INTRODUCTION

IFRS 2 is the accounting standard that explains how to deal with share based payments. Many companies offer shares, share options, or other equity related rewards to their employees and directors. These rewards help in motivating people and in linking their performance with the success of the organisation. IFRS 2 guides businesses on how to recognise and measure these transactions in a proper and consistent form.

Share based payments are now used in different industries. Large corporations, financial institutions, and even growing companies include them in their compensation plans. Because of this, accounting students and working professionals must understand IFRS 2. It is an important topic in ACCA, CA, ICAEW, and similar qualifications.

The purpose of this article is to give a simple and clear explanation of IFRS 2. The language is kept easy so that even beginners can follow without confusion. As you already know, we have started a complete and easy to understand series on IAS and IFRS. So this article continues that series and begins our explanation of IFRS 2 in a structured and helpful way.

2. What Are Share Based Payments

Share based payments are transactions in which a company gives shares, share options, or any other equity related benefit to its employees or other parties. Instead of paying only cash, the company provides a part of the compensation in the form of equity. This helps in building a long term connection between the employee and the business because the value of the reward depends on the overall performance of the company.

Share based payments can also be given to suppliers or service providers. For example, a company may issue shares to a consultant in return for services. In all such cases, IFRS 2 applies and explains how the transaction should be measured.

Companies use share based payments for different reasons. Some use them to attract skilled employees. Some use them to keep important staff for a longer period. Others use them to encourage better performance because when the value of shares increases, the benefit for the employee also increases. These payments can be equity settled or cash settled. Both types are explained later in this article.

3. Scope of IFRS 2

The scope of IFRS 2 explains which types of transactions must follow this standard. It mainly covers situations where an entity receives goods or services and pays for them using shares, share options, or any other equity based arrangement. The standard also covers transactions where the payment amount is linked to the price of the company’s shares, even if the settlement takes place in cash.

IFRS 2 applies when a company receives goods or services from employees, directors, consultants, or any external party. If the payment is based on the value of shares, then the transaction falls under IFRS 2. For example, if an employee receives share options for completing three years of service, then this is within the scope of IFRS 2. If a supplier receives shares as a form of payment, then this is also covered.

However, IFRS 2 does not apply to certain areas. For example, it does not apply to transactions that are covered by IFRS 3 relating to business combinations. It also does not apply to financial instruments that are dealt with under IFRS 9. These areas have their own specific standards. IFRS 2 focuses only on share based payment arrangements.

4. Types of Share-Based Payments

A. Equity-Settled Share-Based Payments

These are transactions where the company pays employees or other parties by giving its own shares.
The entity receives goods or services, and in return issues equity instruments.

Key points:

• The fair value of the shares at the grant date is used.
• The expense is recorded over the vesting period.
• No liability is created because the payment is made in equity.

Common examples:

• Employee stock options
• Restricted share units (RSUs)
• Performance shares

B. Cash-Settled Share-Based Payments

In these transactions, the company pays the employee or supplier cash, but the payment amount is based on the value of the company’s shares.

Key points:

• Measured at fair value at each reporting date, not only once.
• A liability is created because cash will be paid.
• Fair value changes go to profit or loss.

Example:
Share appreciation rights (SARs) where employees receive cash equal to the increase in share price.

C. Share-Based Payments With a Choice of Settlement

These allow either:

• The company to choose equity or cash, or
• The employee to choose equity or cash.

There are two scenarios:

1. Entity Chooses Settlement

The company must assess whether it has a present obligation.

• If it is obliged to pay cash → treat as cash-settled
• If not obliged → treat as equity-settled

2. Employee Chooses Settlement

Split the award into two parts:

• A liability component (cash alternative)
• An equity component (share alternative)

Each part is measured separately.

5. Measurement Principles

IFRS 2 requires that share-based payment transactions are measured at fair value. The fair value is determined at the grant date for equity-settled transactions and at each reporting date for cash-settled transactions.

The main idea is to record the cost of goods or services received accurately in the financial statements. This ensures transparency and comparability.

