IFRS 2 Share-Based Payments: A Practical Guide for Finance Teams
How IFRS 2 works in practice — equity-settled vs cash-settled awards, Black-Scholes inputs, and disclosure requirements.
What Is IFRS 2?
IFRS 2 Share-Based Payments governs the accounting for transactions where an entity receives goods or services in exchange for equity instruments (shares or share options) or cash payments based on the price of its equity. Share-based payment accounting is a significant area for technology companies, PE-backed businesses, and any organisation that uses equity incentives as part of its compensation structure.
Equity-Settled vs Cash-Settled
Equity-settled awards (share options, RSUs, EMI options): The fair value is measured at the grant date and recognised as an expense over the vesting period, with a corresponding credit to equity. The fair value is not subsequently remeasured — changes in share price after grant date do not affect the P&L charge. Cash-settled awards (SARs, phantom shares): The liability is measured at fair value at each balance sheet date until settlement, with all changes in fair value recognised in P&L. This creates volatility in the income statement that equity-settled awards do not.
Measuring Fair Value for Options
The fair value of share options is typically calculated using an option pricing model — most commonly the Black-Scholes model for standard European options, or a binomial/Monte Carlo model for more complex awards with market-based vesting conditions. Key inputs: current share price, exercise price, expected term, expected volatility (often using historical share price volatility as a proxy), risk-free interest rate, and expected dividends. The finance team typically works with remuneration advisers or valuation specialists on these calculations.
Vesting Conditions
Service conditions and non-market performance conditions (e.g. EPS growth targets) affect the number of awards expected to vest — the IFRS 2 charge is adjusted based on the best estimate of awards that will vest. Market-based conditions (e.g. TSR targets) are incorporated into the grant date fair value — they do not affect the number of awards used in the accrual calculation once granted.
EMI Options in UK Companies
Enterprise Management Incentive (EMI) options are a UK tax-advantaged share option scheme for qualifying companies. Under EMI, employees receive favourable capital gains tax treatment on exercise gains. The IFRS 2 accounting is the same as for other equity-settled options — grant date fair value expensed over the vesting period.
Further Reading
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