FAR-3-Share Based [PDF]

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COURSE DEVELOPER AND THEIR BACKGROUND COURSE DESCRIPTION

COURSE OUTLINE

CHAPTER # TITLE RATIONALE

INSTRUCTION TO THE USERS

PRE-TEST LEARNING OBJECTIVES

CONTENT PREPARATORY ACTIVITIES

FAR 3: INTERMEDIATE ACCOUNTING III This module is prepared by Mr. Jerry D. Mariano. He is a faculty member of Tarlac State University College of Business and Accountancy-Accountancy Department. He is a Certified Public Accountant. He teaches financial accounting and tax courses. This course is the culmination of financial accounting courses. This will cover constructive accounting and special topics in financial accounting. This course shall thoroughly cover recognition, measurement and valuation, presentation and disclosure requirements for special topics such as post-employment benefits, accounting for income tax, share-based compensation and noncurrent asset held for sale, discontinued operation and accounting changes. 1. Employee Benefits (Postemployment Benefits& Other Employee Benefits) 2. Accounting for Income Tax 3. Share-based Payments/Compensation 4. Noncurrent Held for Sale, Discontinued Operation and Accounting Changes 3 Share-Based Payment (Share Options & Share Appreciation Right) This module covers the topic about accounting for share-based payment-Share Options and Share Appreciation Rights. The highlights of this topic include the equity settlement versus the cash settlement, measurement of share-based, recognition of compensation expense, acceleration, modification and cancelation of terms and the cash and share alternative. This module provides knowledge and understanding to business students regarding compensation arrangement set by the company based on the share-based payment. This module helps to understand the concept and rules of accounting for employee benefits (postemployment). In this module, illustrations and sample problems are also provided in an informative and comprehensive manner to be able to understand better the topics. To evaluate what the students have learned, this module provides work exercises (activity) at the closure activities section. To ensure that learning objectives are attained at the end of the semester, the learner/students are evaluated based on attendance, portfolio journal (activity), formative assessment and summative assessment. See evaluation for the details. For further readings, see assignment/agreement section. 1. Define and explain the concepts behind share-based compensation plan, 2. Identify and record the transactions affecting share appreciation and share options 3. Solve and compute for the valuation of fair value method and intrinsic value method of measuring share options, to account for the share-based transaction with cash and share alternative 4. Classify and report the effect of each transaction in relation with share-based compensation The share-based payment topic (Share options and share appreciation right are actually in the law subject partnership and corporation. In this module, the sharebased payment application is extensively discussed. DEVELOPMENTAL ACTIVITIES

 Share-based Compensation-Share Options 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 its shares. Compensation plans are a common feature of employee remuneration for directors, senior executives

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and other key employees. PFRS 2 measurement of share –based compensation: 1. Equity settled-share options 2. Cash settled-share appreciation rights 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, granted as part of remuneration package, in addition to a cash salary and other employment benefits. Measurement of compensation a. FV Method -this means compensation is equal to compensation to the FV of the SO on the date of grant. -mandated by the PFRS 2. b. Intrinsic Vale Method -this means that compensation is equal to the intrinsic value of the SO. It is the “excess of the market value of the share over the option price.” It can only be used if the FV of the share option cannot be estimated reliably. Recognition of Compensation a. If the SO vest immediately, the employee is not required to complete a specified period of service before unconditionally entitled to the SO. In this case, on grant date, the entity shall recognize the compensation as expense in full with corresponding increase in equity. b. If the SO 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. This is on the theory that the share options are in recognition for services rendered between the date of grant and the exercise date. Journal Entries: To recognize the compensation as expense (either as full expense for immediate recognition as stated in letter (a) or (b) if there is vesting period, allocate the compensation expense over the vesting periodfrom the date of grant to the date the options can first be exercised) Salaries-share options X Share options outstanding (SOO) X To record the exercise of share options Cash Share options outstanding Ordinary share capital Share premium

X X X X

Note: If the SO are not subsequently exercised, the share options outstanding account shall be adjusted and credited to share premium. Share options sometimes have conditions: 1. No. of share options may vary it depends on the increase in sales or performance of the employee/s 2. Exercise price may change it depends on the increase in sales or performance of the employee/s 3. Vesting period 4. FV of share options Note: The employee/s who completed the service period may or may not exercise the share options. And it is also possible that during the vesting period some employees will leave the entity. Illustration- with condition and share options vary On January 1, 2019, an entity granted SO to each of the 300 employees working in the sales

