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FINANCIAL ACCOUNTING AND REPORTING

SHARE BASED COMPENSATION – PFRS 2

I. Key Terms and Definitions:

a) 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 the entity’s shares or other equity instruments of the entity.

b) Equity-settled share-based payment transaction - The entity receives goods or services

as consideration for equity instruments of the entity including shares or share options.

c) Intrinsic value - The difference between the fair value of the shares to which the
counterparty has the (conditional or unconditional) right to subscribe or which it has the right
to receive, and the price (if any) the counterparty is (or will be) required to pay for those
shares.

d) Share option - A contract that gives the holder 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
options granted to officers and employees are recognized as compensation expense.

e) Vest - To become an entitlement or exercisable. Under a share-based payment

arrangement, a counterparty’s right to receive cash, other assets or equity instruments of the
entity vests when the counterparty’s entitlement is no longer conditional on the satisfaction of
any vesting conditions.

f) Vesting conditions - The conditions that determine whether the entity receives the services
that entitle the counterparty to receive cash, other assets or equity instruments of the entity,
under a share-based payment arrangement. Conditions can either one or both of the
following:
a. Service conditions require the counterparty to complete a specified period of service.
b. Performance conditions require the counterparty to complete a specified period of service
and specified performance targets to be met.

g) Vesting period - The period during which all the specified vesting conditions of a share-
based payment arrangement are to be satisfied.

II. Measurement of Compensation for Share Options

1. Fair Value Method – The compensation expense shall be computed by using the fair value of
the share options at grant date multiplied by the number of options that actually vest and
allocate as expense over the vesting period. But if the share options vest immediately and are
granted for past services, compensation expense is recognized immediately.

2. Intrinsic Value Method – Alternative method used if the fair value of the share option cannot be
estimated reliably. The intrinsic value is measured at the end of each reporting period and the
date the share options are exercised with the corresponding expensed recognized on those
dates. Unlike the fair value method, compensation expense is recognized beyond the vesting
period.

III. Share Appreciation Rights

1. A cash bonus plan given to officers and employees that entitles the grantees payment equal to
the appreciation of the market value of the shares over a predetermined price based on a stated
number of shares on the date of exercise.
2. If the share appreciation right is granted for past services, compensation expense shall be
recognized immediately, otherwise it shall be allocated during the vesting period by using the
appreciation at end of the reporting period as an estimate of the value on the date of exercise.
. Changes in value of the liability shall be only recognized in profit or loss including decreases in
value and recorded as a “gain on reversal” of share appreciation right.

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IV. If the share-based payment transaction is granted for past services and exercisable
immediately, the fair value at the date of grant shall be recognized in full.

V. Modifications to the terms and conditions on which equity instruments were granted

(a) The entity shall account for the cancellation or settlement as an acceleration of vesting, and
shall therefore recognize immediately the amount that otherwise would have been recognized for
services received over the remainder of the vesting period.

(b) The conversion to a payment made to the employee on the cancellation or settlement of the
grant shall be accounted for as the repurchase of the equity interest. The excess of the payment
made from the fair value recognized in equity shall be recognized as an expense.

VI. Share-based payment transactions in which the terms of the arrangement provide the
counterparty with a choice of settlement

(a) For transactions with parties other than employees, in which the fair value of the goods or
services received is measured directly, the entity shall measure the equity component of the
compound financial instrument as the difference between the fair value of the goods or
services received and the fair value of the debt component, at the date when the goods or
services are received.

(b) For other transactions, including transactions with employees, the entity shall measure the fair
value of the compound financial instrument at the measurement date, taking into account the
terms and conditions on which the rights to cash or equity instruments were granted. In other
words, the compound financial instrument shall be measured using the fair value of the share
alternative at grant date.

(c) At the date of settlement, the entity shall remeasure the liability to its fair value. If the entity issues
equity instruments on settlement rather than paying cash, the liability shall be transferred direct to
equity, as the consideration for the equity instruments issued.

(d) If the entity pays in cash on settlement rather than issuing equity instruments, that payment shall
be applied to settle the liability in full. Any equity component previously recognized shall remain
within equity. By electing to receive cash on settlement, the counterparty forfeited the right to
receive equity instruments. However, this requirement does not preclude the entity from
recognizing a transfer within equity, ie a transfer from one component of equity to another.

MULTIPLE CHOICE PROBLEMS

1. On January 1, 2019 Latvia Company established a fixed share option plan for its senior employees.
A total of 50,000 options were granted to the senior employees that permit them to purchase 150,000
shares of the company’s P50 par share capital at P100 per share. Each option had a fair value of
P45 on the grant date. Options are exercisable immediately and can be exercised anytime until
December 31, 2021. The market price for Latvia Company share capital on grant date was P140.
The company uses the fair value method of determining the value of the options.

1. What is the compensation expense that Latvia Company should recognize in 2019?
a. 2,250,000
b. 750,000
c. 1,125,000
d. 2,000,000

2. What is the share premium if employees exercise all the share options on December 31, 2020?
a. 9,750,000
b. 7,500,000
c. 6,000,000
d. 8,250,000

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2. Irish Company granted 10,000 share options to each of its five directors on January 1, 2020. The
options vest on January 1, 2024. The fair value of each option on January 1, 2020 is P50 and it is
anticipated that all of the share options will vest on January 1, 2024. What will be the increase in
expense and equity for the year ended December 31, 2020?
a. 2,500,000
b. 500,000
c. 625,000
d. 125,000

3. On January 1, 2018, Cally Company granted 100 share options to 500 employees, conditional upon
the employee’s remaining in the company’s employ during the vesting period. The share options
vest at the end of the 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, 2018, none of the employees who are entitled to share options have left the
company. On December 31, 2019, 30 employees have left and it is expected that on the basis of a
weighted-average probability, a further 40 employees will leave before the end of the thee-year
period. On December 31, 2020, only 20 employees actually leave and all of the share options are
exercised on such date.

