Chapter 18: Share Based Compensation (Share Appreciation Right)

y Cash settled transaction - A share-based payment transaction whereby an entity incurs a liability for services received and the liability is based on the entity s equity instruments. - The entity shall measure the services acquired and liability incurred at the fair value of the liability - Until the liability is settled, the entity shall 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. - Example : grant of share appreciation right to employees y 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 NOTE : On the exercise date, if the market value of number of shares OR the increase in the price of a the share is equal to the predetermined price, the given number of shares over a given period entity has no obligation because there is no - Like a share option , viewed as compensation for appreciation or increase in market value on exercise services rendered date. In this case, the accrued compensation the year - Unlike in a share option, the entity shall recognize before (dec. 31) the exercise date shall be reversed a liability because a SAR is actually an obligation on on exercise date as follows: the part of the entity to pay cash in the future on exercise data. Accrued Salaries Payable - Creates a liability Gain on reversal of share appreciation right y Measurement of Compensation - Compensation is based on the fair value of the IFRS The intrinsic value of the SAR on the date of exercise liability at the reporting date and shall be is the amount paid out to the employees. remeasured at every year-end until it is finally settled. Any changes in fair value are included in Compensation expense for each year : profit or loss. Share appreciation rights ( # of employees x SAR to - During the vesting period, from the date of grant to each employee) X fair value = TOTAL FAIR VALUE the exercise date, if there are increases or Accrued liability (Total FV/# of years of vesting decreases in the market value of the shares, the period X years elapsed) liability for the compensation will be adjusted. On the dates when the SARs are exercised: - The Fair Value of the liability is equal to the excess Share appreciation rights not yet exercised [(total of the market value of share over a predetermined SAR exercised SAR) X SAR per employee ] price for a given number of shares over a definite X Fair Value

vesting period. (Market Value Predetermined price) x no. of shares = total compensation The compensation in a SAR is the cash paid by the entity. This amount becomes known only on exercise date, NOT on the date of grant. y Recognition of Compensation a. if the SAR right vests immediately, the compensation is recognized immediately on the date of grant. B. if the SAR does not vest until the employee completes a definite vesting period, the compensation is recognized over the service or vesting period. Entry : (Dec. 31) Salaries Accrued Salaries Payable To settle the appreciation right: Accrued Salaries Payable Cash

Accrued liability Share appreciation rights exercised X intrinsic value Total payment Salaries Cash Compensation related to rights not yet exercised + Compensation paid for rights already exercised Total compensation expense for the year If there is a decrease in the accrued liability: Accrued Salaries Payable Salaries -Reversal of accrued liability related to rights not yet exercised +Compensation paid for rights already exercised Net compensation expense for the year On the last year: Salaries Accrued Salaries Payable Cash Share appreciation rights exercised X intrinsic value Total payment -Accrued liability Net compensation expense for the year y -

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.; the instrument is not a financial instrument 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.

Fair value of share alternative - Fair value of liability on grant date Equity Component *The fair value of the share alternative is actually the fair value of the whole compound financial instrument. Entries to recognize the liability and equity components: Dec. 31 Salaries Share Options Outstanding *allocation of the equity component equally over the vesting period Salaries Accrued Salaries Payable Share basis X fair value Total Liability Accrued liability = total liability/# of years of vesting period y Final Accounting The method of settlement chosen by the employee will determine the final accounting

Cash and Cash Alternative Some share-based payment transactions allow the employee the choice as to whether to settle the transactions in cash, or by issuing equity shares. An employee may have the right to choose between: a. Cash alternative cash payment equal to the market value of a certain number of shares subject to certain conditions b. Share alternative equity shares given to the employee The accounting for this type of instrument depends on which party has the choice of settlement

A. If the employee has chosen the cash alternative, the entry is: Accrued salaries payable Share options outstanding Cash Share Premium B. If the employee has chosen the equity alternative, the entry on December 31, 2014 is: Accrued salaries payable Share options outstanding Share capital Share Premium NOTE: the entity issued the no. of shares stated as share alternative and not the no. of phantom shares which serve as the basis only in computing the liability. Illustration: the supplier has the choice of settlement, therefore, the instrument issued for the purchase of the equipment is a compound financial instrument. If the fair value of the asset received can be measured directly and easily, the equity component is the fair value of the asset minus the fair value of the liability.

