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• An 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. The entity shall recognize a corresponding
increase in:
a. Equity if the goods or services were received in an equity-settled share-based payment transaction
b. Liability if the goods or services were acquired in a cash-settled share-based payment transaction
• When the goods or services received or acquired in a share-based payment transaction do not qualify for
recognition as assets, they shall be recognized as expenses.
Thus, the cumulative compensation expense also represents the total share options
Journal entries
outstanding at the end of each period.
Upon settlement:
Share options outstanding xxx
Equity accounts xxx
On grant date, Entity A estimates that the share options have a fair value of P20 per option. Entity A also estimates that
the volume of sales of the product will increase by an average of between 11 percent and 15 percent, per year, and
therefore expects that, for each employee who remains in service until the end of year 3,200 share options will vest.
The entity also estimates, on the basis of a weighted average probability, that 20 percent of employees will leave before
the end of year 3.
By the end of year 1, seven employees have left and the entity still expects that a total of 20 employees will leave by
the end of year 3. Product sales have increased by 12 percent and the entity expects this rate of increase to continue
over the next 2 years.
By the end of year 2, a further five employees have left. The entity now expects only three more employees will leave
during year 3. Product sales have increased by 20 percent, resulting in an average of 16 percent over the two years to
date. The entity now expects that sales will average 16 percent or more over the three-year period, and hence expects
each sales employee to receive 300 share options at the end of year 3.
By the end of year 3, a further two employees have left. The entity's sales have increased by an average of 16 percent
over the three years. All share options were exercised at the end of year 3.
Required
a. Journalize the following the transactions above and compute for the compensation expense and share options
outstanding per year,
b. Assume that the entity decided to settle the share options at the end of year 2 (i.e. acceleration of vesting), what
would be the compensation expense for that period?
c. Assume that instead of the exercise of the share options, the entity paid the employees a total of P400,000 at the
end of year 3, what would be the compensation expense for that period?
Some share appreciation rights vest immediately, and the employees are therefore
not required to complete a specified period of service to become entitled to the cash
payment. Thus, the entity shall recognize immediately the services received and a
liability to pay for them.
If the share appreciation rights do not vest until the employees have completed a
Vesting period specified period of service, the entity shall recognize the services received, and a
liability to pay for them, as the employees render service during that period.
The liability shall be measured, initially and at the end of each reporting period until
settled, at the fair value of the share appreciation rights, by applying an option
pricing model.
Thus, the cumulative compensation expense also represents the total outstanding
Journal entries
liability at the end of each period.
Upon settlement:
Liability xxx
Cash xxx
Case Study 2
An entity grants 100 cash share appreciation rights (SARs) to each of its 500 employees, on condition that the
employees remain in its employ for the next three years.
During year 1, 35 employees have left. The entity estimates that a further 60 will leave during years 2 and 3.
During year 2, 40 employees have left, and the entity estimates that a further 25 will leave during year 3.
At the end of year 3, 150 employees exercised their SARs, another 140 employees exercised their SARs at the end of
year 4 and the remaining 113 employees exercised their SARs at the end of year 5.
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 year 3, all SARs held by the remaining employees vested. The intrinsic values of the SARs at the date of exercise
(which equal the cash paid out) at the end of years 3, 4 and 5 are also shown below.
Required
Compute the amounts of compensation expense and liability that the entity should report every year.
The entity has granted a compound financial instrument, which includes a debt
component (i.e. the counterparty’s right to demand payment in cash) and an equity
component (i.e. the counterparty’s right to demand settlement in equity
instruments rather than in cash).
Counterparty’s
choice
The entity shall measure the equity component of the compound financial
instrument as the difference between the fair value of the goods or services received
and the fair value of the debt component, at the date when the goods or services are
received.
The entity shall determine whether it has a present obligation to settle in cash and
Entity’s choice account for the share-based payment transaction accordingly. The entity has a
present obligation to settle in cash if the choice of settlement in equity instruments
has no commercial substance (e.g. because the entity is legally prohibited from
If the entity has a present obligation to settle in cash, it shall account for the
transaction in accordance with the requirements applying to cash-settled share-
based payment transactions.
