IFRS 2 Share-based Payment specifies how an entity reports transactions in which it receives goods or services and pays with its own equity instruments, or with cash or other assets in amounts based on the price of those instruments. The aim is to reflect the effects in profit or loss and financial position, including the expense when share options are granted to employees (IFRS 2.1). The Standard applies to all such transactions, whether or not the entity can identify specifically the goods or services received (IFRS 2.2).
Three types of share-based payment
IFRS 2 covers three types of transaction (IFRS 2.2):
| Type | What the entity gives | Credit side | Remeasured later? |
|---|---|---|---|
| Equity-settled | Its own equity instruments, or the transaction is one it has no obligation to settle (IFRS 2, Appendix A) | Equity (IFRS 2.7) | No: equity instruments granted to employees are measured at grant date (IFRS 2.11) |
| Cash-settled | Cash or other assets in amounts based on the price of its (or a group entity's) equity instruments (IFRS 2, Appendix A) | Liability (IFRS 2.7) | Yes, at each reporting date until settled (IFRS 2.30) |
| With a cash alternative | Either, depending on the terms | Liability if, and to the extent that, the entity has incurred a liability to settle in cash; otherwise equity (IFRS 2.34) | See below |
Where the counterparty can choose cash or shares, the entity has granted a compound financial instrument with a debt component and an equity component (IFRS 2.35). Where the entity chooses, it accounts for the award as cash-settled if it has a present obligation to settle in cash, for example because it has a past practice or stated policy of doing so (IFRS 2.41–42); otherwise as equity-settled (IFRS 2.43).
Outside the scope: transactions with an employee in their capacity as a holder of equity instruments, such as a rights issue open to all holders of a class (IFRS 2.4); goods acquired as part of the net assets in a business combination, in a combination of entities or businesses under common control, or on the contribution of a business to form a joint venture (IFRS 2.5); and contracts to buy or sell non-financial items that fall within the scope of IAS 32 and IFRS 9 (IFRS 2.6).
Recognition: when, and against what
The entity recognises the goods or services when it obtains the goods or as the services are received, with a corresponding increase in equity (equity-settled) or a liability (cash-settled) (IFRS 2.7). If they do not qualify as assets, they are expensed (IFRS 2.8). Timing follows the vesting terms:
- Immediate vesting: without evidence to the contrary, the services are presumed received, so the full amount is recognised at grant date (IFRS 2.14).
- A service period: the services are recognised as they are rendered during the vesting period. Options conditional on three years' service are recognised over those three years (IFRS 2.15).
Measurement: grant date and fair value
For equity-settled transactions the entity measures the goods or services received directly at their fair value, unless that cannot be estimated reliably, in which case it measures them by reference to the fair value of the equity instruments granted (IFRS 2.10).
- Employees and others providing similar services: the entity measures the services by reference to the fair value of the equity instruments granted, because it is typically not possible to estimate the fair value of the services reliably. That fair value is measured at grant date (IFRS 2.11).
- Other parties: there is a rebuttable presumption that the fair value of the goods or services can be estimated reliably, measured at the date the goods are obtained or the service is rendered (IFRS 2.13). If the identifiable consideration appears to be less than the fair value of the instruments granted, this typically indicates unidentifiable goods or services, measured as the difference (IFRS 2.13A).
Grant date is when the entity and the counterparty have a shared understanding of the terms and conditions; if the agreement needs approval, for example by shareholders, it is the date that approval is obtained (IFRS 2, Appendix A). The fair value of the instruments is based on market prices if available (IFRS 2.16); otherwise on a valuation technique consistent with generally accepted methodologies for pricing financial instruments, such as an option pricing model (IFRS 2.17). In rare cases where fair value cannot be estimated reliably, intrinsic value is used and remeasured until settlement (IFRS 2.24).
IFRS 2 uses its own definition of fair value, so an entity measures it under IFRS 2, not IFRS 13 (IFRS 2.6A). IFRS 13's measurement and disclosure requirements do not apply to these transactions (IFRS 13.6). For the general framework, see IFRS 13 Fair Value Measurement.
