SHARE BASED COMPENSATION – 2ND ACTIVITY
Problem 1 (Share-based Compensation)
At the beginning of 2015, M Company granted 150 share options each to its 700
employees. The grant is conditional upon the employees remaining in the company’s
employ during a vesting period of three years.
The company estimated the exercise price at grant date to be P75. However, the
exercise price drops to P60 if the company’s earnings will increase by at least an
average of 12% per year over the three-year period.
The company estimates that the fair value of the share options on grant date is P20 per
option if the exercise price is P60. And if the exercise price is P75, the company
estimates that the fair value of the share options is P17 per option.
During 2015, the company’s earnings increased by 14%. And 22 employees left during
this year and the company expects on the basis of weighted average probability that a
further 47 employees will leave the company during 2016 and 2017.
During 2016, the company’s earnings increased by 16% and 15 employees have left and
the company expects that a further 23 employees will leave during 2017.
During 2017, the company’s earnings increase by only 8%. By the end of 2017, 28
employees have left the company.
1. What is the compensation expense for 2015?
2. What is the expected number of employees entitled to share options in 2016?
3. What is the cumulative compensation expense for 2016?
4. What is the compensation expense in 2017?
5. What is the cumulative compensation expense for 2017?
Suggested Solution:
2015 2016 2017
No. of employees at grant date 700 700 700
Less: Actual number of resignations 22 37 65
Expected number of resignations 47 23_________________
Employees entitled to share options 631 640 635
2015 2016 2017
No. of employees entitled to share options
631 640 635
Multiply by: share options per employee 150 150 150
Total share options 94,650 96,000
95,250
Multiply by: fair value of option P20 P20 P17
Total compensation P1,893,000 P1,920,000 P1,619,250
Multiply by: ratio of vesting period 1/3 2/3 3/3
Cumulative compensation expense P631,000 P1,280,000 P1,619,250
Less: prior years' compensation expense 0 P631,000 P1,280,000
Current year's compensation expense P631,000 P649,000
P339,250
1. Compensation expense for 2015: P631,000
2. Expected number of employees entitled to share options in 2016: 640
3. Cumulative compensation expense for 2016:P1,280,000
4. Compensation expense in 2017: P339,250
5. Cumulative compensation expense for 2017: P1,280,000
Problem 2 (Share-based Compensation)
On January 1, 2016, G Company grants 500 share appreciation rights each to its 150
employees on the condition that the employees will stay in the company for the next
three years.
During 2016, 7 employees leave and the company estimates that a further 18
employees will leave during 2017 and 2018. During 2017, 5 employees and the company
estimates that a further 8 employees will leave during 2018. 3 employees leave during
2018.
At the end of 2018, 50 employees exercise their share appreciation rights and 35
employees exercise theirs at the end of 2019. The remaining employees exercise their
share appreciation rights at the end of 2020.
The company estimates that the fair value of the share appreciation rights at the end of
each year in which a liability exists as shown below. At the end of 2018, all share
appreciation rights held by the employees vested. The intrinsic values of the share
appreciation rights at the date of exercise at the end of 2018, 2019, and 2020 are also
shown below:
Year Fair Value Intrinsic Value
2016 P18
2017 P20.5
2018 P22.5 P18.5
2019 P24 P28
2020 30.5
6. What is the compensation expense in 2017?
7. What is the compensation expense in 2018?
8. What amount of accrued salaries should the company report at the end of year 2018?
9. What is the compensation expense in 2019?
10. What is the compensation expense in 2020?
Suggested Solution:
6.)No. of employees (150-7-18) 125
Share appreciation rights per employee 500
Total share appreciation rights 62,500
Multiply by: fair value P18
Total fair value P1,125,000
x 1/3
Compensation expense in 2016 P375,000
No. of employees (150-7-5-8) 130
Share appreciation rights per employee 500
Total share appreciation rights 65,000
Multiply by: fair value 20.5
Total fair value P1,332,500
x 2/3
Accrued Liability - Dec.31, 2017 P888,333
Less: Compensation expense in 2016 P375,000
Compensation expense in 2017 P513,333
7.) and 8.)
Share Appreciation rights not yet exercised (85x500) 42,500
Multiply by fair value P22.5
Accrued liability - Dec. 31, 2018 P956,250
Less: Accrued liability - Dec. 31, 2017 P888,333
Compensation expense related to right not yet exercised P67,917
Share appreciation rights exercised (50x500) 25,000
Multiply by: intrinsic value P18.5
Compensation paid for rights already exercised P462,500
Total compensation expense for 2018 P530,417
9.)Share Appreciation rights not yet exercised (50x500) 25,000
Multiply by fair value P24
Accrued liability - Dec. 31, 2019 P600,000
Less: Accrued liability - Dec. 31, 2018 P956,250
Decrease in accrued liability (P356,250)
Share appreciation rights exercised (35x500) 17,500
Multiply by: intrinsic value P28
Compensation paid for rights already exercised P490,000
Total compensation expense for 2019 P133,750
10.) Share appreciation rights exercised (50x500) 25,000
Multiply by: intrinsic value P30.5
Total payment in 2020 P762,500
Less: Accrued liability - Dec. 31, 2019 P600,000
Compensation expense in 2020 P162,500
