IFRS 2 Share-Based Payment is an International Financial Reporting Standard that specifies the financial reporting for transactions in which an entity receives goods or services as consideration for equity instruments, or incurs liabilities for share-based amounts.

When was IFRS 2 effective?

IFRS 2 was issued in February 2004 and is effective for annual periods beginning on or after 1 January 2005.

What are vesting conditions under IFRS 2?

Vesting conditions are conditions that must be satisfied for the counterparty to become entitled to receive cash, other assets, or equity instruments. They include service conditions and performance conditions (market and non-market).

Master IFRS 2 | Share-Based Payments Explained

The ‘OBJECTIVE’ of IFRS 2 is to Specify the ‘financial reporting’ by an entity when it undertakes a share‑based payment transaction. In particular, it requires an entity to reflect in its profit or loss and financial position the effects of share‑based payment transactions, INCLUDING expenses associated with transactions in which ‘share options‘ are granted to employee(s).

IFRS Standards · Share-Based Payment

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📅 Effective: 1 Jan 2005 · 📄 Issued: Feb 2004 · 🏛 IASB Standard

01 · Overview

What Is IFRS 2? Objective & Purpose

IFRS 2 Share-Based Payment is the International Financial Reporting Standard that prescribes how entities should account for transactions in which they receive goods or services as consideration for issuing equity instruments, or by incurring liabilities for share-based amounts. It was issued by the International Accounting Standards Board (IASB) in February 2004 and became effective for annual periods beginning on or after 1 January 2005.

Prior to IFRS 2, many companies disclosed minimal information about share-based compensation or none at all. The standard was introduced to close this transparency gap, ensuring that share-based payments are reflected in an entity’s financial statements in the same way any other form of compensation would be.

Core Principle

An entity must recognise the goods or services received or acquired in a share-based payment transaction as they are received. A corresponding increase in equity (equity-settled) or a liability (cash-settled) is recognised at the same time. Services received are typically recognised as an expense.

2004 Year IFRS 2 was issued by IASB

3 Main transaction types covered

140+ Countries apply IFRS standards

FV Primary measurement basis

02 · Scope

Scope of IFRS 2 & Key Exclusions

IFRS 2 applies to all share-based payment transactions, regardless of whether the entity can identify specifically some or all of the goods or services received. It applies to transactions with employees and non-employees alike.

What Is Included?

The standard covers three broad categories: transactions where an entity receives goods or services in exchange for equity instruments it has issued; transactions where an entity acquires goods or services by incurring liabilities measured by reference to the entity’s share price; and transactions where the entity receives or acquires goods or services, but the terms allow either party to choose whether settlement is in cash or equity.

Notable Exclusions

IFRS 2 does not apply to transactions with a shareholder acting as a shareholder (rather than a supplier), share-based payments for acquiring businesses (which fall under IFRS 3), or certain transactions with employees in their capacity as equity holders.

Important Exclusion

Business combinations where shares are issued as consideration for acquiring a business are scoped out of IFRS 2. Such transactions are governed by IFRS 3 Business Combinations.

03 · Transaction Types

Three Types of Share-Based Payment Transactions

Type	Settlement	Measurement Basis	Remeasurement
Equity-Settled Equity	Shares, share options, or other equity instruments	Fair value at grant date	Not remeasured after grant date
Cash-Settled Liability	Cash amount linked to share price (e.g., SARs, phantom shares)	Fair value of liability at each reporting date	Remeasured at every reporting date until settlement
Choice of Settlement Hybrid	Either party can choose cash or equity settlement	Compound instrument approach if entity has choice	Depends on which party holds the choice

Understanding which type of transaction you have is the critical first step in applying IFRS 2, as it determines the measurement model and balance sheet presentation used throughout the arrangement’s life.

04 · Recognition

Recognition Principles Under IFRS 2

The fundamental recognition principle is straightforward: an entity recognises the goods or services received and the corresponding equity increase or liability, as the goods or services are received over the vesting period.

When Does Recognition Begin?

Recognition typically begins on the grant date, the date at which the entity and the counterparty have a shared understanding of the terms and conditions of the arrangement. For employee arrangements, this is generally when the board formally approves the award.

Expense Spreading Over Vesting Period

Where employees must render services over a vesting period to earn their right to the award, the compensation cost is recognised over that vesting period using a straight-line method (or an accelerated method where appropriate).

Identify the Grant Date

Determine when the mutual understanding of the arrangement exists.

Measure Fair Value

Calculate the fair value of the equity instrument (or liability) at grant date.

Determine Vesting Period

Identify service and performance conditions to set the expense period.

Spread the Expense

Recognise the cost over the vesting period, updating for forfeitures.

05 · Measurement

Measurement at Fair Value

IFRS 2 requires share-based payments to be measured at fair value. The approach differs depending on whether the counterparty is an employee or a third party.

Transactions with Employees

For employee transactions, the fair value of the equity instrument granted is used, measured at grant date. This is because it is often not possible to reliably measure the fair value of services received from employees.

