Cash Settled Share-based Payments as per IFRS 2 INCLUDE the transactions in which the entity acquires goods or services by incurring liability to transfer cash or other assets to the supplier of those goods or services for amounts that are based on the price (or value) of ‘Equity Instruments’ (including Shares or Share Options) of the entity.
What Are Cash Settled Share-based Payments?
A cash settled share-based payment is a transaction in which an entity receives goods or services from employees or other parties, and in return assumes a liability to transfer cash (or other assets) to those parties, where the amount of that liability is based on the price (or value) of the entity’s own equity instruments.
Under IFRS 2 Share-based Payment, a cash settled share-based payment transaction is one where “the entity acquires goods or services by incurring a liability to transfer cash or other assets to the supplier of those goods or services for amounts that are based on the price (or value) of equity instruments (including shares or share options) of the entity or another group entity.”
The defining characteristic is that the settlement is always in cash, the employee never receives actual shares. Instead, the payment amount is indexed to the share price, giving employees economic exposure to share price movements without any transfer of equity.
This stands in contrast to Equity Settled Share-based Payments, where employees receive shares or options as compensation, and the company recognises an equity reserve rather than a liability on its balance sheet.
Common Types & Instruments
Several well-known instruments fall under the cash settled share-based payments umbrella. Understanding each is critical for accurate accounting:
Share Appreciation Rights (SARs)
SARs entitle employees to a cash payment equal to the increase in the company’s share price over a specified base price during the vesting period. They mirror the payoff of share options but always settle in cash. SARs are among the most common cash settled instruments and are explicitly referenced in IFRS 2’s implementation guidance.
Phantom Share Plans
Phantom shares are notional (fictional) shares allocated to employees. At settlement, the employee receives a cash payment equal to the value of those phantom shares at market price. They track share value in full not just appreciation, making them economical equivalents to holding actual shares without conferring ownership rights.
Cash-settled Restricted Share Units (RSUs)
Similar to standard RSUs but settled in cash at the market price on the vesting date rather than through the delivery of actual shares. These are common in jurisdictions where share delivery involves complex regulatory requirements.
Deferred Cash Bonus Plans Linked to Share Price
Some bonus arrangements defer payment and link the final payout to share price performance. Where the payment amount is determined by reference to the entity’s Equity Instruments, these plans fall within the scope of IFRS 2 as cash settled arrangements.
IFRS 2 Recognition Criteria
IFRS 2, effective for annual periods beginning on or after 1 January 2005, is the governing standard for all share-based payment transactions. For cash settled transactions specifically, paragraphs 30–33 set out the recognition and measurement requirements.
When to Recognise
An entity must recognise:
- Services received as an expense in profit or loss (or as an asset where appropriate) as the employee renders service during the vesting period.
- A corresponding liability on the balance sheet, measured at the fair value of the liability at each reporting date.
The Core Recognition Principle
The services received (and the liability) are recognised over the vesting period, the period during which all specified vesting conditions are to be satisfied. This matches the expense recognition to the period in which the economic benefit (services) is received.
Expense Recognition Pattern
If vesting conditions are satisfied evenly over time (straight-line vesting), the expense is recognised on a straight-line basis. If vesting accelerates or is back-loaded, expense must reflect the pattern of service receipt.
Measurement at Fair Value
The measurement of cash settled share-based payments is one of the most technically challenging aspects of IFRS 2. The liability is measured at fair value at every reporting date, not at grant-date fair value as with equity settled awards.
What Does “Fair Value of the Liability” Mean?
For a SAR or phantom share plan, the fair value of the liability is the amount the entity would have to pay if it settled the award today. This is typically estimated using option pricing models (for awards with option-like features) or simply the current share price (for full-value awards like phantom shares).
Option Pricing Models
The most frequently used model for SARs is the Black-Scholes-Merton model, though binomial (lattice) models are also common for awards with complex features. Key inputs include:
- Current share price at the measurement date
- Exercise price (or base price of the SAR)
- Expected volatility of the share price
- Risk-free interest rate over the expected term
- Expected dividends
- Expected term (taking into account employee behaviour)
At Settlement Date
At the date the award is settled (i.e., cash is paid out), any difference between the carrying amount of the liability and the cash paid is recognised in profit or loss. In practice, if the liability has been correctly measured at fair value using the current share price, this difference should be minimal for full-value awards.
