ACC 109: Intermediate Accounting 4

Module #5 Student Activity Sheet

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Lesson title: Share- based Payments, Part I Materials:

Learning Targets: Columnar, notebook, non-scientific
At the end of the module, students will be able to: calculator, ballpen, pencil, Student Activity
1. Understand the concepts of share – based payments Sheets
transaction and the applicable accounting method.
2. Account for share – based compensation plans. References:
Intermediate Accounting 2
2020 edition by Zeus Vernon B. Millan

A. LESSON PREVIEW/REVIEW

Introduction

This is based on PFRS 2 Share-based Payments. Discussion of such standard will be divided into two. This
module will discuss the Part I which is Equity settled share-based payment transaction then next module will
discuss the second part entitled, Cash-settled share-based payment transactions.

A corporation is allowed to issue its own shares in exchange for a received consideration or rendered services.
But, the value of such considerations or services must not be less than the par value of issued shares and
exchange is accounted for under PFRS 2.

B. MAIN LESSON

Content and Skill-Building

Share - based Payments ➢ transactions where entity acquires goods or services and pays them by issuing its
own equity instruments or cash based on the value of its own equity instruments.
➢ payment of gods or services received could be:
1. Equity – settled - payment is in the form of shares of stocks issuance or
share option.
2. Cash – settled – an obligation is incurred and payment is based on the
fair value of its own equity instruments.
3. Choice between equity–settled and cash–settled – the entity or
counterparty is given a choice of settlement in a form of equity instruments
or cash-based based on the fair value of equity instruments.

Equity Instruments
➢ a contract that evidences a residual interest in the assets of the entity after deducting all its
liabilities.

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 ACC 109: Intermediate Accounting 4
Module #5 Student Activity Sheet

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Recognition ➢ share -based payments transactions are recognized only when the goods are received
and the services are received. If such consideration received does not qualify as an
asset, they are recognized as expense.

➢ an increase in equity is recognized if goods and services are received in an equity

share-based payment transaction.

➢ a liability is recognized for goods and services acquired in a cash-settled share -based
payment transactions.

Accounting for Equity share – based payment transaction with employees and non-employees are as
follows:
Non – Employees Employees
Order priority in measurement are as Order priority in measurement are as
follows: follows:
1. Fair value of goods or services 1. Fair value of equity instruments
received. granted.
2. fair value of equity instruments 2. Intrinsic value
granted.

Employees and others providing similar services – individual who render personal services to the
entity and either:
a) An individual regarded as employees for legal or tax services.
b) An individual who work for the entity under its direction in the same way as individuals who are
regarded as employees for legal or tax purposes.
c) The services rendered are similar to those rendered by employees.

Equity instruments granted – the right to an equity instruments of an entity conferred by the entity to another
party under share – based payment arrangement.

Fair market measurement date for:

1. Transactions with non-employees – at the date goods and services are received.
2. Transactions with employees – at the date of grant by the authorized approver.

Intrinsic value – difference between the fair value of the shares which the counterparty has the right to
subscribe or receive and the subscription price the counterparty is required to pay.

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 ACC 109: Intermediate Accounting 4
Module #5 Student Activity Sheet

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Pro-forma entries are as follows:

For Non-employees For Employees

At the date goods & Asset or Expense Account xx

Services are received Subscribed capital xx
Share premium xx

At the date of grant Asset or Expense Account xx

Share capital xx
Share premium xx

At the date of settlement Subscribed capital xx

Share Capital xx

Accounting for Share-based compensating plans

Share-based compensation

➢ given to key employees as bonuses or additional compensation.

➢ could be in form of equity-settled, cash-settled, or choice between the two.

➢ The benefits of this are:

o Possible reduction in employee turnover.

o Motivation to employee to contribute in the achievement of entity’s goals for an

opportunity given of becoming owners of the entity.

Share option - contract that gives the holder the right but not obligation to subscribe to the entity’s shares at a
fixed or determinable price for a specified period of time.

Measurement is according to order or priority:

1. Fair value of equity instruments granted at grant date.

2. Intrinsic value.

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 ACC 109: Intermediate Accounting 4
Module #5 Student Activity Sheet

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Compensation expense is recognized as follows:

1. If the share options granted vest immediately, meaning the entitlement to shares is not dependent on
the need to satisfy condition, salaries expense is recognized in full, with a corresponding increase in
equity, at grant date.

