BALIUAG UNIVERSITY

Integrated Accounting Course II

Summer 2017

MODULE 15: Share-Based Payments LVC

1. RELATED STANDARD: IFRS 2 – Share-based Payment

 Definition of Terms
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 of equity instruments of the entity or another group entity.
Equity-settled share-based payment transaction - A share-based payment transaction in which the entity
(a) receives goods or services as consideration for its own equity instruments (including shares or share options), or
(b) receives goods or services but has no obligation to settle the transaction with the supplier.
Grant date - The date at which the entity and another party (including an employee) agree to a share-based payment
arrangement.
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.
Market condition - A performance condition upon which the exercise price, vesting or exercisability of an equity
instrument depends that is related to the market price (or value) of the entity’s equity instruments (or the equity
instruments of another entity in the same group).
Performance condition - A vesting condition that requires:
(a) the counterparty to complete a specified period of service (ie a service condition); the service requirement can be
explicit or implicit; and
(b) specified performance target(s) to be met while the counterparty is rendering the service required in (a).
Reload feature - A feature that provides for an automatic grant of additional share options whenever the option holder
exercises previously granted options using the entity’s shares, rather than cash, to satisfy the exercise price.
Reload option - A new share option granted when a share is used to satisfy the exercise price of a previous share option.
Service condition - A vesting condition that requires the counterparty to complete a specified period of service during
which services are provided to the entity.
Share-based payment arrangement - An agreement between the entity (or another group entity or any shareholder of
any group entity) and another party (including an employee) that entitles the other party to receive
(a) cash or other assets of the entity for amounts that are based on the price (or value) of equity instruments
(including shares or share options) of the entity or another group entity, or
(b) equity instruments (including shares or share options) of the entity or another group entity, provided the specified
vesting conditions, if any, are met.
Share-based payment transaction - A transaction in which the entity
(a) receives goods or services from the supplier of those goods or services (including an employee) in a share-based
payment arrangement, or
(b) incurs an obligation to settle the transaction with the supplier in a share-based payment arrangement when
another group entity receives those goods or services.
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.
Vest - To become an entitlement.
Vesting condition - A condition that determines 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.
Vesting period - The period during which all the specified vesting conditions of a share-based payment arrangement are
to be satisfied.

 Share-based payment
 A share-based payment is a transaction in which the entity receives goods or services either as consideration for its
equity instruments or by incurring liabilities for amounts based on the price of the entity's shares or other equity
instruments of the entity.
 The accounting requirements for the share-based payment depend on how the transaction will be settled, by the
issuance of
A. Equity
B. Cash

 Equity Settled transaction

 Share options – Call options are granted to employees that give them right to purchase an entity’s shares in
exchange for their services.
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 Measurement
Particular Fair Value Method Intrinsic Value Method
Measurement Fair value of share options on the date of Share option = Market price of share minus
grant. Option price
Subsequent If the modification of condition is beneficial to Remeasured based on change in market
measurement employees and increases the fair value of price of share at each reporting date and
share options granted, increase in fair value is at the settlement date
accounted as additional compensation.
*Modification is beneficial if the exercise price
is reduced.
Requirement Mandated by IFRS 2 Used only if fair value of share option
cannot be estimated reliably

 Recognition of compensation
a. Vesting immediately – Recognize compensation expense immediately and record the equity component (share
options outstanding).
b. With vesting period – Recognize compensation expense over the vesting period. If the total compensation
changes in the subsequent period, the change is accounted prospectively.

 Acceleration of vesting (cancellation or settlement during vesting period)

a. Award of options granted early
- Expensed immediately the compensation that would have been recognized in the future.
b. Cash payment instead of exercise of option
- Charged to (1) share option outstanding and the excess to (2) expense account (salaries).

 Parent company grants share options to employees of subsidiary

 Subsidiary accounts the granting as equity contribution from the parent measured at fair value of options at
date of grant.

 Cash Settled Transaction

 Share appreciation rights
 Stock appreciation right is a bonus given to employees that is equal to the appreciation of company stock over
an established time period.
 Cash settlement is equal to the excess of the market price over the predetermined price for a stated number of
shares.

 Measurement and recognition

 The compensation expense and the related liability shall be measured at fair value
 The fair value of the share appreciation rights is equal to the excess of the market price of share over the
predetermined price.
 Decline in fair value of share shall be accounted as gain on reversal of share appreciation rights and reduction
of liability for compensation.

 Recognition of compensation
a. Vesting immediately – Recognize compensation expense and liability immediately.
b. With vesting period – Recognize compensation expense and liability over the vesting period.

 Cash and share alternative

 The entity may allow the employee the choice as to whether the settlement is in cash or by issuance of equity
securities.
 Entity has the choice
o Accounted as financial liability or equity but not both.
 Employees have the choice
o Accounted as compound financial instrument. Accounted for separately as partly liability and partly equity.
o Equity component is the fair value of the compound instrument minus fair value of liability component
(residual amount).
 Final settlement
a. Cash settlement chosen
o Excess of the cash settlement over the carrying amount of the compound financial instrument is
credited to share premium.
b. Equity settlement chosen

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o Excess of the par value of share capital over the carrying amount of the compound financial instrument
is credited to share premium.

