Soooooocs 2 Pages

SHARE – BASED PAYMENT Submitted by: Rachelle P. Nayles Allizon Mae V. Obligacion Akilah Jillian P. Oliver Tristan Jude E. Osea Jonie Jane C. Pacamarra

September 2018

SHARE-BASED PAYMENT PROBLEM NO. 1: Share Options – Fair Value Method Background On January 1, 2009, an entity grants 100 share options to each of its 500 employees. Each grant is conditional upon the employee working for the entity over the next three years. The entity estimates that the fair value of each option id CU15. (a) On the basis of weighted average probability, the entity estimates that 20 percent of employees will leave during the three-year period and therefore, forfeit their rights to share options. Application of Requirements Scenario 1: If everything turns out as exactly as expected, compute for the following: 1. Compensation expense for 2009 a. 200, 000 c. 600, 000 b. 400, 000 d. 0 2. Compensation expense for 2010 a. 200, 000 c. 600, 000 b. 400, 000 d. 0 3. Compensation expense for 2011 a. 200, 000 c. 600, 000 b. 400, 000 d. 0 Scenario 2: During 2009, 20 employees leave. The entity revises its estimate of total employee departures over the three-year period from 20 percent (100 employees) to 15 percent (75 employees). During 2010, a further 22 employees leave. The entity revises its estimate of total employee departures over the three-year period from 15 percent (75 employees) to 12 percent (60 employees). During 2011, a further 15 employees leave. Compute for the following: 1. Compensation expense for 2009 a. 212,500 b. 637,500 2. Compensation expense for 2010 a. 660,000 b. 440,000

c. 200,000 d. 0 c. 227,500 d. 0

3. Compensation expense for 2011 a. 664,500 b. 224,500

c. 0 d. 227,500

SUGGESTED SOLUTIONS: Scenario 1 Nos. 1. – 3. Total Employees Expected Number leaving With vested benefit × Share Options Total Option Shares × Fair Value Options Total value/Revised Value × Ratio of actual years/vesting period Cumulative Remuneration Costs Less: Prior Year Costs Current Year Remuneration Costs

2009 500 100 400 100 40,000 15 600,000

2010 500 100 400 100 40,000 15 600,000

2011 500 100 400 100 40,000 15 600,000

1/3

2/3

3/3

200,000 200,000 (A)

400,000 200,000 200,000 (A)

600,000 400,000 200,000 (A)

Under PFRS 2 (Share-based Payment) for transactions with employees and others providing similar services, the entity measures the fair value of the equity instruments granted, because it is typically not possible to estimate reliably the fair value of employee services received. It is measured at the fair value of the equity instruments granted (such as transactions with employees), fair value is estimated at grant date. The entity should recognize the cost of services rendered by the employees equal to fair value of the equity instruments granted and amortized over the vesting period. However, if an employee left the company during the vesting period, the amount recognized during the vesting period would be reversed ; this is because the service condition was not considered when estimating the fair value of the shares option at grant date.

Scenario 2 Nos. 1. – 3. Total Employees Expected Number leaving With vested benefit × Share Options × Fair Value Options Total value/Revised Value × Ratio of actual years/vesting period Cumulative Remuneration Costs Less: Prior Year Costs Current Year Remuneration Costs

2009 500 75 425 100 42,500 15 637,500

2010 500 60 440 100 44,000 15 660,000

2011 500 57 (actual) 443 100 44,300 15 664,500

1/3

2/3

3/3

212,500 212,500 (A)

440,000 212,500 227,500 (C)

664,500 440,000 224,500 (B)

The same standard follows with the second scenario, it differs only to the number of vested beneficiaries because in each year the departure employees differ.

PROBLEM NO. 2: Grant with a performance condition, in which the length of the vesting period varies Background On January 1, 2009, the entity grants 100 share options each to 500 employees for the purchase of P50 par ordinary share at P60 per share, conditional upon the employees’ remaining in the entity’s employ during the vesting period. The share options will vest at the end of 2009 if the entity’s earnings increase by more than 18 percent; at the end of 2010 if the entity’s earnings increase by more than an average of 13 percent per year over the twoyear period; and at the end of 2011 if the entity’s earnings increase by more than an average of 10 percent per year over the three-year period. The share options has a fair value of CU30 per share at the start of 2009. No dividends are expected to be paid over the three-year period. By the end of 2009, the entity’s earnings have increased by 14 percent, and 30 employees have left. The entity expects that earnings will continue to increase at a similar rate in 2010, and therefore expects that the shares will vest at the end of 2010. The entity expects on the basis of a weighted average probability, that a further 30 employees will leave during 2010, and therefore expects that 440 employees will vest in 100 share options each at the end of 2010.

