2nd Quiz – Share-Based Payments

ACCT 1143
60 points

Test 1: (10 points) TRUE OR FALSE. Write the word “TRUE” if the statement is correct, otherwise write “FALSE”.
1. IFRS 2 applies to both equity-settled and cash-settled share-based payment transactions.
2. For equity-settled share-based payments, the fair value of the equity instruments is measured at the grant date and not
remeasured subsequently.
3. If the fair value of equity instruments cannot be measured reliably, the intrinsic value method can be used instead.
4. For cash-settled share-based payments, the liability is remeasured at fair value at each reporting date until settlement.
5. Share-based payment transactions with employees are always classified as equity-settled.
6. If a share-based payment plan includes a non-vesting condition, the fair value of the equity instruments is adjusted to reflect the
likelihood of the condition being met.
7. For equity-settled share-based payments, the expense is recognized over the vesting period, regardless of whether the options are
ultimately exercised.
8. If a share-based payment plan includes a market condition (e.g., a target share price), the fair value of the equity instruments must
reflect the probability of achieving the condition.
9. For share-based payments with performance conditions, the expense is recognized only if the performance conditions are met.
10. If share options are forfeited due to a market condition not being met, the expense recognized in prior periods is not reversed.

Test 2: Straight Problems: Write your answers on a separate sheet of yellow paper. (30 points)

Problem 1 On January 1, 2023, ABC Corporation grants 100,000 share options to its employees as part of a share-based
payment plan. The options vest on December 31, 2025 (3-year vesting period), provided the employees remain with the company
during this period. The fair value of each option on the grant date is estimated at P15. The exercise price is P20 per share. The market
price per share at grant date is P33. The company expects that 90% of the employees will remain in service until the vesting date. The
options can be exercised for the next 3 years after the vesting date.

Additional Information:
a. On December 31, 2023, the company revises its estimate of employee turnover and now expects that only 85% of the
employees will remain in service until the vesting date.
b. On December 31, 2024, the company revises its estimate again and now expects that 88% of the employees will remain in
service until the vesting date.
c. On December 31, 2025, it is determined that 87% of the employees have remained in service and are eligible to exercise their
options.
Required: (10 POINTS)
1. Compute the cost of employee benefits to be presented in the statement of comprehensive income for the year
ended:
a. December 31, 2023.
b. December 31, 2024.
c. December 31, 2025.
d. December 31, 2026.
e. December 31, 2027.
2. Determine the balance of the entity’s obligation on share-based payments as of December 31, 2025.
3. Assume that on July 1, 2027, half of the vested share options were exercised when the market price per share is P35
and par value per share of P10.
a. Provide the journal entry to record the exercise.
b. Compute the increase in the shareholders’ equity at the exercise date.
c. Compute the balance of the share premium from share options as of December 31, 2027.
4. Assume that on July 1, 2027, all of the vested share options were exercised when the market price per share is P35
and par value per share of P10. The accountant made the following entry:
Cash 1,740,000
Compensation Expense 1,305,000
Ordinary Shares 870,000
Share Premium 2,175,000
Provide any necessary adjusting entry.
Problem 2 On January 1, 2023, XYZ Corporation grants 50,000 cash-settled share appreciation rights (SARs) to its employees.
Each SAR gives the employee the right to receive cash equal to the increase in the company's share price over the grant price of P20.
The SARs vest on December 31, 2025 (3-year vesting period), provided the employees remain with the company during this period.
The fair value of each SAR is estimated as follows:
• January 1, 2023: P5
• December 31, 2023: P6
• December 31, 2024: P7
• December 31, 2025: P8
• December 31, 2026: P6
• December 31, 2027: P8
Additional Information:
• The company expects that 90% of the employees will remain in service until the vesting date.
• On December 31, 2023, the company revises its estimate and now expects that 85% of the employees will remain in service.
• On December 31, 2024, the company revises its estimate again and now expects that 88% of the employees will remain in
service.
• On December 31, 2025, it is determined that 87% of the employees have remained in service and are eligible to exercise their
SARs.
Required: (10 POINTS)
1. Compute the employee service cost to be presented in the statement of comprehensive income for the year ended:
a. December 31, 2023.
b. December 31, 2024.
c. December 31, 2025.
d. December 31, 2026.
e. December 31, 2027.
2. Determine the balance of the entity’s obligation on share-based payments as of December 31, 2025.
3. Assume that on July 1, 2027, half of the vested SARS were exercised when the market price per share is P25 and par
value per share of P10.
a. Provide the journal entry to record the exercise.
b. Compute the increase in the shareholders’ equity at the exercise date.
c. Compute the balance of the entity’s obligation on share-based payments as of December 31, 2027.
4. Assume that on July 1, 2027, all of the vested share options were exercised when the market price per share is P25
and par value per share of P10. The accountant made the following entries:
Compensation Expense 217,500
Cash 217,500
Provide any necessary adjusting entry.
Problem 3 At the beginning of year 1, the entity grants 150 shares each to 300 employees, conditional upon the employees
remaining in the entity’s employ during the vesting period. The shares will vest at the end of year if the entity’s earnings increase by more
than 18%; at the end of year 2 if the entity’s earnings increase by more than an average of 13% per year over the two-year period, and
at the end of year 3 if the entity’s earnings increase by more than average of 10% per year over the three-year period. The shares have
a fair value of P 20 per share at the start of year 1, which equals the share price at grant date.

