannot be
estimated reliably.
The share market prices are P45 on December 31, 2020, P50 on December 31, 2021, and P55 on December 31, 2022. All of the options were exercised on December 31, 2022.
REQUIRED Provide journal entries in connection with the share options from January 1, 2020 to December 31, 2022 using the intrinsic value method.
2020
Dec 31 Salaries expense PHP 225,000.00
Share options outstanding ((45 - 30) x 30,000 / 2) PHP 225,000.00
2021
Share options outstanding ((50 - 30) x 30,000 - 225,000) PHP 375,000.00
2022
Share options outstanding ((55 - 50) x 30,000) PHP 150,000.00
Cash (30,000 x 30) PHP 900,000.00

Share options outstanding PHP 750,000.00
Ordinary share capital (30,000 x 10) PHP 300,000.00
The December 31, 2022 entry is immediately recognized as an additional compensation after the vesting period due to the increase in intrinsic value.
Rose Company has granted 150,000 share options to the employees with a fair value of P6,000,000. The options vest in three years. The option price is P80 and the par value is P50. The Monte-Carlo
PROBLEM
Model was used to value the options.
On January 1, 2020, which is the date of the grant, the estimate of employees leaving the entity during the vesting period is 5%. On December 31, 2021, the estimate of employees leaving the entity
during the vesting period is revised to 6%.
On December 31, 2022, only 5% of the employees actually left the entity and only 100,000 share options were exercised when the market value is P150 per share.
REQUIRED Compute the compensation expense for 2020, 2021, and 2022 as a result of the share options.
2020 2021 2022

Fair value PHP 6,000,000.00 PHP 6,000,000.00 PHP 6,000,000.00
Multiplied by: number of employees remaining (100% less
95% 94% 95%
estimated number of employees leaving)
Total compensation PHP 5,700,000.00 PHP5,640,000.00 PHP 5,700,000.00
Divided by: number of vesting years 3 3 3
Multiplied by: number of accrued years 1 2 3
Cumulative compensation PHP 1,900,000.00 PHP 3,760,000.00 PHP 5,700,000.00
Less: Cumulative compensation of preceding year PHP (1,900,000.00) PHP (3,760,000.00)
Compensation expense for the year PHP 1,900,000.00 PHP 1,860,000.00 PHP 1,940,000.00
Therefore, compensation expenses for the years 2020, 2021, and 2022 are P1,900,000, P1,860,000, and P1,940,000 respectively.
REQUIRED Compute the share premium as a result of the exercise of the share options in 2022.
Cash PHP 8,000,000.00

Share options outstanding PHP 3,800,000.00
Ordinary shares PHP 5,000,000.00
Therefore, share premium amounts to P6,800,000.

Marie Company granted 200 share options to 300 employees, conditional upon the employees remaining in the entity's employ during the vesting period. The share options will vest over a three-year
PROBLEM
period. The fair value of each option is P50.
By the end of 2020, 20 employees have left and based on the weighted average probability, a further 10 employees will leave during the vesting period.
By the end of 2021, only 8 employees have left and a further 32 employees will leave during 2022.
By the end of 2022, only 25 employees left the entity.
2020 2021 2022

Number of employees 300 300 300
Less: Employees who left (cumulative) 20 28 53
Less: Employees who are expected to leave 10 32 -
Employees entitled to share options 270 240 247
Multiplied by share options per employee 200 200 200
Total share options 54,000 48,000 49,400
Multiplied by fair value PHP 50.00 PHP 50.00 PHP 50.00
Total compensation PHP 2,700,000.00 PHP 2,400,000.00 PHP 2,470,000.00
Cumulative compensation PHP 900,000.00 PHP 1,600,000.00 PHP 2,470,000.00
Less: Cumulative compensation of preceding year PHP (900,000.00) PHP (1,600,000.00)
Compensation expense for the year PHP 900,000.00 PHP 700,000.00 PHP 870,000.00
Therefore, compensation expenses for the years 2020, 2021, and 2022 are P900,000, P700,000, and P870,000 respectively.
On January 1, 2020, Hannah Company granted share options to each of the 100 employees. The share options will vest at the end of 2022, provided that the employees will remain in the entity's
PROBLEM
employ and provided the sales increase at least by an average of 5% per year. The fair value of each option is P30.
If the sales increase by an average of at least 5% per year, each employee shall receive 100 share options.
No employees left during the three-year vesting period. The sales during the vesting period increased by 8% in 2020, 10% in 2021, and 18% in 2022.
2020 2021 2022