By the end of 2010, the entity’s earnings have only increased by 10 percent and therefore the shares do not vest at the end of 2010, 28 employees have left during the year. The entity expects that a further 25 employees will leave during 2011, and the entity’s earnings will increase by at least 6 percent, thereby achieving the average of 20 percent per year. By the end of 2011, 23 employees have left and the entity’s earnings had increased by 8 percent resulting in an average increase of 10.67 percent per year. At the beginning of 2012, the share options were exercised. Answer the following: 1. What is the journal entry at the beginning of 2009? a. Memo entry: the entity grants 100 share options each to 500 employees, conditional upon the employees’ remaining in the entity’s employ during the vesting period. b. Debit Salaries expense, P440,000; Credit Stock options outstanding P440,000 c. Debit Salaries expense, P1,320,000; Credit Salaries payable P1,320,000 d. No journal entry or memo entry is needed. 2. Compensation expense for 2009 a. 660,000 c. 394,000 b. 440,000 d. 1,320,000 3. Compensation expense for 2010 a. 1,251,000 c. 394,000 b. 834,000 d. 591,000 4. Compensation expense for 2011 a. 0 c. 6,000 b. 1,257,000 d. 423,000 5. What is the journal entry to record the exercise of all the stock options? a. Debits: Cash P2,514,000 and stock options outstanding P1,257,000; Credits: Ordinary shares P2,095,000 and share premium excess over par P1,676,000 b. Debits: Cash P2,514,000 and stock options outstanding P834,000; Credits: Ordinary shares P2,095,000 and share premium excess over par P1,253,000 c. Debits: Cash P2,514,000 and stock options outstanding P423,000; Credits: Ordinary shares P2,095,000 and share premium excess over par P842,000 d. Debits: Cash P2,514,000; Credits: Ordinary shares P2,095,000 and share premium excess over par P419,000 SUGGESTED SOLUTIONS: 1. No Journal Entry is made at the beginning of 2009 because under Paragraph 7 of PFRS 2 the entity shall recognize compensation expense when it obtains the goods or as the services are received. The compensation is recognized as expense over the vesting period.

2. Number of Employees Employees who left in 2009 Employees expected to leave Employees entitled to share option Multiply by share options per employee Total share options Multiply by fair value Total Compensation expense Compensation Expense for 2009 (1320000/3)

500 (30) (30) 440 100 44,000 30 1,320,000 440,000

3. Number of employees Employees who left in 2009 Employees who left in 2010 Employees expected to leave Employees entitled to share option Multiply by share options per employee Total share options Multiply by fair value Total Compensation expense Cumulative Compensation (1,251,000/3*2) Less: Compensation recognized in 2009 Compensation expense 2010

500 (30) (28) (25) 417 100 41,700 30 1,251,000 834,000 (440,000) 394,000

4. Number of employees Employees who left in 2009 Employees who left in 2010 Employees who left in 2011 Employees entitled to share option Multiply by share options per employee Total share options Multiply by fair value Total Compensation expense Less: Cumulative compensation Compensation expense 2011

500 (30) (28) (23) 419 100 41,900 30 1,257,000 (834,000) 423,000

5. December 31, 2011 Cash (41,900 x 60) 2,514,000 Share option Outstanding 1,257,000 Ordinary Share Capital (41,900 x 50) Share Premium

2,095,000 1,676,000

Note: Paragraph 15 of PFRS 2 states that if the equity instruments granted do not vest until the counterparty completes a specified period of service, the entity shall presume that the services to be rendered by the counterparty as consideration for those equity instruments will be received in the future, during the vesting period. The entity shall account for those services as they are rendered by the counterparty during the vesting period, with a corresponding increase in equity.

PROBLEM NO. 3: Performance Condition, Nonmarket condition, # of equity instruments varies On January 1, 2009, Diamond Company granted share options to each of its 200 employees. The share options will vest at the end of 2011, provided that the employees remain in the entity’s employ and if the sales increase at least by an average of 5% per year. If the sales increase by an average of at least 5% per year, each employee shall receive 50 share options. If the sales increase by an average of at least 10% per year, each employee shall receive 100 share options. If the sales increase by an average of at least 15% per year, each employee shall receive 150 share options. The fair value of each share options is P30. No employees have left during the threeyear vesting period. The sales over the vesting period increased as follows: 2009 2010 2011 Compute for the following: 1. Compensation expense for 2009 a. 100,000 b. 300,000 2. Compensation expense for 2010 a. 100,000 b. 300,000 3. Compensation expense for 2011 a. 100,000 b. 300,000

8% 10% 18%

c. 200,000 d. 400,000 c. 200,000 d. 400,000 c. 200,000 d. 400,000

SUGGESTED SOLUTIONS: 1. Number of Employees Multiply by share options per employee Total share options Multiply by fair value of share option Total Compensation

200 50 10,000 30 300,000

Compensation expense for 2009 (300,000/3)

100,000 (A)

*The employees are entitled to 50 share options each because the sale increased by at least 8%. 2. Number of Employees Multiply by share options per employee Total share options Multiply by fair value of share option Total Compensation Compensation expense for 2010 (300,000/3*2) Less: Compensation recognized in 2009 Compensation Expense for 2010

200 50 10,000 30 300,000 200,000 (100,000) 100,000 (A)

*The employees are entitled to 50 share options each because the sale increased by an average of 9% over the last 2 years. 3. Number of Employees Multiply by share options per employee Total share options Multiply by fair value of share option Total Compensation Less: Cumulative compensation Compensation Expense for 2011

200 100 200,000 30 600,000 (200,000) 400,000 (D)

The employees are entitled to 100 share options each because the sale increased by an average of 12% over the last 3 years. Paragraph 19 of PFRS 2 states that vesting conditions, other than market conditions, shall not be taken into account when estimating the fair value of the shares or share options at the measurement date.