To record the settlement assuming the supplier has chosen the cash alternative: A/P SOO Int. Expense Cash Share Premium Cash payment (# of phantom sh. X mkt price on that date) -Fair value of liability Implied interest To record the settlement assuming the supplier has chosen the share alternative: A/P SOO Share Capital Share Premium

Fair value of asset - Fair value of liability Equity component If the fair value of the asset received cannot be measure directly, the asset is recorded at the fair value of the shares to be issued. In such a case, the Fair value of the shares to be issued - Fair value of the liability Fair value of the equity component To record the purchase of the equipment: Equipment Accounts payable Share Options Outstanding

Chapter 8: Operating lease

Lease - PAS 17, par. 4: an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. - An agreement between one party called the lessor and another party called the lessee whereby the lessee is granted the right to use the property owned by the lessor for a specific period of time in consideration for certain payment in the form of rent. - Accountants recognize two kinds of lease namely operating lease or finance or capital lease. Operating Lease Lessee - PAS 17, par. 33: lease payments under an operating lease shall be recognized as an expense on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of the user s benefit. - The periodic rental is simply recognized as rent expense on the part of the lessee. - Also called the rental approach - A lease bonus paid by the lessee to the lessor in addition to the periodic rental is treated as prepaid rent expense by the lessee to be amortized over the lease term. - Leasehold improvement made by the lessee shall be depreciated over the life of the improvement or lease term, whichever is shorter - The residual value of the leasehold improvement is ignored by the lessee in computing depreciation because legally, the leasehold improvement becomes the property of the lessor upon the expiration of the lease term. - Any security deposit refundable upon the lease expiration is accounted for as an asset by the lessee. Operating Lease Lessor - PAS 17, par. 50: lease income from operating lease shall be recognized on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished - The periodic rental received by the lessor in an operating lease is simply recognized as rent income

A lessor shall present an asset subject to operating lease in its statement of financial position according to the nature of the asset The leased property remains as an asset of the lessor and consequently, the lessor bears all ownership or executory costs such as depreciation of leased property, real property taxes, insurance and maintenance. However, the lessor may pass on to the lessee the payment for taxes, insurance and maintenance cost. The depreciation policy for depreciable leased asset shall be consistent with the lessor s normal depreciation for similar asset. Initial direct costs are often incurred by the lessor and include amounts such as commissions, legal fees and internal costs that are incremental and directly attributable to negotiating and arranging a lease. Initial direct costs incurred by lessor in an operating lease shall be added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease income. Any security deposit refundable upon the lease expiration shall be accounted for as liability by the lessor. Any lease bonus received by the lessor from the lessee is recognized as unearned rent income to be amortized over the lease term.

Entries Lessee: 1. Leased an equipment from another entity Rent expense Cash 2. Made a security deposit refundable upon the lease expiration Rent deposit Cash 3. In addition to annual rental, paid cash to the lessor as a lease bonus Prepaid rent Cash 4. The lease bonus is amortized over _ years. Rent expense Prepaid rent Entries Lessor: 1. Leased a machine to another entity Cash

Rent Income 2. Received a security deposit to be refunded upon the lease expiration Cash Liability for rent deposit 3. In addition to annual rental, received cash from the lessee as a lease bonus Cash Unearned rent income 4. Paid initial direct costs (directly attributable to negotiating and arranging the operating lease) Deferred initial direct costs Cash 5. Paid repair and maintenance Repair and maintenance Cash 6. The lease bonus is amortized over _(rental) years. Unearned rent income Rent income 7. The machinery is depreciated over its useful life Depreciation Acc. Dep. NOTE: the depreciation is from the date of acquisition, NOT from the date of lease. The reason is that the machinery is acquired for leasing purposes and therefore available for its intended use, meaning for rental from date of acq. Idle property is subject to depreciation as long as it is available for its intended use. 8. The initial direct costs are recognized as expense over the lease term. Amortization of initial direct costs Deferred initial direct costs *The balance of the deferred initial direct costs shall be presented as an addition to the carrying amount of the machinery.