Number of employees 100 100 100
Less: Employees who left (cumulative) - - -
Less: Employees who are expected to leave - - -
Employees entitled to share options 100 100 100
Multiplied by share options per employee 100 100 200
Total share options 10,000 10,000 20,000
Multiplied by fair value PHP 30.00 PHP 30.00 PHP 30.00
Total compensation PHP 300,000.00 PHP 300,000.00 PHP 600,000.00
Cumulative compensation PHP 100,000.00 PHP 200,000.00 PHP 600,000.00
Less: Cumulative compensation of preceding year PHP (100,000.00) PHP (200,000.00)
Average increases per year: 2020 2021 2022

Increase in previous year 8% 8% 10%
Increase in current year 8% 10% 18%
Total 16% 18% 28%
Divided by 2 2 2 2
Average increase 8% 9% 14%
Number of share options applicable 100 100 200
Therefore, compensation expenses for the years 2020, 2021, and 2022 are P100,000, P100,000, and P400,000 respectively.
On January 1, 2020, Charm Company granted 10,000 share options to the CEO, conditional upon the executive's remaining in the entity's employ until the end of 2022. The par value is P50 and the
PROBLEM
exercise price is P120. However, if earnings increase by at least an average of 10% per year over the three-year period, the exercise price is P90.
On January 1, 2020, the entity estimated that the fair value of the share option is P45 if the exercise price is P90. If the exercise price is P120, the fair value of the option is P40.
The earnings of the entity increased over the three-year period as follows:
2020 10%
2021 11%
2022 3%
The share options were exercised on December 31, 2022.
REQUIRED Prepare the journal entries to record the share options each year and the exercise of the share options on December 31, 2022.
2020 2021 2022

Share options 10,000 10,000 10,000
Multiply by fair value PHP 45.00 PHP 45.00 PHP 40.00
Average increases per year: 2020 2021 2022

Increase in previous years (cumulative) 10% 21%
Increase in current year 10% 11% 3%
Total 10% 21% 24%
Divided by number of years 1 2 3
Average increase 10.00% 10.50% 8.00%
Exercise price applicable PHP 45.00 PHP 45.00 PHP 40.00
2020
2021
2022
Cash PHP 1,200,000.00

Ordinary share capital PHP 500,000.00
On January 1, 2020, Easy Company granted 30,000 share options to employees. The share options will vest at the end of three years provided the employees remain in service until then. The option
PROBLEM
price is P60 and the entity's share price is also P60 at the date of grant. The par value of the share is P50.
At the date of grant, the entity concluded that the fair value of the share options cannot be estimated reliably.
The share options have a life of 6 years. This means that the options can be exercised within three years after vesting. All share options vested at the end of three years and no employees left during
the three-year period.
The share prices and the number of share options exercised are set out below.
Share options
Share price
exercised
2020 PHP 63.00
2021 PHP 66.00
2022 PHP 75.00
2023 PHP 88.00 10,000
2024 PHP 100.00 15,000
2025 PHP 90.00 5,000
REQUIRED Prepare journal entries to record the compensation expense each year and the exercise of the share options.
VESTING PERIOD EXERCISE PERIOD

