IFRS 2 share-based payment: equity-settled and cash-settled

What does IFRS 2 cover?

All share-based payment transactions: awards settled in the company's own shares or options, awards settled in cash based on the share price, and awards where the company or the employee can choose. It covers employee schemes such as share options, restricted shares, performance shares and employee share purchase plans, and also shares issued to suppliers for goods or services. Awards granted by a parent to a subsidiary's employees are accounted for in both the group and the subsidiary. Awards to directors and other key management personnel are also disclosed under IAS 24.

How are equity-settled awards measured?

For employee awards, the company measures the services received indirectly, at the fair value of the equity instruments granted, at the grant date: the date both parties agree the terms. Where there is no market price, as for most employee options, it uses an option pricing model, such as Black-Scholes, a binomial model or a Monte Carlo simulation, with inputs including the share price, exercise price, expected volatility, dividends, the risk-free rate and the expected life. The total cost is recognised over the vesting period, debiting the expense and crediting equity, and the grant date fair value is never updated. These measurements are outside the scope of IFRS 13, because IFRS 2 sets its own.

How do vesting conditions affect the expense?

• Service conditions, such as staying three years: the estimate of how many awards will vest is updated each period, and the cumulative expense trued up.
• Non-market performance conditions, such as an earnings per share target: treated in the same way, so no expense remains if the target is missed.
• Market conditions, such as a share price or total shareholder return target: reflected in the grant date fair value, with no reversal if they are not met, provided the service is completed.
• Non-vesting conditions, such as an employee choosing to stop saving in a share plan: also reflected in fair value, with failure treated as a cancellation.

IFRS 2 in practice: share options with a three-year service condition

On 1 January 2026 a company grants 1,000 options to each of 50 managers, vesting if they are still employed on 31 December 2028. The grant date fair value is CU 6 per option.

Each year the company debits staff costs and credits equity. The estimate of leavers changes each year, and the expense absorbs the change. If the share price later falls below the exercise price and the options lapse unexercised, nothing is reversed: the services were received. When options are exercised, the cash received is credited to equity. The options also affect diluted earnings per share; see IAS 33 earnings per share.

How are cash-settled awards accounted for?

For share appreciation rights or phantom shares paid in cash, the company recognises a liability as the services are received and remeasures it at fair value at each reporting date and at settlement, with changes in profit or loss. The total expense therefore equals the cash eventually paid. Awards with a choice of settlement are split or classified depending on who holds the choice and whether the company has a present obligation to pay cash.

What happens when an award is modified or cancelled?

A modification that increases the fair value of an award, such as repricing options after a share price fall, adds the incremental fair value at the modification date, recognised over the remaining vesting period, on top of the original grant date fair value, which is still recognised. A modification that reduces value does not reduce the expense. A cancellation by the company or the employee accelerates the remaining unrecognised expense immediately.

How does deferred tax work for share-based payments?

Where the tax deduction is based on the share price at exercise, IAS 12 measures the deferred tax asset on the deduction expected at the reporting date, based on the current share price. If the expected deduction exceeds the cumulative expense, the excess deferred tax goes directly to equity. See deferred tax under IAS 12.

How does IFRS 2 compare with ASC 718?

The principles are similar, but US GAAP lets companies recognise awards with graded vesting and only service conditions on a straight-line basis, where IFRS 2 treats each tranche as a separate award, front-loading the expense. US GAAP also allows a policy of accounting for forfeitures as they occur rather than estimating them, and records excess tax benefits in the income statement rather than equity. See IFRS vs US GAAP key differences and ASC 718 stock-based compensation.

This guide is general information. It is not tax or legal advice for your situation.