IFRS 2 share-based payments insight

A wider scope than often assumed

IFRS 2 Share-based Payment applies whenever an entity receives goods or services in exchange for equity instruments, or for a liability based on the price or value of its own or another group entity’s equity instruments.

IFRS 2 is not confined to listed groups. Its scope includes share options and awards, EMI, CSOP and SAYE schemes, growth shares, phantom share plans, share appreciation rights, and shares issued to advisers or suppliers in place of a cash fee. A scheme’s UK tax-advantaged status affects only its tax consequences, not the accounting.

The standard also applies where the entity receiving the services has no obligation to settle. Where a parent or a shareholder settles an award, for example a founder transferring shares personally to a key employee for services to the company, the company must still recognise an expense.

Excluded are, among others, equity instruments issued as consideration in a business combination within IFRS 3 (or in a combination under common control or on the formation of a joint venture), contracts to buy or sell non-financial items within the scope of IAS 32 and IFRS 9, and transactions with employees in their capacity as shareholders, such as a rights issue to all shareholders. Awards granted to an acquiree’s employees for post-combination services remain within scope.

A recurring source of audit adjustments

Because many arrangements are designed without early finance input, unrecognised share-based payments remain a recurring source of audit adjustments.

Equity-settled awards: grant-date fair value, recognised over vesting

Measured at grant date

Employee services are measured by reference to the fair value of the equity instruments granted, at grant date: the date on which the entity and the counterparty reach a shared understanding of the terms and conditions. Where shareholder or other approval is required, grant date is the date of approval, although the expense may be recognised from an earlier date if services are already being rendered, using an estimate of grant-date fair value that is trued up once grant date is established.

Non-employees

For non-employees, there is a rebuttable presumption that the fair value of the goods or services received can be estimated reliably; that fair value, at the date of receipt, is used unless the presumption is rebutted.

Valuation

Fair value is based on market prices where available. Otherwise, as is usual for private companies, a generally accepted valuation technique such as the Black-Scholes-Merton, binomial or Monte Carlo model, is required. For unlisted entities, the current share price and expected volatility are typically the most significant judgements.

Recognition

The charge is debited to profit or loss, unless it qualifies for recognition as an asset, with a corresponding credit to equity. Awards that vest immediately are expensed in full at grant date; otherwise the charge is spread over the vesting period. Grant-date fair value is not revisited, however the share price moves. After vesting, no adjustment is made to total equity if options lapse unexercised, although a transfer within equity is permitted.

Vesting and non-vesting conditions

The classification of each condition attached to an award drives the accounting and should be determined at the outset. A performance condition must be accompanied by a requirement to complete a period of service. The period for achieving the target may start before the service period, provided it does not start substantially earlier, but must not extend beyond the end of the service period; a target that need not be achieved during a period of service is a non-vesting condition.

Condition	Typical examples	Effect on grant-date fair value	Consequence if not satisfied
Service condition	Remaining in employment for three years	Not reflected	Awards forfeited; cumulative expense reversed
Non-market performance condition	EBITDA or revenue targets; occurrence of a sale or IPO	Not reflected	Awards forfeited; cumulative expense reversed
Market performance condition	Share price or relative TSR target; exit at or above a specified equity value	Reflected	No reversal, provided all service and non-market conditions are met
Non-vesting condition	Employee continuing to contribute to a SAYE savings contract	Reflected	If within the control of the entity or the counterparty, treated as a cancellation; otherwise, expense continues

For service and non-market conditions, management estimates at each reporting date the number of awards expected to vest and revises the cumulative expense, so that by the vesting date the total charge reflects the number of awards that actually vest. Where the length of the vesting period depends on non-market condition, the expected vesting period is estimated and revised; where it depends on a market condition, the estimate made at grant date is not revised.

Exit-based awards need particular care

Exit-based awards, common in UK private equity-backed groups, need particular care: the occurrence of a sale or listing is a non-market performance condition, whereas a requirement to exit at or above a specified equity value is a market condition.

Illustrative example: equity-settled award with service conditions

Service condition only, with a revised estimate of leavers

On 1 January 20X1 an entity grants 1,000 share options to each of 50 employees, conditional on each employee remaining in service for three years. The grant-date fair value is £4.50 per option. On 31 December 20X1, management expects 10 employees to leave before vesting; at 31 December 20X2 that estimate is revised to 8. On 31 December 20X3 the options vest for the 43 employees who remain.