Transactions with Non-Employees

For non-employee transactions, there is a rebuttable presumption that the fair value of the goods or services received can be reliably estimated. If so, this fair value is used, measured at the date the entity obtains the goods or the counterparty renders services.

Valuation Models for Options

For share options, IFRS 2 requires the use of an option pricing model. Commonly used models include Black-Scholes-Merton and binomial lattice models. The inputs to these models typically include the exercise price, share price, expected volatility, risk-free rate, expected dividend yield, and expected option life.

Black-Scholes-Merton Formula (illustrative)

C = S₀ · N(d₁) − Ke^−rT · N(d₂)

d₁ = [ln(S₀/K) + (r + σ²/2)T] / σ√T
d₂ = d₁ − σ√T

Key Inputs for Option Valuation

Share price at grant date, exercise price, expected option life, expected volatility (historical or implied), expected dividend yield, risk-free interest rate for the expected term, and any market performance conditions.

06 · Vesting

Vesting Conditions: A Critical Distinction

Vesting conditions are conditions that must be satisfied for the counterparty to become entitled to the award. IFRS 2 draws an important distinction between market conditions and non-market vesting conditions, as this affects how the standard’s accounting rules are applied.

Condition Type	Example	Reflected in Fair Value?	Trued Up for Failure?
Service Condition	Employee must remain for 3 years	No	Yes – accrual adjusted
Non-Market Performance	EPS growth target of 10% p.a.	No	Yes – accrual adjusted
Market Performance	Total Shareholder Return vs. index	Yes – built into FV	No – no true-up for failure
Non-Vesting Condition	Employee must not compete	Yes – built into FV	No – no true-up

Practical Insight

The distinction is decisive: if a market condition is not met, no expense reversal is allowed. But if a non-market performance condition is not met, cumulative expense is reversed because the entity never received the services it paid for.

07 · Equity-Settled

Equity-Settled Share-Based Payments

Equity-settled transactions are the most common form of share-based compensation i.e. covering share options, restricted shares, performance shares, and similar instruments. Under IFRS 2, the accounting model for Equity Settled awards is characterised by a “lock-in” of the grant date fair value.

Key Accounting Rules

The fair value of the instrument is determined once, at grant date, and is never subsequently adjusted for changes in the share price, actual performance (for non-market conditions), or changes in expected volatility. The total compensation cost is fixed at grant date and is spread over the vesting period.

Estimating Forfeitures

Entities are required to estimate the number of instruments expected to vest (accounting for service and non-market performance conditions) and to revise this estimate each reporting period. When the award vests, a final true-up is made to ensure cumulative expense equals the grant-date fair value of instruments that actually vested.

Cumulative Expense — Equity-Settled (Per Period)

Cumulative Expense = FV_grant × Estimated Instruments Vesting × (Period Elapsed / Vesting Period)

Lapse After Vesting

When vested options lapse (expire unexercised), IFRS 2 does not require any reversal of the previously recognised expense. The amount remains in equity and may be transferred within equity components.

08 · Cash-Settled

Cash-Settled Share-Based Payments

Cash-settled arrangements such as Stock Appreciation Rights (SARs), phantom shares, or deferred cash bonuses linked to share price are measured differently. Because the entity has an obligation to pay cash, a liability is recognised rather than equity.

Remeasurement at Every Reporting Date

Unlike equity-settled awards, the liability for Cash Settled awards is remeasured at fair value at every reporting date until settlement. Changes in fair value are recognised in profit or loss in the period they arise. This creates P&L volatility, as the expense tracks movements in the share price over the life of the award.

Liability — Cash-Settled (Per Reporting Date)

Liability = FV_{reporting date} × Estimated Instruments Vesting × (Period Elapsed / Vesting Period)

P&L Volatility Warning

Because cash-settled awards are remeasured at fair value at each balance sheet date, rising share prices increase the liability and create additional expense. This creates significant earnings volatility that many preparers seek to hedge or mitigate.

09 · Modifications

Modifications, Cancellations & Settlements

IFRS 2 provides specific guidance on what happens when the terms of a share-based payment arrangement are changed after the grant date.

Modifications That Are Beneficial to the Employee

If a modification increases the fair value of the award for example, reducing the exercise price or extending the option term; the incremental fair value (new fair value minus original fair value, both measured at modification date) is recognised as additional expense over the remaining vesting period.

Modifications That Are Not Beneficial

If a modification reduces the fair value of the award (e.g., increasing the exercise price), IFRS 2 requires the entity to continue recognising expense based on the original grant-date fair value, as if the modification had not occurred. The entity ignores the reduction.

Cancellations & Settlements

A cancellation or settlement of an award is treated as an acceleration of vesting. Any remaining unrecognised expense is recognised immediately, with no reversal of amounts already charged. If something of value is paid to cancel an award (in excess of the fair value at cancellation), the excess is recognised as an expense immediately.

Grant Date

Fair value locked in; vesting period determined.

