IFRS 2 Share-Based Payment: The Complete Guide

IFRS 2 share-based payment is an international accounting standard issued by the International Accounting Standards Board (IASB). It sets out how companies must account for transactions in which they receive goods or services, most commonly employee services, in exchange for equity or cash settlement linked to the company's stock.

The standard’s primary objective is to ensure that the fair value of these share-based payments is reflected in the financial statements, capturing both the cost to the company and the economic benefits received.

What transactions does IFRS 2 cover?

IFRS 2 applies to all arrangements in which an entity receives goods or services and settles the obligation through share-based consideration. This includes:

• Employee and executive compensation plans where remuneration is provided in the form of shares, share options, or other equity instruments.
  
• Payments to suppliers or contractors settled in shares, share options, or other equity-based awards instead of cash.
  
• Cash-settled arrangements whose value is linked to the company’s share price, such as Stock Appreciation Rights (SARs).
  
• Group share-based arrangements in which one group entity receives goods or services and another group entity provides the equity instruments as consideration.

The standard applies equally to public and private entities. It also covers transactions where the goods or services received are not specifically identifiable; in such cases, the cost is measured by reference to the fair value of the equity instruments granted.

What are the exceptions to IFRS 2?

IFRS 2 applies to all share-based payment transactions except:

• Transactions that are part of a business combination, which are accounted for under IFRS 3.
  
• Certain contracts that fall within the scope of IAS 32 and IFRS 9.

Types of share-based payments

Under IFRS 2, share-based payments fall into three main categories based on how they are settled. The classification determines how the transaction is measured, recognised, and presented in the financial statements.

Equity-settled share-based payments

In these arrangements, the entity issues its own equity instruments, such as shares or share options in exchange for goods or services.

In practice, this means:

• They are measured at the fair value of the equity instruments at the grant date.
• Expense is recognised over the vesting period.
• Once recognised, the amount is not remeasured, even if the share price changes.

Example: A company grants 10,000 stock options to senior employees, vesting over three years, as part of their remuneration package. At the grant date, the fair value of each option is estimated at $5, giving a total grant-date fair value of $50,000 (10,000 × $5).

Under IFRS 2, this $50,000 is recognised as an employee benefit expense over the vesting period, in proportion to the number of options vesting each year.

Example journal entry for equity-settled share-based payment at grant date:

Dr Employee Benefit Expense     

Cr Share-based Payment Reserve (Equity)

Cash-settled share-based payments

Here, the entity incurs a liability to pay an amount that is linked to its share price. For example, Stock Appreciation Rights (SARs) that are settled in cash.

In practice, this involves:

• Initially measured at fair value of the liability at the grant date.
• Remeasured at each reporting date and on settlement, with changes in fair value recognised in profit or loss.
• Can lead to volatility in reported earnings, as liability values fluctuate with share prices.

Example:
A company grants 5,000 share appreciation rights (SARs) to employees, vesting evenly over three years (1,667 SARs per year). At the grant date, the fair value per SAR is $4, giving an initial total fair value of $20,000. The fair value rises to $5.00 in Year 1, $6.50 in Year 2, and $7.20 in Year 3.

Year 1

• Vested SARs = 1,667
• FV = $5.00
• Cumulative liability = 1,667 × $5 = $8,335
• Expense for Year 1 = $8,335 − $0 = $8,335

Year 2

• Cumulative vested SARs = 3,334
• FV at Year 2 = $6.50
• Cumulative liability = 3,334 × $6.50 = $21,671
• Expense for Year 2 = $21,671 − $8,335 = $13,336

This Year 2 expense includes:

The cost of the second year’s 1,667 newly vested SARs at the Year 2 fair value, plus the remeasurement of the first year’s SARs from $5 to $6.50.

Year 3

• Cumulative vested SARs = 5,000
• FV at Year 3 = $7.20
• Cumulative liability = 5,000 × $7.20 = $36,000
• Expense for Year 3 = $36,000 − $21,671 = $14,329

This Year 3 expense includes the cost of the final year’s tranche and the remeasurement of all previously vested SARs to the final fair value.

At the end of Year 3, the total liability is $36,000, which is paid in cash to employees if the SARs are exercised.

Example journal entry for cash-settled share-based payments at period end:

Dr Employee Benefit Expense     

Cr Share-based Payment Liability

Share-based payments with a choice of settlement

Some arrangements give either the entity, the counterparty, or both the right to choose whether the transaction is settled in cash or in equity instruments.

In such cases, accounting treatment generally follows these rules:

• If the entity has the choice, it must assess whether it has a present obligation to settle in cash. If so, the arrangement is treated as cash-settled; otherwise, it is equity-settled.
  
• If the counterparty has the choice, the transaction is typically treated as a compound instrument, split into an equity component and a liability component.
  
• The accounting treatment depends on the terms and conditions, and often requires careful judgement.
  

Example:

A company grants a consultant 1,000 SARs with a choice of settlement, either entirely in shares or entirely in cash. The award vests evenly over two years (500 SARs per year). At the grant date, the fair value per SAR is $10, giving a total fair value of $10,000.

