Share-based payment: formula sheet

Key formulas

Equity-settled double entry

Dr Expense (or asset) ; Cr Equity

Spread over the vesting period. Measured at the grant date fair value of the equity instruments for employee awards.

Cash-settled double entry

Dr Expense (or asset) ; Cr Liability

Liability is remeasured at fair value at each reporting date until settlement, with changes in profit or loss.

Vesting period

Vesting period = grant date to vesting date

The expense is spread over this period.

Service condition

Service condition = employee must stay for a specified period

A vesting condition. Leavers affect the number of awards expected to vest.

Performance condition

Performance condition = service condition + a specified target

A market condition is a performance condition tied to the share price.

Choice of settlement

Counterparty has choice → compound instrument; Entity has choice → liability if it has a present obligation to settle in cash, otherwise equity

Entity-choice cases are a judgement; check the substance of past practice or stated policy.

Cumulative expense at end of year

Number of awards expected to vest × fair value per award at grant date × (years elapsed ÷ total vesting period)

Use the best estimate of awards at each year end. Fair value is fixed at grant date.

Annual expense

Cumulative expense to date − cumulative expense charged in prior years

This can be negative if estimates fall, giving a credit to profit or loss.

Journal entry

Dr Employee expense (P&L) ; Cr Equity (share-based payment reserve)

If the cost relates to an asset, debit the asset instead where the standard allows.

Market conditions

Included in grant-date fair value; no later adjustment to expense if the condition is missed

Expense is still recognised if the service condition is met.

Non-market vesting conditions

Adjust the expected number of awards each year; final total is based on awards that actually vest

Service and non-market performance conditions are not in the fair value.

Liability during the vesting period

Liability = rights expected to vest × fair value per right at the reporting date × (years served ÷ total vesting period)

Use the current fair value, not the grant-date value. Use the latest estimate of leavers.

Liability after vesting

Liability = outstanding unexercised rights × fair value per right at the reporting date

No time proportion applies once vesting is complete.

Expense for the year

Expense = closing liability − opening liability + cash paid on rights exercised in the year

The charge goes to profit or loss. On exercise, the liability is also reduced by the cash paid, so add that payment back to get the expense.

Journal entry

Dr Profit or loss (employee cost) ; Cr Liability

There is no credit to equity. Contrast this with equity-settled schemes.

Settlement

Dr Liability ; Cr Cash

Any remaining difference between the liability and the cash paid is taken to profit or loss.

Minimum expense

Total expense ≥ grant-date fair value of original award × number of instruments that ultimately vest

Applies to modifications of equity-settled awards, whether the terms are improved or made worse. It does not apply if the award is cancelled or settled, or if the number of instruments is reduced (treated as a cancellation).

Incremental fair value

Incremental FV = FV of modified instrument at modification date − FV of original instrument at modification date

Measured per instrument. Multiply by the number expected to vest. If positive, recognise over the period from modification date to end of the modified vesting period.

Non-beneficial modification

Reduction in fair value, fewer instruments or tougher vesting terms: continue to recognise original expense

Exception: if the change reduces the number of instruments granted, treat that reduction as a cancellation.

Cancellation or settlement

Expense on cancellation = grant-date FV × number of instruments expected to vest (full vesting period) − amount already recognised

Accelerate the remaining expense into the period of cancellation. Do not reverse amounts already recognised.

Payment on cancellation

Payment up to FV of instruments at cancellation date → debit equity; excess → debit expense

Applies to equity-settled awards settled in cash.

Equity component of compound award

Equity component = Fair value of equity alternative (the shares) − Fair value of cash alternative (the debt component)

Debt component is the fair value of the cash alternative. Measure at grant date. Equity part is never remeasured.

Liability at reporting date

Liability = Fair value of cash alternative × Expected vesting proportion × (Years elapsed ÷ Total vesting period)

Remeasure to fair value at each year end and at settlement. Changes go to profit or loss.

Annual expense for compound award

Expense = Change in cumulative liability + Equity component expensed for the year

Equity portion is spread over the vesting period. Liability movement is cumulative.

Settlement of compound award by cash

Remeasure the liability to its fair value at settlement date and extinguish it with the cash paid. Any cash paid in excess of the liability is treated as a repurchase of the equity component and charged to equity

The equity component already recognised stays in equity, though you may transfer it between components of equity. Treat any payment beyond the liability as a repurchase of the equity component, charged to equity. Do not call it an expense.

