Two Ways to Measure an Equity-Settled Transaction

IFRS 2’s starting position is that a share-based payment transaction should be measured directly, at the fair value of the goods or services received. This works well for a straightforward transaction with a supplier — pay a contractor in shares instead of cash, and the fair value of the design work or consulting hours received is usually observable.

It works far less well for employees. There is no independent market price for “three years of continued employment,” so IFRS 2 requires an indirect measurement instead: the transaction is measured by reference to the fair value of the equity instruments granted, at grant date. The standard presumes this indirect method applies to transactions with employees and anyone else providing similar services, and in practice it is how the overwhelming majority of equity-settled share-based payments are measured.

Grant-Date Fair Value: Fixed, Not Revisited

This is the single most important measurement rule in the whole standard for equity-settled awards: once fair value is determined at grant date, it is never remeasured for changes in the share price, volatility, or any other market input, for as long as the award remains equity-settled. A share option granted when the stock traded at $40 keeps the fair value calculated on that date whether the stock later goes to $10 or to $400.

What does change over the life of the award is the entity’s estimate of how many instruments will actually vest — but that is a completely separate estimate from fair value, covered below.

Recognizing the Expense Over the Vesting Period

An award with only a service condition — the plain-vanilla case — is expensed on a straight-line basis over the vesting period, with the cumulative amount recognized at any reporting date given by:

The charge for any single period is simply the difference between the cumulative expense at the end of the period and the cumulative expense recognized at the end of the prior period — never a fixed fraction calculated once at grant date, because the “number expected to vest” term can change every period.

Worked Example

On 1 January 2024, an entity grants 300 employees 200 share options each (60,000 options in total), conditional on the employees remaining in service for three years. The grant-date fair value of each option, calculated using the Black-Scholes model, is $12. At grant date, the entity estimates that 20 employees will leave before the options vest.

Notice that the $12 fair value never changes across the three years — only the headcount estimate does, and by the vesting date it is trued up to the actual number of employees who stayed (a fact, not an estimate). The cumulative expense at vesting always equals fair value × the actual number of instruments that vested, regardless of how the estimate moved in between.

What If There Is No Vesting Period?

If equity instruments granted vest immediately — the counterparty is not required to complete a specified period of service before becoming unconditionally entitled to them — the entity recognizes the full expense immediately at grant date, on the presumption that the services have already been rendered (for example, as consideration for past service).

The Corresponding Entry: A Credit to Equity

For an equity-settled transaction, the double entry is always the same shape: debit expense (or asset, where the goods or services qualify for capitalization — for example, share options granted to employees building a qualifying asset under IAS 16 or IAS 38), credit equity. The credit to equity is typically taken to a separate reserve (often called a share-based payment reserve or share option reserve) rather than directly to share capital, and stays there until the instruments are exercised, expire, or the entry is reclassified within equity — it is never reversed to profit or loss purely because an option later expires unexercised.

Why the True-Up Only Runs One Way

The mechanism above — revising the expected number of instruments to vest — only applies to service conditions and non-market performance conditions. As Part 3 explains in detail, market conditions are treated completely differently: they are baked into the grant-date fair value itself and are never revisited, no matter what actually happens to the share price or TSR ranking over the vesting period.