2. If the share options granted do not vest until the employees completes a specified period of service, the
entity recognizes salaries expense as the employee renders service over the vesting period.

In the absence of evidence to the contrary, it is presumed that the share options vest immediately.

Vesting condition – condition that determines whether the entity receives the services that entitle the
counterparty to receive cash or other assets or equity instruments of the entity under a share- based
payment arrangement.

➢ vesting condition could be:

o Service condition – requires employees to render service over a specified period of
time in order to be entitled to receive or subscribe to the shares embodied in the share options.
o Performance condition – requires employees over a specified period of time and
specified performance target to be met while rendering the required service.

➢ can also be classified as

o Market conditions – performance condition that is related to market price of entity’s
shares.
o Non-market conditions – condition that is other than market conditions.

Market Condition Non-market condition

✓ taken into account when estimating the ✓ taken into account when estimating
fair value of shares or share options at the number of equity instrument that
the measurement rate. are expected to vest.
✓ fair value estimates are not subsequently ✓ estimate is subsequently revised in
revised irrespective of the outcome. light of new information.
✓ compensation expense is recognized for ✓ changes in estimates are accounted
services that the employees has rendered prospectively.
even if market condition is not satisfied
and share option do not vest.

✓ compensation already recognized are not subsequently adjusted regardless of

outcome.

✓ related share premium that has already been recognized remains in equity.

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 ACC 109: Intermediate Accounting 4
Module #5 Student Activity Sheet

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Modifications of terms and conditions

➢ accounted only if beneficial to employee under the following cases:

a) The total fair value of the equity instruments granted is increased. Increase is recognized as
additional expense over the remaining vesting period.

b) The vesting period is shortened. Any remaining amount of salaries not yet recognized is
recognized over the remaining shortened vesting period.

Cancellation and Early settlement

➢ accounted for as acceleration of vesting.

➢ the amount of salaries that would have been recognized over the remaining vesting period,
is recognized immediately.

➢ any payment to employees is accounted for as

o repurchase equity interest.
o expense if payment exceeds the fair value of the equity instruments.
o extinguishment of liability if grant include liability component.

Employee Stock Ownership Plan (ESOPs)

➢ recognize expense when cash and or/shares are contributed to the plan.

➢ when ESOP borrows fund to purchase entity’s share, the entity recognizes an increase in
liability when the loan is guaranteed and a corresponding decrease in shareholders’ equity.

Skill Building Activity

1. Which of the following standards addresses the accounting for transactions that involve the issuance of an
entity’s own equity instruments in exchange for goods or services?
a. PAS 2 c. PFRS 2
b. PAS 32 d. PFRS 12

2. The exercise price and market price of stock under a fixed compensatory stock option plan are equal on
the grant date. The fair value of the options is greater than the option price. Under the fair value method
a. Compensation expense will be recognized in connection with the option plan.
b. No compensation expense will be recognized in connection with the option plan.
c. Deferred compensation will be recognized.
d. No paid-in capital from stock options will be recognized.

3. Many shares and most share options are not traded in an active market. Therefore, it is often difficult to
arrive at a fair value of the equity instruments being issued. Which of the following option valuation
techniques should not be used as a measure of fair value in the first instance?
a. Black-Scholes model. c. Monte-Carlo model.
b. Binomial model. d. Intrinsic value.

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 ACC 109: Intermediate Accounting 4
Module #5 Student Activity Sheet

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

4. On February 1, 20x1, NOTION IDEA Co. offered its key employees share options that enable them to
acquire NOTION shares for ₱320. The shares are selling at ₱480. On February 5, 20x1, the key
employees counter-offered an exercise price of ₱280 which was accepted by the board on February 6,
20x1. The share options were approved by the shareholders on a general meeting on April 1, 20x1. The
key employees received the share options on May 1, 20x1 and are to be exercised on before December
31, 20x1. Information on the fair value of the share options is shown below:
1-Feb 160 1-Apr 166
5-Feb 162 1-May 168
6-Feb 164