Vesting Conditions Explained
Vesting conditions determine when an employee becomes entitled to exercise or receive the award. IFRS 2 classifies conditions into two key categories, and how they are treated differs significantly:
| Condition Type | Examples | Treatment |
|---|---|---|
| Service Condition | Employee must remain employed for 3 years | Recognised over the vesting period; forfeitures adjust the cumulative expense |
| Performance Condition — Non-market | EPS must grow by 10% over 3 years | Included in the estimate of awards expected to vest; revised if performance expectations change |
| Performance Condition — Market | TSR must exceed a peer group index | Factored into the fair value measurement at grant date; not revised subsequently even if the condition is not met |
| Non-vesting Condition | Employee must hold shares acquired on exercise | Factored into fair value; no revision if condition not met |
Journal Entries & Accounting Treatment
The general accounting treatment for cash settled share-based payments follows a consistent pattern across each reporting period from grant date to settlement. Here is how the entries flow:
Each Reporting Date During Vesting
At each balance sheet date, the entity recognises a portion of the total expected cost, adjusted for the remeasured fair value of the liability:
The credit accumulates on the balance sheet as a current or non-current liability depending on the expected settlement date. The debit is recognised in profit or loss as employee compensation expense (or capitalised if the services relate to a qualifying asset).
On Remeasurement (Between Vesting and Settlement)
If the award has vested but not yet been exercised (where exercise is at the employee’s discretion), the liability continues to be remeasured. Changes in fair value go to profit or loss:
On Settlement (Cash Payment)
Any difference between the carrying amount of the liability and cash paid is recognised in profit or loss at settlement.
Worked Example: Share Appreciation Rights
On 1 January 2024, Entity XYZ grants 1,000 SARs to a senior executive. The SARs vest after 3 years of continuous service (service condition only) and will be settled in cash based on the share price appreciation above the base price of $20 per share.
Assume the following fair values (determined using Black-Scholes):
| Date | Share Price | Fair Value per SAR | Awards Expected to Vest |
|---|---|---|---|
| 31 Dec 2024 | $24 | $6.40 | 1,000 |
| 31 Dec 2025 | $27 | $9.10 | 1,000 |
| 31 Dec 2026 (vesting) | $30 | $10.00 | 1,000 |
| Settlement (30 Jun 2027) | $32 | $12.00 (intrinsic) | — |
Expense Calculation
| Year | Cumulative Liability | Prior Liability | Expense for Year |
|---|---|---|---|
| 2024 | $6.40 × 1,000 × 1/3 = $2,133 | $0 | $2,133 |
| 2025 | $9.10 × 1,000 × 2/3 = $6,067 | $2,133 | $3,934 |
| 2026 | $10.00 × 1,000 × 3/3 = $10,000 | $6,067 | $3,933 |
| 2027 (to settlement) | $12.00 × 1,000 = $12,000 | $10,000 | $2,000 (remeasurement) |
Total expense recognised over the life of the award: $12,000 exactly the cash paid out at settlement. The remeasurement ensures the liability always equals the intrinsic value at each reporting date, eliminating any settlement difference.
Cash vs Equity Settled: Key Differences
The distinction between cash settled share-based payments and equity settled share-based payments has profound implications for financial reporting. Understanding the differences is essential for anyone working in financial reporting, compensation design, or equity research.
| Feature | Cash Settled | Equity Settled |
|---|---|---|
| Balance sheet impact | Liability recognised | Equity reserve recognised |
| Measurement basis | Fair value remeasured at each reporting date | Grant-date fair value locked in |
| P&L volatility | High — driven by share price movements | Low — fixed expense spread over vesting period |
| Dilution | No dilution to existing shareholders | Dilutive — increases shares outstanding |
| Cash flow impact | Operating / financing cash outflow at settlement | No direct cash outflow (proceeds if exercised) |
| Tax deductibility | Typically deductible when cash is paid | Varies significantly by jurisdiction |
| Employee perception | Clear, predictable cash value | Value depends on share price at exercise |
| Employer risk | Employer bears all share price risk | Employee bears share price risk post-grant |
Disclosure Requirements under IFRS 2
IFRS 2 paragraphs 44–52 require extensive disclosures for share-based payment arrangements. For cash settled share-based payments specifically, the following disclosures are mandatory:
Nature & Terms of Arrangements
- Description of each type of cash settled arrangement (e.g., SARs, phantom shares)
- Vesting conditions, contractual life, settlement terms
- Number of instruments granted, exercised, forfeited, expired during the period
Fair Value Information
- Weighted average Fair Value of the liability at period end
- Valuation methodology used (e.g., Black-Scholes, binomial model)
- Key model inputs: expected volatility, expected term, risk-free rate, expected dividends
- How expected volatility was determined (historical vs implied)
Financial Statement Impact
- Total expense for cash settled arrangements recognised in the period
- Carrying amount of the liability at period end
- Intrinsic value of vested liabilities (where the employee has an unconditional right to cash but settlement has not yet occurred)
Reconciliation of Outstanding Awards
IFRS 2 requires a reconciliation of the number of awards outstanding at the beginning and end of the period, showing grants, exercises, forfeitures, and expirations. For cash settled awards with exercise prices, the weighted average exercise price must also be disclosed.
Frequently Asked Questions
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