By the end of year 1, the entity’s earnings have increased by 14% and 20 employees have left. The entity expects that earnings will
continue to increase at a similar rate in year 2, and therefore expects that the shares will vest at the end of year 2. The entity expects,
on the basis of a weighted average probability, that a further 30 employees will leave during year 2. By the end of year 2, the entity’s
earnings have increased by only 10% and therefore the shares do not vest at the end of year 2. 42 employees have left during the year.
The entity expects that a further 15 employees will leave during year 3 and that the entity’s earnings will increase by at least 6% thereby
achieving the average 10% per year. By the end of year 3, 10 employees have left and the entity’s earnings had increased by 8%,
resulting in an average of 10.67% per year.

Required: (10 POINTS)

1. What amount of compensation expense should be recognized in year 1?
2. What amount of compensation expense should be recognized in year 2?
3. What amount of compensation expense should be recognized in year 3?
4. What amount should the entity report as share options outstanding at the end of year 2?
5. What amount should the entity report as share options outstanding at the end of year 3?
Problem 4 On January 01, 2023, TatayDigz Corporation grants 150 cash share appreciation rights (SARs) to each of its 500
employees, on condition that the employees remain in its employ for the next three years. During 2023, 14 employees leave. The entity
estimates that a further 24 will leave during 2024 and 2025. During 2024, 10 employees leave and the entity estimates that a further 8
will leave during 2025. During 2025, 6 employees leave. At the end of 2025, 60 employees exercise their SARs, another 40 employees
exercise their SARs at the end of 2026 and the remaining employees exercise their SARs at the end of 2027.

The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown below. At the end of 2025, all
SARs held by the remaining employees had vested. The intrinsic values of the SARs at the date of exercise (which equal the cash paid
out) at the end of 2025, 2026 and 2027 are also show below:
Year Fair value Intrinsic value
2023 30
2024 32
2025 36 35
2026 42 40
2027 47 46

Determine the following: (10 POINTS)

a. Compensation expense in 2023.
b. Compensation expense in 2024.
c. Compensation expense in 2025.
d. Compensation expense in 2026.
e. Compensation expense in 2027.

Problem 5 On January 1, 2023, BBM CORP, granted to an employee the right to choose either the following:
a) 1,000 BBM shares (i.e., a right to a cash payment equal to the value of 1,000 shares)
b) 1,200 shares

The grant is conditional upon completion of 3 years of service. If the employee chooses the share alternative, the
shares must be held for 3 years after vesting date.

BBM's shares have a par value of P10 per share. Market prices per share are shown below:
January 1, 2023………60
December 31, 2023….72
December 31, 2024….78
December 31, 2025….80

After taking into account the effects of the post-vestin9 transfer restrictions, BBM estimates that the grant date fair
value of the share alternative is P56 per share.

Required: (10 POINTS)

a. What is the compensation expense in December 31, 2023, 2024 and 2025?
b. Prepare the necessary journal entry on the settlement date assuming the employee chooses to receive equity instrument
rather than cash and assuming the employee chooses to receive cash rather than equity instrument.