If no such obligation exists, the entity shall account for the transaction in accordance
with the requirements applying to equity-settled share-based payment
transactions. Upon settlement:
a. if the entity elects to settle in cash, the cash payment shall be accounted for as
the repurchase of an equity interest, i.e. as a deduction from equity, except as
noted in (c) below.
b. if the entity elects to settle by issuing equity instruments, no further accounting
is required (other than a transfer from one component of equity to another, if
necessary), except as noted in (c) below.
c. if the entity elects the settlement alternative with the higher fair value, as at
the date of settlement, the entity shall recognize an additional expense for the
excess value given, i.e. the difference between the cash paid and the fair value
of the equity instruments that would otherwise have been issued, or the
difference between the fair value of the equity instruments issued and the
amount of cash that would otherwise have been paid, whichever is applicable.
Case Study 3
An entity grants to an employee the right to choose either 1,000 phantom shares (i.e., a right to a cash payment equal
to the value of 1,000 shares) or 1,200 shares with a par value of P10 per share. The grant is conditional upon the
completion of three years' service. If the employee chooses the share alternative, the shares must be held for three
years after vesting date. At grant date, the entity's share price is P50 per share. At the end of years 1, 2 and 3, the share
price is P52, P55 and P60 respectively. The entity does not expect to pay dividends in the next three years. After taking
into account the effects of the post-vesting transfer restrictions, the entity estimates that the grant date fair value of
the share alternative is P48 per share.
Required
Journalize the transactions for the three-year vesting period and compute for the compensation expense each period.
Quizzer – Problem 1
1. Ignominy 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.
Question 2: What is the compensation expense for 2019, assuming the share options are not exercised but instead,
the entity paid the employees P5,000,000 on December 31, 2019?
A. P5,000,000
B. P2,200,000
C. P3,200,000
D. None
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.
3. On January 1, 2019, Judicious 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. 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.
4. On January 1, 2019, Junket Company offered its top management share appreciation right with the following terms:
Predetermined price P100 per share
Number of shares 50,000 shares
Service period 3 years
Exercise date January 1, 2022
The quoted prices per share are P100, P124, P151 and P151 on January 1, 2019, December 31, 2019, December 31,
2020 and December 31, 2021, respectively. What amount should be charged to compensation expense for 2021 as
a result of the share appreciation right?
A. P2,550,000
B. P1,300,000
C. P850,000
D. None
5. On January 1, 2019, Kinfolk 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 P110.
As a result of the share appreciation rights, what amount should be recognized as gain on reversal of share
appreciation rights in 2020?
A. P750,000
B. P500,000
C. P250,000
D. None
6. Antonia Company grants 150 share options to each of its 500 employees on January 2, 2019 and exercisable starting
December 31, 2022 for a 2-year period. Each grant is conditional upon the employee working for the entity over
the next three years. Antonia estimates that the fair value of each option is P40. On the basis of weighted average
probability, the entity estimates that 20% of the employees will leave during the three-year period and forfeit their
rights to the share options. During the year 2019, 20 employees left, and Antonia Company still believes that 20%
is a fair estimate of employee departures. During 2020, a further 22 employees left. Due to the low turn-over as of
December 31, 2020, Antonia revises its estimates of employee departures over the three-year period from 20% to
15%. During 2021, a further 18 employees left. What is the compensation expense to be recognized by Antonia
Company for the share options in 2021?
A. P800,000
B. P900,000
C. P940,000
D. P1,700,000
8. On January 1, 2019, PC Company grants to an employee the right to choose either 10,000 shares, i.e. a right to a
cash payment equal to the value of 10,000 shares, or 12,000 shares. The grant is conditional upon the employee
remaining in the company’s employ for 3 years. If the employee chooses the share alternative, the shares must be
held for 3 years after vesting date. On January 1, 2019, the company’s share price is P50. At the end of the years
2019, 2020 and 2021, the share price is P52, P56 and P62, respectively. After taking into account the post-vesting
transfer restrictions, the grant date fair value of the share alternative is P49. The company’s shares have a nominal
value of P10.
Question 1: What is the total amount of expense should the company recognize in 2019?