PROBLEM NO. 4: Grant with a performance condition, in which the exercise price varies Background At the beginning of 2009, an entity grants to a senior executive 30,000 share options, conditional upon the executive’s remaining in the entity’s employ until the end of 2011. The exercise price is CU40. However, the exercise price drops to CU30 if the entity’s earnings increase by at least an average of 10% per year over the three-year period. On the grant date, the entity estimates that the fair value of the share options, with an exercise price of CU30, is CU16 per option. If the exercise price is CU40, the entity estimates that the share options have a fair value of CU12 per option. During 2009, the entity’s earnings increased by 12 percent, and the entity expects that the earnings will continue to increase at this rate over the next two years. The entity therefore expects that the earnings target will be achieved, and hence the share options will have an exercise price of CU30. During 2010, the entity’s earnings increased by 13 percent, and the entity continues to expect that the earnings target will be achieved. During 2011, the entity’s earnings increased by only 3 percent, and therefore the earnings target was not achieved. The executive completes three years’ service, and therefore satisfies the service condition. Because the earnings target was not achieved, the 30,000 vested share options have an exercise price of CU40. Compute for the following: 1. Compensation expense for 2009 a. 240,000 b. 160,000 2. Compensation expense for 2010 a. 0 b. 320,000 3. Compensation expense for 2011 a. 360,000 b. 40,000

c. 480,000 d. 0 c. 160,000 d. 80,000 c. 0 d. 320,000

SUGGESTED SOLUTIONS: 1. Share options Multiply by Fair value Total Compensation

30,000 16 480,000

Compensation Expense for 2009 (480,000/3)

160,000 (B)

*The condition is achieved so the exercise price is CU30 and the fair value of the option is CU16. 2. Share options Multiply by Fair value Total Compensation Cumulative compensation (480,000/3*2) Less: Recognized compensation Compensation Expense 2010

30000 16 480,000 320,000 (160,000) 160,000 (C)

The condition is achieved so the exercise price is CU30 and the fair value of the option is CU16. (12%+13%=15%/2 years= 12.5%) 3. Share options Multiply by Fair value Total Compensation Less: Cumulative compensation Compensation Expense 2010

30,000 12 360,000 (320,000) 40,000 (B)

The earnings target of at least an average of 10% over three years is not achieved in 2011. (12%+13%+3%=28%/3 years=9.33%) Therefore, the exercise price is CU40 and the fair value of the option is CU12 Paragraph 19 of PFRS 2 states that vesting conditions, other than market conditions, shall not be taken into account when estimating the fair value of the shares or share options

at the measurement date.

PROBLEM NO. 5: Grant with a market condition Background On January 1, 2009, Panda Co. grants to a senior executive 5,000 share options, conditional upon the executive remaining in the entity’s employ until the end of 2011. However, the share options cannot be exercised unless the share price has increased from P50 at the beginning of 2009 to above P65 at the end of year 2011. If the share price is above P65 at the end of 2011, the share options can be exercised at any time during the next seven years, i.e. by the end of year 10. The entity applies a binomial option pricing model, which takes into account the possibility that the share price will exceed P65 at the end of 2011( and hence, the share options become exercisable) and the possibility that the share price will not exceed P65 at the

end of the year 3 (and hence, the options will be forfeited). It estimates the fair value of the share options with this market condition to be P24 per option. Compute for the following: 1. Compensation expense for 2009 a. 120,000 b. 40,000 d. 0 2. Compensation expense for 2010 a. 120,000 b. 40,000 d. 0 3. Compensation expense for 2011 a. 120,000 b. 40,000 d. 0

c. 80,000

c. 80,000

c. 80,000

SUGGESTED SOLUTIONS: Year 1 2 3

Calculations (5,000 options) (P24 F.V.)(1/3) (5,000 options) (P24 F.V.)(1/3) (5,000 options) (P24 F.V.)(1/3)

Compensation Expense P40,000 (B) P40,000 (B) P40,000 (B)

Paragraph 21 of PFRS 2 states that Market conditions, such as a target share price upon which vesting (or exercisability) is conditioned, shall be taken into account when estimating the fair value of the equity instruments granted. Therefore, for grants of equity instruments with market conditions, the entity shall recognize the goods or services received from a counterparty who satisfies all other vesting conditions (e.g. services received from an employee who remains in service for the specified period of service), irrespective of whether that market condition is satisfied.

PROBLEM NO. 6: Grant with a market condition, in which the length of the vesting period varies Background On January 1, 2009, an entity grants 10,000 share options with a ten-year life to each of ten senior executives. The share options will vest and become exercisable immediately if and when the entity’s share price increases from CU50 to CU70, provided that the executive remains in service until the share price target is achieved. The entity applies a binomial option pricing model, which takes into account the possibility that the share price target will be achieved during the ten-year life of the options, and the possibility that the target will not be achieved.