Vesting conditions and non-vesting conditions
A vesting condition determines whether the entity receives the services that entitle the counterparty to the award. It is either a service condition, which requires a specified period of service, or a performance condition, which requires service plus a performance target (IFRS 2, Appendix A). A target defined by the entity's own operations is a non-market condition; one based on the price of its equity instruments is a market condition (IFRS 2, Appendix A).
| Condition | In grant-date fair value? | Effect on the amount recognised |
|---|---|---|
| Service, or non-market performance (e.g. profit growth) | No (IFRS 2.19) | The number of instruments expected to vest is estimated and revised; if the condition is not met, nothing is recognised on a cumulative basis (IFRS 2.19–20) |
| Market performance (e.g. a target share price) | Yes (IFRS 2.21) | Expense is recognised if all other vesting conditions are met, even if the market condition is not (IFRS 2.21) |
| Non-vesting condition | Yes (IFRS 2.21A) | Expense is recognised if all non-market vesting conditions are met, whether or not the non-vesting condition is (IFRS 2.21A) |
If the entity or the counterparty can choose whether to meet a non-vesting condition, failure to meet it during the vesting period is treated as a cancellation (IFRS 2.28A). After vesting date, total equity is not adjusted: the expense is not reversed if vested instruments are later forfeited or options are not exercised, though a transfer within equity is allowed (IFRS 2.23).
Worked example: equity-settled options with true-up
Illustrative figures only:
- On 1 January of Year 1 an entity grants 100 share options to each of its 50 employees, conditional on three years' service (a service condition only).
- The grant-date fair value is 12 per option, estimated with an option pricing model.
- End of Year 1: 5 employees are expected to leave over the three years. End of Year 2: the estimate rises to 8. In fact 7 leave, so 43 employees vest.
| Year | Options expected to vest | Cumulative expense | Expense for the year |
|---|---|---|---|
| 1 | 45 × 100 = 4,500 | 4,500 × 12 × 1/3 = 18,000 | 18,000 |
| 2 | 42 × 100 = 4,200 | 4,200 × 12 × 2/3 = 33,600 | 15,600 |
| 3 | 43 × 100 = 4,300 (actual) | 4,300 × 12 = 51,600 | 18,000 |
The grant-date fair value of 12 never changes; only the number of options is trued up (IFRS 2.19–20). The Year 2 entry:
| Account | Debit | Credit |
|---|---|---|
| Employee benefits expense | 15,600 | |
| Equity: share-based payment reserve | 15,600 |
How the conditions change the result, using the same facts:
- Non-market target missed. If vesting also required a cumulative profit target, expected to be met at the end of Years 1 and 2 but missed in Year 3, the cumulative expense falls to zero, so Year 3 shows a reversal of 33,600 (IFRS 2.19).
- Market target missed. If vesting instead required a target share price, the grant-date fair value would already reflect it (say 9 instead of 12). The entity would still recognise 4,300 × 9 = 38,700 even if the price is not reached, because the 43 employees completed the service (IFRS 2.21).
- After vesting. If 300 vested options lapse unexercised in Year 5, the 51,600 is not reversed (IFRS 2.23).
Cash-settled awards
For cash-settled transactions, the entity measures the goods or services and the liability at the fair value of the liability, and remeasures that fair value at the end of each reporting period and at settlement, with changes in profit or loss (IFRS 2.30). A typical example is share appreciation rights (SARs), under which employees receive cash based on the increase in the share price (IFRS 2.31). The services and liability are recognised as employees render service (IFRS 2.32), and the liability reflects the extent of service rendered to date (IFRS 2.33).
Non-market vesting conditions adjust the number of awards included in the liability (IFRS 2.33A–33B), while market and non-vesting conditions are reflected in fair value at each remeasurement (IFRS 2.33C). The cumulative expense therefore equals the cash ultimately paid (IFRS 2.33D).
