FINANCIAL ACCOUNTING

SHARE-BASED COMPENSATION SHARE OPTIONS

SHARE-BASED COMPENSATION SHARE APPRECIATION RIGHT
BOOK VALUE PER SHARE
SHARE-BASED COMPENSATION SHARE OPTIONS
 ILLUSTRATION:
with condition and exercise price varies

On January 1, 2017, an entity granted to a senior executive 20,000 share options,

conditional upon the executive's remaining in the entity's employ until December
31, 2019. 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 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 2017 and
2018, the earnings increased by 12% and 11% respectively. However, during 2019,
the earnings increased only by 4%. The compensation expense for each year of
the three-year vesting period is computed as follows:
 2017 2018

Share options 20,000 Share options 20,000

Multiply by fair value 30 Multiply by fair value 30
Total compensation 600,000 Total compensation 600,000
Compensation for 2017: Cumulative compensation-2018
(600,000/3 year) 200,000 (600,000/3 x 2 years) 400,000
Compensation recognized-2017 (200,000)
The earnings target of an average of 10% Compensation expense in 2018 200,000
per year is achieved in 2017 and 2018.
Thus, the exercise price is P80 and the fair
value of the share option is P30.
 2019

Share options 20,000

Multiply by fair value 25
Cumulative compensation -2019 500,000
Cumulative compensation -2018 (400,000)
Compensation expense in 2019 100,000

The earnings target of an average of 10% over three years is not achieved in 2019. The
average is only 9% (12% + 11% +4% equals 27% divided 3). Thus, the exercise price is P100
and the fair value of the share option is P25.
 Illustration: Intrinsic value method

On January 1, 2017, an entity granted 10,000 share options to employees. The

share options vest on December 31, 2018 provided the employees remain in
service until then. The fair value of the share option cannot be estimated reliably.
The par value per ordinary share is P100. The option price is P125 and the market
value of the ordinary share is also P125 at the date of grant. All share options
vested on December 31, 2018 and no employees left the entity. The share
options can be exercised starting January 1, 2019 and expire two years after. All
share options are exercised on December 31, 2016. The share market prices are
P150 on December 31, 2018 and P200 on December 31, 2019.
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 and loss".

The intrinsic value is the excess of the market value of the share over
the option price.
 2017 2018

Market value - December 31, 2017 150 Market value - December 31, 2018 180
Less: Option price 125 Less: Option price 125
Intrinsic value of each option 25 Intrinsic value of each option 55
Multiply by share options 10,000 Multiply by share options 10,000
Total compensation 250,000 Cumulative compensation-2018 550,000
Compensation expense for 2017: Compensation recognized-2017 125,000
(250,000/2) 125,000 Compensation expense-2018 425,000
 2019 JOURNAL ENTRIES:

2017
Dec. 31 Salaries - share options 125,000
Market value - December 31, 2019 200 Share options outstanding 125,000
Market value - December 31, 2018 180 2018

Increase in intrinsic value 20 Dec. 31 Salaries - share options 425,000

Share options outstanding 425,000
Multiply by share options 10,000
2019
Additional compensation in 2019 200,000
Dec. 31 Salaries - share options 200,000
Share options outstanding 200,000
Note that the increase in intrinsic value
after the vesting period recognized as an 31 Cash (10000 shares x 125) 1,250,000
additional compensation immediately. Share options outstanding 750,000
Ordinary share capital (10000 x 100) 1,000,000
Share premium 1,000,000
SHARE-BASED COMPENSATION SHARE APPRECIATION RIGHT
BOOK VALUE PER SHARE