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MODULE 6 PACKET
ELEC 2 – Valuation Concepts and Methods
MODULE 6 SHARE-BASED COMPENSATION

Welcome to Module 6
In this module, we will discuss accounting for share-based compensation

CONSULTATION HOURS:
Virtual time: During your class schedule (either Monday or Tuesday)
Phone or Messenger: Every Thursday from 8am to 11am and 1pm to 4pm

MODULE 6 LEARNING OBJECTIVES:

By the end of this module, the students will be able to:
1. Define a share-based compensation plan
2. Understand the recognition and measurement of share options
3. Know the accounting treatment of modification of vesting conditions of share options
4. Understand a cash settled share-based payment transaction
5. Know the recognition and measurement of share appreciation right
6. Account for share-based transaction with cash alternative and share alternative

COURSE CONTENT FOR MODULE 6:

ACTIVITY DESCRIPTION TIME TO COMPLETE

Lecture Discussion Share options 1.5 hour

Share appreciation right 1.5 hour

Activity Problem Solving 2 hours

Summative quiz for module 6 (to be

Quiz 1 hour
announced)

2020-2021 Module Packet for ELEC 2 (Valuation Concepts and Methods) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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LECTURE DISCUSSIONS

6.1 SHARE OPTIONS

Share based compensation plan is a compensation arrangement by the entity whereby its
employees shall receive shares of capital in exchange for their service 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 renumeration for directors, senior
executives and other key employees. They are usually tied to performance to motivate the
recipients. The measurement principles and specific requirements for accounting of the following
share-based compensation:

Equity settled – the entity issues equity instruments in consideration for services received (share
options)
Cash settled – the entity incurs a liability for services received and the liability is based on the
entity’s equity instruments (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. These
options are conceived as additional compensation on the part of senior officers and other key
employees.

Fair value method – means that the compensation is equal to the fair value of the share options on
the date of grant. This is the method mandated by PFRS2.

Intrinsic value method – means that the compensation is equal to the intrinsic value of the share
options. This is the excess of the market value of the share over the option price.

The following accounting procedures should be observed in the recognition of expense:

a. If the share options vest immediately, the employee is not required to complete a specified
period of service before unconditionally entitled to the share option. On grant date, the
entity shall recognize the compensation as expense in full with corresponding increase in
equity as share options outstanding (share premium).
b. If the share options do not vest until the employee completes a specified service period, the
compensation is recognized as an expense over the service period or vesting period – the
date of grant to the date on which the options can first be exercised. This is when the share
options are in recognition for services rendered between the date of grant and the exercise
date.
Cash
Salaries Expense Share options outstanding
Share options outstanding Share Capital
Share Premium
2020-2021 Module Packet for ELEC 2 (Valuation Concepts and Methods) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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Illustration. No Vesting Period. Options are exercisable immediately, hence the compensation is
recognized in full on the date of grant.

On Jan. 1, 2021, share options are granted Salaries – share options (10k x P3) 30,000
to employees to purchase 10,000 ordinary Share options outstanding 30,000
shares, P5 par value, at P6 per share. On Cash (10k x P6) 60,000
this date, the fair value of each share is P3. Share options outstanding 30,000
On Dec. 31, 2021, an entry is made if the Ordinary shares (10k x P5) 50,000
employees exercised their share options Share premium 40,000

Illustration. With Vesting Period. Options can be exercised only as provided.

On Jan. 1, 2021, share options are Total compensation / FV-SO (10k x P2) 20,000
granted to employees who have Annual compensation (20k / 2) 10,000
completed 2 years of service to purchase
2021
10,000 ordinary shares, P5 par value, at
P6 per share. The fair value of each Salaries – share options 10,000
share is P2. Options can be exercised Share options outstanding 10,000
2022
starting Jan. 1, 2023 and expire after a
year. Salaries – share options 10,000
Share options outstanding 10,000
Cash (10k x P6) 60,000
On Dec. 31, 2023, an entry is made if Share options outstanding 20,000
the employees exercised their share Ordinary shares (10k x P5) 50,000
options Share premium 30,000

Before the exercise of the share options, share options outstanding account is a component of share
premium. Thus, if the share options are not subsequently exercised, the share options outstanding
account shall be adjusted and credited to share premium.

Illustration. Some employees left.

On Jan 1, 2020, an entity granted 100 share options each to 500 employees, conditioned upon the
employees 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.
By December 31, 2020, 30 employees have left and it is expected that on the basis of weighted
average probability, another 30 employees will leave during the vesting period.
By December 31, 2021, 28 employees have left and the entity expects another 25 employees to
leave during 2022.
By December 31, 2022, 22 employees have left and therefore, _______ employees shall receive
share options at the end of the year.

