IFRS 2 Share-Based Payments: A Practical Guide for Finance Teams

IFRS 2 Share-based Payment governs how a business accounts for paying for goods or services with its shares, share options, or cash amounts based on its share price — most commonly, employee share schemes. Its central idea is that these arrangements have a real cost that belongs in the financial statements, even though no cash may change hands. This guide explains the two main types, how each is measured, how vesting conditions are handled, and why IFRS 2 is one of the more judgemental standards. For structured learning, see our financial reporting CPD.

What is IFRS 2?

IFRS 2 applies whenever an entity receives goods or services and pays for them using equity instruments (such as shares or share options) or amounts that depend on its share price. The classic example is granting share options to employees: the employee provides services, and the company "pays" partly in options. IFRS 2 requires the entity to recognise the cost of these arrangements as an expense (or, in some cases, an asset) — bringing what used to be an off-statement perk onto the income statement.

The two main types

The accounting depends on how the arrangement is settled:

• Equity-settled — the entity settles by issuing its own equity instruments (for example, shares or share options).
• Cash-settled — the entity settles in cash, with the amount based on its share price (for example, share appreciation rights).

Some arrangements give a choice of settlement, but the equity-settled and cash-settled models are the foundation.

Equity-settled: measure at grant-date fair value

For equity-settled transactions, the cost is measured at the fair value of the equity instruments at the grant date. Crucially, that fair value is fixed at grant date and not remeasured for later changes in the share price. The total is recognised as an expense over the vesting period — the period over which the employee earns the award — with a corresponding credit to equity. So even if the options later become more or less valuable, the expense is based on the original grant-date value.

Cash-settled: remeasure each period

Cash-settled transactions work differently. Here the entity recognises a liability, measured at the fair value of that liability, and remeasures it at the end of each reporting period until it's settled, taking changes through profit or loss. Because the eventual payment is in cash and tied to the share price, the liability has to keep tracking fair value — unlike the fixed grant-date measurement used for equity-settled awards.

How vesting conditions are treated

Awards usually only vest if certain conditions are met, and IFRS 2 treats them in two distinct ways:

• Service conditions and non-market performance conditions (e.g. staying employed for three years, or hitting a profit target) are not built into the grant-date fair value. Instead, you adjust the number of awards expected to vest, revising that estimate over the vesting period so the cumulative expense reflects how many awards actually vest.
• Market conditions (e.g. the share price reaching a target) and non-vesting conditions are built into the fair value at grant date, and are not subsequently trued up — so the expense stands even if a market condition isn't ultimately met.

Where the cost lands in the accounts

Whichever model applies, the expense is generally recognised in profit or loss over the vesting period, matching the cost to the services received. The other side of the entry differs: equity-settled awards build up a balance within equity, while cash-settled awards build up a liability that is settled in cash. Working out which side of the balance sheet an arrangement affects — equity or liabilities — is often the quickest way to sanity-check that it has been classified correctly in the first place.

Why IFRS 2 is challenging

The difficulty is valuation and judgement. Measuring fair value often requires an option-pricing model (such as Black-Scholes), with assumptions about volatility, expected life and more. Estimating how many awards will vest involves forecasting staff turnover and performance. And the distinction between market and non-market conditions changes the accounting materially. Because the amounts can be significant and the assumptions subjective, IFRS 2 is a common area of audit focus — particularly for listed companies and high-growth businesses that use equity heavily to reward people.

Frequently asked questions

What's the difference between equity-settled and cash-settled?

Equity-settled is settled in the entity's own shares or options and measured at grant-date fair value (fixed); cash-settled is settled in cash based on the share price and remeasured to fair value each period.

Are share options an expense?

Yes. IFRS 2 requires the cost of share-based payments, including employee share options, to be recognised — typically as an expense over the vesting period.

When is the fair value measured?

For equity-settled awards, at grant date, and it isn't remeasured afterwards. For cash-settled awards, fair value is remeasured at each reporting date until settlement.

How are performance conditions handled?

Service and non-market performance conditions adjust the number of awards expected to vest; market conditions are reflected in the grant-date fair value instead.

Strengthen your reporting knowledge with Learnsignal

IFRS 2 rewards a clear grasp of the principles behind the numbers. Learnsignal's financial reporting CPD helps finance professionals master share-based payments and the wider standards, with flexible, expert-led learning that fits around work.