1. What is the meaning of book value per share?

Book value per share is just one of the methods for comparison in valuing of a
company. Enterprise value, or firm value, market value, market capitalization, and other
methods may be used in different circumstances or compared to one another for
contrast. For example, enterprise value would look at the market value of the
company's equity plus its debt, whereas book value per share only looks at the equity
on the balance sheet. Conceptually, book value per share is similar to net worth,
meaning it is assets minus debt, and may be looked at as though what would occur if
operations were to cease. One must consider that the balance sheet may not reflect with
certain accuracy, what would actually occur if a company did sell all of their assets.

The book value of assets and shares are the value of these items in a company's
financial records. These values can be found in the company's balance sheet and
accounting tools such as journals and ledgers.

The book value per share is a market value ratio that weighs stockholders'
equity against shares outstanding. In other words, the value of all shares divided by the
number of shares issued. Book value of an asset refers to the value of an asset when
depreciation is accounted for. Depreciation is the reduction of an item's value over time.

Generally, the book value per share is of use to investors for determining
whether a share is undervalued. Avoid confusing this measurement with the market
value per share. Market value per share is the price a share is being traded on the
market, influenced by the impressions investors have of the future of that share.

2. What is the basic formula in the computation of book value per share?

The formula for calculating the book value per share is given as follows:

N.B.: We used the “average number of shares outstanding” because the closing
period amount may skew results if there was a stock issuance or major stock buyouts.
Using the period-end amount (which includes short-term events) may provide incorrect
results and may mislead investors into thinking that the stock price is overvalued or
undervalued when it is not actually the case.

The book value per share (BVPS) is calculated by taking the ratio of equity available
to common stockholders against the number of shares outstanding. When compared to the
current market value per share, the book value per share can provide information on how a
company’s stock is valued. If the value of BVPS exceeds the market value per share, the
company’s stock is deemed undervalued. The book value is used as an indicator of the
value of a company’s stock, and it can be used to predict the possible market price of a
share at a given time in the future.

3. Distinguish between liquidation price and call price in connection with

preference share. Which price considered for book value purposes?

Liquidation value is the likely price of an asset when it is allowed insufficient time
to sell on the open market, thereby reducing its exposure to potential buyers. Liquidation
value is typically lower than fair market value. Unlike cash or securities,
certain illiquid assets, like real estate, often require a period of several months in order to
obtain their fair market value in a sale, and will generally sell for a significantly lower price
if a sale is forced to occur in a shorter time period. Liquidation value may be either the
result of a forced liquidation or an orderly liquidation. Either value assumes that the sale is
consummated by a seller who is compelled to sell and assumes an exposure period which is
less than market normal.

The call price is the price a bond issuer or preferred stock issuer must pay
investors if it wants to buy back, or call, all or part of an issue before the maturity date.

4. What is the meaning of “preference as to assets” and “preference as to

dividends”?

The term preference as to dividends does not mean that the preference shareholders
have an absolute right to dividends. Preference as 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. In the absence of a contrary statement,
the preference share has a preference as to dividend. The term preference as to assets means
that the preference shareholders have the right to receive an amount equal to par value or
any liquidation value of their shareholdings in the event of liquidation in addition to
cumulative dividends in arrears.

5. Explain the preferential rights of the preference share with respect to

dividends
a) Cumulative
A cumulative preference share is one on which any undeclared dividends
accumulate each year until paid. Accordingly, the cumulative preference share
is entitled to all dividends in arrears.
b) Noncumulative
 A noncumulative preference share is one on which the right to receive
dividends is forfeited in any one year in which dividends are not declared.
c) Participating
A participating preference share in one which is entitled to receive dividends
in excess of the basic or fixed dividend rate. Participating preference share may
be fully participating with ordinary share on a prorate basis or participating
only to certain amount or percentage.
d) Nonparticipating
A nonparticipating preference share is one that is entitled to receive only the
dividends equal to the fixed preference rate.

CHAPTER 22

1. Explain fully a cash settled share-based payment transaction.

Share-based Payment, applies when a company acquires or receives goods and
services in exchange for an equity-based payment. These goods can include
inventories, property, plant and equipment, intangible assets, and other non-
financial assets. Services can include that provided by employees in exchange
for an equity-based payment eg share options. There are two notable exceptions:
shares issued in a business combination, which are dealt with under IFRS

2. Distinguish cash settled share-based payment transaction from equity settled

share-based payment transaction
IFRS 2 requires an expense to be recognised for the goods or services
received by a company. The corresponding entry in the accounting records will
either be a liability or an increase in the equity of the company, depending on
whether the transaction is to be settled in cash or in equity shares. Goods or
services acquired in a share-based payment transaction should be recognised
when they are received. In the case of goods, this is obviously the date when this
occurs. However, it is often more difficult to determine when services are
received. If shares are issued that vest immediately, then it can be assumed that
these are in consideration of past services. As a result, the expense should be
recognised immediately.
 Alternatively, if the share-based payment vest (becomes an entitlement) in
the future, then it is assumed that the equity instruments relate to future services
and recognition is therefore spread over that vesting period (period during which
specified conditions are to be satisfied eg remain in employment for 3 years).

