Seminar 24: Share-Based Payment III and

Employee Benefits
AC2101
Seminar Group 4
Team 10

Pamela Keh, Tan Jia Teng, Tan Xin Rong, Low Zi He, Loh Lee Kheng
1
 Part I: Question 1

Part I: Explain clearly why the following statements

are TRUE or FALSE:
Goods or services received in a share-based payment
transaction must be recognised when the goods are
obtained or the services are received.

2
Part I: Question 1
TRUE

SFRS (I) 2 Para 7:

An entity shall recognise the goods or services received or acquired in a share-based

payment transaction when it obtains the goods or as the services are received. The
entity shall recognise a corresponding increase in equity if the goods or services were
received in an equity-settled share-based payment transaction, or a liability if the goods
or services were acquired in a cash-settled share-based payment transaction.

3
 Part I: Question 2

Part I: Explain clearly why the following statements

are TRUE or FALSE:
A share–based payment transaction in which the
entity receives goods or services as consideration for
equity instruments of the entity is classified in
SFRS(I) 2 Share-based Payment as a cash-settled
share-based payment transaction. 4
Part I: Question 2
FALSE

Cash-Settled Share Based Payment Transaction:

A share-based payment transaction in which the entity acquires goods or services by

incurring a liability to transfer cash or other assets to the supplier of those goods or services
for amounts that are based on the price (or value) of equity instruments (including shares or
share options) of the entity or another group entity.

Liability Equity
5
Part I: Question 2
FALSE

Equity-Based Share Based Payment Transaction:

A share-based payment transaction in which the entity

(a) receives goods or services as consideration for its own equity instruments (including
shares or share options), or
(b) receives goods or services but has no obligation to settle the transaction with the
supplier.

6
 Part I: Question 3

Part I: Explain clearly why the following statements

are TRUE or FALSE:
The fair value of share appreciation rights (SAR)
settled in cash is estimated at the date of grant and
expensed over the vesting period for which the
compensation is provided.
7
Part I: Question 3
FALSE
Granted by entity to employees as part of their remuneration
package, whereby the employees will become entitled to a future
cash payment (rather than an equity instrument), based on the
increase in the entity’s share price from a specified level over a
SHARE specified period of time [ SFRS(I) 2 Para 31 ]

APPRECIATION
These arrangements are examples of cash-settled share-based
RIGHTS payment transactions. [ SFRS(I) 2 Para 31 ]

The entity shall recognise the services received, and a liability to

pay for those services, as the employees render service.
[ SFRS(I) 2 Para 32 ] 8
Part I: Question 3
FALSE
SFRS(I) 2 Para 33:

The liability shall be measured, initially and at the end of each reporting period until
settled, at the fair value of the share appreciation rights, by applying an option pricing model…

1. FV is NOT estimated at date of grant but is remeasured at the end of each reporting
period.
2. Amount expensed will be adjusted accordingly over the vesting period

9
 Part I: Question 4

Part I: Explain clearly why the following statements

are TRUE or FALSE:
Historical volatility provides the best basis for
forming reasonable expectations of the future price
of share options.

10
Part I: Question 4
FALSE

SFRS (I) 2 Para B13

Expectations about the future are generally based on experience, modified if the future is
reasonably expected to differ from the past.

11
Part I: Question 4
SFRS (I) 2 Para B13

In some circumstances, identifiable factors may indicate that unadjusted historical

1 experience is a relatively poor predictor of future experience.

For example, if an entity with two distinctly different lines of business disposes of the one that was
significantly less risky than the other, historical volatility may not be the best information on which to
base reasonable expectations for the future.

SFRS (I) 2 Para B14

2
In other circumstances, historical information may not be available.

For example, a newly listed entity will have little, if any, historical data on the volatility of its share
price.
12
Part I: Question 4
FALSE

SFRS (I) 2 Para B15:.

In summary, an entity should not simply base estimates of volatility, exercise behaviour
and dividends on historical information without considering the extent to which the past
experience is expected to be reasonably predictive of future experience.

Therefore, historical volatility DOES NOT provide the best basis for
forming reasonable expectations of the future price of share
options.
13
Part II

14
Part II
On 2 January 20x1, to arrest the high staff turnover rate, Maple Limited
decides to grant 100 units of cash-settled awards to each of its 300
employees on condition that the employees remain in its employment
for the next 3 years. Cash is payable at the end of 3 years (that is, on 31
December 20x3) based on the share price of Maple’s shares on that date.