Total rental for the lease term is determined as follows: 2012 (1,000,000 x 6/12) 500,000 2013 1,250,000 2014 1,250,000 Total rental for 3 years 3,000,000 Average annual rental (3M/3) Books of the Lessor 2012 Cash 500T Rent receivable 500T Rent income 2013 Cash 1,000,000

1M

1.25M Rent income 1M Rent receivable 250T Rent income for 2012 and 2013 Rent collected (500T + 1.25M) Rent receivable Cash 1.25M Rent income Rent receivable

2M 1.75M 250T

2014

1M 250T

NOTE : the rent receivable has a zero balance on the end of the lease period. Books of the Lessee 2012 Rent expense Cash Rent payable 2013 Rent expense Rent payable Cash 2014 Rent expense Rent payable Cash

1M 500T 500T 1M 250T 1.25M 1M 250T

Unequal rental payments 1.25M - PAS 17, par. 33: lease payments under an operating lease shall be recognized as an expense Disclosures for operating leases Lessee on a straight line basis over the lease term unless 1. The total future minimum lease payments under another systematic basis is representative of the noncancelable operating leases for each of the time pattern of the user s benefit. following periods: - Where the operating lease requires unequal cash a. Not later than one year payments, the total cash payments for the lease b. Later than one year and not later than 5 years term shall be amortized uniformly on the straight c. Later than 5 years line basis as rent expense or rent income. 2. The total of future minimum lease payments expected to be received under noncancelable subleases at the end of the reporting period.

3. Lease and sublease payments recognized as expense in the period, with separate amounts for minimum lease payments, contingent rents and sublease payments. 4. A general description of the lessee s significant leasing arrangements. Disclosures for operating leases Lessor 1. Future minimum lease payments under noncancelable operating leases in the aggregate and for each of the following periods: a. Not later than one year b. Later than one year and not later than 5 years c. Later than 5 years 2. Contingent rents recognized as income in the period. 3. A general description of the lessor s leasing arrangement.

Preference as to assets - The preference shareholders are entitled to payment not only for the liquidation value but also for dividend in arrears. If non-cumulative, only the current year dividends. Preference as to dividends - Does not mean that the preference shareholders have an absolute right to dividends - Simply means that if dividends are declared, the preference shareholders have the right to receive dividends first before the ordinary shareholders are paid a dividend. Where there are treasury shares and subscribed - In the absence of any statement to the contrary, the preference share has preference as to share capital, the amount of par or stated value to be dividends. assigned to the pertinent share capital is computed - When preference share has preference as to as follows: dividends, the dividend right may be: Shares Amount a. Noncumulative Share capital issued xx xx b. Cumulative Add: Share capital subscribed xx xx c. Nonparticipating Total xx xx d. Participating Less: Treasury shares at par xx xx Amount and shares outstanding xx xx A. Noncumulative preference share one in which the right to receive dividends is forfeited in For purposes of book value computation, treasury any one year in which the dividends are not declared. shares shall be treated as retired. Thus, the preference share is entitled only to current Accordingly, any gain on retirement is credited to year dividends. share premium, and any loss on retirement is

Chapter 19: Book Value Per Share Book value per share The amount that would be paid on each share assuming the entity is liquidated and the amount available to shareholder s is exactly the amount reported as shareholder s equity. When there is only one class of share capital, the formula for the computation of BVPS is: o BVPS = Total SHE/# of shares outstanding When there are two classes of share capital, it is necessary to apportion the SHE between the preference share and ordinary share. o Book value per preference share = Preference SHE/# of pref. sh. Outstanding o Book value per ordinary share = Ordinary SHE/# of ordinary shares outstanding For the purposes of apportionment between the preference sh. and ordinary sh., the ff. procedures should be observed: 1. An amount equal to the par or stated value is allocated to the preference share and ordinary share. 2. Any balance of the SHE in excess of the par or stated value is then apportioned taking into account the liquidation value and dividend rights of the preference shareholders. For book value purposes, the ff. are assumed to be available for dividends: (excess over par) a. Retained earnings b. Share premium c. Revaluation surplus d. Those that will form part of OCI

charged first to share premium and then to retained earnings. Liquidation value of preference share The liquidation value is the amount which the preference shareholders normally receive upon the liquidation of the corporation. The liquidation value may be more than the par value. In the absence of a liquidation value, the preference shareholders shall receive an amount equal to the par or stated value, unless there is a deficit in which case the preference shareholders would share on a pro rata basis with the ordinary shareholders. The preference share may have a call price but this is ignored for book value computation. The call price is the amount paid to preference shareholders upon redemption of preference share during the lifetime of the corporation.