In this case, the contract specifies that both settlement alternatives have the same value at the grant date. Because the fair value of the share-settled outcome and the cash-settled outcome are identical, the $10,000 is split equally between:

• Equity component = $5,000 (fixed at grant date — no remeasurement)
• Liability component = $5,000 (remeasured at each reporting date)

Year 1

• Vested SARs = 500 (half of the award)
• Fair value at year-end = $12
• Liability portion vested to date = 500 × $12 × 50% = $3,000
• Equity portion vested to date = $5,000 × 50% = $2,500
• Cumulative expense = $3,000 (liability) + $2,500 (equity) = $5,500
• Year 1 expense = $5,500 − $0 = $5,500
  

Year 2

• Vested SARs = 1,000 (fully vested)
• Fair value at year-end = $15
• Liability portion = 1,000 × $15 × 50% = $7,500
• Equity portion = $5,000 (full amount recognised by end of vesting)
• Cumulative expense = $7,500 + $5,000 = $12,500
• Year 2 expense = $12,500 − $5,500 = $7,000

At settlement (end of year 2):

If the consultant chooses cash → they receive $7,500 in cash (liability portion) + retain shares from the equity component (worth $5,000 at grant date, possibly more now).

If a consultant chooses shares → they receive shares representing both the equity portion and the cash portion converted to equity.

How to determine the fair value of share-based payments under IFRS 2

Two widely used models to determine fair value are the Black-Scholes-Merton (BSM) model and the binomial (lattice) model.

Regardless of the model, IFRS 2 requires the following key inputs at grant date:

• Exercise price – Price at which the option holder can purchase shares.
• Share price at grant date – Market price of the underlying share.
• Expected volatility – A measure of how much the share price is expected to fluctuate, often based on historical volatility adjusted for future expectations.
• Option life – Expected period until exercise, factoring in early exercise behaviour.
• Risk-free interest rate – Typically the yield on a government bond matching the expected option life.
• Expected dividends – Dividend yield over the expected life of the option.
• Vesting conditions – Tied to the company’s share price or service and performance targets.

Black-Scholes-Merton model vs Binomial model

Black-Scholes-Merton

• Assumes the option is held to maturity and exercised only at expiry.
• Suitable for plain-vanilla options without complex exercise patterns.
• Simpler and widely accepted but less flexible for features like early exercise or vesting restrictions.

Binomial (lattice) model

• Simulates different possible share price paths and exercise behaviours at each step.
• Can incorporate early exercise, vesting restrictions, and changes in volatility.
• More complex but often more accurate for employee share options.

Group share-based payment transactions

IFRS 2 covers cases where one group entity receives goods or services (for example, a subsidiary receives employee services) and another group entity provides the settlement (for example, the parent issues shares or pays cash).

How the subsidiary accounts for parent-issued awards

1. The subsidiary recognises an expense for the services it receives over the vesting period.
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2. The credit side depends on who has the obligation to settle with the employees:

a. No obligation at the subsidiary: credit equity (an equity contribution from the parent). This is the typical case when the parent issues its own shares or pays cash and the subsidiary has no legal or constructive obligation to the employees.

b. Subsidiary has the obligation to settle: classify based on the settlement terms in the subsidiary’s plan:

- If the subsidiary must deliver its own equity instruments, credit equity (equity-settled).

- If the subsidiary must pay cash or other assets, credit a liability and remeasure it at each reporting date (cash-settled).

In consolidation, the award is classified based on how the group will settle overall. If settled in the parent’s own equity instruments, treat as equity-settled at the group level (no liability). If settled in cash by any group entity, treat as cash-settled at the group level (recognise and remeasure a liability).

Disclosure requirements under IFRS 2

IFRS 2 requires entities to provide enough detail in their financial statements for users to understand:

• the nature and scope of share-based payment arrangements
  
• how the fair value of awards is determined
  
• the impact on profit or loss and financial position
  

At a minimum, disclosures should include:

• A description of each type of award (equity-settled or cash-settled)
  
• The number and weighted average exercise price of awards: opening balance, grants, exercises, forfeitures, expiries, and closing balance
  
• Awards vested, unvested, and expected to vest at period-end
  
• Fair value of awards granted, vested, and exercised during the period
  
• Aggregate fair value of outstanding awards, split between vested and unvested
  
• Total expense for the period, split between equity-settled and cash-settled
  
• A roll-forward of awards from opening to closing balance, showing all changes
  
• The valuation method used and key assumptions (volatility, expected life, risk-free rate, dividend yield)
  
• Opening and closing liability balances, along with any remeasurement gains or losses

You can generate and download a complete IFRS 2 disclosure report anytime directly from your EquityList dashboard. Book a demo to know more.

IFRS 2 vs US GAAP (ASC 718)

Both IFRS 2 and US GAAP’s ASC 718 require share-based payments to be measured at fair value and expensed over the vesting period, but there are notable differences:

• Measurement: Under IFRS 2, equity-settled awards are measured at grant-date fair value and not remeasured. Cash-settled awards are remeasured at each reporting date. US GAAP follows the same principle but uses the term “liability-classified” for cash-settled awards.
  
• Forfeitures: IFRS 2 estimates forfeitures at the grant date and adjusts over time. US GAAP recognises forfeitures only when they occur.
  
• Conditions: Both frameworks treat market conditions as part of grant-date fair value, while non-market conditions affect the number of awards expected to vest.
  
• Other differences: Minor variations exist in tax treatment, modification accounting, and presentation, which can affect reported results.

FAQs

1. Which IFRS covers share-based payments?‍

IFRS 2 Share-based Payment, issued by the IASB, sets out how entities account for transactions in which they receive goods or services in exchange for their own equity instruments, or incur liabilities based on the value of those instruments.

2. How is fair value measured?‍

If an observable market price exists for identical or similar equity instruments, it should be used. If not, especially for unlisted companies, valuation models such as Black-Scholes, binomial, or Monte Carlo simulations are applied. These models factor in exercise price, expected term, volatility, risk-free interest rate, and expected dividends.