The entity estimates that the fair value of the share options at grant date is CU25 per option. From the option pricing model, the entity determines that the mode of the distribution of possible vesting dates is five years. In other words, of all the possible outcomes, the most likely outcome of the market condition is that the share price target will be achieved at the end of 2013. Therefore, the entity estimates that the expected vesting period is 5 years. The entity also estimates that two executives will have left by the end of 2013, and therefore, expects that 80,000 share options (10,000 share options x 8 executives) will vest at the end of 2013. Throughout the years 2009-2012, the entity continues to estimate that a total of two executives will leave at end of 2013. However, in total three executives leave, one in each of 2011, 2012, 2013. The share price target is achieved at the end of 2014. Another executive leaves during 2014, before the share price target is achieved. Compute for the following: 1. Compensation expense for 2009 a. 0 b. 400,000 2. Compensation expense for 2010 a. 2,000,000 b. 400,000 3. Compensation expense for 2011 a. 1,200,000 b. 800,000 4. Compensation expense for 2012 a. 1,400,000 b. 400,000 5. Compensation expense for 2013 a. 1,750,000 b. 150,000

c. 150,000 d. 2,000,000 c. 800,000 d. 150,000 c. 400,000 d. 2,000,000 c. 200,000 d. 1,750,000 c. 400,000 d. 350,000

SUGGESTED SOLUTIONS:

Year 2009 2010 2011 2012 2013

Share Options 80,000 80,000 80,000 80,000 70,000

× × × × ×

Fair Value 25 25 25 25 25

Total Value/Revised Value 2,000,000 2,000,000 2,000,000 2,000,000 1,750,000

Remuneration Cost Schedule: Year 2009 2010 2011 2012 2013

Total Value/Revised Value 2,000,000 2,000,000 2,000,000 2,000,000 1,750,000

Ratio

Cumulative

1/5 2/5 3/5 4/5 5/5

400,000 800,000 1,200,000 1,600,000 1,750,000

Prior Years None 400,000 800,000 1,200,000 1,600,000

Current Year 400,000 (B) 400,000 (B) 400,000 (C) 400,000 (B) 150,000 (B)

Under PFRS 2, par. 15b: “If an employee is granted share options conditional upon the achievement of a performance condition and remaining in the entity’s employ until the performance condition is satisfied, and the length of the vesting period varies depending on when that performance condition is satisfied, the entity shall presumed that the services to be rendered by the employee as consideration for the share options will be received in the future, over the expected vesting period at grant date based on the most likely outcome of the performance condition. If the performance condition is a market condition, the estimate of the length of the expected vesting period shall be consistent with the assumptions used in estimating the fair value of the options granted and shall not be subsequently revised. If the performance condition is not a market condition, the entity shall revise its estimate of the length of the vesting period, if necessary , if subsequent information indicates that the vesting period differs from previous estimates.

PROBLEM NO. 7: Grant of share options that are subsequently repriced Background On January 1, 2009, GARCIA Co. grants 100 share options to each of its 400 employees. Each grant is conditional upon the employee remaining in service over the next three years. The entity estimates that the fair value of each options is P15. On the basis of weighted average probability, the entity estimates that 100 employees will leave during the three-year period and therefore, forfeit their rights to the share options. During 2009, 40 employees left and that by the end of year 2009, the entity’s share prices has dropped and the entity reprices its share options, and that the repriced share options vest at the end of 2011. The entity estimates that a further 70 employees will leave during 2010 and 2011. During 2010, a further 35 employees leave, and the entity estimates that a further 30 employees will leave during 2011.

During 2011, a total of 28 employees leave. The share options vested at the end of 2011. The entity estimates that at the date of repricing, the fair value of each of the original share options granted (i.e. before taking into account the repricing) is P6, and that the fair value of each repriced share option is P10. Compute for the following: 1. Compensation expense for 2009 a. 0 b. 435,000 2. Compensation expense for 2010 a. 209,000 b. 442,500 3. Compensation expense for 2011 a. 354,000 b. 180,600

c. 145,000 d. 195,000 c. 118,000 d. 159,000 c. 564,300 d. 210,300

SUGGESTED SOLUTIONS: Total Employees Actual Number who had left Expected Number leaving With vested benefit × Share Options Total Option Shares × Fair Value Options Total value/Revised Value × Ratio of actual years/vesting period Adjustment- result of revision (Sched. A) Cumulative Remuneration Costs Less: Prior year/s Remuneration Costs- Current Year Schedule A 2010 2011

2009 400 (40) (70) 290 100 29,000 15 435,000 1/3 145,000 145,000 145,000 (C)

2010 400 (75) (30) 295 100 29,500 15 442,500 2/3 295,000 59,000 354,000 145,000 209,000 (A)

2011 400 (103) 297 100 29,700 15 445,500 3/3 445,500 118,800 564,300 354,000 210,300 (D)

29,500 share options x (10 – 6 x ½) = 59,000 29,700 share options x (10 – 6) = 118,800

