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SHARE – BASEDPAYMENTSubmitted by:Rachelle P. NaylesAllizon Mae V. ObligacionAkilah Jillian P. OliverTristan Jude E. OseaJonie Jane C. PacamarraSeptember 2018SHARE-BASED PAYMENTPROBLEM NO. 1: Share Options – Fair Value MethodBackground On January 1, 2009, an entity grants 100 share options to each of...

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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-BA SHARE-BASED SED 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 Requ Requirem irem irements ents 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

212,500 212 212,500 ,500 (A)

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

664,500 440,000 224 224,500 ,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 pe performance rformance con condition, dition, in wh which ich the le length ngth of the v esting period va varies ries 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 go goods ods 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 1,320,000 440,0 440,000 00

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) 394 394,,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) 423 423,,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, Non Nonmarket market conditi condition, on, # of eq equity uity instrumen instruments ts 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)

100 100,000 ,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) 100 100,,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, 400,000 000 ((D 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 p performance erformance cond condition, ition, 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)

16 160,000 0,000 (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) 160 160,000 ,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 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% 9.33% 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 marke markett 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 P40,000 ,000 (B) P40 P40,000 ,000 (B) P40 P40,000 ,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: G Grant rant w with ith a market con condition, dition, in w which hich the le length ngth of the vesting pe period riod 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 400 400,000 ,000 (B) 400 400,000 ,000 (B) 400 400,000 ,000 (C) 400 400,000 ,000 (B) 150 150,000 ,000 (B)

Under PFRS 2, par. 15b: “If an employee is grante...