Year	Calculation of cumulative expense	Cumulative (£)	Charge for year (£)
20X1	40 × 1,000 × £4.50 × 1/3	60,000	60,000
20X2	42 × 1,000 × £4.50 × 2/3	126,000	66,000
20X3	43 × 1,000 × £4.50 × 3/3	193,500	67,500

Each charge is recorded as Dr Profit or loss, Cr Equity, and is unaffected if the options are out of the money at vesting. Had vesting also depended on a relative TSR condition that was missed, the same £193,500 would be recognised, provided the £4.50 grant-date fair value had been measured taking that market condition into account. Had an EBITDA target been missed instead, the cumulative expense would be reversed through profit or loss.

Cash-settled awards

Cash-settled arrangements, such as share appreciation rights and phantom share plans, give rise to a liability, measured at fair value and remeasured at each reporting date and at settlement, with changes in profit or loss, and built up over the vesting period. Service and non-market conditions adjust the number of awards included in the measurement; market and non-vesting conditions are reflected in fair value. The cumulative expense ultimately equals the cash paid.

Net settlement for employee tax

An otherwise equity-settled award under which the entity is required by tax laws or regulations to withhold shares to settle the employee’s tax obligation, and to pay that amount to the tax authority, is classified as equity-settled in its entirety, provided the amount withheld does not exceed the employee’s tax obligation; any excess withheld is accounted for as cash-settled. The payment to the tax authority is accounted for as a deduction from equity for the shares withheld, except to the extent that it exceeds the fair value of those shares at the net settlement date.

Modification from cash to equity

Where a cash-settled award is modified to become equity-settled, the liability is derecognised, equity is recognised at the modification-date fair value of the instruments to the extent services have been rendered, and any difference is taken immediately to profit or loss.

Awards with a choice of settlement

Counterparty choice

Where the counterparty can choose between cash and equity, the entity has granted a compound financial instrument with liability and equity components. For employee awards, the equity component is the difference between the fair value of the compound instrument and that of the liability component and is often nil where the alternatives are of equal value.

Entity choice

Where the entity has the choice, no split is made. The award is cash-settled if a present obligation to settle in cash exists, for example where share settlement lacks commercial substance or there is a past practice or stated policy of cash settlement. Otherwise, it is equity-settled, and any later cash settlement is deducted from equity as a repurchase of an equity interest. If the entity settles using the alternative with the higher fair value at the settlement date, the excess is recognised as an additional expense.

Modifications, cancellations and forfeitures

As a minimum, grant-date fair value is recognised unless awards fail to vest because a service or non-market condition is not met. Within that framework:

Beneficial modifications, such as a repricing, generate an additional charge equal to the incremental fair value, being the difference between the fair values of the modified and original awards, both measured at the modification date. This is recognised over the remaining vesting period, or immediately if the award has already been vested.
Modifications that are not beneficial to the employee, such as lengthening the vesting period, are disregarded, and the original charge continues to be recognised. A reduction in the number of awards, however, is accounted for as a cancellation of that portion.
Cancellations and settlements during the vesting period, by either the entity or the counterparty, are treated as an acceleration of vesting, with the remaining charge recognised immediately. Any payment is deducted from equity, and any excess over the instruments’ fair value at that date is expensed. Designated replacement awards are treated as a modification. An employee ceasing SAYE contributions is a common example of cancellation.
Forfeitures, where an employee leaves before satisfying a service condition, result in the cumulative expense for those awards being reversed. As a change in estimate, the reversal is recognised in profit or loss in the current period rather than as a prior-period adjustment.

Group arrangements, recharges and tax

Group arrangements

Where a parent grants awards over its own shares to a subsidiary’s employees and the subsidiary has no obligation to settle, the subsidiary accounts for the arrangement as equity-settled, recognising an expense and a capital contribution in equity. The parent, in its separate financial statements, typically increases its investment in the subsidiary with a credit to equity. A subsidiary obliged to settle in its parent’s shares or in cash accounts for the award as cash settled.

Intragroup recharges

IFRS 2 does not address intragroup recharges and practice varies; a common approach is for the subsidiary to recognise the recharge in equity against the capital contribution, and the parent to treat it as a reduction in its cost of investment. Any excess of the recharge over the capital contribution is generally treated as a distribution by the subsidiary and as income or a return of investment by the parent. The policy adopted should be applied consistently.

Tax and employer’s National Insurance

In the UK, corporation tax relief under Part 12 CTA 2009 is generally available when employees acquire qualifying shares, based broadly on intrinsic value at that date rather than the IFRS 2 charge. Under IAS 12, deferred tax is recognised on the estimated future deduction, measured by reference to the share price at the reporting date, with any tax effect of a deduction exceeding the cumulative expense recognised directly in equity. Entities reporting under FRS 102 apply the timing difference approach in Section 29 instead. Any employer’s National Insurance liability, for which IFRS has no specific guidance, is commonly accrued over the vesting period by reference to the share price at each reporting date and continues to be remeasured after vesting until the awards are exercised or lapse.