Under PFRS 2, par. 27: “The entity shall recognize, as a minimum, the services received measures at the grant date fair value of the equity instruments granted, unless those equity instruments do not vest because of failure to satisfy a vesting condition (other than a market condition) that was specified at the grant date. This applies irrespective of any modifications to the terms and conditions on which the equity instruments were granted, or

a cancellation or settlement of that grant of equity instruments. In addition, the entity shall recognize the effects of modifications that increase the total fair value of the share-based payment arrangement or the otherwise beneficial to the employee.” If the modification increases the fair value of the equity instruments granted (e.g. By reducing the exercise price), measured immediately before and after the modification, the entity shall include the incremental fair value granted in the measurement of the amount recognized for services received as consideration for the equity instrument granted. The incremental fair value granted is the difference between the fair value of the modified equity instrument and that of the original equity instrument, both estimated as the date of the modification. If the modification occurs during the vesting period, the incremental fair value granted is included int the measurement of the amount recognized for services received over the period from the modification dated until the date when the modified equity instruments vest, in addition to the amount based on the grant date, fair value of the original equity instruments, which is recognized over the remainder of the original vesting period. If the modification occurs after the vesting date, the incremental fair value granted is recognized immediately, or over the vesting period if the employee is required to complete an additional period of service before becoming unconditionally entitled to those modified equity instruments.

PROBLEM NO. 8: Intrinsic Value Tamara Company adopted a share option plan that granted options to key executives to purchase 15,000 ordinary shares with P100 par value. The options were granted on January 1, 2009, and were exercisable two years after grant date if the grantee was still an employee of the company. The options expired three years from date of grant. The option price was set at P130 and the market price at the date of grant was also P130 per share. The fair value of the share options cannot be estimated reliably. The share market prices are P145 on December 31, 2009, P150 on December 31, 2010, and P155 on December 31, 2011. All of the options were exercised on December 31, 2011. Based on the above and the result of the audit, determine the following: 1. Compensation expense for 2009 a. 225,000 b. 112,500 2. Compensation expense for 2010 a. 12,500 b. 100,000 3. Compensation expense for 2011 a. 112,500 b. 225,000

c. 187,500 d. 75,000 c. 187,500 d. 25,000 c. 75,000 d. 25,000

SUGGESTED SOLUTIONS: Nos. 1 – 2 Market Value Option Price Intrinsic Value Multiply by Share Options Total Compensation Multiply by Ratio Cumulative Compensation Compensation recognized in prior year Compensation expense –current year

2009 145 (130) 15 15,000 235,000 1/2 112,500 112,500 (B)

2010 150 (130) 20 15,000 300,000 2/2 150,000 (112,500) 187,500 (C)

Under PFRS 2, one method of measuring compensation is the Intrinsic Value method which means the compensation is equal to the intrinsic value of the share options. Intrinsic Value is the “excess of the market value of the share over the option price”. Paragraph 24 of PFRS 2 provides that the intrinsic value method can be used only if the fair value of the share option cannot be estimated reliably. In addition, share options are recognized 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 or loss. No. 3 Market Value – 2011 Market Value – 2010 Increase in Intrinsic Value Multiply by share options Additional compensation in 2011

2011 155 (150) 5 15,000 75,000 (C)

The increase in intrinsic value after the vesting period is recognized as additional compensation immediately. In this problem, the vesting period is only 2 years but options were exercised 3 years after grant date.

PROBLEM NO. 9: On January 1, 2009, Drenz Co. grants 100 cash share appreciation rights (SARs) to each of its 600 employees, on condition that the employees remain in its employ for the next three years. During 2009, 36 employees leave. The entity estimates that a further 60 employees will leave during 2010 and 2011. During 2010, 42 employees leave and the entity estimates that a further 27 will leave during 2011. During 2011, 21 employees leave. At the end of 2011, 150 employees exercise their SARs, another 230 employees exercise their SARs at the end of 2012 and the remaining employees exercise their SARs at the end of 2013. 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 2011, all SARs held by the remaining employees vest. The intrinsic values of the SARs at the date of exercise (which equal the cash paid out) at the end of years 2011, 2012, and 2013 are also shown below. Year Fair Value Intrinsic Value 2009 15 2010 18 2011 21 15 2012 24 20 2013 25 Based on the above and the result of the audit, determine the following: 1. Compensation expense for 2009 a. 252,000 b. 756.000 2. Compensation expense for 2010 a. 594,000 b. 342,000 3. Compensation expense for 2011 a. 143,100 b. 225,000 4. Compensation expense for 2012 a. 446,700 b. 460,000 5. Compensation expense for 2013 a. 302,500 b. 460,000

c. 342,000 d. 225,000 c. 891,000 d. 737,100 c. 368,100 d. 737,100 c. 290,400 d. 13,300 c. 290,400 d. 12,100

SUGGESTED SOLUTIONS: Nos. 1- 5 Number of employees Less: Employees who left this year

2009 600

2010 600

2011 600

(36)

(42)

(21)

(36)

(78)

Employees who left previous years (60)

2012 351

2013 121

(150)

(230)

(121)

(27)

Employees expected to leave Employees who exercised their SARs (Cumulative) Employees entitled to share option Multiply by share option per employee Total share options Multiply by fair value at REPORTING DATE Total Compensation Multiply by: ratio Cumulative Compensation Expense/Liability Less: Cumulative Compensation prior year Add: Additional compensation expense (150 x 100 x 15) (230 x 100 x 20) (121 x 100 x 25) Compensation Expense

504

495

351

121

0

100

100

100

100

100

50,400 15

49,500 18

35,100 21

12,100 24

0 25

756,000 1/3 252,000

891,000 2/3 594,000

737,100 3/3 737,100

290,400 290,400

0 0

-

(252,000)