If the example's awards were SARs with a fair value of 14 at the end of Year 1 and 15 at the end of Year 2, the liability would be 4,500 × 14 × 1/3 = 21,000 at the end of Year 1 and 4,200 × 15 × 2/3 = 42,000 at the end of Year 2, an expense of 21,000 in each year.
An award with a net settlement feature for withholding an employee's tax obligation is classified wholly as equity-settled if it would have been so classified without that feature (IFRS 2.33E–33F).
Modifications and cancellations
- Floor: whatever the modification, cancellation or settlement, the entity recognises at least the grant-date fair value of the instruments, unless they fail to vest because a non-market vesting condition specified at grant date is not met (IFRS 2.27).
- Beneficial modifications: for a modification during the vesting period, the incremental fair value, measured at the modification date, is recognised over the period from the modification date until the modified instruments vest, on top of the original grant-date amount (IFRS 2.B43).
- Unfavourable modifications: the entity keeps accounting as if the modification had not occurred, except that a reduction in the number of instruments granted is accounted for as a cancellation of that portion (IFRS 2.B44).
- Cancellation or settlement during the vesting period (other than forfeiture because the vesting conditions are not met): treated as an acceleration of vesting, so the remaining amount is recognised immediately. A payment to the employee is a deduction from equity, except any excess over the fair value of the instruments at the repurchase date, which is expensed (IFRS 2.28).
Group arrangements
An award may be settled by another group entity or a shareholder on behalf of the entity receiving the goods or services, and it remains within IFRS 2 (IFRS 2.3A). In its separate or individual financial statements:
- The entity receiving the services treats the award as equity-settled if the awards are its own equity instruments or it has no obligation to settle; otherwise as cash-settled (IFRS 2.43B). Its amount may differ from that of the group or of the settling entity (IFRS 2.43A).
- The settling entity treats it as equity-settled only if it settles in its own equity instruments; otherwise as cash-settled (IFRS 2.43C).
- Intragroup recharges do not change the receiving entity's accounting (IFRS 2.43D).
Disclosures
The entity discloses information about the nature and extent of its arrangements (IFRS 2.44), how fair value was determined (IFRS 2.46), and the effect on profit or loss and financial position (IFRS 2.50), including the total expense for the period and the equity-settled portion (IFRS 2.51).
What has changed, and current status
- The International Accounting Standards Board (IASB) issued IFRS 2 in February 2004. It amended the Standard in January 2008 and, in June 2009, incorporated the guidance of IFRIC 8 and IFRIC 11 on scope and on group and treasury share transactions (IFRS Foundation).
- In June 2016 the IASB issued Classification and Measurement of Share-based Payment Transactions, which clarified vesting and non-vesting conditions in cash-settled awards, net settlement for withholding tax, and modifications that change an award from cash-settled to equity-settled (IFRS Foundation). The amendments apply for annual periods beginning on or after 1 January 2018 (IFRS Foundation).
- Since then only minor consequential amendments have been made, the latest listed being Definition of Material (October 2018) (IFRS Foundation). IFRS 2 does not appear among the Standards amended by requirements effective for annual periods beginning on or after 1 January 2026, or by IFRS 18 or IFRS 19 (IFRS Foundation: changes in the 2026 edition).
Related Standards and a practical tool
- Other employee benefits fall under IAS 19, which excludes benefits covered by IFRS 2 (IAS 19.2): see Analysis of IAS 19 Employee Benefits.
- In an acquisition, the acquiree's awards and replacement awards are measured using the IFRS 2 method (IFRS 3.30): see IFRS 3 Business Combinations.
- The reserve movement is presented in the statement of changes in equity.
- The Full IFRS Bundle brings together practical models for applying several Standards.
Sources
- IFRS Foundation: IFRS 2 Share-based Payment. References in brackets are to paragraphs of the Standard and its appendices.
- IFRS Foundation: IFRS 13 Fair Value Measurement, IAS 19 Employee Benefits, IFRS 3 Business Combinations.
- IFRS Foundation project page: Classification and Measurement of Share-based Payment Transactions (2016).
- IFRS Foundation: Changes in this edition (2026).