2020 2021 2022 2023 2024 2025
Year-end share price PHP 63.00 PHP 66.00 PHP 75.00 PHP 88.00 PHP 100.00 PHP 90.00
Less: Option price (within vesting period) PHP (60.00) PHP (60.00) PHP (60.00) PHP - PHP - PHP -
Less: Previous share price (after vesting period) PHP - PHP - PHP - PHP (75.00) PHP (88.00) PHP (100.00)
Excess / increase in intrinsic value PHP 3.00 PHP 6.00 PHP 15.00 PHP 13.00 PHP 12.00 PHP (10.00)
Multiplied by number of shares remaining 30,000 30,000 30,000 30,000 20,000 5,000
Total compensation PHP 90,000.00 PHP 180,000.00 PHP 450,000.00 PHP 390,000.00 PHP 240,000.00 PHP (50,000.00)
2020
2021
2022
2023
Cash (10,000 x 60) PHP 600,000.00

Share options outstanding (10,000 x (88-60)) PHP 280,000.00
Share premium PHP 380,000.00
2024
Cash (15,000 x 60) PHP 900,000.00

2025
Dec 31 Share options outstanding PHP 50,000.00
Gain on reversal of increase in intrinsic value PHP 50,000.00
Cash (5,000 x 60) PHP 300,000.00

On January 1, 2020, Joice Company granted 20,000 share options to the employees. The option price is P110 and the par value of each share is P100. The vesting period is 4 years. The fair value of the
PROBLEM
share options to the vesting date on December 31, 2023 has been reliably determined at P1,500,000.
The entity has decided to settle the award early on December 31, 2022. The compensation expense recognized was P300,000 in 2020 and P400,000 in 2021.
The compensation expense that would have been charged in 2022 is P500,000. The share options are exercised by the employees on December 31, 2022.
REQUIRED Prepare journal entries related to the share options for 2020, 2021, and 2022.
2020
2021
2022
Share options outstanding (1,500,000 - (300,000 +
PHP 800,000.00
400,000))
Cash (20,000 x 110) PHP 2,200,000.00

Ordinary share capital (20,000 x 100) PHP 2,000,000.00
REQUIRED Prepare journal entry related to the share options for2022 assuming that the entity paid P1,300,000 to the employees, instead of issuing the share options.
Share options outstanding (300,000 + 400,000) PHP 700,000.00

Salaries expense PHP 600,000.00
Cash PHP 1,300,000.00
The company adopted a stock option plan that granted options to executives to purchase 30,000 shares of the company’s P 10 par value common stock. The options were granted on January 2, year 1
PROBLEM
and were exercisable two years after date of grant if the grantee is still an employee of the company.
The options expire three years from date of grant. The option price was set at P 30 and the market price at the date of the grant was P 45/share. The fair value of the stock option cannot be estimated
reliably.
The market price of the share was P 52 at the end of year 1 and 60 at the end of year 2.
All the options were exercised during year 3; 20,000 shares on June 30 when the market price was P 60/share and 10,000 shares on August 30 when the price was P 70/share.
REQUIRED Prepare all journal entries relating to the stock option plan.

Year 1, Grant date Year 1, year-end Year 2 Year 3, June 30 Year 3, August 30
Year-end share price PHP 45.00 PHP 52.00 PHP 60.00 PHP 60.00 PHP 70.00
Less: Option price (within vesting period) PHP (30.00) PHP (30.00) PHP (30.00)
Less: Previous share price (after vesting period) PHP - PHP - PHP - PHP (60.00)
Excess / increase in intrinsic value PHP 15.00 PHP 22.00 PHP 30.00 PHP 10.00
Multiplied by number of shares remaining 30,000 30,000 30,000 10,000
Total compensation PHP 450,000.00 PHP 660,000.00 PHP 900,000.00 PHP - PHP 100,000.00
Cumulative compensation PHP 330,000.00 PHP 900,000.00
Less: Cumulative compensation of preceding year PHP - PHP (330,000.00)
Compensation expense for the year PHP - PHP 330,000.00 PHP 570,000.00
The Year 3, August 30 credit to share options is immediately recognized as an additional compensation after the vesting period due to the increase in intrinsic value.
Y1
Jan 2 No entry. Share options weren't vested at this time.