A. Grant Date

• For equity-settled payments, fair value is measured at the date the company grants the shares or options.
• This value is not adjusted later, even if the share price changes after the grant date.

B. Vesting Conditions

Vesting conditions are the requirements employees must meet to receive the share-based payment.

Examples:

• Working for the company for 3 years
• Achieving a performance target

The fair value is adjusted for the probability of meeting these conditions.

C. Non-Vesting Conditions

Non-vesting conditions do not affect whether the employee receives the award, but they can affect the amount of expense recognized.

Example:

• A bonus linked to overall sales growth, which does not determine eligibility, but affects the payout amount.

D. Modifications

If the terms of a share-based payment are changed after the grant date (modification), IFRS 2 requires re-measuring the fair value.

• Increase in value → recognize additional expense
• Decrease in value → adjust expense accordingly

E. For Cash-Settled Payments

• Fair value is measured at each reporting date until the liability is settled.
• Changes in fair value are recorded in profit or loss.

6. Recognition in Financial Statements

IFRS 2 requires that share-based payment transactions are recognized as expenses in the financial statements. The treatment depends on whether the transaction is equity-settled or cash-settled.

A. Equity-Settled Share-Based Payments

• The company records an expense for the goods or services received.
• The credit entry goes directly to equity.
• The expense is recognized over the vesting period, which is the time employees must work or meet performance conditions.

Example:
An employee receives share options vesting over 3 years. The company spreads the expense over 3 years, and the corresponding entry increases equity.

B. Cash-Settled Share-Based Payments

• The company records an expense for the goods or services received.
• The credit entry goes to a liability, because the company will pay cash.
• The liability is remeasured at each reporting date until it is settled.
• Changes in fair value are recognized in profit or loss.

Example:
Employees receive cash based on share price growth (Share Appreciation Rights). The company updates the liability and records profit or loss changes at each reporting period.

C. Share-Based Payments With Cash or Equity Alternatives

• Separate the award into equity and liability components depending on the expected settlement.
• Recognize the expense over the vesting period.
• Adjust entries if the settlement choice changes.

D. Key Points for Recognition

• Expense must match the benefit received.
• Recognition must follow the vesting period.
• For cash-settled transactions, the liability is updated at each reporting date.
• IFRS 2 ensures accurate and transparent reporting of share-based payments in financial statements.

FAQs on IFRS 2 – Share-Based Payments

1. What is IFRS 2 in simple words?

IFRS 2 explains how companies should account for share-based payments given to employees or other parties. These can be shares, share options, or cash linked to share value.

2. Who needs to follow IFRS 2?

Any company that gives goods or services in exchange for shares, share options, or cash based on shares must apply IFRS 2.

3. What is the difference between equity-settled and cash-settled payments?

• Equity-settled: Payment is made using company shares. Expense is recorded, credit goes to equity.
• Cash-settled: Payment is made in cash, based on share value. Expense is recorded, credit goes to liability and fair value is updated at each reporting date.

4. What are vesting conditions?

Vesting conditions are requirements employees must meet to receive the share-based payment, such as completing a certain period of service or achieving performance targets.

5. Are modifications allowed under IFRS 2?

Yes. If terms of a share-based payment change after the grant date, the fair value is remeasured and the expense adjusted accordingly.

6. Why is IFRS 2 important for students?

It is a key standard in ACCA, CA, and other accounting courses. Understanding IFRS 2 helps students learn how modern companies reward employees and record transactions correctly.

Conclusion

IFRS 2 provides clear guidance on accounting for share-based payments. It ensures companies record expenses correctly, whether the payment is in equity or cash. Students and professionals should focus on the types of share-based payments, measurement principles, and recognition in financial statements.

By understanding IFRS 2, you will be able to:

• Identify equity and cash-settled payments
• Recognize expenses accurately over the vesting period
• Apply fair value measurement correctly
• Prepare transparent financial statements that comply with IFRS

This article is part of our IAS and IFRS series, written in a simple way for CA and ACCA students. The next articles will continue to explain other standards in an easy and structured manner.

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