1. How much is the compensation expense that should be recognized for the year 2020?
a. 490,000
b. 880,000
c. 380,000
d. 500,000

2. What is the share premium from the exercise all the share options on December 31, 2020?
a. 2,250,000
b. 1,350,000
c. 1,900,000
d. 1,100,000

4. On January 1, 2018, Mickey Company granted share options to each of its 300 employees working in
the sales department. The share options vest at the end of a three-year period provided that the
employees remain in the company’s employ and provided the volume of sales will increase by more
than 10% per year. The fair value of each share option on grant date is P30.

If the sales increase by more than 10%, each employee will receive 200 share options. If the sales
increase by more than 15%, each employee will receive 300 share options.

On December 31, 2018, the sales increased by more than 10%, and no employees have left the
company. On December 31, 2019, sales increased by more than 15% and no employees have left.
On December 31, 2020, sales once again increased by more than 15% and 50 employees left the
company. How much is the compensation expense that should be recognized for the year 2020?
a. 1,200,000
b. 2.250,000
c. 900,000
d. 450,000

5. Milky Company has granted share options to its employees. The total compensation expense to the
vesting date of December 31, 2020 has been calculated at P5,000,000. The entity has decided to
settle the award a year earlier than originally planned on December 31, 2019. The amount of
compensation expense charged since the date of grant on January 1, 2014 was P1,200,000 for 2013
and P1,600,000 for 2018. The compensation expense that was calculated initially for 2019 is
P1,500,000.

1. What is the compensation expense for 2019?

a. 2,200,000
b. 1,500,000
c. 700,000
d. 0

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2. What is the compensation expense for 2019, assuming the share options are not exercised but
instead, the entity paid the employees P4,500,000 on December 31, 2019?
a. 2,200,000
b. 1,500,000
c. 1,700,000
d. 0

6. On January 1, 2017, Cater Company granted its employees an option to purchase 50,000 shares of
Cater P50 par value share capital at P150 per share. The option became exercisable on December
31, 2018, after employees complete two years of service. The fair value of the share options cannot
be measured reliably on the date of grant. The options were exercised on December 31, 2019. The
market prices of Cater’ shares were:

Jan. 1, 2017 150

Dec. 31, 2017 160
Dec. 31, 2018 175
Dec 31, 2019 180

What is the amount of compensation expense to recognized by Cater for 2019?

a. 500,000
b. 1,250,000
c. 750,000
d. 250,000

7. On January 1, 2017, Dribble Company offered its top management share appreciation right with the
following terms:

Predetermined price P100 per share

Number of shares 50,000 shares
Service period 3 years
Exercise date January 1, 2020

The share appreciation right is to be exercised on January 1, 2020. The quoted prices of Dribble
Company share are 100, 124, 151 and 160 on January 1, 2017, December 31, 2017, December 31,
2018, and December 31, 2019 respectively.

1. What is the 2019 compensation expense?

a. 1,700,000
b. 1,200,000
c. 1,300,000
d. 1,150,000

2. What is the 2020 “gain on reversal” if the December 31, 2019 market value is P130 per share?

a. 700,000
b. 500,000
c. 200,000
d. 300,000

8. On January 1, 2018, Border Company granted its president 50,000 share appreciation rights for past
services. These rights are exercisable immediately and expire on December 31, 2019. On exercise,
the president is entitled to receive cash for the excess of the share’s market price on the grant
date. The president did not exercise any of the rights during 2018. The market price of the share was
P100 on January 1, 2018, P115 on December 31, 2018 and P110 on December 31, 2019. As a result
of the share appreciation rights, Border should recognize a gain on the settlement of the share
appreciation right of

a. 500,000
b. 100,000
c. 250,000
d. 0

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9. On January 1, 2018, Lucca Company granted to an employee the right to choose either shares or
cash payment. The choices are as follows:

* Share alternative – equal to 20,000 shares with a par value of P30.

* Cash alternative – cash payment equal to the market value of 25,000 shares.

The grant is conditional upon the completion of three years service. On grant date, on January 1,
2018, the share price is P35. After taking into account the effect of vesting restrictions, Lucca
Company has estimated that the fair value of the share alternative to be P55.

1. What is the 2018 compensation expense if the share price on December 31, 2018 is P42?
a. 1,050,000 c. 350,000
b. 425,000 d. 405,000

2. What is the 2019 compensation expense if the share price on December 31, 2019 is P57?
a. 950,000 c. 600,000
b. 675,000 d. 525,000

3. What is the 2020 compensation expense if the share price on December 31, 2020 is P65?
a. 525,000 c. 675,000
b. 600,000 d. 750,000

10. Holly Company purchased inventory from a supplier on June 30, 2020 with a cash price of
P3,000,000 to be paid on December 31, 2020. The supplier was given the option to choose 20,000
share with a fair value of P130 per share and a par value of P100 or a cash payment based on the
fair value of the same 20,000 shares on December 31, 2020. The fair value of the shares on
December 31, 2020 was P160 per share. What was the amount of interest expense if the counter
party selected the cash alternative on December 31, 2020?
a. 600,000
b. 200,000
c. 400,000
d. 0

END

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