A. P173,333
B. P202,666
C. P229,333
D. P276,000
Question 2: What is the total amount of expense should the company recognize in 2020?
A. P173,333
B. P202,666
C. P229,333
D. P276,000
Question 3: What is the value of the cash alternative as of December 31, 2020?
A. None
B. P200,000
C. P373,333
D. P560,000
9. On January 1, 2019, Color Company granted 80,000 cash shares appreciation rights to the executives on condition
that the executives remain in its employ for the next three years. The entity estimates that the fair value of the share
appreciation rights at the end of each year in which a liability exists are as follows:
Year Fair Value
2018 P15
2019 P18
2020 P20
Compensation expense relating to the plan is to be recorded over a three-year period beginning January 1, 2019.
What amount of compensation expense should Color Company recognize for the year ended December 31, 2020?
A. None
B. P400,000
C. P560,000
D. P960,000
Quizzer – Theory 1
1. Which of the following transactions involving the issuance of shares does not come within the definition of a "share-
based" payment under PFRS 2?
A. Employee share purchase plans
B. Employee share option plans
C. Share-based payment relating to an acquisition of a subsidiary
D. Share appreciation rights
2. These are transactions in which the entity receives goods or services as consideration for equity instruments of the
entity, including shares and share options.
A. Equity settled share-based payment transactions C. Equity payment transactions
B. Cash settled share-based payment transactions D. Cash payment transactions
3. What is the date on which the fair value of the equity instrument granted is measured?
A. Measurement date C. Exercise date
B. Grant date D. End of reporting period
5. The entity has issued a range of share options to employees. What type of share-based payment transaction does
this represent?
A. Asset-settled share-based payment transaction C. Cash-settled share-based payment transaction
B. Equity-settled share-based payment transaction D. Liability-settled share-based payment transaction
6. Which of the following statements in relation to share options granted to employees in exchange for their services
is true?
I. The services received shall be measured at the fair value of the employees' services.
II. Fair value shall be measured at the date the options vest.
A. I only B. II only C. Both I and II D. Neither I nor II
7. It is the difference between the fair value of the shares to which the counterparty has the right to subscribe and the
price the counterparty is required to pay for those shares.
A. Fair value B. Intrinsic value C. Market value D. Book value
8. It is the date on which the entity and another party agree to a share-based payment arrangement, being when the
entity and the counterparty have a shared understanding of the terms and conditions of the arrangement.
A. Grant date C. Exercise date
B. Measurement date D. End of reporting period
9. For transactions with employees and others providing similar services, the fair value of the equity instrument
granted is measured on
A. Exercise date C. End of reporting period
B. Grant date D. Beginning of the year of grant
10. It is 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 appreciation right
B. Share warrant D. Share split
11. These are transactions in which the entity acquires goods or services by incurring liabilities to the supplier of those
goods or services for amounts that are based on the price of the entity's shares and other equity instruments.
A. Equity transactions C. Purchase transactions
B. Cash payment transactions D. Cash settled share-based payment transactions
13. For cash settled share-based payment transactions, an entity shall measure the goods or services received and the
liability incurred at the
A. Fair value of the goods and services received
B. Fair value of the liability
C. Either the fair value of the goods or services received or the fair value of the liability
D. Neither the fair value of the goods or services received nor the fair value of the liability
14. In accordance with PFRS 2, how should an entity recognize the change in the fair value of the liability in respect of
a cash-settled share-based payment transaction?
A. Should not recognize in the financial statements but disclose in the notes thereto
B. Should recognize in the statement of changes in equity
C. Should recognize in other comprehensive income
D. Should recognize in profit or loss
15. Which of the following statements in relation to a cash-settled share based payment transaction is true?
I. The fair value of the liability shall be remeasured at the end of each reporting period.
II. The fair value of the liability shall be remeasured at the date of settlement.
A. I only B. II only C. Both I and II D. Neither I nor I
16. If share-based payment transaction provides that the employees have the right to choose the settlement whether
in cash or shares, the entity is deemed to have issued
A. A compound financial instrument C. A liability instrument
B. An equity instrument D. Either an equity instrument or liability instrument