IFRS 2: Share-based payment
Equity-settled share options valued at grant date and spread over the vesting period, and cash-settled share appreciation rights remeasured each year.
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
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What it is: How a company accounts for paying people with shares or share options, or with cash linked to its share price.
The key idea: it is still an expense, spread over the vesting period (the time staff must work to earn it). Share options are valued once, at the grant date, and credited to equity. Cash-settled awards are a liability revalued every year.
Example. 50 staff get 100 options each, worth £6 an option at grant, if they stay 3 years. If 45 are expected to stay, year 1 expense = 45 × 100 × £6 × 1/3 = £9,000.
Key words
- Equity-settled
- The company receives services and pays with its own equity instruments (shares or share options).Example: Share options for directors.
- Cash-settled
- The company pays cash, but the amount depends on its share price.Example: Share appreciation rights (SARs) paid in cash.
- Grant date
- The date the company and employee agree the arrangement. Equity-settled awards to employees are measured at fair value at this date.Example: Options granted on 1 January 20X1.
- Vesting period
- The period over which all the conditions (for example, staying employed) must be met.Example: A 3-year service condition.
- Vesting conditions
- Service conditions and performance conditions. Market conditions (share price targets) are built into the grant-date fair value; others affect how many awards are expected to vest.Example: Stay 3 years and grow profit by 10% a year.
Learn
Equity-settled
Dr Expense, Cr Equity (often “other components of equity”). For employees, measure at the fair value of the options at grant date. That value is never changed. What changes each year is the estimate of how many will vest (for service and non-market performance conditions).
Cumulative method. Expense to date = number expected to vest × options each × grant-date fair value × years passed ÷ vesting years. This year’s charge = expense to date − expense already recognised.
- If options vest but are never exercised (for example, the share price falls), the expense is not reversed.
- A market condition (such as a share price target) is already in the grant-date fair value, so there is no adjustment if it isn’t met.
- A cancellation is treated as an acceleration of vesting: the rest of the expense is recognised at once.
Cash-settled
Dr Expense, Cr Liability. Measure the liability at the fair value at each reporting date (and at settlement), with changes in profit or loss. The same cumulative approach applies, but using the current fair value each year.
| Equity-settled | Cash-settled | |
|---|---|---|
| Credit | Equity | Liability |
| Fair value used | Grant date, fixed | Each reporting date |
| Example | Share options | Share appreciation rights |
For goods or services from non-employees, equity-settled payments are measured at the fair value of the goods or services received, if that can be estimated reliably.
Worked example
On 1 January 20X1 a company grants 100 share options to each of 50 employees, conditional on 3 years’ service. The grant-date fair value is £6 per option. At the end of 20X1 it expects 45 employees to stay; at the end of 20X2, 42; at the end of 20X3, 40 actually vest.
| Year | Expense to date | £ | Charge for the year £ |
|---|---|---|---|
| 20X1 | 45 × 100 × £6 × 1/3 | 9,000 | 9,000 |
| 20X2 | 42 × 100 × £6 × 2/3 | 16,800 | 7,800 |
| 20X3 | 40 × 100 × £6 × 3/3 | 24,000 | 7,200 |
| Account | Dr £ | Cr £ |
|---|---|---|
| Staff costs | 7,800 | |
| Equity (share options reserve) | 7,800 | |
| (the 20X2 charge) | ||
If they were cash-settled SARs instead, and a SAR’s fair value at the end of 20X1 was £8, the year-1 liability would be 45 × 100 × £8 × 1/3 = £12,000, recalculated at each year end with the new fair value.
Practice questions
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