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department. The FV option of each SO on grant date is P20. Conditions: 1. The SO vest at the end of a three-year period provided that the employees remain in the entity’s employ and 2. Provided the volume of sales will increase by an average of 10% per year. 2.1 if the sales increase by an average of 10%, each employee will receive 200 share options 2.2 if the sales increase by an average of 15% per year, each employee will receive 300 share options. During 2019, sales increased by 10%; During 2020, the sales increased by 20% resulting in an average of 15% for the two years (10% + 20%=15%) By the end 2021, the sales increased by an average of 16%. 20 employees left the entity. Computation of compensation expense. 2019 Compensation expense (300 employees x 200 SO xP20 FV/3 years x 1 st year) 400,000 Salaries-SO 400,000 SOO 400,000 2020 Cumulative compensation (300 employees x 300 SO x P20/3yrs x 2nd year) 1,200,000 Compensation expense-2019 (400,000) Compensation expense-2020 800,000 Salaries-SO 800,000 SOO 800,000 2021 Cumulative compensation (300 employees-20 employees x 300 SO x P20/3yrs x 3rd year)

Cumulative compensation-2020 Compensation expense-2021 Salaries-SO 480,000 SOO 480,000

1,680,000

(1,200,000) 480,000

Illustration-with condition and exercise price varies On January 1, 2019, an entity granted a senior executive 20,000 share options conditional upon the executive’s remaining in the entity’s employ until December 31, 2021. Par value per share is P50 Exercise price is P100 Exercise price drops to P80 if the entity’s earnings increase by at least an average of 10% per year over the three-year period. On grant date, the entity estimates that the fair value of the share option is P30 if the exercise price is P80. If the exercise price is P100, the fair value of the share option is P25. During 2019 and 2020, the earnings increased by 12% and 11% respectively. However, during 2021, the earnings increased only by 4%. Computation: 2019 Compensation expense (20,000 SO x P30 FV/3yrs x 1st yr) 200,000 Salaries-SO 200,000 SOO 200,000 2020 Cumulative compensation (20,000 x P30/3yrs x 2 nd yr) 400,000 Compensation expense-2019 (200,000) Compensation expense-2020 200,000

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Salaries-SO SOO

200,000 200,000

2021 Cumulative compensation (20,000 x P25) Cumulative compensation-2020 Compensation expense-2021 Salaries-SO 100,000 SOO 100,000

500,000 400,000 100,000

*(12%+11%+4%=27%/3=9%). Therefore, exercise price is P100 and the FV of the SO is P25. Illustration-Intrinsic value On January 1, 2019, an entity granted 10,000 share options to employees. FV of the SO cannot be estimated reliably. Par value per ordinary share is P100. Option price (OP) is P125 and MV of the ordinary share at grant date is also P125. Share Options can be exercised starting January 1, 2021 Market prices: December 31, 2019-P150 December 31, 2020-P180 December 31, 2021-P200 Condition: 1. Vesting period, 2 years (the employees to remain In service until December 31, 2020) All SO vested on Dec. 31, 2020 and no employees left the entity. Computation: 2019 Compensation expense (P150 MV 2020 – P125 OP x 10,000 SO/2yrs x 1 st yr) 125,000 2020 Cumulative expense (P180 MV 2021 - P125 OP x 10,000 SO/2yrs x 2 nd yr) Compensation recognized in 2019 Compensation expense in2020

550,000 125,000 425,000

2021 Additional compensation in 2021 (P200 MV 2021-P180 MV 2020 x 10,000 SO) 200,000

Note: the increase in intrinsic value after the vesting period is recognized as additional compensation immediately. Acceleration of vesting If the entity cancels or settles a grant of SO during the vesting period, the entity shall account for the cancelation or settlement as an acceleration of vesting. a. Recognized immediately the remainder of compensation expense. b. Pay the employee on the cancelation or settlement of the grant and account it as repurchase of equity interest, meaning deduction from equity. If the payment exceeds the FV of the SO, the excess shall be recognized as an expense. Illustration:

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On January 1, 2019, an entity granted 50,000 SO to the employees. Option price Par Value/share Vesting Period Total compensation expense in 4 years Compensation expense charged in income statement 2019 & 2020 *the entity decided to settle the award early on December 31, 2021.