Cash-Settled Share Based Transaction

Payment Vesting Condition: Service Condition

Grant Date is on 2nd January 20x1 Vesting Period is 3 years

15
Part II
During 20x1, 35 employees leave and Maple expects another 35 employees
in total to leave in 20x2 and 20x3. Share price of Maple Limited at the grant
date and 31 December 20x1 is $12.80 and $14.30 respectively.

During 20x2, 25 employees leave and Maple expects another 20 to leave in

20x3. Share price of Maple Limited at 31 December 20x2 is $13.60.

During 20x3, 15 employees leave and the share price at 31 December 20x3 is
$14.00.

Maple Limited has a 31 December financial year end and it complies with the
relevant Singapore Financial Reporting Standards including SFRS(I) 2 Share-
based Payment.
16
 Part II: Timeline
Share Price: $13.60

25 employees left

20 employees are expected

Share Price: $12.20 to leave

31 Dec x3
31 Dec x1 (Vesting Date)

02 Jan x1 31 Dec x2
(Grant Date)
Share Price: $14.30 Share Price: $14

35 employees left 15 employees left

35 employees are expected

to leave

17
Part II: Question A
Required

Determine the cost of this award to be recognised by Maple Limited in its

financial statements for the years ended 31 December 20x1, 20x2 and 20x3.

Year Calculation Remuneration Cumulative

300 - 35 - 35 Expense Remuneration

31/12/20x1 230 employees * 100 shares $109,633 $109,633

* $14.30 * 1/3 300 - 35 - 25 - 20

31/12/20x2 220 employees * 100 shares $89,834 $199,467

* $13.60 * 2/3 300 - 35 - 25 - 15

31/12/20x3 225 employees * 100 shares $115,533 $315,000

* $14.00 * 3/3
18
Part II: Question B
Required

Prepare the necessary journal entries to account for the above cash-settled
award for the year ended 31 December 20x3.

31 Dec 20x3
Dr Staff Costs $115,533
Cr Liability - Cash Settled Share Options
$115,533 Dr Liability $315,000
Cr Cash $315,000

19
Part II: Question C
Jason, one of Maple’s key research directors, has tendered his resignation.
After due negotiations with Jason, Maple Limited grants share options to Jason
on the condition that Jason does not compete with Maple Limited for a
period of 3 years. The fair value of the award at the date of grant, including
the effect of the non-compete clause is $180,000.

Required

Discuss briefly how the grant date fair value of $180,000 should be accounted
for in the financial statements of Maple Limited.

20
Part II: Question C
Accounting Expense and equity-based share payment transaction
treatment:

Non-vesting condition
Non-compete (conditions that do not determine whether the entity receives services
clause: that entitle the employee to receive payment)

Expenses cannot be reversed as non-vesting condition are taken

into account when estimating the FV of share options.
SFRS (I) 2
Para 21A:

21
Part II: Question C

Fair Value → $180,000

Treatment: Variable vesting period → No
*Since there is no service condition,
we should recognise the expense at
grant date

Journal entries for year 1-At Grant Date

Dr Non-compete Expense $180,000

Cr Shared-based payment reserve

$180,000

22
Part II: Question D (i)
“Recognising an expense when the option does not ultimately vest and
the employee receives no benefit from the award is counter-intuitive.”

Required

Describe briefly a scenario where an expense is recognised when the option

does not ultimately vest and the employee receives no benefit from the
award.

23
Part II: Question D (i)
2 scenarios (where
expense is recognised even though
option does not ultimately vest)

1. Non-vesting conditions
2. Vesting conditions that
are market conditions**

**Recognise expense if the other

conditions including service conditions
are met

Otherwise expense is forfeited

(Reverse expenses recorded)
24
Part II: Question D (i)
Example of company recognising expense when the option does not
ultimately vest and the employee receives no benefit from the award.

Illustration 4 of seminar 22

Non-vesting condition : Saving 10% of his monthly salary of $10,000 for a

period of 3 years

Outcome : CFO stops making the monthly contribution to the plan in the
second year and takes a refund of contribution of $15,000 over the last 15
months.
JE for accelerated vesting
Treatment : Accelerated Vesting

25
Part II: Question D (ii)
“Recognising an expense when the option does not ultimately vest and the
employee receives no benefit from the award is counter-intuitive.”

