1. How to get the ratio of vested years. 2. How to get all the amount in...
Question:
1. How to get the ratio of vested years.
2. How to get all the amount in the journal entry of "To record the exercise of share options"
3. What would be the computation and entry for Situation 3.
Share option outstanding
Share options outstanding is an addition to share premium.
Share option outstanding is measured by the number of share options multiplied by the Fair value of the share option at the grant date.
Situation 1: If no vesting period (meaning, the employees are granted share options without any required years of service), then, the related journal entries are:
Debit Credit
Cash xxxxx
Salaries expense - share options xxxxx
Share capital xxxxx
Share premium xxxxx
To record exercised share options.
*The cash is debited at the offer price.
**The salaries expense is debited at the FV of the share.
***The share capital is credited at the par value of the share and any excess is credited to the share premium.
Situation 2: If with the vesting period, share options outstanding are recorded at the period and issuance of the share capital at recorded at the exercised date.
Let us solve the Illustrative problem.
On January 1, 2020, Milka Corporation will give share-based compensation for its employees with a 2-year vesting period. The share option granted is 100 shares for every employee. The fair value of the share option at the grant date is P50.
The total number of employees at the start of 2020 is 500, resigned employees during the year is 30, and estimated employees to resign is 20. In 2021, 20 employees resigned.
The option price for each share is P60 and the par value of each share is P30.
Requirements: Determine the cost of share premium at the end of 2020 and 2021 and prepare the related journal entries.
Solution:
Number of employees - 2020 500
Less: Resigned employees - 2020 30
Less: Estimated employees to resign 20
Number of employees - 2020 450
Share options granted 100
Total share options granted 45,000
FV of share option at the grant date ₱50
Total Share options 2,250,000
multiplied by ratio of vested years (2 years) 0.5000
Share options outstanding - 2020 P 1,125,000
Related journal entries (2020):
Account Debit Credit
Salaries expense - share options 1,125,000
Share premium - share options outstanding 1,125,000
To record share options outstanding for year 1.
Since the estimated resigned employees of 2020 for 2021 is the same as the actual resigned employees of 2021, then, there are no more adjustments.
Related journal entries (2021):
Account Debit Credit
Salaries expense - share options 1,125,000
Share premium - share options outstanding 1,125,000
To record share options outstanding for year 2.
Cash 2,700,000
Share premium - share options outstanding 2,250,000
Share capital 1,350,000
Share premium 3,600,000
To record the exercise of share options.
Situation 3: If the fair value of the share options is not measured reliably, then, the intrinsic value is used to determine the value of share options. Intrinsic value is computed as the Market value of the shares given less option price.
Financial Reporting and Analysis
ISBN: 978-1259722653
7th edition
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer