Objective

IFRS 2 prescribes how companies should measure and recognize share-based payments, including:

• Equity-settled payments (shares, share options)

• Cash-settled payments (share appreciation rights)

• Transactions with employees or suppliers paid using shares or share-linked instruments

The goal is to ensure these transactions are recorded at fair value and matched with the period when employees render the service.

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🧾 1. Types of Share-Based Payments

A. Equity-Settled Share-Based Payments

Employees receive shares or share options.

B. Cash-Settled Share-Based Payments

Employees receive cash, based on the value of shares (e.g., Share Appreciation Rights — SARs).

C. Share-Based Payments with Choice of Settlement

Either cash or equity, depending on terms.

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🧩 2. Recognition Principle

Recognize:

• Expense for the services received

• Increase in equity (for equity-settled)

• Liability (for cash-settled)

Recognition period = vesting period
(period employees must work before earning the shares)

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🎯 3. Measurement

A. Equity-Settled Transactions

Measure at grant date fair value of equity instruments.
Expense is recognized over the vesting period.

• Market conditions (share price target) → included in FV

• Non-market conditions (service, profit targets) → affect vesting estimation, not FV

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✔ Example 1 – Equity-Settled Share Options (Typical Case)

Company grants 1,000 share options to employees.
Fair value of each option at grant date = $5
Vesting period = 3 years

Calculation:

Total FV = 1,000 × $5 = $5,000
Annual expense = $5,000 / 3 = $1,667 per year

Journal Entry (each year):

If some employees leave → revise estimate.

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B. Cash-Settled Transactions (Share Appreciation Rights – SARs)

Measure the liability at fair value:

• Recalculate FV at each reporting date

• Recognize changes in profit or loss

✔ Example 2 – Cash-Settled SARs

Company grants 500 SARs.
FV at:

• Year 1 = $4

• Year 2 = $6

• Vesting = 2 years

Year 1 Liability:

500 × 4 × (1/2 vesting) = $1,000

Year 2 Liability:

500 × 6 = $3,000
Increase from Year 1 = 3,000 – 1,000 = $2,000

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C. Transactions with Choice of Settlement

Split between equity component + liability component depending on the substance.

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🔁 4. Vesting Conditions

(A) Service Conditions

Employee must stay for a certain time
→ Affects vesting estimate, not FV.

(B) Performance Conditions

• Market (e.g., share price > $50): included in FV

• Non-market (e.g., sales > $10M): adjust number expected to vest

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🧮 5. Modifications, Cancellations, and Settlements

Modifications (increase fair value)

→ Recognize additional expense immediately.

Cancellation

Treat as accelerated vesting.
Recognize remaining expense immediately.

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📘 6. Share-Based Payments to Non-Employees

If company pays vendors/suppliers in shares:

• Measure at fair value of goods/services, unless FV cannot be measured → use FV of equity instruments.

Example:
Legal services worth $20,000 paid with shares

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📊 7. Disclosure Requirements

Companies must disclose:

• Nature and details of schemes

• Number of shares/options granted

• Fair value methods used

• Effect on profit and equity

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📌 8. Summary Table

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🎯 Key Takeaways

• Equity-settled: measure at grant date, recognize over vesting period

• Cash-settled: remeasure every year, record in liability

• Vesting conditions determine expense timing, not FV

• IFRS 2 ensures fair and transparent reporting of share-based compensation