IFRS 2 and FRS 102: where UK GAAP diverges

FRS 102 Section 26 shares these principles but differs on settlement choices, group plans, valuation and disclosure.

FRS 102 Section 26 Share-based Payment shares the core principles of IFRS 2: grant-date fair value for equity-settled awards, remeasurement of cash-settled liabilities, the treatment of vesting conditions and acceleration on cancellation. Following the Periodic Review 2024 amendments, effective for periods beginning on or after 1 January 2026, Section 26 also addresses the cash settlement of equity-settled awards (paragraph 26.13A), the measurement of cash-settled awards (paragraphs 26.14A to 26.14C) and net settlement features for employee tax, broadly in line with IFRS 2. The principal differences are below.

Area	IFRS 2	FRS 102 Section 26
Choice of settlement	Counterparty choice: compound instrument split into liability and equity components. Entity choice: cash-settled only where a present obligation to settle in cash exists.	Entity choice: equity-settled unless the entity has a present obligation to settle in cash, for example where share settlement lacks commercial substance or there is a past practice or stated policy of cash settlement, in which case cash-settled. Counterparty choice: cash-settled, unless the cash alternative has no commercial substance because the cash amount bears no relationship to, and is likely to be lower than, the fair value of the equity instrument, in which case equity-settled. No split accounting (paragraphs 26.15 to 26.15B).
Group plans	Each group entity measures its charge by reference to the grant-date fair value of the awards; no allocation relief.	Group entities may instead recognise and measure the expense on the basis of a reasonable allocation of the group expense, calculated under Section 26, IFRS 2 or an equivalent basis (paragraph 26.16).
Valuation of equity instruments	Market price, otherwise a valuation technique. In rare cases where fair value cannot be estimated reliably, intrinsic value is used and remeasured until settlement.	Three-tier hierarchy: observable market price; then entity-specific observable market data, such as a recent transaction in the shares or a recent independent valuation; then a valuation method using market data to the greatest extent practicable.
Disclosure	Extensive requirements, including option pricing model inputs, movements in awards and the effect on profit or loss and financial position. Qualifying entities applying FRS 101 (UK GAAP using IFRS recognition and measurement) may omit IFRS 2 paragraphs 45(b) and 46 to 52 under FRS 101 paragraph 8(a): a subsidiary only where the awards are over another group entity’s equity instruments, and an ultimate parent only for awards over its own equity instruments where its separate financial statements are presented alongside the consolidated financial statements. In both cases, equivalent disclosures must be included in the consolidated financial statements of the group in which the entity is consolidated. Eligible subsidiaries may instead apply the reduced disclosures in IFRS 19, effective for periods beginning on or after 1 January 2027, with earlier application permitted. A subsidiary must choose between FRS 101 and IFRS 19; it cannot apply both.	Reduced requirements. Qualifying entities may take exemptions under the reduced disclosure framework, subject to conditions. For periods beginning on or after 1 January 2026, small entities applying Section 1A must give the limited disclosures in paragraph 1AC.31D: a description of each arrangement, the number and weighted average exercise price of options outstanding at the start and end of the period and exercisable at the end, the total expense and the carrying amount of any liabilities, together with any further disclosure needed to give a true and fair view. Micro-entities applying FRS 105 do not recognise equity-settled share-based payments until the shares are issued.
First-time adoption	IFRS 1 exempts equity instruments vested before the date of transition; IFRS 2 may be applied to them only if their fair value was previously disclosed publicly. A similar exemption applies to liabilities settled before the date of transition.	Section 35 exempts equity instruments granted, and liabilities settled, before the date of transition to FRS 102.

Moving from FRS 102 to IFRS?

Entities moving from FRS 102 to IFRS ahead of a fundraising or listing should expect to revisit settlement classification, group allocations and valuation evidence, and plan that work well in advance.

Practical next steps

Identify every arrangement in scope, including growth shares, phantom plans, adviser fee arrangements and shares transferred personally by shareholders, not only formal option schemes.
Establish grant date accurately and obtain a supportable valuation at that date, retaining the model, inputs and rationale on file for audit.
Classify each condition as service, non-market, market or non-vesting at the outset, and revisit vesting estimates at each reporting date.
Document modifications, cancellations and leaver events as they occur.
Agree recharge, deferred tax and employer’s NIC treatment before awards are granted.
Confirm which framework, measurement approach and disclosure exemptions apply, and agree the approach with your auditor early.

Share-based payments under IFRS 2: recognition, measurement and the key differences from FRS 102