P60 50 4 years 4,000,000 1,000,000 & 1,050,000

Computation: Compensation expense in 2021(4,000,000 Total compensation expense- 2,050,000 cumulative compensation of 2019 & 2020) = 1,950,000 Query Suppose the SO are not exercised. Instead, the entity paid the employees P2,500,000 to cancel or settle the SO. Share options outstanding 2,050,000 *Salaries-SO 450,000 Cash 2,500,000 *any amount in excess FV already recognized is treated as expense. IFRIC 11-Share-based payments in which the employees of a subsidiary are granted rights to the equity instrument of the parent. Measurement: FV of the SO at grant date Use the account title Equity contribution from parent instead share options outstanding in the computation of the compensation. Journal Entries: To record the compensation expense Salaries-SO Equity contribution from parent.

X X

To record the exercise of the SO recognized by the parent entity Cash X Share capital X Share premium X Modification of condition If an entity modify the vesting condition, the modification should be beneficial to employees like increase in the FV of SO (favorable to employees but additional compensation expense to the entity.) In this scenario we will recognize two compensations: 1. Compensation based on original condition 2. Compensation based on modification However, if the condition is not beneficial to the employees, the entity shall continue to recognize the compensation based on the original condition as if the modification had never occurred. Example of modifications not beneficial to employees: 1. Reduces the FV of the equity instruments 2. Increasing the exercise price of the option Illustration: On January 1, 2019, an entity granted 100 share options to each of the 500 employees.

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2019: 2020: 2021:

FV of SO on grant date Vesting period

P15 3 years

No of employees left the entity: 40 35 45

No of employees expected to leave 70 30

Modification: 1. On January 1, 2020, the entity repriced the SO by lowering the exercise price. The options still vest after three years. 2. Increase the FV of the SO of P6. Computation: 2019 Compensation expense (500 E-40-70 x 100 SO x 15 FV / 3yrs x 1st yr)

195,000

2020 Cumulative compensation-original (500-40-35-30 x 100 SO x 15 FV / 3yrs x 2 nd yr) Compensation based on modification (395 employees x 100 SO x P6 FV/ 2yrs remaining)

Total cumulative compensation Compensation expense for 2019 Compensation expense 2020

395,000

118,500 513,500 (195,000) 318,500

2021 Cumulative compensation-original (500-40-35-45 x 100 SO x 15 FV/ 3 yrs x 3 rd yr)

Compensation based on modification (380 employees x 100 SO x P6 FV) Total cumulative compensation-December 31, 2021 Compensation expense for 2019 +2020 (195,000+ 318,500) Compensation expense for 2021

570,000 228,000 798,000 (513,500) 284,500

Additional Illustration: A-In connection with a share option plan for the benefit of key employees, Ward Company intends to distribute treasury shares when the options are exercised. These shares were previously brought at P42 per share. The par value per share is P30. On January 1, 2019, the entity granted share options of 100,000 shares at an option price of P38 per share as additional compensation for services to be rendered over the next three years. The options are exercisable during a 2-year period beginning January 1, 2022, by grantee still employed by the entity. Market price of share was P47 at the grant date. The fair value of the share option is P12 on grant date. All share options were exercised during 2022. 1. What amount should be reported as compensation expense for 2019? 400,000 FV of SO (100,000 x 12) = 1,200,000/3years x 1 st yr 400,000 2. 2019 Salaries SO outstanding

400,000

2020 Salaries SO outstanding

400,000

2021 Salaries

400,000

400,000

400,000

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SO outstanding 2022 Cash SO outstanding Treasury shares Share premium

400,000 3,800,000 1,200,000 4,200,000 800,000

Option price (100k x 38) SO outstanding Total consideration Cost of Treasury shares (100K x 42) Share premium