Y2
Y3
June 30 Cash PHP 600,000.00
August 30 Salaries expense PHP 100,000.00

Cash PHP 300,000.00

On January 1, 2XX5, Digong Company granted an officer an option to purchase 50,000 shares of Digong’s P50 par value common stock at P150 per share. The option became exercisable on December
PROBLEM
31, 2XX6, after the employee completed two years of service. The option was exercised on January 15, 2XX7.
REQUIRED Prepare the journal entries recording all the related transactions assuming the fair value of the stock option cannot be measured reliably on the date of the grant.

2XX5, Jan 1 2XX5, Dec 31 2XX6, year-end 2XX7, Jan 15
Market price PHP 180.00 PHP 200.00 PHP 230.00 PHP 250.00
Less: Option price (within vesting period) PHP (150.00) PHP (150.00) PHP (150.00)
Less: Previous market price (after vesting period) PHP - PHP - PHP - PHP (230.00)
Excess / increase in intrinsic value PHP 30.00 PHP 50.00 PHP 80.00 PHP 20.00
Multiplied by number of shares remaining 50,000 50,000 50,000 50,000
Total compensation PHP 1,500,000.00 PHP 2,500,000.00 PHP 4,000,000.00 PHP 1,000,000.00
Cumulative compensation PHP 1,250,000.00 PHP 4,000,000.00
Less: Cumulative compensation of preceding year No entry PHP - PHP (1,250,000.00)
Compensation expense for the year PHP - PHP 1,250,000.00 PHP 2,750,000.00
2XX5

2XX6
2XX7
Jan 15 Salaries expense PHP 1,000,000.00
Cash (50,000 x 150) PHP 7,500,000.00

Share options outstanding (50,000 x (250 -150)) PHP 5,000,000.00
On January 1, 2XX5, Digong Company granted an officer an option to purchase 50,000 shares of Digong’s P50 par value common stock at P150 per share. The option became exercisable on December
PROBLEM
31, 2XX6, after the employee completed two years of service. The option was exercised on January 15, 2XX7.
REQUIRED Prepare the journal entries recording all the related transactions assuming the fair value of the stock option is P 80 on January 1, 2XX5 and P 100 on December 31, 2XX5.
2XX5, Jan 1 2XX5, Dec 31 2XX6, Dec 31

Share options 50,000 50,000 50,000
Less: Cumulative compensation of preceding year PHP - PHP (2,500,000.00)
Compensation expense for the year PHP - PHP 2,500,000.00 PHP 2,500,000.00
2XX5

2XX6
2XX7
Jan 15 Cash (50,000 x 150) PHP 7,500,000.00
TOPIC 9: Share-based Compensation
Lecture 02 - Share Appreciation Right
Reference: Intermediate Accounting 2 (2020 edition), Valix, Peralta, Valix
General jutsu:
CASH SETTLED TRANSACTION

A cash settled transaction is a share-based payment transaction whereby an entity incurs a liability for services received and the liability is based on the entity's equity instruments. PFRS 2 paragraph
30 provides that the entity shall measure the services acquired and the liability incurred at the fair value of the liability.
SHARE APPRECIATION RIGHT

A 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. It
entitles the employee to a cash payment equal to the increase in the price of a given number of shares over a given period.
Like a share option, a share appreciation right is viewed as a 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 right 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 the fair value are included in
profit or loss.
The fair value of the 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 . Basically, the compensation in
a share appreciation right is the cash paid by the entity.
RECOGNITION OF COMPENSATION
a. If the share appreciation right vests immediately, the compensation is recognized 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 over the service or vesting period.
CASH AND SHARE ALTERNATIVE

Some share-based payment transactions allow the employee the choice as to whether to settle the transaction in cash, or by issuing entity shares. An employee has the right to choose between:
a. Cash alternative - cash payment equal to the market value of a certain number of shares subject to certain conditions.
b. Share alternative - equity shares given to the employee.
The accounting for this type of instrument depends on which party has the choice of settlement.
If the entity has the choice of settlement, there is no accounting problem. The entity shall account for the instrument initially either as a liability or equity, but not both. In other words, the
instrument is not a compound financial statement.
If the employee has the right to choose the settlement, the entity is deemed to have issued a compound financial statement. Thus, the compound financial instrument is accounted for as partly
liability (cash alternative) and partly equity (share alternative).
The equity component is usually the fair value of the whole compound financial instrument less the fair value of the liability component.
PROBLEM On January 1, 2020, Generous Company offered the top management share appreciation rights with the following terms:
Predetermined price per share PHP 50.00