FV of equity instrument measured. Expense spreading begins.

Each Reporting Date

Accrual updated for revised forfeiture estimates.

Non-market conditions reassessed. Cumulative expense trued up.

Modification Date (if any)

Incremental FV computed and added to remaining cost.

Adverse modifications ignored; beneficial ones give rise to additional charge.

Vesting Date

Final true-up to actual instruments vested.

Cumulative charge equals FV at grant date × number vested.

Exercise / Settlement

Equity or cash settlement recorded; no P&L impact.

For equity-settled: equity reclassified from reserve to share capital.

10 · Disclosure

IFRS 2 Disclosure Requirements

Disclosures under IFRS 2 are extensive and designed to help users understand the nature and extent of share-based payment arrangements and how they affect the entity’s Financial Position and performance.

Three Categories of Required Disclosures

Entities must disclose information about the nature and extent of the arrangements, the determination of fair value of goods/services received or equity instruments granted, and the effect on profit or loss and on the financial position of the entity.

Description of each type of share-based payment arrangement and its general terms and conditions
Number and weighted-average exercise price of options outstanding, granted, forfeited, exercised, and expired during the period
Weighted-average share price at the date of exercise for options exercised
Range of exercise prices and weighted-average remaining contractual life for options outstanding at year-end
Valuation model used for estimating grant-date fair value, and model inputs (volatility, risk-free rate, expected dividends, expected life)
Total expense recognised during the period for share-based payment arrangements
Total carrying amount of liabilities for cash-settled arrangements, and total intrinsic value of liabilities for which the counterparty’s right to cash has vested
Method used to determine the expected volatility and the basis for estimating expected early exercise

11 · Comparison

IFRS 2 vs US GAAP ASC 718: Key Differences

Although IFRS 2 and US GAAP ASC 718 are broadly converged, notable differences remain. Companies reporting under both standards or transitioning between them should be aware of the key divergences.

Topic	IFRS 2	ASC 718 (US GAAP)
Forfeiture Estimates	Must estimate forfeitures and true up each period	Can elect to estimate or account for forfeitures as they occur
Market Conditions	No expense reversal if market condition not met	Same – no reversal if market condition fails
Graded Vesting	Entity can use straight-line or accelerated method	Accelerated attribution required for graded vesting
Reload Options	Reload feature factored into grant-date FV	Similar, some differences in application guidance
Non-Employees	Measure at FV of goods/services (rebuttable presumption)	Same measurement date as employees after ASU 2018-07
Group Share Plans	Specific guidance on subsidiary accounting	Similar guidance under ASC 718 with practical differences

12 · FAQ

Frequently Asked Questions About IFRS 2

What is the difference between a grant date and a vesting date? +

The grant date is the date when the entity and the counterparty have a shared understanding of the terms and conditions of the share-based payment arrangement, typically when the board approves the award. The vesting date is the date when the counterparty’s right to the award becomes unconditional, i.e., all vesting conditions have been satisfied. Expense is recognised over the period between these two dates.

Can an entity reverse expense if options lapse unexercised? +

No. IFRS 2 explicitly states that once vested options lapse (expire unexercised after the vesting date), the entity does not reverse the previously recognised expense. The cumulative expense remains in equity and may be transferred between equity reserves, but cannot be recycled to profit or loss.

How should a subsidiary account for a share plan settled in parent company shares? +

If a subsidiary’s employees participate in a group share plan settled with parent company equity instruments, IFRS 2 generally requires the subsidiary to account for it as an equity-settled arrangement (recognising the expense and a capital contribution from the parent). The parent accounts for the arrangement based on its substance either as equity-settled (increasing equity and recognising the asset from the subsidiary) or recognising recharges as a service.

What valuation model is required under IFRS 2? +

IFRS 2 does not mandate a specific option pricing model. It requires the use of a model that is consistent with generally accepted valuation methodologies for pricing financial instruments and that incorporates all factors that knowledgeable, willing market participants would consider. In practice, Black-Scholes-Merton, binomial lattice models, and Monte Carlo simulations are most commonly used.

How are share-based payments with cash alternatives treated? +

When either the entity or the counterparty has a choice of settlement, IFRS 2 provides specific guidance. If the counterparty has the choice, the arrangement is treated as a compound financial instrument; the equity component and liability component are recognised separately. If the entity has the choice, and it has a present obligation to settle in cash, a liability is recognised. Otherwise, it can be treated as equity-settled.

Does IFRS 2 apply to transactions with non-employees? +

Yes, IFRS 2 applies to all share-based payment transactions regardless of whether the counterparty is an employee or a non-employee (such as a supplier or service provider). However, the measurement approach differs: for non-employees, entities first look to the fair value of the goods or services received, using the fair value of the equity instrument only if the former cannot be reliably estimated.

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Jhanzayb (ACA)

(Qualified) Chartered Accountant – ICAP

Master of Commerce – HEC, Pakistan

Bachelor of Accounting (Honours) – AeU, Malaysia