3,800,000 1,200,000 5,000,000 4,200,000 800,000

B-On January 1, 2019, an entity granted 60,000 share options to employees. The share options vest at the end of three years provided the employees remain in service until then. The option price is P60 and the par value is P50. At the grant date, the entity concluded that the fair value of the share options cannot be measured reliably. The share options have a life of 4 years which means that the share options can be exercised within one year after vesting. The share prices are P62 on December 31, 2019, P66 on December 31, 2020, P75 on December 31, 2021 and P85 on December 31, 2022. All share options were exercised on December 31, 2022. 1. What is the compensation expense for 2022? 600,000 85-75=10 x 60,000= 600,000 additional compensation expense 2019 60,000 2 120,000 x 1/3 40,000

2020 60,000 6 360,000 x 2/3 240,000 (40,000) 200,000

2021 60,000 15 900,000 x 3/3 900,000 (240,000) 660,000

Plus Additional compensation of P600,000 on 2022 2. What amount was credited to share premium upon exercise of the share options on December 31, 2022? 2,100,000 Cash (60,000 x 60) 3,600,000 SO outstanding 1,500,000 SC (60,000 x 50) 3,000,000 SP 2,100,000

 Share-Based Compensation- Share Appreciation Right (SAR) To understand a cash settled share-based payment transaction To know the recognition and measurement of SAR To account share-based transaction with cash alternative and share alternative 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. In other words, the employee entitles to a cash payment equal to the increase in the price of a given number of shares over a given period.

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Unlike in a SO, the entity shall recognize liability or obligation to pay cash in the future on exercise date (on this date will be known if the entity has an obligation to pay cash) Note: the entity will not issue shares or stock in SAR. If you see no. of shares in the problem, the shares will be used only as a medium to be able to know the changes or appreciation of the market value of the right at each reporting date. Measurement: FV of the liability or the entity shall remeasure the FV of the liability at each reporting date with any changes in FV recognized in profit or loss for the period. 1. FV of liability= MV of share –predetermined price for a given number of shares over the vesting period Note: If the given problem has an intrinsic value of the share appreciation right, it is actually the equivalent amount to be paid out to the employees on the date of exercise. Recognition of compensation (SAR) a. Vest immediately, the compensation is recognized on the date of grant b. Does not vest immediately, the employee needs to complete the vesting period. Illustration: An entity granted SAR to the general manager on January 1, 2019. The employee is entitled to receive cash equal to the appreciation in share price over the market value on January 1, 2019. Vesting period No. of shares Exercise date

4 years 20,000 January 1, 2023

The quote prices of the entity’s share are: January 1, 2019 (predetermined price) December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022

200 210 220 240 250

Computation: December 31, 2019 Compensation Expense (210-200 x 20,000/4yrs x 1 st yr) Salaries 50,000 Accrued salaries payable 50,000 December 31, 2020 Accrued compensation (220-200 x 20,000/ 4yrs x 2 nd yr) Accrued compensation-2019 Compensation expense for 2020 Salaries Accrued salaries payable

50,000

200,000 (50,000) 150,000

150,000 150,000

December 31, 2021

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Accrued compensation (240-200 x 20,000/ 4 yrs x 3 rd yr) Accrued compensation as of 2020 Compensation expense 2021 Salaries Accrued salaries payable

400,000 400,000

December 31, 2022 Accrued compensation (250-200 x 20,000) Accrued compensation as of 2021 Compensation expense for 2022 January 1, 2023 To settle the share appreciate right Accrued salaries payable Cash

600,000 (200,000) 400,000

1,000,000 (600,000) 400,000

1,000,000 1,000,000

Suppose the market value drops to P200 on December 31, 2022, the entity has no obligation because there is no appreciation or increase in market value on exercise date. Accrued salaries payable Gain on reversal of share appreciation right

600,000 600,000

Illustration: On January 1, 2019, Module Company granted 100 SARs to each of the 500 employees: Vesting period 3 years Employees left the entity -No of employees exercised their SARs: December 31, 2021 100 December 31, 2022 250 December 31, 2023 150 FV and Instrinsic Value of SARs: December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 December 31, 2023

FV 15 18 20 21

IV

15 20 25

Computation: December 31, 2019 Compensation expense (500 x 100 x 15 /3yrs x 1st yr) Salaries 250,000 Accrued salaries payable December 31, 2020 Accrued liability (500 x 100 x 18/3 yrs x 2 nd yr) Accrued liability of 2019 Compensation expense for 2020