Number of shares 20,000 shares
Service period 3 years
Expiration date December 31, 2022
The share appreciation is to be paid upon exercise. They were exercised on December 31, 2022.
The share prices are as follows:

January 1, 2020 PHP 50.00
December 31, 2020 PHP 56.00
REQUIRED Provide journal entries in connection with the share appreciation rights.
2020 2021 2022

Current market price PHP 56.00 PHP 68.00 PHP 71.00
Less: Predetermined price PHP (50.00) PHP (50.00) PHP (50.00)
Excess PHP 6.00 PHP 18.00 PHP 21.00
Multiplied by number of shares 20,000 20,000 20,000
2020
Salaries payable PHP 40,000.00
2021
2022

Cash PHP 420,000.00
PROBLEM On January 1, 2020, Magna Company offered the chief executive officer share appreciation rights.
Predetermined price per share PHP 100.00

Number of shares 10,000 shares
Service period 3 years
Expiration date December 31, 2022
The share appreciation is to be paid upon exercise. They were exercised on December 31, 2022.
The share prices are as follows:
January 1, 2020 PHP 100.00

December 31, 2021 PHP 112.00
December 31, 2022 PHP 125.00
2020 2021 2022

Current market price PHP 95.00 PHP 112.00 PHP 125.00
Less: Predetermined price PHP (100.00) PHP (100.00) PHP (100.00)
Excess PHP (5.00) PHP 12.00 PHP 25.00
Multiplied by number of shares No entry 10,000 10,000
Total compensation #VALUE! PHP 120,000.00 PHP 250,000.00
Cumulative compensation #VALUE! PHP 80,000.00 PHP 250,000.00
Less: Cumulative compensation of preceding year PHP - PHP (80,000.00)
Compensation expense for the year #VALUE! PHP 80,000.00 PHP 170,000.00
2020
Dec 31 No entry. No share appreciation recognized.
2021
2022

Cash PHP 250,000.00
PROBLEM Norway Company granted 200 share appreciation rights to each of the 500 employees on January 1, 2020.
The rights are due to vest on December 31, 2023 with payment being made on December 31, 2023 with payment being made on the same date and expire the following year. Only 80% of the awards
were vested. The share appreciation rights were exercised on December 31, 2024.
January 1, 2020 PHP 100.00

December 31, 2020, 2021, and 2022 PHP 180.00
December 31, 2023 PHP 210.00
December 31, 2024 PHP 190.00
2020 2021 2022 2023

Current market price PHP 180.00 PHP 180.00 PHP 180.00 PHP 210.00
Less: Predetermined price PHP (100.00) PHP (100.00) PHP (100.00) PHP (100.00)
Excess PHP 80.00 PHP 80.00 PHP 80.00 PHP 110.00
Multiplied by number of shares vested (80% of total
80,000 80,000 80,000 80,000
shares)
Total compensation PHP 6,400,000.00 PHP
6,400,000.00 PHP 6,400,000.00 PHP 8,800,000.00
Divided by: number of vesting years 4 4 4 4
Multiplied by: number of accrued years 1 2 3 4
Cumulative compensation PHP 1,600,000.00 PHP 3,200,000.00 PHP 4,800,000.00 PHP 8,800,000.00
Less: Cumulative compensation of preceding year PHP (1,600,000.00) PHP (3,200,000.00) PHP (4,800,000.00)
Compensation expense for the year PHP 1,600,000.00 PHP 1,600,000.00 PHP 1,600,000.00 PHP 4,000,000.00
2020
Salaries payable PHP 1,600,000.00
2021
2022
2023
2024
Dec 31 Salaries payable PHP 8,800,000.00
Cash PHP 8,800,000.00
On January 1, 2020, Omega Company granted the CEO 50,000 share appreciation rights for past services. These rights are exercisable immediately and expire on December 31, 2021. On exercise, the
PROBLEM
CEO is entitled to receive cash for the excess of the share market price on exercise date over the share market price on the grant date.
The market price of the share was P100 on January 1, 2020 and P115 on December 31, 2020.
The CEO did not exercise any of the rights during 2020. The CEO exercised the rights on December 31, 2021 when the market price was P110.
2020
Jan 1 Salaries expense PHP 750,000.00
Salaries payable ((115 - 100) x 50,000) PHP 750,000.00
2021
Dec 31 Salaries payable ((115 - 110) x 50,000) PHP 250,000.00
Gain on reversal of share appreciation right PHP 250,000.00

