IFRS 2 Part 1: Scope, Objective and the Three Types of Share-Based Payment
Part 1 of a 7-part series on IFRS 2 Share-based Payment: what falls inside the standard’s scope, why it exists, and the three transaction types that shape everything else.
Quick Summary
- What it covers: IFRS 2 governs the accounting for any transaction in which an entity receives goods or services and pays for them with its own equity instruments, or with cash (or other assets) calculated by reference to the value of its equity instruments.
- Three transaction types: equity-settled, cash-settled, and transactions where either the entity or the counterparty can choose how settlement happens.
- The core mechanic: almost every accounting question in IFRS 2 comes back to two things — what is the fair value of what’s being granted, and over what period should the resulting expense be spread.
- Scope carve-outs: a handful of transactions that look like share-based payments are explicitly scoped out and dealt with under other standards instead.
SHARE-BASED PAYMENT — 7 GUIDES
What Is a Share-Based Payment?
A share-based payment transaction is one in which an entity receives goods or services from a supplier — most commonly an employee, but sometimes a consultant, contractor, or other third party — and, instead of paying cash, settles the obligation with its own shares, share options, or other equity instruments, or with a cash payment whose amount depends on the price of its shares.
The most familiar example is an employee share option plan: an employee provides services over a vesting period, and in exchange receives options to buy shares in the company at a fixed price. But the standard’s reach is broader than payroll. It also applies to shares or options issued to suppliers in place of cash for goods delivered, to consultants for professional services, and to a range of cash-settled arrangements such as share appreciation rights (SARs) that mimic the economics of options without issuing any equity at all.
Objective of IFRS 2
Before IFRS 2 existed, many companies recognized no expense at all for employee share options — the cost of the arrangement simply never appeared in profit or loss, even though real value was being transferred to employees in place of cash salary. IFRS 2’s objective is to close that gap: it requires an entity to recognize the effects of share-based payment transactions in its financial statements, including the expense associated with transactions in which employees are granted share options, measured at fair value.
Why this matters in practice: a company that pays part of its remuneration in options rather than cash is not paying less for the services it receives — it is paying with a different currency. IFRS 2 exists so that the income statement reflects the full cost of employee and supplier compensation, regardless of the form it takes.
Scope of IFRS 2
IFRS 2 applies to all share-based payment transactions, whether or not the entity can identify specifically some or all of the goods or services received. This includes transactions with employees and with non-employees, and it applies regardless of whether the entity or the counterparty settles the transaction.
What Falls Outside the Standard
A small number of transactions that resemble share-based payments are specifically excluded from IFRS 2 and accounted for elsewhere:
- Business combinations — equity instruments issued in a business combination in exchange for control of an acquiree are accounted for under IFRS 3, not IFRS 2 (though share-based payments to employees of the acquiree that continue after the combination may still fall within IFRS 2).
- Contracts for the purchase of goods within the scope of financial instruments standards — a contract to buy or sell a non-financial item that can be settled net in cash or another financial instrument is dealt with under IFRS 9, unless it was entered into for the entity’s expected purchase, sale or usage requirements.
- Transactions with shareholders acting purely in their capacity as shareholders (for example, a pro-rata rights issue offered to all shareholders) rather than as suppliers of goods or services.
The Three Types of Share-Based Payment Transaction
Every arrangement within the scope of IFRS 2 falls into one of three categories, and which one determines almost everything about how it is measured and recognized.
| Transaction Type | What Is Delivered | Measured At | Balance Sheet Impact |
|---|---|---|---|
| Equity-settled | Shares, share options or other equity instruments | Fair value at grant date, fixed — never remeasured | Increase in equity |
| Cash-settled | Cash, calculated by reference to share price (e.g. a share appreciation right) | Fair value at each reporting date and at settlement — remeasured throughout | Recognition of a liability |
| Choice of settlement | Either equity or cash, at the choice of the entity or the counterparty | Depends on who holds the choice — see Part 5 | Compound instrument, or liability, or equity |
Parts 2 and 3 of this series work through equity-settled transactions in detail, since they are by far the most common. Part 5 covers cash-settled arrangements and the choice-of-settlement cases.
Key Definitions You Will Need Throughout This Series
A handful of terms recur constantly in IFRS 2, and getting them precisely right early on makes everything that follows much easier to follow.
Grant Date
The date on which the entity and the counterparty (typically an employee) reach a shared understanding of the terms and conditions of the arrangement, and the entity confers on the counterparty the right to cash, other assets, or equity instruments, provided any specified vesting conditions are met. If the arrangement is subject to an approval process (for example, by shareholders), grant date is the date that approval is obtained, not the date terms were initially agreed. Grant date matters because, for equity-settled awards, it is the single date at which fair value is measured — permanently.
Vesting Date and Vesting Period
The vesting date is the date on which the counterparty becomes unconditionally entitled to the equity instruments (or cash). The vesting period is the time between grant date and vesting date, during which all specified vesting conditions must be satisfied. This is the period over which the expense is spread.
Vesting Conditions
A vesting condition determines whether the entity receives the services that entitle the counterparty to the award. IFRS 2 recognizes three broad categories, each with materially different accounting consequences:
- Service conditions — the counterparty must complete a specified period of service (e.g. “must remain employed for three years”).
- Performance conditions — require a service condition to be met, plus a specified performance target. These split further into market conditions (tied to the entity’s own share price or equity value, such as a total shareholder return hurdle) and non-market performance conditions (tied to an operational metric, such as an EPS or revenue target).
- Non-vesting conditions — conditions that are neither service nor performance conditions — something neither the entity nor the counterparty has the discretion to choose whether to satisfy (for example, a requirement that the employee contribute to a savings plan out of after-tax salary).
Part 3 of this series is dedicated entirely to unpacking these categories, because the difference between a market condition and a non-market performance condition — both of which sound like “performance” in everyday language — changes the entire measurement approach.
Fair Value
The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date (consistent with IFRS 13). For equity-settled share-based payments to employees, fair value is measured at grant date; for cash-settled awards, it is remeasured at every reporting date.
Intrinsic Value
The difference between the fair value of the shares a counterparty has the right to subscribe for (or receive) and the price the counterparty is required to pay for those shares. This is a much cruder measure than fair value — it ignores time value entirely — and IFRS 2 only permits its use in the rare cases where the fair value of an equity instrument cannot be reliably estimated.
Recognition Principle, in One Sentence
An entity recognizes the goods or services received or acquired in a share-based payment transaction when it obtains the goods or as the services are rendered. If the goods or services qualify for recognition as an asset, an asset is recognized; otherwise, an expense is recognized. The corresponding entry is either an increase in equity (equity-settled) or the recognition of a liability (cash-settled).
Parts 2 through 6 of this series build out every layer of that single sentence: how to measure the transaction, how to time the recognition across the vesting period, what happens when conditions aren’t met, what happens when the arrangement is modified or cancelled, and how cash-settled and choice-of-settlement transactions differ. Part 7 closes the series with the disclosure requirements, a full worked example, and downloadable Excel valuation templates for share awards, options and performance rights.
Need Help With Share-Based Payment Accounting?
From designing an equity incentive plan through valuing options and preparing the disclosures, our team can help you apply IFRS 2 correctly. Contact our Financial Advisory team today.