250,000 250,000

600,000 (250,000) 350,000

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December 31, 2021 Accrued liability (500 – 100 x 100 x 20/3yrs x 3) Accrued liability as of 2020 Compensation expense Salaries

800,000 (600,000) 200,000

200,000 Accrued salaries payable

Salaries

200,000 150,000

Cash (100 EMP X 100 X P15 IV)

150,000

Note: total compensation expense for 2021 is P350,000 200,000, compensation right not yet exercise; 150,000, compensation right already exercised December 31, 2022 Accrued liability (400-250 x 100 x 21) Accrued liability as of 2021 Decrease in accrued liability

315,000 (800,000) (485,000)

Accrued salaries payable Salaries

485,000

Salaries

500,000

485,000

Cash (250 emp x 100 x 20)

500,000

Net compensation for 2022 is (15,000) 500,000 compensation exercised-reversal of accrued liability of rights not yet exercised (485,000) December 31, 2023 Accrued liability (150 x 100 x 25) Accrued liability as of 2022 Net compensation expense for 2023 Salaries Accrued salaries payable Cash

375,000 315,000 60,000

60,000 315,000

Cash and share alternative An employee may have the right to choose between: a. Cash alternative -cash payment employee

375,000

b. share alternative- equity shares given to the

If the entity has the choice of settlement, there is no accounting problem, but if the employee has the right to choose the settlement the entity has deemed to issue a compound financial instrument. The compound instrument is accounted as partly liability which is the cash alternative and partly equity which is the share alternative. Equity component=FV of the whole instrument- FV of the liability

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Illustration: On January 1, 2019, an entity granted to an employee the right to choose either: a. Share alternative-12,000 shares b. Cash alternative-cash payment equal to phantom shares of 10,000 Vesting period Par value of the share at the date of grant Share price at the date of grant FV of the share alternative per share

3 years P25 51 48

Share prices market value: December 31, 2019 54 December 31, 2020 60 December 31, 2021 65 Computation: FV of share alternative (12,000 x P48) FV of liability on grant date (10,000 shares x 51) Equity component

576,000 510,000 66,000

*576,000 total value of the whole compound financial instrument. Journal entries: December 31, 2019 Salaries (66,000/3) Share options outstanding Salaries

22,000 22,000 180,000

Accrued salaries payable (10,000 x 54/3yrs)

180,000

December 31, 2020 Salaries (66,000/3 x 1st yr) Share options outstanding Salaries

22,000 22,000 220,000

Accrued salaries payable (10,000 x 60/3yrs x 2nd yr-180,000)

220,000

December 31, 2021 Salaries (66,000/3 x 1st yr) Share options outstanding Salaries

22,000 22,000 250,000

Accrued salaries payable (10,000 x 65/3yrs x 3rd yr-400,000)

250,000

Final Accounting If the employee has chosen the cash alternative: Accrued salaries payable

650,000

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Share options outstanding Cash (12,000 shares x 25) Share premium

66,000 650,000 66,000

If the employee has chosen the equity alternative: Accrued salaries payable Share options outstanding Share capital (12,000 shares x 25) Share premium