Cash PHP 500,000.00
On January 1, 2020, Mist Company granted 100,000 share appreciation rights to the employees. The vesting period is 4 years. The agreement required the entity to pay cash-based on the excess of
PROBLEM
market price over the predetermined price of P100.
The market prices per share for December 31, 2020, 2021, 2022, and 2023 are P140, P160, P130, and P150 respectively.
On December 31, 2021, the entity modified the agreement and canceled the 100,000 share appreciation rights. Instead, the entity granted 100,000 share options provided that the employees remain
with the entity for the next two years.
On December 31, 2021, the fair value of the share option is P80. The options are exercisable at the end of the remaining two-year period. The option price is P130 and the par value is P100. All share
options were exercised on December 31, 2023.
REQUIRED Provide all journal entries for 2020, 2021, 2022, and 2023.
Share appreciation rights compensation 2020 2021

Current market price PHP 140.00 PHP 160.00
Less: Predetermined price PHP (100.00) PHP (100.00)
Excess PHP 40.00 PHP 60.00
Multiplied by number of shares 100,000 100,000
Total compensation PHP 4,000,000.00 PHP 6,000,000.00
Divided by: number of vesting years 4 4
Multiplied by: number of accrued years 1 2
Less: Cumulative compensation of preceding year PHP (1,000,000.00)
Compensation expense for the year PHP 1,000,000.00 PHP 2,000,000.00
Modification to share options 2021 2022 2023

Number of shares 100,000 100,000 100,000
Cumulative compensation PHP 4,000,000.00 PHP 6,000,000.00 PHP 8,000,000.00
Less: Cumulative compensation of preceding year PHP (4,000,000.00) PHP (6,000,000.00)
Compensation expense for the year PHP 4,000,000.00 PHP 2,000,000.00 PHP 2,000,000.00
2020
2021

Salaries expense PHP 1,000,000.00
2022
2023
Cash PHP 13,000,000.00

Shares options outstanding PHP 8,000,000.00
On January 1, 2020, Module Company granted 100 share appreciation rights to each of the 500 employees on conditon that the employees remain in the employ of the entity for the next three
PROBLEM
years. No employees left the entity during the three-year vesting period. The employees exercised their share appreciation rights as follows:
December 31, 2022 100 employees

The fair value and intrinsic value of the share appreciation right are as follows:
Fair value Intrinsic value

December 31, 2022 PHP 20.00 PHP 15.00
December 31, 2023 PHP 21.00 PHP 20.00
The intrinsic value of the share appreciation right on the date of exercise is the amount paid out to the employees.
Determine the compensation expense each year from 2020 to 2024 as a result of the share appreciation rights distinguishing between compensation related to rights not yet exercised and already
REQUIRED
exercised.
Rights not yet exercised 2020 2021 2022 2023

Number of share appreciation rights not yet exercised 50,000 50,000 40,000 15,000
Multiply by fair value PHP 15.00 PHP 18.00 PHP 20.00 PHP 21.00
Total compensation PHP 750,000.00 PHP 900,000.00 PHP 800,000.00 PHP 315,000.00
Cumulative compensation PHP 250,000.00 PHP 600,000.00 PHP 800,000.00 PHP 315,000.00
Less: Cumulative compensation of preceding year PHP (250,000.00) PHP (600,000.00) PHP (800,000.00)
Compensation expense for the year PHP 250,000.00 PHP 350,000.00 PHP 200,000.00 PHP (485,000.00)
Rights exercised 2022 2023 2024

