IFRS 2 Share-Based Payments - Summary

IFRS 2 Share-Based Payments

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IFRS Summaries by Imad Uddin, FRM

Objective of IFRS 2

Ensure that entities reflect in their financial statements the effects of share-based payment transactions.
This includes transactions where an entity receives goods or services as consideration for its equity instruments (e.g., shares or share options) or for cash amounts based on the price of its equity instruments.
Requires recognition of an expense (or an asset, if criteria met) when goods or services are received.

Scope

Applies to all share-based payment transactions including:
Equity-settled share-based payment transactions.
Cash-settled share-based payment transactions.
Transactions where the entity or the counterparty has a choice of whether the entity settles in cash or by issuing equity instruments.
Applies to transactions with both employees (and others providing similar services) and non-employees (e.g., suppliers of goods or services).
Includes transfers of equity instruments of the entity's parent, or another group entity, to parties that have supplied goods or services to the entity (group schemes).
IFRS 2 does not apply to transactions where an entity acquires goods as part of the net assets acquired in a business combination (IFRS 3), nor to transactions involving financial instruments covered by IAS 32/IFRS 9 (unless they are consideration for goods/services).

Types of Share-Based Payment Arrangements

Type Description Settlement Basis
Equity-settled Entity receives goods or services as consideration for its own equity instruments (e.g., shares or share options) or equity instruments of another group entity. Equity Instruments
Cash-settled Entity acquires goods or services by incurring a liability to transfer cash or other assets to the supplier, for amounts based on the price (or value) of the entity's equity instruments (e.g., Share Appreciation Rights - SARs). Cash
Choice of Settlement Arrangements where the entity or the counterparty has the choice of whether the entity settles the transaction in cash (or other assets) or by issuing equity instruments. Depends on who has choice & terms

Recognition and Measurement – Equity-Settled

Recognition Date (Grant Date):

Grant date is the date at which the entity and the counterparty (employee or supplier) agree to a share-based payment arrangement. Agreement is evidenced when both parties have a shared understanding of the terms and conditions.

Measurement Basis:

Measure the goods or services received, and the corresponding increase in equity, directly at the fair value of the goods/services received, unless that fair value cannot be estimated reliably.
If fair value of goods/services cannot be reliably estimated (typically for employee services), measure their value indirectly by reference to the fair value of the equity instruments granted, measured at grant date.
Fair value of equity instruments is not remeasured after grant date for market-based vesting conditions or intrinsic value changes.

Recognition of Expense:

Recognize the goods or services received over the vesting period – the period during which all specified vesting conditions are to be satisfied.
Expense is recognized with a corresponding increase in equity (e.g., in an account such as 'Share-based Payment Reserve' or 'Other Capital Reserves').
If goods/services vest immediately, recognize expense in full on grant date.

Vesting Conditions:

Vesting conditions determine whether the entity receives the services that entitle the counterparty to the share-based payment.
Type Description Impact on Accounting
Service Conditions Require the counterparty to complete a specified period of service. Cumulative expense reflects elapsed service period and best estimate of instruments expected to vest (considering expected forfeitures due to failure to meet service conditions). Estimate is trued up to actual.
Performance Conditions Require specific performance targets to be met. Further classified into Market or Non-Market conditions. Expense recognition depends on probability of meeting the condition.
- Market Conditions Conditions relating to the market price of the entity's equity instruments (e.g., share price target, TSR relative to index). Included in grant date fair value of the instrument (using appropriate option pricing models). Expense recognized irrespective of whether market condition is met, provided all other (e.g., service) conditions are met. No true-up for market conditions.
- Non-Market Conditions Conditions not relating to market price (e.g., achieving profit target, revenue growth, completion of a project). NOT included in grant date fair value. Instead, estimate and update number of instruments expected to vest based on probability of achieving the condition. Cumulative expense is trued up to reflect actual outcome.
Non-Vesting Conditions Other conditions not related to service or performance (e.g., employee must not join a competitor, or a requirement to remain employed by a specific subsidiary that is not linked to service to the group). These are rare for employee SBP. Treated similarly to market conditions; included in grant date fair value. Expense recognized provided other conditions met, regardless of non-vesting condition outcome.

Modifications, Cancellations, and Settlements:

If terms are modified in a way that increases the total fair value of the award granted to the counterparty (or is otherwise beneficial), recognize the incremental fair value granted over the remaining vesting period (in addition to original grant date FV).
If a modification reduces total fair value or is not beneficial, continue to account for the original grant as if modification had not occurred (unless it results in forfeiture).
Cancellation or settlement by the entity: Treat as an acceleration of vesting; recognize immediately the amount that would otherwise have been recognized for services received over the remainder of the vesting period. Any payment made on cancellation is treated as repurchase of equity interest (up to FV of award), excess as expense.

Recognition and Measurement – Cash-Settled

Measurement Basis:

Acquire goods/services by incurring a liability to transfer cash/other assets for amounts based on the price/value of entity's equity instruments.
Measure the liability initially and at each reporting date until settled, at the fair value of the liability.
Changes in the fair value of the liability are recognized in profit or loss for the period.
Services received are expensed over the vesting period.

Example: Share Appreciation Rights (SARs)

Employees are entitled to a future cash payment equal to the increase in the entity's share price from a specified level over a specified period.
The fair value of the SARs (the liability) is recognized as an expense over the service/vesting period. The liability is remeasured at each reporting date and at settlement date, with changes in fair value going to P&L.