650,000 66,000 300,000 416,000

Underscore that the entity issued 12,000 shares and not 10,000 phantom shares which serve as the basis only in computing the liability. Additional information: If the entity purchased an asset on account and the supplier has the choice of settlement, the instrument issued is a compound financial instrument. The fair value of the asset received will be used as the component of whole instrument. FV of the asset received- fair value of liability= Equity component And if the fair value of the asset received cannot be measured directly, the asset is recorded at the fair value of the shares to be issued. Additional Illustration: A-On January 1, 2019, an entity offered management share appreciation rights equal to 50,000 shares with a predetermined price of P100. The service period is 3 years and the exercise date is January 1, 2022. The quoted prices per share are P124 on December 31, 2019, P151 on December 31, 2020 and P151 on December 31, 2021. 1. What amount should be charged to compensation expense for 2021? 850,000 2019 2020 2021 50,000 50,000 50,000 24 51 51 1,200,000 2,550,000 2,550,000 x 1/3 x 2/3 x 3/3 400,000 1,700,000 2,550,000 (400,000) (1,700,000) 1,300,000 850,000 2. What amount should be recognized as gain on reversal of share appreciation rights in 2021 if the market price dropped to P120 on December 31, 2021? 700,000 Cumulative 2020 1,700,000 Cumulative 2021 (50,000 x 20) 1,000,000 Gain on reversal 700,000 B-On January 1, 2019, an entity granted the chief executive officer (CEO) 50,000 share appreciation rights for past services. The rights are exercisable immediately and expire on December 31, 2020. On exercise, the CEO is entitled to receive cash for the excess of the share market price on exercise date over the market price on grant date. The CEO did not exercise any of the rights in 2019. The market price of the share was P100 on January 1, 2019 and P115 on December 31, 2019. The CEO exercised the rights on December 31, 2020 when the market price was P110. 1. What is the compensation expense for 2019? 750,000 50,000 x (115-100)= 750,000 The compensation is recognized as expensed entirely in 2019.

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Salaries 750,000 Accrued salaries payable 750,000 2. What amount should be recognized as gain on reversal of share appreciation rights in 2020? Accrued compensation -12/31/20 (50,000 x 10) 500,000 Accrued compensation -12/31/19 (750,000) Dec in accrued compensation (250,000) Accrued salaries payable Cash Gain on reversal of share appreciation rights

750,000 500,000 250,000

CLOSURE ACTIVITIES Share-Based Payments The following work exercises intend to evaluate what the learners have learned in this topic. Write your answers in your portfolio journal. Show your computation in good form. Problem A On January 1, 2019, Masipag Company granted 100 share options each to 500 employees, conditional upon the employee’s remaining in the entity’s employ during the vesting period. The share options vest at the end of a 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, 2020, 30 employees have left and it is expected that on the basis of a weighted average probability, a further 30 employees will leave before the end of the three-year period. On December 31, 2021, only 20 employees actually left and all of the share options are exercised on such date. 1. What amount of compensation expense should be recognized for 2021? Problem B On January 1, 2019, Relax Company granted to a senior executive 30,000 share options, conditional upon the executive’s remaining in the entity’s employ until December 31, 2021. The par value per share is P50. The exercise price is P100. However, the exercise price drops to P80 if the entity’s earnings increase by at least an average of 10% per year over the three-year period. On grant date, the entity estimated that the fair value of the share option is P30 if the exercise price is P80. If the exercise price is P100, the fair value of the share option is P25. During 2019 and 2020, the earnings increased by 11% and 12% respectively. However, during 2021, the earnings increased only by 4%. 2. What amount should be recognized as compensation expense for 2021? Problem C On January 1, 2019, Alpha Company offered share appreciation rights with the following terms: Predetermined price Number of shares Service period Exercise date

P100 per share 50,000 shares 3 years January 1, 2022

The share appreciation rights are exercised on January 1, 2022. The quoted prices per share are 100, 124, 151 and 151 on January 1, 2019, December 31, 2019, December 31, 2020 and December 31, 2021, respectively. 3. What amount should be reported as compensation expense for 2021 as a result of the share