Required

Discuss briefly why we continue to recognise share option expense in these

cases.

26
Part D (ii)
Market conditions and non-vesting conditions are taken into account when
estimating the FV of the equity granted.

Para 21 and 21A states that for equity instrument with non-vesting and
market conditions , the entity shall recognise the goods or services received
regardless of whether that Market/Non-vesting condition is being
fulfilled

Since the possibility of the market/Non-vesting condition not being achieved

has already been taken into account when estimating the FV at grant date,
the entity should continue to recognise share option expense
27
Part III

28
Part III:
On 1 November 20x2, CK Ltd engaged the services of HL Bank to provide
consultancy services on a $100,000,000 bond issuance. The fee for the
consultancy service is $520,000, similar to fees charged by other banks. CK
Ltd will issue 100,000 shares to HL Bank for the consultancy service. HL Bank
provided the consultancy service continuously over the period until the
successful completion of the bond issuance on 30 June 20x3.

On 30 June 20x3, CK Ltd issued the agreed number of shares to HL Bank in

payment for the consultancy service. CK Ltd’s shares were traded on the
market at $5.50 per share on that date. CK Ltd has a 31 December financial
year end.

29
Part III:

1. Equity-settled SBPT with entities other than employees

2. Measured based on FV of services ($520,000)

31/12/x2

Dr Consultancy Service Fee $130,000*

Cr Share Based Payment Reserve $130,000*

*($520,000/8) x 2
30
Part III:

*Taken from SFRS (I) 2 Mind Map 1 31

Part III:
*($520,000/8) x 6

30/6/x3
Dr Consultancy Service Fee $390,000
Cr Share Based Payment Reserve $390,000
Dr Share Based Payment Reserve $520,000

Cr Share Capital
$520,000
(Optional) Dr Cash
32
$100,000,000
Part IV

33
Part IV:
A share option plan was initiated by Chatter Limited for its CEO on 1 January
20x4. The share option plan having the following terms:

a. The vesting date is 31 December 20x6 and the CEO must still remain in the
company’s employ at that date.

Vesting Period is 3 years

Service Condition

34
Part IV: Performance Condition:
Non-market vesting condition

b. The number of options that will vest is dependent on the average rate of
growth of earnings per share over the next three years as follows:

i. If the average rate of growth of earnings per share per year is less than
12%, the number of share options is nil.

ii. If the average rate of growth of earnings per share per year is between
12% and 20%, 180,000 share options will be given to the CEO.

iii. If the average rate of growth of earnings per share per year exceeds
20%, 250,000 share options will be given to the CEO.

35
Part IV:
Each option has an estimated fair value of $3.25 at the grant date. The
average annual growth rate of the company is not expected to be less than
12% per year. The company has the following estimations, forecasts and
actual information on its earnings:

a. Earnings per share for the year ended 31 December 20x4 increased by 15% and
the company expected this rate of growth to be maintained for the next two
years. (180,000 share options)
b. For the year ended 31 December 20x5, earnings per share increased by 26% and
the company expects the average rate of growth of earnings per share for the
three years to 31 December 20x6 to be 20.5% (average of 20x4 and 20x5 growth
rates). (250,000 share options)
c. The average rate of growth in earnings per share per year for the three-year period
ended 31 December 20x6 was 12.5%. (180,000 share options)
36
Part IV:
Required

Ignoring any tax effects, calculate the remuneration expense relating to the
share options for the period 20x4 to 20x6 and prepare the journal entries
relating to the share options for each of the years.

Year Calculation Remuneration Cumulative

Expense Remuneration

31/12/20x4 180,000 options * $3.25 * 1/3 $195,000 $195,000

31/12/20x5 250,000 options * $3.25 * 2/3 $346,667 $541,667

31/12/20x6 180,000 options * $3.25 * 3/3 $43,333 $585,000

37
Part IV:
Journal Entries

31/12/20x4
DR Staff costs $195,000
CR Share-based payment reserve $195,000

31/12/20x5
DR Staff costs $346,667
CR Share-based payment reserve $346,667

31/12/20x6
DR Staff costs $43,333
CR Share-based payment reserve $43,333
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