2020-2021 Module Packet for ELEC 2 (Valuation Concepts and Methods) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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Compensation expense for each year of the three-year vesting period is computed as follows:

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University of San Agustin, Iloilo City, 5000, Philippines
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Illustration. With condition and varying share options

On Jan. 1, 2020, an entity granted share options to each of the 300 employees in its sales
department. The share options vest at the end of a 3-year period provided that the employees
remain in the entity’s employ and that sales will increase by an average of 10% per year.
Fair value of each share option on grant date is P20.
If the sales increased by an average of 10%, each employee will receive 200 share options. If the
sales increased by an average of 15% for year, each employee will receive 300 share options.
During 2020, the sales increased by 10% and the entity expect this rate of increase to continue in
the next two years. During 2021, the sales increased by 20% or an average of 15% for the 2 years.
In 2022, the sales increased by an average of 16% over three years and 20 employees left the entity.

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University of San Agustin, Iloilo City, 5000, Philippines
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Illustrations from IA 2, 2020 edition, Valix

2020-2021 Module Packet for ELEC 2 (Valuation Concepts and Methods) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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Illustrations from IA 2, 2020 edition, Valix

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University of San Agustin, Iloilo City, 5000, Philippines
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Acceleration of vesting – if an entity cancels or settles a grant of share options during the vesting
period, the entity should account for the cancellation or settlement as acceleration of vesting. The
entity shall recognize immediately the compensation expense that otherwise would have been
recognized for services received over the remainder of the vesting period. Any payment made to
the employee on the cancellation or settlement of the grant shall be accounted for as the repurchase
of equity interest – deduction from equity. If the payment exceeds the fair value of the share
option, the excess should be recognized as an expense.

Illustration. On Jan. 1, 2020, an entity granted 50,000 their options to the employees. The option
price is P6 in the par value is P5. The vesting period is 4 years. The fair value of the share options
or total compensation expense to the vesting date on December 31, 2023 has been calculated at
P400,000. The entity has decided to settle the award early on December 31, 2022. The
compensation expense charged in the income statement since the date of the grant are P100,000
for 2020 and P105,000 for 2021.

If the share options are canceled or settled during the vesting period, it is as if the vesting date had
been brought forward and the balance of the fair value not yet expensed is recognized immediately.
The entity shall recognize immediately in 2022 the compensation expense that otherwise would
have been recognized for services over the remainder of the vesting period.

Total compensation exp 400,000 2022

Cumulative compensation ’20 & ‘21 (205,000) Salaries 195,000
Compensation expense in 2022 195,000 Share options outstanding 195,000
If share options are exercised on Dec. 2022 Cash (50k x P6) 300,000
Share options outstanding 400,000
Share capital (50k x P5) 250,000
Share premium 450,000
If the share options are not exercised but Share options outstanding 205,000
employees were instead paid P300,000 to Salaries 95,000
cancel or settle the share options Cash 300,000
Any cash paid up to the fair value of the options or cumulative compensation already recognized
is deducted from equity or charged to share options outstanding. Any amount in excess of the
fair value already recognized is treated as expense.

IFRIC 11

Share-based payment transactions in which employees of a subsidiary are granted rights to the
equity instrument of the parent shall also be accounted for as equity-settled. The subsidiary shall
measure the services received from its employees on the basis of the fair value of the share options
at grand date. An increase in equity is recognized as contribution for the parent in the financial
statements of the subsidiary.

2020-2021 Module Packet for ELEC 2 (Valuation Concepts and Methods) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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Illustration. On Jan. 1, 2020, a parent entity granted 500 share options to each of 100 employees
of a subsidiary, conditioned upon the completion of 2 years of service with the subsidiary. The fair
value of a share option is P50 on January 1, 2020. At grant date, the subsidiary estimated that 80%
of the employees will complete the 2-year service period. At the end of the vesting period, 90% of
the employees completed the required 2 years of service. The parent entity did not require the
subsidiary to pay for the shares needed to settle the grant of share options. The share options were
exercised in January 2022. The exercise price is P120 and the par value is P100 per share.

Journal entries on the books of the subsidiary

2020-2021 Module Packet for ELEC 2 (Valuation Concepts and Methods) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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Modification of condition

If an entity modified the vesting condition in which equity instruments were granted, the following
procedures shall be followed:
1. The entity shall continue to account for the equity instruments granted based on the original
condition and vesting period at the date of the grant. If the modification is beneficial to
employees and increases the fair value of the equity instruments granted, the entity shall
include the increase in fair value as additional compensation. The modification is
beneficial to employees if the exercise price of the share option is reduced.
The increase in fair value is the difference between the fair value of the modified equity
instruments and the fair value of the original equity instruments both estimated at the date
of modification.
The increase in fair value is recognized as compensation over the remaining vesting period
or from the date of modification until the date when the modified equity instruments vest.
Two compensations are recognized: compensation based on original condition and
compensation based on modification.