B. Cumulative preference share one in which Case 2: PS is cumulative and nonparticipating any undeclared dividends accumulate each year until - The preference shareholders get dividends in arrears (current year + previous years div) paid. Thus, the cumulative preference share is - The balance goes to the ordinary share bec. The PS entitled to all dividends in arrears. is nonparticipating C. Non participating preference share one Excess over par Pref. Sh. Ord. Sh. that is entitled to receive only the dividends equal to Balances XX XX XX the fixed rate. Preference Dividend (XX) XX D. Participating preference share one which is Balance to common XX entitled to receive dividends in excess of the basic or XX fixed rate. Participating preference share may be Total SHE XX XX fully participating with ordinary share on a pro rata XX XX /Shares outstanding basis or participating only to a certain amount or BVPS XX XX percentage. Case 3: PS is cumulative and participating However, before the preference share can - Inasmuch as the preference shareholders are participate, the ordinary share should receive first an participating, the ordinary stockholders get the amount equal to the basic preference rate, meaning current year dividend using the preference rate. preference rate times the par value of the ordinary - The balance for participation is allocated to the share outstanding. preference and ordinary share on a prorate basis. - The fractions are developed from the aggregate par Special Notes value of share capital a. In the absence of specific designation, Excess over par Pref. Sh. Ord. Sh. preference share is assumed to be Balances XX XX XX noncumulative and nonparticipating. Preference Dividend (XX) XX b. Dividends in arrears usually include current Ordinary Dividend (XX) XX dividends. Dividend in arrears in prior years Bal. for participation XX shall be specifically disclosed, otherwise, Preference XX there are no arrearages. Ordinary __ XX c. In case where there are two classes of Total SHE XX XX preference share with different dividend /Shares outstanding XX XX rates and both are participating, the lower BVPS XX XX rate shall be the basis for allocation to the ordinary share. Case 4: PS is cumulative and participating up to 16% If only one preference share is participating, the rate of the participating preference share shall be used as basis for ordinary share dividend. Case 1: PS is noncumulative and nonparticipating - The preference shareholders get only dividends for the current year bec. It is noncumulative. - The balance (net income pref.div) goes to the ordinary share because the preference share is nonparticipating. * excess over par sum of the SHE accounts other than the par or stated value of share capital Ex. Share premium, Retained earnings The phrase participating up to 16% means that the preference share shall receive for the current year a maximum of 16% on the par value. Since the preference share already receives a e.g. 12% as basic dividend for the current year, then it participates only to the extent of 4% on the par of the pref. shares. The balance goes to the ord. share. Case 5: PS is cumulative and non participating, with liquidation value of P106 per share Excess over par Pref. Sh. Ord. Sh. Balances XX XX XX Liquidation premium (XX) XX Preference Dividend (XX) XX Balance to common XX XX

Total SHE /Shares outstanding BVPS

XX XX XX

XX XX XX

The liquidation premium is the excess of the liquidation value over the par value of the preference share.

CHAPTER 16: Retained Earnings Debit balance R/E deficit (deduction from SHE) - accumulated losses DIVIDENDS: a. Dividends out of earnings b. Dividends out of capital

Property Dividends or Dividends in Kind - distribution of noncash assets to owners - 2 accounting issues: a. Measurement of property dividend payable b. Measurement of the noncash asset to be distributed as property dividend Measurement of property dividend payable - initially, measure liability at fair value of the non cash asset on the date of declaration and is increased or decreased as a result of the change in fair value of the asset at year-end and date of settlement. - the offsetting dr. or cr. Is through equity or directly to R/E

Dividends out of earnings - if the entity has a deficit, it is illegal to pay dividends -if the entity declares dividends in excess of R/E, the excess is a return of capital and therefore violates the TRUST FUND DOCTRINE *stock dividends may be declared from share premium on par value share Settlement of property dividend payable 3 essential dates: - The difference between the CA of the div payable 1. Date of declaration & the CA of the asset distributed shall be 2. Date of record recognized in P or L. 3. Date of payment *The liability for dividend must be recognized on the Measurement of noncash asset distributed date of declaration. - Measure at the lower of the CA and fair value less cost to distribute Dividends out of earnings usually in the form of: - Impairment loss : CA > FV a. Cash dividends b. Property dividends c. Liability dividends in the form of bond and scrip d. Stock dividends or bonus issue Cash Dividends - may be expressed as: a. a certain amount of pesos per share b. a certain percent of the par or stated value declaration of cash dividends: RE or Dividends Dividends Payable Dividends used when dividends are declared during the year; closed to RE account at the end of the year When dividends declared are paid: Dividends payable Cash *NO ENTRY on date of record