(594,000)

(737,100)

(290,400)

225,000 460,000 1) 252,000 (A)

2) 342,000 (B)

3) 368,100 (C)

4) 13,300 (D)

302,500 5) 12,100 (D)

According to PFRS 2, paragraph 30-33: Cash-settled share-based payment results in a liability a. Allocate grant date measurement over vesting period b. Remeasure the fair value of the liability at the end of each reporting period c. Remeasurement recognised in profit or loss Given the need to measure the liability at its expected value, and (ultimately) at the amount at which it will be settled, the measurement of the fair value of share appreciation

rights IS UPDATED TO FAIR VALUE AT THE REPORTING DATE rather than (as is the case with equity settled share-based payment arrangements) at the grant date. If the share appreciation rights do not vest, the entity recognizes the services received, and a liability to pay for them, as the employees render service during that period. The liability is measured, initially and at the end of each reporting period until settled, at the FAIR VALUE of the share appreciation rights.

PROBLEM NO. 10: Share Options – with Cash Alternative Background At the beginning of 2007, the entity grants 30,000 shares with a fair value of CU33 per share to a senior executive, conditional upon the completion of three years’ service. By the end of 2008, the share price has dropped to P25 per share. At that date, the entity adds a cash alternative to the grant, whereby the executive can choose whether to receive 30,000 shares or cash equal to the value of 30,000 shares on vesting date. The share price is P23 on vesting date. Based on the above and the result of the audit, determine the following: 1. Compensation expense for 2007 a. 330,000 c. 500,000 b. 660,000 d. 0 2. Compensation expense for 2008 a. 330,000 c. 250,000 b. 270,000 d. 0 3. The balance of the liability component of the instrument as of December 31, 2008? a. 230,000 c. 250,000 b. 500,000 d. 0 4. Compensation expense for 2009 a. 330,000 c. 230,000 b. 270,000 d. 0 5. The balance of the liability component of the instrument as of December 31, 2009? a. 230,000 c. 300,000 b. 690,000 d. 0 6. The balance of the equity component of the instrument as of December 31, 2009? a. 80,000 c. 240,000 b. 160,000 d. 0

SUGGESTED SOLUTIONS: The compensation expense of P330,000 in 2009 is allocated between liabilities and equity, to bring in the final third of the liability based on the fair value of the shares as at the date of the modification.

No. of shares x Fair Value Total Fair Value x Ratio Cumulative compensation expense Less cum. Comp prev. year Compensation Expense

2007 30,000 33

2008 30,000 33

2009 30,000 33

LIAB 30,000 23

990,000

990,000

990,000

690,000

1/3

2/3

3/3

3/3

330,000

660,000

990,000

690,000 (5)

330,000 (1)

330,000 330,000 (2)

660,000 330,000

Less: adjust liability to fair value (25-23)x 30,000 Compensation expense

Cumulative compensation expense Reclassify equity to liabilities (30,000 x 25 x 2/3) Rem. Equity, 12/31/08 Adjustment [330,000-(25/33x330,000)] Equity, 12/31/09 [(33-25)x30,000x3/3]

60,000 270, 000 (4) 2008 660,000 500,000 (3) 160,000 80,000 (6) 240,000

For nos. 1, 2 and 4 PFRS 2, paragraph 7 provides that the entity shall recognize the goods or services received or acquired in a share-based payment transaction when it obtains the goods or as the services are received. This is why the 30,000 shares are pro-rated to three years which it covers.

For nos. 3 and 5 Par. 38, of PFRS 2 states that the entity shall recognize the goods and services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the entity shall remeasure the fair value of the liability at each reporting date and at the date of settlement.

For no. 6 PFRS 2, par. 35, states that the equity component is measured as the difference between the fair value of the goods and services received and the debt component.

PROBLEM NO. 11: On January 1, 2008, ZEUS Co. granted to an employee the right to choose either shares or cash payment. The choices are as follows:  

Share alternative – equal to 36,000 shares with par value of P40. Cash alternative – cash payment equal to the market value of 30,000 shares

The grant is conditional upon the completion of three years of service. On grant date, on January 1, 2008, the share price is 50. The share prices for the three-year vesting period are P52 on December 21, 2008, P55 on December 31, 2009 and P60 on December 31, 2010. After taking into account the effect of vesting restrictions, ZEUS Company has estimated the fair value of the share alternative is P48. 1. What is the total fair value of the equity component on January 1, 2008 as a result of the share and cash alternative? a. 228,000 c. 72,000 b. 76,000 d. 60,000 2. What is the compensation expense for the year 2008? a. 520,000 c. 444,000 b. 596,000 d. 656,000 3. What is the compensation expense for the year 2009? a. 580,000 c. 596,000 b. 656,000 d. 504,000 4. What is the compensation expense for the year 2010? a. 700,000 c. 624,000 b. 776,000 d. 928,000 5. If the employee has chosen the cash alternative, the cash payment on December 31, 2010 is equal to a. 1,800,000 c. 228,000 b. 700,000 d. 1,440,000 6. If the employee has chosen the share alternative, the share premium or additional paid in capital shall be recognized at a. 1,200,000 c. 1,800,000 b. 588,000 d. 1,440,000 SUGGESTED SOLUTIONS: 1. Fair value of Share alternative (36,000 shs x P48) Fair value of liability on grant date, January 1, 2008 (30,000 shs x P50) Equity Component

1,728,000* 1,500,000 288,000 (A)

Under PFRS 2, Paragraph 38, the compound financial instrument shall be accounted for separately as liability and equity.

