Share-based payment in tech companies

What kinds of awards do tech companies grant?

The most common are RSUs, rights to receive shares for no payment once the employee has served for a period, typically four years with 25% vesting each year, or a one-year cliff followed by quarterly vesting. Start-ups often grant options, rights to buy shares at a fixed exercise price. Executives receive performance share units tied to revenue growth or total shareholder return, and many companies run employee share purchase plans at a discount. Most awards are equity-settled; some, such as phantom shares or share appreciation rights paid in cash, are cash-settled.

How are equity-settled awards measured?

At the fair value of the equity instruments at grant date. For an RSU, that is the share price at grant less the present value of any dividends the employee will not receive during vesting; most growth tech companies pay none. Options are valued with an option pricing model, such as Black-Scholes or a binomial model, using expected volatility, expected term, the risk-free rate and dividends. Private companies estimate volatility from listed peers and need a valuation of their shares. The grant-date fair value is not remeasured. Service conditions and non-market performance conditions, such as revenue targets, affect the number of awards expected to vest; market conditions, such as total shareholder return, are built into the grant-date fair value and not trued up.

Share-based payment with graded vesting: IFRS 2 and US GAAP

A company grants 4,000 RSUs with a grant-date fair value of US$ 25 each, US$ 100 thousand in total. 1,000 vest at the end of each of the next four years, subject only to continued service. IFRS 2 treats each annual tranche as a separate award with its own vesting period: the first tranche is expensed over one year, the second over two years, and so on.

Both methods expense 100 thousand over four years, but IFRS 2 puts more than half of it in year one. Under ASC 718, a company with service-only graded awards may choose either the straight-line method over the whole award or the accelerated, tranche-by-tranche method; with straight-line, the cumulative expense must at least equal the portion vested at each date, which is met here. Because a growing company grants new awards every year, overlapping front-loaded tranches make IFRS reporters' expense noticeably higher than that of US peers using straight-line.

How are forfeitures handled?

IFRS 2 requires the company to estimate how many awards will vest, taking expected employee departures into account, revise the estimate as information changes and true it up to the actual number at vesting, reversing the expense on awards forfeited. US GAAP lets companies choose between estimating forfeitures and recognising them as they occur. Under both, expense is not reversed for awards that vest but are never exercised, such as options that expire out of the money.

What about net settlement and cash-settled awards?

Many companies withhold some of the vesting shares to pay the employee's tax, remitting cash to the tax authority. Since a 2018 amendment, IFRS 2 classifies such an award as entirely equity-settled if it would have been without the net settlement feature, and the cash paid to the tax authority is deducted from equity. US GAAP allows withholding up to the maximum statutory tax rate in the relevant jurisdictions without making the award a liability. Cash-settled awards are liabilities, remeasured at fair value at each reporting date until settlement, so their expense moves with the share price.

How are payroll and income taxes accounted for?

Employer social security taxes on share awards are outside IFRS 2. Under IFRS, companies typically accrue them over the vesting period, measured using the share price at each reporting date. Under US GAAP, employer payroll taxes are recognised when the event that triggers the tax occurs, usually vesting or exercise.

For income taxes, where the tax deduction is based on the value of the shares at vesting or exercise, as in the United States, IAS 12 measures the deferred tax asset using the share price at the reporting date, for the part of the vesting period that has passed. Tax benefits up to the cumulative expense go to profit or loss, and any excess goes directly to equity. Under US GAAP, the deferred tax asset is based on the expense recognised, and at vesting or exercise the difference between the actual deduction and that expense goes through income tax expense, which makes tech companies' effective tax rates move with their share prices. See deferred tax under IAS 12.

How is share-based payment presented?

The expense is presented in the same lines as the employees' other pay: cost of revenue, research and development, sales and marketing or general and administrative. Share-based payment for engineers building new software can be part of capitalised development costs, and awards that are incremental costs of winning contracts can be part of capitalised commissions. In the cash flow statement it is a non-cash adjustment, and awards dilute earnings per share.

Many tech companies report adjusted operating profit or adjusted EBITDA excluding share-based payment. Under IFRS 18, from 2027, a subtotal like this that is used in public communications to give management's view of performance is a management-defined performance measure: it must be reconciled in the notes to the most comparable IFRS subtotal, with the tax and non-controlling interest effect of each adjustment and an explanation of why it is useful. See management-defined performance measures and ARR and other SaaS metrics.

What else differs from US GAAP?

Modifications such as option repricings are accounted for similarly, with any incremental fair value expensed. Private companies under US GAAP have practical expedients, such as measuring some liability awards at intrinsic value and using a simplified expected term; IFRS 2 has no private company relief. Group arrangements, where a parent grants awards to a subsidiary's employees, require the subsidiary to recognise the expense under IFRS 2. See SaaS accounting.

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