Recognition – Choice of Settlement

Entity Has Choice of Settlement (Equity or Cash):

If the entity has a present obligation to settle in cash (e.g., no practical ability to refuse cash settlement if chosen), account for it as a cash-settled transaction.
If the entity has no present obligation to settle in cash (i.e., it can choose equity or has a practice of equity settlement), account for it as an equity-settled transaction.
If the entity issues a compound instrument (e.g., debt convertible into shares at entity's option), it separates the debt (liability) and equity components per IAS 32. The share-based payment aspect relates to the equity component.

Counterparty Has Choice of Settlement (Equity or Cash):

This is a compound financial instrument with both a debt (cash settlement option) and an equity (equity settlement option) component.
For goods/services from non-employees: Measure equity component as residual after deducting FV of debt component from FV of compound instrument.
For transactions with employees: Measure fair value of both components separately. Sum of FVs may exceed FV of goods/services received; difference is expense.
Liability component is remeasured at each reporting date with changes to P&L. Equity component is not remeasured. On settlement, liability derecognized, equity issued if that option chosen.

Fair Value Measurement

Inputs to Valuation Models for Options/Shares:

Factor Notes
Exercise Price Price at which holder can buy shares.
Expected Life of Option Period until exercise/lapse; considers vesting, employee behaviour.
Current Share Price Share price at grant date.
Expected Volatility Estimate of share price fluctuation over option's life. Based on historical/implied volatility.
Risk-free Interest Rate Yield on government bonds with term similar to expected life.
Expected Dividends Anticipated dividends on underlying shares during option's life (reduces option value).

Valuation Methods:

Option pricing models (e.g., Black-Scholes-Merton, binomial model) are commonly used for share options.
For awards with market conditions or complex features, more sophisticated models like Monte Carlo simulation may be necessary.
If fair value of equity instruments cannot be reliably estimated (very rare for listed entities), use intrinsic value, remeasuring until final settlement.

Group Share-Based Payments

Payments Settled by Parent or Another Group Entity (Equity-Settled):

When a parent grants rights to its equity instruments to employees of its subsidiary:
The subsidiary measures the services received as an equity-settled SBP, with a corresponding increase in equity (as a capital contribution from the parent).
The parent recognizes an increase in its investment in the subsidiary.
When a subsidiary grants rights to equity instruments of its parent to its own employees:
The subsidiary accounts for it as an equity-settled SBP.

Group Cash-Settled Schemes:

If a subsidiary's employees receive cash-settled awards based on the parent's equity price:
The subsidiary recognizes the expense and liability if it has the obligation to settle.
If the parent has the obligation to settle, the subsidiary still recognizes the expense, but the credit is to equity (as a capital contribution), and the parent recognizes the liability.

Disclosures

General Disclosure Objectives:

Enable users to understand the nature and extent of share-based payment arrangements existing during the period.
Enable users to understand how the fair value of goods/services received, or equity instruments granted, was determined.
Enable users to understand the effect of SBP transactions on the entity's profit or loss and financial position.

Required Information (Examples):

Item Category Disclosure Requirement Detail
Description of Arrangements Type of SBP arrangement (e.g., share option plan, SAR plan), general terms and conditions (vesting requirements, maximum term, settlement method).
Number & Terms of Instruments Reconciliation of number of share options/equity instruments outstanding (opening, granted, forfeited, exercised, expired, closing). Weighted average exercise prices. Range of exercise prices and weighted average remaining contractual life for outstanding options.
Fair Value Determination For equity instruments granted: Weighted average fair value at grant date. How fair value was measured (model used, key inputs like share price, exercise price, volatility, expected life, dividends, risk-free rate).
Expense Recognized Total expense recognized in P&L for the period. Total carrying amount at period end for liabilities arising from cash-settled SBP. Total intrinsic value at period end of vested liabilities.

Practical Example (Equity-Settled)

Example: Share Option Plan

Entity grants 1,000 share options to an employee.
Vesting period: 3 years, conditional on the employee remaining in service.
Fair value per option at grant date: $5.
Total expense to be recognised: 1,000 options Γ— $5/option = $5,000.
Expense per year (assuming linear vesting, no expected forfeitures initially): $5,000 / 3 years = $1,667.
Journal Entry Each Year (for 3 years):
Dr. Employee Benefit Expense $1,667
Cr. Equity (Share-based Payment Reserve) $1,667
If forfeitures are expected or occur, the expense is adjusted.

Practical Example (Cash-Settled)

Example: Share Appreciation Rights (SARs)

Entity grants 500 SARs to an employee. Payment based on share price increase from grant date.
Vesting period: 2 years.
Fair Value Estimates:
End of Year 1: $4 per SAR.
End of Year 2 (Vesting Date): $6 per SAR.
Accounting (assuming linear vesting):
End of Year 1:
Liability = 500 SARs Γ— $4 Γ— (1/2 vested) = $1,000.
Dr. Employee Benefit Expense $1,000
Cr. Liability (SARs) $1,000
End of Year 2:
Cumulative Liability needed = 500 SARs Γ— $6 = $3,000.
Liability already recognized = $1,000.
Expense for Year 2 = $3,000 - $1,000 = $2,000.
Dr. Employee Benefit Expense $2,000
Cr. Liability (SARs) $2,000
At settlement, the final liability (based on share price at exercise) is paid in cash and the liability is derecognized.
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Disclaimer: These IFRS summaries are provided for educational purposes only.

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Imad Uddin is deeply passionate about IFRS and has founded Analyqt, a consulting firm dedicated to helping clients navigate complex accounting and financial reporting challenges. In addition to his advisory work, Imad is committed to education and knowledge-sharing, which led to the creation of IFRSMasterclass.com, a platform offering high-quality IFRS training and resources.

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