Deferred tax asset on share-based payment

Deferred tax asset = Estimated future deduction (intrinsic value at reporting date × number of awards expected to vest) × (Years elapsed ÷ Total vesting period) × Tax rate

Intrinsic value per award is the current share price less the exercise price, if any. Use the estimated future tax deduction based on the current share price. Spread over the vesting period.

Deferred tax split between P&L and equity

Tax credit to P&L = Tax rate × the lower of (cumulative IFRS 2 expense, cumulative estimated deduction). Excess of total deferred tax over this amount is credited to equity

If the estimated deduction is at or below the cumulative expense, all tax goes to profit or loss. The P&L credit is then the tax on the lower deduction, and nothing goes to equity.

Quick revision

• IFRS 2 applies to equity-settled, cash-settled and choice-of-settlement transactions.
• Equity-settled employee awards are measured at the grant-date fair value of the equity instruments and not remeasured afterwards.
• The debit is an expense (unless the cost qualifies for capitalisation as an asset) and the credit is equity.
• Spread the cost over the vesting period, using the best estimate of the number of awards expected to vest.
• Annual charge = cumulative expense to date − expense already recognised.
• Market conditions are built into fair value; non-market vesting conditions affect the number of awards expected to vest.
• Cash-settled awards create a liability, measured at fair value at each reporting date and at settlement.
• The change in the cash-settled liability goes through profit or loss each year.
• For modifications that increase fair value, recognise the extra fair value over the remaining vesting period; reducing fair value does not lower the original expense.
• A cancellation by the entity or employee is usually treated as acceleration: recognise the remaining expense immediately.
• With a choice of settlement, the accounting depends on who holds the choice, the entity or the counterparty.
• In group schemes, the entity receiving the services recognises the expense, and the settling entity records the matching credit or payment.

Common mistakes

• Treating share appreciation rights as equity-settled because they refer to shares. Fix: Check what is delivered. If the payout is cash based on the share price, it is cash-settled and creates a liability.
• Using the date the scheme is announced or the vesting date as the grant date. Fix: Grant date is when both parties agree the terms and any needed approval is obtained. Check for pending shareholder approval.
• Remeasuring the fair value at each year end. Fix: For equity-settled awards, fix the fair value at grant date and never update it. Only the expected number of awards changes.
• Adjusting the expense for a missed market condition. Fix: If the condition is share price based, it is already in fair value. Keep the expense if the employee serves the required period, even if the price target is missed.
• Using the grant-date fair value every year, as for equity-settled schemes. Fix: For cash-settled schemes, remeasure at each reporting date until settlement. Only equity-settled schemes fix the grant-date value.
• Crediting equity instead of a liability. Fix: Ask whether cash leaves the entity. If yes, credit liability.
• Remeasuring the whole award at the modification-date fair value. Fix: For equity-settled awards, keep the grant-date FV. Only the incremental amount uses modification-date values.
• Reducing the expense when the exercise price is raised or the vesting terms are made tougher. Fix: Ignore non-beneficial changes to value or vesting terms. Keep at least the original grant-date charge, based on the number that ultimately vest. A cut in the number of instruments is the exception: treat it as a partial cancellation.
• Treating a counterparty-choice award as fully equity-settled. Fix: Whenever the employee can demand cash, split into a liability and an equity component.
• Remeasuring the equity component each year. Fix: Only the liability is remeasured. The equity component is fixed at grant date.

Exam tips

• Always state the credit side: equity for equity-settled, liability for cash-settled. Markers look for it.
• Define grant date in the context of the scenario. Look for pending approvals or unagreed terms.
• Label each condition by name. Use the words service, market, non-market performance or non-vesting.
• Use the scenario's facts when you explain the classification. This earns professional skills marks for analysis and application.
• Check scope first when the scenario mentions an acquisition or shares used to buy a business.
• Highlight the grant date and the vesting period first. Many questions hide them in the narrative.
• State clearly whether each condition is a market or non-market condition, and say what that means for the expense. Examiners reward this reasoning.
• Show a cumulative working so that part marks are available if one estimate is wrong.