2. The entity shall continue to recognize compensation based on the original condition as
if the modification had never occurred under the following circumstances: the modification
reduces the fair value of the equity instruments and when the modification is apparently
not beneficial to the employees (increase in exercise price)

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University of San Agustin, Iloilo City, 5000, Philippines
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University of San Agustin, Iloilo City, 5000, Philippines
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Illustrations from IA 2, 2020 edition, Valix

2020-2021 Module Packet for ELEC 2 (Valuation Concepts and Methods) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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6.2 SHARE APPRECIATION RIGHT

A cash settled transaction is a shared-based payment transaction whereby an entity incurs a

liability for services received and the liability is based on the entity’s equity instruments.

In a cash settled share-based compensation, the entity shall measure the services acquired and
the liability incurred at the fair value of the liability.

Until the liability is settled, there is a need to remeasure the fair value of the liability at each
reporting date and at the date of settlement with any changes in fair value recognized in profit
or loss for the period.

The best example of a cash settlement share-based compensation is the grant of share
appreciation right to employees.

A 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.
It entitles the employee to a cash payment equal to the increase in the price of a given number
of shares over a given period.

The entity shall recognize a liability because it is an obligation on the part of the entity to pay
cash in the future on exercise date.

The compensation is based on the fair value of the liability at the reporting date and shall be
remeasured every year and until it is finally settled.

Any changes in fair value are included in profit or loss. The fair value of liability is equal to
the excess of the market value of share over a predetermined price for a given number of shares
over a definite vesting period.

The compensation in a share appreciation right is the cash paid by the entity. This amount
becomes known only an exercise date, not on the date of grant.

If the share appreciation right vests immediately, the compensation is recognized immediately
on the date of the grant. If the share appreciation right does not vest until the employee
completes a definite vesting period, the compensation is recognized over the service or vesting
period.

2020-2021 Module Packet for ELEC 2 (Valuation Concepts and Methods) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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Illustrations from IA 2, 2020 edition, Valix

Salaries Accrued Salaries Payable

Accrued Salaries Payable Cash

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University of San Agustin, Iloilo City, 5000, Philippines
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University of San Agustin, Iloilo City, 5000, Philippines
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Illustrations from IA 2, 2020 edition, Valix

2020-2021 Module Packet for ELEC 2 (Valuation Concepts and Methods) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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Illustrations from IA 2, 2020 edition, Valix

It includes
salaries
accrued and
those paid due
to the exercise
of rights in the
year

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Modification from cash-settled to equity method

If certain terms are modified such that the cash settled share-based payment becomes equity
settled share-based payment, the following procedures should be applied:
1. The equity settled share-based payment transaction is measured based on the fair value of
such equity instruments granted on the modification date and is recognized in equity.
2. The liability for the cash settled share-based payment transaction as of modification date
is derecognized.
3. The difference between the carrying amount of the liability and the amount of equity is
recognized immediately in profit or loss.

Illustration. On Jan. 1, 2020, an entity granted 50,000 share appreciation rights to employees. The
vesting period is four years. The agreement required the entity to pay cash based on the excess of
market price over the predetermined price of P100.

The market price is per share for December 31, 2020, 2021, 2022 and 2023 are P120, P140, P130,
and P160, respectively.

On December 31, 2021, the entity modified the agreement and canceled the 50,000 share
appreciation rights. Instead, the entity granted 50,000 share options provided that the employees
remain with the entity for the next two years.

On December 31, 2021, the fair value of the share option is P60. The options are exercisable at the
end of the two-year period. The option price is P120 and the par value is P100. All share options
were exercised on December 31, 2023.

2020-2021 Module Packet for ELEC 2 (Valuation Concepts and Methods) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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2020, 2021, 2022

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Cash and Share Alternative

Cash alternative is when cash payment equal to the market value of certain number of shares
subject to certain conditions.

Share alternative - equity shares given to the employees.

Accounting for this type of instrument depends on which party has the choice of settlement.

If the entity has the choice of settlement, there is no accounting problem. The entity shall
account for the instrument initially either as liability or equity, but not both.

In other words, if the entity has the choice of settlement, the instrument is not a compound
financial instrument.

However, if the employee has the right to choose the settlement, the entity is deemed to have
issued a compound financial instrument. Thus, the compound financial instrument is accounted
for as partly liability which is the cash alternative and partly equity which is the share
alternative.

The equity component is usually the fair value of the whole compound financial instrument
minus the fair value of the liability component. The equity component is always the residual
amount.

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Illustrations from IA 2, 2020 edition, Valix

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University of San Agustin, Iloilo City, 5000, Philippines
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Illustrations from IA 2, 2020 edition, Valix

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University of San Agustin, Iloilo City, 5000, Philippines
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Illustrations from IA 2, 2020 edition, Valix

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University of San Agustin, Iloilo City, 5000, Philippines
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Illustrations from IA 2, 2020 edition, Valix

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University of San Agustin, Iloilo City, 5000, Philippines
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Let’s try this!!!

ACTIVITY
1.

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2.

3.

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4.

5.

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6.

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University of San Agustin, Iloilo City, 5000, Philippines
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