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Illustrative Problems
1. Defined by IFRS 2 as 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.
A. Share option C. Share split
B. Pre-emptive share right D. Share-based payment
2. Defined by IFRS 2 as 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.
A. Value in use C. Intrinsic value
B. Fair value D. Theoretical value
3. Defined by IFRS 2 as 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 of equity instruments of the entity or another group entity.
A. Equity-settled share-based payment C. Liability-settled share-based payment
B. Cash-settled share-based payment D. Account-settled share-based payment
4. Defined by IFRS 2 as a vesting condition that requires the counterparty to complete a specified period of and
specified performance target(s) to be met while the counterparty is rendering the service so required.
A. Vesting condition C. Market condition
B. Service condition D. Performance condition
5. The measurement required by IFRS 2 for share option in an equity-settled share-based payment is the
A. Fair value C. Residual value
B. Intrinsic value D. Theoretical value
6. In an equity-settled transaction, if the total compensation changes in the subsequent period, the change is
A. Accounted retrospectively C. Accounted prospectively
B. Deferred through the vesting period D. Not accounted
7. If the equity-settled transaction (share option) is granted early during the vesting period, the compensation that
wold have been recognized in the future shall be
A. Deferred until the exercise of the option C. Recognized in profit or loss immediately
B. Recognized in other comprehensive income D. Shall be offset against the value of the equity granted
8. Stock appreciation right would normally be settled through
A. Cash settlement C. Issuance of shares
B. Issuance of share options D. Any of the foregoing
9. In stock appreciation right, decline in fair value of share shall be accounted as
A. Loss and decrease in liability C. Gain and increase in liability
B. Loss and increase in liability D. Gain and decrease in liability
10. If the employee has the choice as to whether the settlement is in cash or by issuance of equity securities, the share-
based payment is accounted as
A. An equity instrument C. Either A or B but not both
B. A financial liability D. Compound financial instrument
11. Which of the following parties cannot be granted shares or share options by the entity?
A. Non-executive director C. Supplier of goods and services
B. Chief accountant D. None of the foregoing
12. Which of the following statement about expected vesting period agrees with IFRS 2?
A. The entity shall estimate the length of the expected vesting period at grant date, based on the most likely
outcome of the performance condition.
B. The entity shall estimate the length of the expected vesting period at measurement date based on the
contractual obligations.
C. 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 may be subsequently revised.
D. The entity shall revise its estimate of the length of the vesting period annually.
13. On January 1, Year 1, M 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, Year 2, 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,
Year 3, only 20 employees actually left and all of the share options are exercised on such date. What is the
compensation expense for Year 3?
A. 500,000 B. 880,000 C. 380,000 D. 470,000

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Share-Based Payment LVC
14. N COMPANY has granted share options to employees. The total compensation expense to the vesting date of
December 31, Year 4 has been calculated at P6,000,000. The entity has decided to settle the award early on
December 31, Year 3. The compensation expense charged since the date of grant on January 1, Year 1 was
P1,500,000 for Year 1 and P1,300,000 for Year 2. The compensation expenses that would have been charged for
Year 3 is P1,200,000. What is the compensation expense for Year 3?
A. 3,200,000 B. 2,000,000 C. 1,200,000 D. 0
15. Refer to the preceding problem. What is the compensation expense for Year 3, assuming the share options are not
exercised but instead, the entity paid the employees P5,000,000 on December 31, Year 3?
A. 5,000,000 B. 2,200,000 C. 3,200,000 D. 0
16. On January 1, Year 1, O COMPANY granted 60,000 share options to employees. The share options will vest at the
end of three years provided the employees remain in service until then. The option price is P60 and the par value
per share is P50. At the date of grant, 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, Year 1, P66 on December 31, Year 2, P75
on December 31, Year 3 and P85 on December 31, Year 4. All share options were exercised on December 31, Year 4.
What is the compensation expense for Year 4?
A. 900,000 B. 600,000 C. 660,000 D. 0
17. On January 1, Year 1 P COMPANY offered the 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, Year 4
The quoted prices per share are 100, 124, 151 and 151 on January 1, Year 1, December 31, Year 1, December 31,
Year 2 and December 31, Year 3, respectively. What amount should be charged to compensation expense for Year 3
as a result of the share appreciation right?
A. 2,550,000 B. 1,300,000 C. 850,000 D. 0
18. On January 1, Year 1, Q COMPANY granted the president 50,000 share appreciation rights for past service. These
rights are exercisable immediately and expire on December 31, Year 2. 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 Year 1. The market price of the share was P100 on January 1, Year 1 and
P115 on December 31, Year 1. The grantee exercised the rights on December 31, Year 2 when the market price was
P110. As a result of the share appreciation rights, what amount should be recognized as gain on reversal of share
appreciation rights in Year 2?
A. 750,000 B. 500,000 C. 250,000 D. 0
19. On January 1, Year 1, R 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, Year 1, the
share price is P51. The share prices for the three-year vesting period are P54 on December 31, Year 1, P66 on
December 31, Year 2 and P65 on December 31, Year 3. After taking into account the effect of vesting restrictions,
the entity has estimated that the fair value of the share alternative is P48.
What is the compensation expense for Year 3?
A. 480,000 B. 420,000 C. 600,000 D. 580,000
20. Refer to the preceding problem. What is the share premium if the employee has chosen the share alternative on
December 31, Year 3?
A. 730,000 B. 750,000 C. 550,000 D. 880,000
21. Refer to the preceding problem. What is the share premium if the employee has chosen the cash alternative on
December 31, Year 3?
A. 730,000 B. 180,000 C. 700,000 D. 0

- End of discussion

“A good head and a good heart are always a formidable combination.” Nelson Mandela

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