IFRS 2 requires an entity to recognise the effects of share-based payment transactions in its financial statements, including expenses and equity or liability movements. The core principle is that goods or services received in a share-based payment arrangement must be recognised when they are obtained (IFRS 2.7).

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Types of Share-Based Payment Arrangements

IFRS 2 distinguishes three main categories, each with different recognition approaches:

• Equity-settled share-based payments – settled by issuing equity instruments (e.g., shares or share options)
• Cash-settled share-based payments – settled by paying cash based on the price of the entity's shares (e.g., share appreciation rights)
• Choice-of-settlement transactions – where either the entity or the counterparty can choose between equity or cash settlement

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Equity-Settled Transactions

For equity-settled arrangements, the entity recognises the goods or services received and a corresponding increase in equity. The fair value is measured at the grant date and is not subsequently remeasured (IFRS 2.10–2.11). Key recognition points include:

• Services from employees are recognised over the vesting period (IFRS 2.15)
• The cumulative expense reflects the best estimate of the number of awards expected to vest, updated at each reporting date for non-market vesting conditions (IFRS 2.20)
• Market conditions (e.g., a target share price) are incorporated into the grant-date fair value and are not adjusted subsequently (IFRS 2.21)
• If awards vest immediately with no service condition, the expense is recognised in full at grant date (IFRS 2.14)

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Cash-Settled Transactions

Cash-settled share-based payments are measured at the fair value of the liability at each reporting date, with changes in fair value recognised in profit or loss (IFRS 2.30–2.33). This differs significantly from equity-settled awards because:

• The liability is remeasured at every reporting date and at the settlement date
• Fair value changes are recognised immediately in profit or loss, not deferred to the vesting period alone
• This creates potential earnings volatility linked to share price movements

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Measurement of Fair Value

For transactions with employees, fair value is based on the fair value of the equity instruments granted (IFRS 2.11), typically using option pricing models such as Black-Scholes or a binomial model. For transactions with non-employees, fair value is based on the fair value of goods or services received, unless that cannot be reliably measured (IFRS 2.13).

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Vesting Conditions

IFRS 2 distinguishes between:

• Service conditions – requiring a specified period of service
• Performance conditions – further split into market conditions (reflected in fair value at grant date) and non-market conditions (reflected in the number of awards expected to vest)

Vesting conditions that are not market conditions do not affect the grant-date fair value but instead affect the number of instruments included in the expense calculation (IFRS 2.19–2.21).

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Modifications, Cancellations, and Settlements

If terms are modified in a way that increases fair value, the incremental fair value is recognised over the remaining vesting period (IFRS 2.27). Cancellations are treated as accelerated vesting, with any remaining unrecognised expense recognised immediately (IFRS 2.28).

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