3. What is a share appreciation right?

A stock appreciation right (SAR) is a form of bonus compensation given to
employees that is equal to the appreciation of company stock over an
established time period. Similar to employee stock options (ESO), SARs are
beneficial to the employee when company stock prices rise; the difference with
SARs is that employees do not have to pay the exercise price, but receive the
sum of the increase in stock or cash.
The primary benefit that comes with stock appreciation rights is the fact
that the employee can receive proceed

4. Distinguish a share appreciation right from a share option.

Stock appreciation rights offer the right to the cash equivalent of value
increases of a certain number of stocks over a predetermined time period. This
type of bonus is almost always paid in cash; however, the company may pay the
employee bonus in shares. In most cases, SARs can be exercised after they
vest; when SARs vest, it simply means that they become available to exercise.
SARs are generally issued in conjunction with stock options in order to assist in
funding the purchase of options or to pay off taxes due at the time the SARs are
exercised; these are referred to as "tandem SARs."
5. Explain the measurement of compensation arising from share appreciation
right.
As a general principle, the total expense related to equity-settled share-based
payments will equal the multiple of the total instruments that vest and the grant-
date fair value of those instruments. In short, there is truing up to reflect what
happens during the vesting period. However, if the equity-settled share-based
payment has a market related performance condition, the expense would still be
recognised if all other vesting conditions are met.
6. Explain the recognition of compensation arising from share appreciation
right.
The issuance of shares or rights to shares requires an increase in a
component of equity. IFRS 2 requires the offsetting debit entry to be expensed when
the payment for goods or services does not represent an asset. The expense should
be recognised as the goods or services are consumed. For example, the issuance of
shares or rights to shares to purchase inventory would be presented as an increase
in inventory and would be expensed only once the inventory is sold or impaired.
The issuance of fully vested shares, or rights to shares, is presumed to relate to past
service, requiring the full amount of the grant-date fair value to be expensed
 immediately. The issuance of shares to employees with, say, a three-year vesting
period is considered to relate to services over the vesting period. Therefore, the fair
value of the share-based payment, determined at the grant date, should be expensed
over the vesting period.

7. What is a “share and cash alternative” granted to an employee?

Share and cash alternative are a type of equity compensation granted by

companies to their employees and executives. Rather than granting shares of
stock directly, the company gives derivative options on the stock instead. These
options come in the form of regular call options and give the employee the right
to buy the company’s stock at a specified price for a finite period of time. Terms
of employee stock options will be fully spelled out for an employee in an
employee stock options agreement.

8. What is the meaning of “phantom share” in a share and cash alternative

granted to an employee?
Phantom stock is a promise that an employee will receive a bonus equivalent to
either the value of the company’s shares or the amount that the stock prices
increase over a given period of time. The bonus an employee receives is taxed
as ordinary income based on the time that it is received. Because phantom stock
is not tax-qualified, it does not have to follow the same rules that employee stock
ownership plans

9. What is the treatment of a share and cash alternative if the entity has the
choice settlement?

Stock options are a benefit often associated with startup companies, which may
issue them in order to reward early employees when and if the company goes
public. They are awarded by some fast-growing companies as an incentive for
employees to work towards growing the value of the company's shares. Stock
options can also serve as an incentive for employees to stay with the company.
The options are canceled if the employee leaves the company before they vest.
ESOs do not include any dividend or voting rights.

Non-qualified stock options (NSOs) can be granted to employees at all

levels of a company, as well as to board members and consultants. Also known
as non-statutory stock options, profits on these are considered as ordinary
income and are taxed as such.

10. What is the treatment of a share and cash alternative if the employee has the
choice of settlement?
 In general, the greatest benefits of a stock option are realized if a
company’s stock rises above the exercise price. Typically, employee stock
options are issued by the company and cannot be sold, unlike standard listed
or exchange-traded options. When a stock’s price rises above the call option
exercise price, call options are exercised and the holder obtains the company’s
stock at a discount. The holder may choose to immediately sell the stock in the
open market for a profit or hold onto the stock over time.

Incentive stock options (ISOs), also known as statutory or qualified options,

are generally only offered to key employees and top management. They receive
preferential tax treatment in many cases, as the IRS treats gains on such options
as long-term capital gains.