If the employee has the right to choose the settlement, the entity is deemed to have issued a compound financial instrument. 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 minus the fair value of the liability component. The equity component is always

the residual amount. *The fair value of the share alternative of P1,728,000 is actually the fair value of the whole compound financial instrument. 2. - 4. Share basis Market Value Total Liability Period Accrued Liability – current year Accrued Liability - prior year Liability Component Equity Component* Compensation expense

2008 30,000 (52) 1,560,000 1/3 520,000 520,000 76,000 596,000(B)

2009 30,000 (55) 1,650,000 2/3 1,100,000 520,000 580,000 76,000 656,000 (B)

2010 30,000 (60) 1,800,000 3/3 1,800,000 1,100,000 700,000 76,000 776,000 (B)

*Equity Component = 288,000/3 = 76,000 5. If the employee has chosen Cash Alternative, Accrued salaries payable Share options Outstanding Cash Share Premium

1,800,000 228,000 1,800,000 288,000

6. If the employee has chosen Share Alternative, Accrued salaries payable 1,800,000 Share options Outstanding 228,000 Share Capital (36,000 x 40) Share Premium

1,440,000 588,000

PROBLEM NO. 12: On January 1, 2007, Josh Company granted share options to 10 of its key employees entitling them to acquire P100 par value shares of the company at P110 per share. The share options will vest on December 31, 2009, provided that the employees remain in the company’s employ and provided that revenues reach P100 million, the employees will receive 1,000

options each. If revenues reach P150 million, the employees will receive 2,000 options each. If revenues reach P200 million, the employees will receive 3,000 options each. The market value of the option on the date of grant is P30. The company has a steady pattern of 25% increase in revenue every year over the last 5 years and expects the same pattern during the vesting period. In addition, the following information were deemed relevant for the computation of the compensation expense for each year: Estimated number of employees who will leave the company Dec. 31, 2007 2 Dec. 31, 2008 2 Dec. 31, 2009 3* *Actual number of employees who left the company. Date

Actual revenue earned P80 million P120 million P200 million

1. What is the compensation expense to be recognized in 2007? a. 80,000 c. 180,000 b. 100,000 d. 300,000 2. What is the compensation expense to be recognized in 2008? a. 80,000 c. 240,000 b. 100,000 d. 300,000 3. What is the compensation expense to be recognized in 2009? a. 630,000 c. 320,000 b. 500,000 d. 310,000 4. If the actual employees receiving their options exercise all their options in 2010, how much is credited to share premium from the related issuance of share? a. 210,000 c. 840,000 b. 630,000 d. 900,000 SUGGESTED SOLUTIONS: Nos. 1-3 Key employees Est. no. of employees who will leave No. of shares per employee Total number of shares x Fair Value Total Fair Value x Ratio Cumulative compensation expense Less cum. Comp prev. year Compensation Expense

2007 10 2 8 1,000 8,000 30 240,000 1/3 80,000 80,000 (A)

2008 10 2 8 2,000 16,000 30 480,000 2/3 320,000 80,000 240,000 (C)

2009 10 3 7 3,000 21,000 30 630,000 3/3 630,000 320,000 310,000 (D)

PFRS 2, paragraph 7 provides that the entity shall recognize the goods or services received or acquired in a share-based payment transaction when it obtains the goods or as

the services are received. No. 4 Cash (21,000 x110) 2,310,000 Share Option Outstanding 630,000 Ordinary Share capital (21,000 x 100) Share Premium

2,100,000 840,000

PROBLEM NO. 13: On January 1, 2007, DRENZ Company granted share options to 10 of its key employees entitling them to acquire P100 par value shares of the company at P110 per share conditional upon the employees’ remaining in the company’s employ during the vesting period. The 10,000 share options shall vest at the end of 2007 if the company’s revenues reach P90M; or at the end of 2008 if the company’s revenues reach P100M; or at the end of 2008 if the revenues reach P110M. The market value of the option on the date of grant is P30. The company has a steady pattern of 25% increase in revenue every year over the last 5 years and expects the same pattern during the vesting period. The company also expects that no employee shall leave the company during the vesting period. Revenues actually earned and recorded by the company during 2007 through 2009 follow: 2007

P80 million

2008

P90 million

2009

P110 million

1. What is the compensation expense to be recognized in 2007? a. 50,000 c. 150,000 b. 100,000 d. 300,000 2. What is the compensation expense to be recognized in 2008? a. 50,000 c. 150,000 b. 100,000 d. 300,000 3. What is the compensation expense to be recognized in 2009? a. 50,000 c. 150,000 b. 100,000 d. 300,000 4. If the employees exercised all their options in 2010, how much premium from the related issuance of shares? a. 100,000 c. 400,000 b. 300,000 d. 500,000