Number of share appreciation rights 10,000 25,000 15,000
Multiply by intrinsic value PHP 15.00 PHP 20.00 PHP 25.00
Total payment PHP 150,000.00 PHP 500,000.00 PHP 375,000.00
Add: Compensation related for rights not yet exercised PHP 200,000.00 PHP (485,000.00)
Less: Accrued liability of the previous year PHP (315,000.00)
REQUIRED Prepare journal entries to recognize the compensation expense each year including the exercise of the share appreciation rights.
2020
2021
2022

Cash PHP 150,000.00
2023
Dec 31 Salaries payable PHP 485,000.00
Retained earnings / Salaries expense / Gain on
PHP 485,000.00
reversal of share appreciation

Cash PHP 500,000.00
2024
Cash PHP 375,000.00
On January 1, 2020, Midnight Company granted 100 appreciation rights to each of the 600 employees on the condition that such employees remain in the employ of the entity for the next three
PROBLEM
years and that the entity reaches a sales target of P15,000,000 by the end of December 31, 2022. No employees left the entity during the three-year vesting period.
On December 31, 2020, the entity expects that the sales target will not be achieved by December 31, 2022. However, during the year 2021, sales increased significantly and by the end of year 2021,
the entity expects that the sales target will be achieved by December 31, 2022.
On December 31, 2022, the sales target is achieved and employees exercised their rights as follows:

The fair value and intrinsic value of the share appreciation right are as follows:
Fair value Intrinsic value

December 31, 2022 PHP 17.00 PHP 15.00
December 31, 2023 PHP 21.00 PHP 22.00
The intrinsic value of the share appreciation right on the date of exercise is the amount paid out to the employees.
REQUIRED Determine the compensation expense each year from 2020 to 2024 as a result of the share appreciation rights distinguishing between compensation related to rights not yet exercised and already
Rights not yet exercised 2020 2021 2022 2023

Number of share appreciation rights not yet exercised - 60,000 50,000 25,000
Multiply by fair value PHP 14.00 PHP 15.00 PHP 17.00 PHP 21.00
Total compensation PHP - PHP 900,000.00 PHP 850,000.00 PHP 525,000.00
Cumulative compensation PHP - PHP 600,000.00 PHP 850,000.00 PHP 525,000.00
Less: Cumulative compensation of preceding year PHP - PHP (600,000.00) PHP (850,000.00)
Compensation expense for the year PHP - PHP 600,000.00 PHP 250,000.00 PHP (325,000.00)
Rights exercised 2022 2023 2024

Number of share appreciation rights 10,000 25,000 25,000
Multiply by intrinsic value PHP 15.00 PHP 22.00 PHP 24.00
Total payment PHP 150,000.00 PHP 550,000.00 PHP 600,000.00
Add: Compensation related for rights not yet exercised PHP 250,000.00 PHP (325,000.00)
Less: Accrued liability of the previous year PHP (525,000.00)
REQUIRED Prepare journal entries to recognize the compensation expense each year including the exercise of the share appreciation rights.
2020
Dec 31 No entry. Sales target not expected to be achieved.
2021
2022

Cash PHP 150,000.00
2023
Dec 31 Salaries payable PHP 325,000.00
Retained earnings / Salaries expense / Gain on
PHP 325,000.00
reversal of share appreciation

Cash PHP 550,000.00
2024
Cash PHP 600,000.00
PROBLEM On January 1, 2020, Ultimate Company granted to an employee the right to choose either shares or cash payment. The choices are:
Share alternative - equal to 25,000 shares with par of P30.
Cash alternative - cash payment equal to the market value of 20,000 phantom shares.
The grant is conditional upon the completion of three years of service. On grant date, on January 1, 2020, the share price is P51.
The share prices for the three-year vesting period are P54 on December 31, 2020, P66 on December 31, 2021, and P65 on December 31, 2022.
After taking into account the effect of vesting restrictions, the entity has estimated that the fair value of the share alternative is P48.
REQUIRED Prepare journal entry to recognize the compensation expense for 2020, 2021, and 2022.
Fair value of share alternative (25,000 shares x 48) PHP 1,200,000.00