What amount of fair value is assigned to the share options?

a. 160 c. 166
b. 164 d. 168

5. East Co. issued 1,000 shares of its ₱5 par ordinary share to Howe as compensation for 1,000 hours of
legal services performed. Howe usually bills ₱160 per hour for legal services. However, other lawyers have
different bill prices for essentially the same legal service. On the date of issuance, the stock was trading on
a public exchange at ₱140 per share. By what amount should the share premium account increase as a
result of this transaction?
a. 135,000
b. 140,000
c. 155,000
d. 160,000

Check for Understanding

Use the following information for the next two questions:

On January 1, 20x1, THRIVE PROSPER Co. grants 1,000 share options to each of its 100 key employees
conditional upon each employee remaining in THRIVE’s employ over the next three years. THRIVE estimates
that the fair value of each share option is ₱60. On the basis of a weighted average probability, THRIVE Co.
estimates on December 31, 20x1 and December 31, 20x2 that 20 per cent of the employees will leave during
the three-year period and therefore forfeit their rights to the share options. Twenty (20) employees actually left
the company during the three-year period. Fifteen (15) employees left in 20x1 and the other five (5) left in
20x3.

1. How much is the accumulated share premium from share options outstanding as of December 31, 20x2?
a. 3,300,000
b. 3,200,000
c. 1,700,000
d. 1,600,000

2. How much is the salaries expense in 20x3?

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 ACC 109: Intermediate Accounting 4
Module #5 Student Activity Sheet

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

a. 2,000,000
b. 1,700,000
c. 1,600,000
d. 0

Use the following information for the next two questions:

On January 1, 20x1, Waterproofing Co. granted 1,000 share options to each of its 100 key employees
conditional upon each employee remaining in Waterproofing’s employ over the next three years. Waterproofing
estimated that the fair value of each share option is ₱60. On the basis of a weighted average probability,
Waterproofing Co. estimated on January 1, 20x1 that 20 per cent of employees will leave during the three-year
period and therefore forfeit their rights to the share options. During 20x1, 2 employees left. Waterproofing
revised its estimate of total employee departures over the three-year period from 20 per cent to 15 per cent.
During 20x2, additional 3 employees left. Waterproofing again revised its estimate of total employee
departures over the three-year period from 15 per cent to 12 per cent. During 20x3, additional 5 employees
left.

3. How much is the accumulated share premium from share options outstanding as of December 31, 20x2?
a. 3,200,000
b. 3,300,000
c. 3,520,000
d. 3,570,000

4. How much is the salaries expense in 20x3?

a. 1,600,000
b. 1,880,000
c. 1,900,000
d. 0

5. On January 1, 20x1, November Rain Co. granted 1,000 share options to each of its 20 key employees
conditional upon the employee completing a 3-year service period. The fair value per share option on Jan.
1, 20x1 was ₱12. On Jan. 1, 20x2, November added a subscription price of ₱10 to the share options. This
decreased the fair value from ₱12 to ₱2. A total of two employees left as at Dec. 31, 20x2. November Co.
expects that 8 more employees will leave before the end of 20x3. How much is the cumulative amount of
equity recognized from the grant as of Dec. 31, 20x2?
a. 24,000
b. 36,000
c. 54,000
d. 80,000

This document is the property of PHINMA EDUCATION

 ACC 109: Intermediate Accounting 4
Module #5 Student Activity Sheet

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

C. LESSON WRAP-UP

Summary / Frequently Asked Questions

1. Why is stock based compensation or share -based compensation an expense?
The vesting of stock-based compensation represents a noncash expense that reduces book income, which
isn't recognized by the IRS as a deductible expense. Since it's a noncash expense, operating cash flow will be
increased relative to income.

Thinking about Learning

What are your challenges in learning the concepts in this module? If you do not have challenges, what is your
best learning for today?
________________________________________________________________________________________
________________________________________________________________________________________

What are the questions/thoughts you want to share to your teacher today?
________________________________________________________________________________________
________________________________________________________________________________________

Answer Key
Skill Building Activity
1. C
2. A
3. D
4. C
5. A (140 – 5) x 1,000 = 135,000. The ₱160 billing price is not deemed the fair value of the legal services
received.

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