SUGGESTED SOLUTIONS: Share Options Multiply by: Fair value at GRANT DATE Total Compensation Multiply by: ratio Cumulative Compensation Expense/Liability Less: Cumulative Compensation prior year Compensation Expense

2007 10,000

2008 10,000

2009 10,000

30

30

30

300,000 ½

300,000 2/3

300,000 3/3

150,000

200,000

300,000

-

(150,000)

(200,000)

1) 150,000 (C)

2) 50,000 (A)

3) 100,000 (D)

In PFRS 2, paragraph 15b,  Compensation expense should be allocated throughout the service period.  The value of the option is its FAIR VALUE AT GRANT DATE  If transaction has non-market condition, where the performance target is not directly based on the share price of the entity, such conditions is taken into account when estimating the number of options that will vest at the end of the vesting period. No. 4 Cash (10,000 x 110) Share premium-share options (10,000 x 30) Share capital -Ordinary (10,000 x 10) Share Premium - Ordinary

1,100,000 300,000 1,000,000 400,000

Share options accounting treatment under PFRS 2, During exercise period: IF EXERCISED: Dr. Cash (exercise price* number of shares exercised) xx Dr. Share premium-share options (fair value of options exercised) xx Cr. share capital ordinary (par value*number of shares exercised) Cr. share premium-Ordinary (balancing figure)

xx xx

PROBLEM NO. 14: The shareholder’s equity section of MARJ Co. showed the following data on December 31, 2006: Ordinary Shares, P3 par, 150,000 shares authorized, 125,000 shares issued and outstanding Share Premium Ordinary Share Options Outstanding Accumulated Profit

P375,000 P3,525,000 P75,000 P240,000

The share options were granted to key executives and provided them the right to acquire 15,000 shares of Ordinary share at P35 per share. The share was selling at P40 at the time the options were granted. The following transactions occurred during 2007: 3/30 Key executives exercised 2,250 options outstanding at December 31, 2005. The market price per share was P44 at this time. 4/1 The company issued bonds of 1,000,000 at 105, giving each P1,000 bond a detachable warrant enabling the holder to purchase 2 shares of share at P40 for 1-year period. Market values immediately following issuance of the bonds were P4 per warrant and P998 per P1,000 bond without the warrant. 6/30 The company issues rights to shareholders (1 right on each share, exercisable within a 30-day period) permitting holders to acquire 1 share of P40 with every 10rights submitted. Share were selling for P43 this time. All, but 3,000 rights were exercised on July 31, and the additional shares were issued. 9/30

All warrants issued with the bonds on April 1 were exercised.

11/30 The market price per share dropped to P33 and options came due. Since the market price was below the option price, no remaining options were exercised. 1. What is the credit to the Share Premium account related to the issuance of ordinary shares through the exercise of options on 3/30? a. 83,250 b. 72,000 c. 4,500 d. 0 2. What amount should have been allocated to the share warrants outstanding account as a result of issuance of the bonds with the detachable warrants? a. 52,000 b. 4,192 c. 4,000 d. 0 3. What amount should be credited to the Share Premium account as a result of the issuance of shares through the rights exercised by stockholders on 6/30? a. 534,275 b. 497,000 c. 462,500 d. 459,725 4. What is the credited to the Share Premium account from the exercise of warrants which were originally attached to the bonds? a. 126,000 b. 74,000 c. 52,000 d. 0 5. What is the adjusted balance of the Ordinary share options outstanding? a. 75,000 b. 63,750 c. 11,250 d. 0

6. What is the balance of the Ordinary share warrants outstanding? a. 52,000 b. 22,000 c. 10,000 d. 0

SUGGESTED SOLUTIONS: Journal Entries a) 3/30 Cash (2250 x 35) Share Premium- Share Option (75000x2250/15000) Ordinary Shares (2250 x 3) Share Premium – Excess over Par b) 4/1 Cash (1000000 x 1.05) Bonds Discount (1000000-998000) Bonds Payable Share Premium – Share Warrant

78,750 11,250 6,750 83,250 (1) 1,050,000 2,000 1,000,000 52,000 (2)

c) Memo Entry 6/30 Issued rights to shareholders permitting holders to acquire 1 share at P40 with every 10 rights submitted – maximum of 12,725 shares (127,250 shares /10) d) 7/31 Cash ((12,725 – 3,000/10) x 40) Share Capital (12,425 x 3) Share Premium - excess over par e) 9/30 Cash (1000x2x40) Share Premium – share warrant Share Capital (1000x2x3) Share Premium – excess over par f) 11/30 Share Premium – Share Option (75,000-11,250) Share Premium – Expired share option Ordinary share options outstanding Beginning Balance (a) (f)

75000 (11250) (63750) 0 (5)

497,000 37,275 459,725 (3)

80,000 52,000 6,000 126,000 (4)

63,750 63,750

Ordinary Share Warrant outstanding @issue date (b) (e)

52000 (52000) 0 (6)

 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 or loss. For grant of share options, the share-based payment arrangement is finally settled when the options are exercised, are forfeited or lapsed.  The intrinsic value is the excess of the market value of the share over the option price  PAS 32 states that the components of a compound financial instruments shall be accounted for separately. The equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component.