Fair value of liability on grant date, January 1, 2020
PHP (1,020,000.00)
(20,000 shares x 51)
Fair value of equity component PHP 180,000.00
2020 2021 2022

Number of phantom shares 20,000 20,000 20,000
Multiplied by market value PHP 54.00 PHP 66.00 PHP 65.00
Cumulative compensation PHP 360,000.00 PHP 880,000.00 PHP 1,300,000.00
2020
Share options outstanding (180,000 / 3 years) PHP 60,000.00
2021
2022
REQUIRED Prepare journal entry on December 31, 2022 assuming the employee chose the cash alternative.

Shares options outstanding PHP 180,000.00
Cash PHP 1,300,000.00
Share premium - unexercised share options PHP 180,000.00
REQUIRED Prepare journal entry on December 31, 2022 assuming the employee chose the share alternative.

Shares options outstanding PHP 180,000.00
Ordinary share capital (25,000 x 30) PHP 750,000.00

Accounting For Share Based Compensation-PROBLEMS

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Accounting For Share Based Compensation-PROBLEMS

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TOPIC 9: Share-based Compensation

Lecture 01 - Share Options

MEASUREMENT OF SHARE OPTIONS

RECOGNITION OF COMPENSATION: SHARE OPTIONS

Dec 31 Share options outstanding (5,000 x 30) PHP 150,000.00

Cash (30,000 x 30) PHP 900,000.00

2020 2021 2022

Cash PHP 8,000,000.00

Therefore, share premium amounts to P6,800,000.

By the end of 2022, only 25 employees left the entity.

2020 2021 2022

2020 2021 2022

Average increases per year: 2020 2021 2022

The share options were exercised on December 31, 2022.

2020 2021 2022

Average increases per year: 2020 2021 2022

Cash PHP 1,200,000.00

VESTING PERIOD EXERCISE PERIOD

Cash (10,000 x 60) PHP 600,000.00

Cash (15,000 x 60) PHP 900,000.00

Cash (5,000 x 60) PHP 300,000.00

Cash (20,000 x 110) PHP 2,200,000.00

Share options outstanding (300,000 + 400,000) PHP 700,000.00

VESTING PERIOD EXERCISE PERIOD

Dec 31 Salaries expense PHP 330,000.00

August 30 Salaries expense PHP 100,000.00

Cash PHP 300,000.00

VESTING PERIOD EXERCISE PERIOD

Dec 31 Salaries expense PHP 1,250,000.00

Cash (50,000 x 150) PHP 7,500,000.00

2XX5, Jan 1 2XX5, Dec 31 2XX6, Dec 31

Dec 31 Salaries expense PHP 2,500,000.00

CASH SETTLED TRANSACTION

SHARE APPRECIATION RIGHT

CASH AND SHARE ALTERNATIVE

Predetermined price per share PHP 50.00

The share prices are as follows:

2020 2021 2022

Salaries payable PHP 420,000.00

Predetermined price per share PHP 100.00

The share prices are as follows:

January 1, 2020 PHP 100.00

2020 2021 2022

Salaries payable PHP 250,000.00

January 1, 2020 PHP 100.00

2020 2021 2022 2023

Salaries payable PHP 500,000.00

Share appreciation rights compensation 2020 2021

Modification to share options 2021 2022 2023

Salaries payable PHP 3,000,000.00

Cash PHP 13,000,000.00

December 31, 2022 100 employees

Fair value Intrinsic value

Rights not yet exercised 2020 2021 2022 2023

Rights exercised 2022 2023 2024

Salaries expense PHP 150,000.00

Salaries expense PHP 500,000.00

December 31, 2022 100 employees

Fair value Intrinsic value

Rights not yet exercised 2020 2021 2022 2023

Rights exercised 2022 2023 2024

Salaries expense PHP 150,000.00

Salaries expense PHP 550,000.00