IFRS 2 Share-based Payment: Summary, Worked Example & Practice Questions

IFRS 2 bites whenever an entity receives goods or services and pays for them with something whose value is tied to its own shares — employee options, free shares, share appreciation rights, or shares handed to a consultant instead of an invoice (IFRS 2.2). The counterparty does not have to be an employee, and no cash needs to change hands for a cost to arise: the accounting question is what was received, not what was paid out.

Three arrangements are distinguished, and everything else in the standard follows from which one applies (IFRS 2.4–6A):

• Equity-settled — the counterparty ends up holding shares or options. Cost is locked to the value of the award on grant day, and the credit sits permanently in equity.
• Cash-settled — the counterparty receives cash (or another asset) sized by reference to the share price, the classic case being share appreciation rights. Cost is a liability that gets re-priced every period end.
• Choice of settlement — either the entity or the counterparty may elect cash or shares. Who holds the choice drives the treatment: a counterparty choice creates a compound arrangement split between liability and equity, while an entity choice is equity-settled unless the entity has no genuine ability, or no practice, of issuing shares (IFRS 2.34–43).

Getting the classification wrong is expensive, because equity-settled and cash-settled awards over the same shares produce completely different expense profiles even when the eventual payout is identical.

For awards to employees, valuing the services directly is impractical, so the value of the instruments handed over stands in for them, fixed as at grant date (IFRS 2.11–12). Grant date is when both sides have signed up to the terms — not the day the award is exercisable, and not the day the employee finishes the vesting period. Because the measurement date is frozen, a share price that triples afterwards changes nothing in the expense; the entity simply recorded the cost of what it promised on the day it promised it. For awards to non-employees the presumption reverses: the goods or services received are valued directly unless that value cannot be estimated reliably (IFRS 2.13).

Not every hurdle attached to an award is handled the same way. Conditions requiring the employee to stay, or the business to hit a profit or sales target, are stripped out of the valuation and instead drive the count of awards assumed to vest, which is revisited annually. Conditions tied to the share price itself — a target price, a total shareholder return ranking against peers — are baked into the grant-date value by the valuation model and are then never unwound (IFRS 2.19–21A). The practical consequence catches students out: if a share-price target is missed and nobody receives anything, the cumulative charge already recorded stays on the income statement, provided the employee served the required time.

• Service condition — keep working for the required period. Affects the estimate of vesting awards.
• Performance condition (non-market) — profit, EPS, sales or a milestone target. Affects the estimate of vesting awards.
• Performance condition (market) — share price, or return relative to an index. Priced into grant-date value; no reversal if missed.
• Non-vesting condition — for example a required employee contribution to a savings plan. Priced into grant-date value; failing it is treated as a cancellation (IFRS 2.28A).

An award granted outright with nothing left to earn is expensed immediately. Far more commonly the counterparty has to serve out a period first, and the cost is then allocated over the years across which the services are rendered (IFRS 2.14–15). Where vesting depends on hitting a non-market target with no fixed timetable, the spread runs over the period the entity currently expects the target to be met, revised as expectations change.

The mechanic to memorise works on cumulative amounts, not annual ones. Each period end, multiply the awards now expected to vest by the frozen grant-date value per award, pro-rate that for the portion of the vesting period served, and expense the difference between that running total and everything already charged (IFRS 2.20). Because the estimate is refreshed every year, an unexpected wave of leavers can produce an annual charge far below the prior year's — or, in extreme cases, a credit. The final year replaces estimate with fact, so the cumulative charge lands on the number of awards that genuinely vested.

Where the entity owes cash whose amount rises and falls with its own share price, the obligation is a liability, and IFRS 2 refuses to let it go stale. The liability is remeasured to current fair value at every reporting date and again on the day it is settled, with all movement taken to profit or loss (IFRS 2.30–33). Note the difference from equity-settled accounting: nothing is frozen at grant, so a rising share price steadily inflates the expense right up to payout, and a falling one claws it back.

The build-up during the earning period follows the same pro-rating logic — current fair value of the rights, multiplied by expected vesting numbers, multiplied by the fraction of the service period completed. Once the rights have vested, the pro-rating stops but the remeasurement does not: until the cash is handed over, every reporting date resets the liability. Over the life of the award the total charge equals the cash actually paid, no more and no less, which is precisely why the periodic figures move around so much.

Once an equity-settled award is granted, the original cost is effectively unstoppable. Repricing underwater options, extending an exercise window or relaxing a target does not erase the original grant-date charge; the entity keeps recognising it as if the terms had never changed, and adds any incremental value the change conferred on the counterparty, spread over whatever service period remains (IFRS 2.26–27). A change that leaves the counterparty no better off — a tougher target, a reduced number of options — adds nothing at all and is simply disregarded.

Cancelling or settling an award early is treated as bringing vesting forward: whatever cost would have been recognised across the remaining service period is charged immediately (IFRS 2.28). Any payment made on cancellation is deducted from equity up to the fair value of the instruments cancelled, and any excess above that value is expensed. Failure to satisfy a non-vesting condition receives the same accelerated treatment, which is why an employee who stops contributing to a save-as-you-earn plan triggers an immediate catch-up charge rather than a reversal.

The disclosure objective is that a reader can understand what schemes exist, how they were valued, and what they cost (IFRS 2.44–52). In practice that means describing each type of arrangement and its terms, providing the roll-forward of option numbers across the year — outstanding at the start, granted, forfeited, exercised, expired, outstanding and exercisable at the end — together with the exercise prices attaching to them on a weighted-average basis and the average share price ruling when options were exercised.

• How fair value was determined, including the model used and the inputs fed into it — expected volatility and how it was estimated, expected life, the risk-free rate and expected dividends.
• The total expense recognised for the year, showing separately the part arising from equity-settled arrangements.
• The carrying amount of any share-based payment liabilities, and the intrinsic value of those that had already vested at the reporting date.