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appreciation rights? Problem D On January 1, 2019, Planet Company purchased an equipment with a cash price of P2,000,000. The supplier can choose how the purchase is to be settled. The choices are 20,000 shares with par value of P50 in one years’ time, or a cash payment equal to the market value of 15,000 phantom shares on December 31, 2019. At grant date on January 1, 2019, the market price of each share is P80 and on the date of settlement on December 31, 2019, the market price of each share is P100. 4. What is the equity component arising from the purchase of equipment with share and cash alternative? 5. What amount of interest expense should be recognized on December 31, 2019 if the supplier has chosen the “cash alternative”? Problem E B Company has granted share options to its employees. The total compensation expense to the vesting date of December 31, 2020 has been calculated at P6,000,000. The entity has decided to settle the award early on December 31, 2019. The compensation expense charged since the date of grant on January 1, 2017 was P1,500,000 for 2017 and P1,300,000 for 2018. The compensation expense that would have been charged for 2019 is P1,200,000. 6.What is the compensation expense for 2019? 7. What is the compensation expense for 2019, if the share options are not exercised but instead the entity paid P5,000,000 to the employees ? Problem F C Company granted 10,000 share options to each of its five directors on January 1, 2019. The options vest on January 1, 2023. The fair value of each option on January 1, 2019 is P50 and it is anticipated that all of the share options will vest on January 1, 2023. 8. What will be the increase in expense and equity for the year ended December 31, 2019? Problem G On January 1, 2019, F Company granted its president 50,000 share appreciation rights for past services. These rights are exercisable immediately and expire on December 31, 2020. On exercise date, the president is entitled to receive cash for the excess of the share market price over the share market price on the grant date. The president did not exercise any of the rights during 2019. The market price of the share was P100 on January 1, 2019 and P115 on December 31, 2019. The grantee exercised the rights on December 31, 2020 when the market price was P115. 9. As a result of the share appreciation rights, what amount should be recognized as gain on reversal of share appreciation rights in 2020? Problem H On January 1, 2019, G Company granted to an employee the right to choose either shares or cash payment. The choices are as follows:  Share alternative – equal to 25,000 shares with par value of P30.  Cash alternative – cash payment equal to the market value of 20,000 shares. The grant is conditional upon the completion of three years of service. On grant date, on January 1,

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2019, the share price is P51. The share prices for the three-year vesting period are P54 on December 31, 2019, P60 on December 31, 2020, and P65 on December 31, 2021. After taking into account the effect of vesting restrictions, the entity has estimated that the fair value of the share alternative is P48. 10. What is the compensation expense for 2019? 11. What is the compensation expense for 2020? 12. What is the share premium if employee chose the share alternative? 13. What is the share premium if employee chose the cash alternative? ----------------------------------------------------------------------------------------------------------------------------Philippians 4:13- I can do all this through him who gives me strength. SYNTHESIS / GENERALIZATION 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, granted as part of remuneration package, in addition to a cash salary and other employment benefits. Measurement of compensation a. FV Method -this means compensation is equal to compensation to the FV of the SO on the date of grant. -mandated by the PFRS 2. b. Intrinsic Vale Method -this means that compensation is equal to the intrinsic value of the SO. It is the “excess of the market value of the share over the option price.” It can only be used if the FV of the share option cannot be estimated reliably. Recognition of Compensation a. If the SO vest immediately, the employee is not required to complete a specified period of service before unconditionally entitled to the SO. In this case, on grant date, the entity shall recognize the compensation as expense in full with corresponding increase in equity. b. If the SO 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. This is on the theory that the share options are in recognition for services rendered between the date of grant and the exercise date. 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. In other words, the employee entitles to a cash payment equal to the increase in the price of a given number of shares over a given period. Unlike in a SO, the entity shall recognize liability or obligation to pay cash in the future on exercise date (on this date will be known if the entity has an obligation to pay cash) Note: the entity will not issue shares or stock in SAR. If you see no. of shares in the problem, the shares will be used only as a medium to be able to know the changes or appreciation of the market value of the right at each reporting date. Measurement: FV of the liability or the entity shall remeasure the FV of the liability at each reporting date with any changes in FV recognized in profit or loss for the period. FV of liability= MV of share –predetermined price for a given number of shares over the vesting period

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Note: If the given problem has an intrinsic value of the share appreciation right, it is actually the equivalent amount to be paid out to the employees on the date of exercise. Recognition of compensation (SAR) a. Vest immediately, the compensation is recognized on the date of grant b. Does not vest immediately, the employee needs to complete the vesting period. EVALUATION The student/learner’s performance in the module is evaluated as follows: 20% 20% 20%

Attendance (Active participation in the class) Portfolio Journal (Answers to Portfolio Journal) Formative Examination Summative Examination (This topic is included in the Online/Offline Written 40% Midterm Examination) ASSIGNMENT / The next topic is Noncurrent Asset Held for Sale, Discontinued Operation and AGREEMENT Accounting Changes. Student is advised to read in advance the topic in the book of Valix, Peralta, Financial Accounting 3, 2019 edition.

For further reading: Milan Financial Accounting 3, 2019 edition REFERENCES

Valix, Peralta, Financial Accounting Volumes 2, 2019 edition Millan, Intermediate Accounting Part 2, 2019 edition

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