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Strategic Business Reporting (International) · Other reporting issues

IFRS 2 Share-based Payment for ACCA SBR

Updated 11 October 2026 · Fact-checked

IFRS 2 covers transactions where an entity pays for goods or services with shares, options or cash linked to its share price. Equity-settled awards are measured once at grant-date fair value. Cash-settled awards are remeasured to fair value at each reporting date. The cost is spread over the vesting period.

Understand IFRS 2 Share-based Payment

Companies often pay employees with share options instead of cash. This is a real cost to the entity. IFRS 2 says you must recognise it as an expense, even though no cash leaves the business at grant date.

There are two main types. In an equity-settled transaction, the entity gives shares or options. The credit goes to equity. In a cash-settled transaction, the entity pays cash based on the share price, for example share appreciation rights (SARs). The credit goes to a liability.

Measurement differs. For equity-settled awards to employees, use the fair value of the equity instruments at grant date. Do not change it later for share price movements. For cash-settled awards, measure the liability at fair value at each reporting date and at settlement. Every change goes to profit or loss.

The cost is recognised over the vesting period, the time employees must serve to earn the award. Service conditions and non-market performance conditions (such as profit or sales targets) do not affect fair value. Instead, they change your estimate of how many awards will vest. Market conditions (such as a target share price) and non-vesting conditions are built into the fair value. You do not reverse the expense if a market condition is missed, provided the service condition is met.

At each year end, you true up your estimate. The cumulative expense to date is calculated, and you subtract what was already expensed. The difference is the charge for the year. At the end, the total expense equals the fair value of awards that actually vested (for non-market conditions).

Key rules to remember

Equity-settled cumulative expense
Cumulative expense = Expected number vesting × Grant-date fair value per award × (Years elapsed ÷ Total vesting period)
Fair value is fixed at grant date. Only the expected number of awards is updated each year.
Annual equity-settled charge
Charge for year = Cumulative expense at year end − Cumulative expense at previous year end
Debit expense (or asset if capitalised), credit equity. The charge can be negative if estimates fall.
Cash-settled liability
Liability = Expected number vesting × Fair value per award at reporting date × (Years elapsed ÷ Total vesting period)
Fair value is updated every year end until settlement. Debit expense, credit liability.
Annual cash-settled charge
Charge for year = Closing liability − Opening liability + Cash paid in year
Cash paid on exercise during the year is added back, as it reduced the liability.
Vesting condition treatment
Service and non-market conditions: adjust number expected to vest. Market and non-vesting conditions: include in fair value
If a market condition is not met but the service condition is met, the expense is not reversed.

How to solve IFRS 2 Share-based Payment questions

Use this method for any IFRS 2 question, whether it asks for calculations, journals or a discussion.

  1. 1Identify the type of award: equity-settled or cash-settled. Check the scenario for who receives what, and in what form.
  2. 2Note the grant date, vesting period and each condition. Classify each condition as service, non-market, market or non-vesting.
  3. 3Choose the measurement basis. Equity-settled: grant-date fair value, fixed. Cash-settled: fair value at each reporting date.
  4. 4Estimate the number of awards expected to vest. Allow for leavers and for any non-market conditions. Ignore market conditions here.
  5. 5Calculate the cumulative expense to date using the time proportion of the vesting period.
  6. 6Subtract the prior cumulative expense to find the year's charge. For cash-settled awards, adjust for any cash paid.
  7. 7Write the journal: Dr Expense, Cr Equity or Cr Liability. Show the closing balance in the statement of financial position.
  8. 8Apply the answer to the scenario. Comment on judgements, such as estimating leavers, and on the effect on profit and equity.

Quickest way: Cumulative table method

When to use it: Use this for any multi-year award where estimates change. It is fast and easy for a marker to follow.

  1. Draw columns: Year, Cumulative expense or liability, Previous cumulative, Charge for year.
  2. Fill the cumulative figure first using number × fair value × time fraction.
  3. Find each charge by subtraction. Do not recompute from scratch each year.
  4. For cash-settled awards, use the fair value at each year end, not grant date.
  5. Finish with the journal and one line of comment. Show the working clearly so you earn method marks.

Common mistakes in IFRS 2 Share-based Payment

  • Remeasuring the fair value of equity-settled options at each year end.

    Students mix up the equity-settled and cash-settled rules.

    Fix: For equity-settled awards, fix the fair value at grant date. Only the number expected to vest changes.

  • Charging the full cost in the year of grant.

    Students forget that the cost is spread over the vesting period.

    Fix: Multiply by years elapsed ÷ total vesting period. The cumulative amount builds up year by year.

  • Reversing the expense when a market condition, such as a share price target, is missed.

    Students treat all performance conditions the same way.

    Fix: Market conditions are in the fair value. If the employee meets the service condition, the expense stays, whether or not the market condition is met.

  • Crediting equity for a cash-settled award.

    Students focus on 'share-based' and forget that cash is paid.

    Fix: Cash-settled awards create a liability. Credit liability and remeasure it every year end to fair value.

  • Forgetting to add cash paid when working out the cash-settled charge.

    Students compare opening and closing liability only.

    Fix: Charge = closing liability − opening liability + cash paid. Check by rebuilding the liability roll-forward.

  • Applying the expected leaver rate to the wrong period.

    Students use the original estimate in every year.

    Fix: Use the latest estimate at each year end. Then true up the cumulative figure by subtraction.

Worked examples

Example 1

On 1 April 20X1, Meru Ltd grants 200 share options to each of its 100 managers. The options vest on 31 March 20X4 if the manager is still employed. The grant-date fair value is ₹30 per option. At 31 March 20X2, Meru expects 90 managers to stay. At 31 March 20X3, it expects 86. At 31 March 20X4, 85 managers remain and the options vest. Calculate the expense for each year and show the journal for the year ended 31 March 20X3.

Show the solution
  1. This is an equity-settled award with a three-year vesting period. Fair value is fixed at ₹30.
  2. Total options per manager are 200, so the options expected to vest are 200 × number of managers.
  3. Year to 31 March 20X2: 90 × 200 × ₹30 × 1/3 = 18,000 × ₹30 × 1/3 = ₹5,40,000 × 1/3 = ₹1,80,000. Charge = ₹1,80,000.
  4. Year to 31 March 20X3: 86 × 200 = 17,200 options. 17,200 × ₹30 = ₹5,16,000. Multiply by 2/3 = ₹3,44,000. Charge = ₹3,44,000 − ₹1,80,000 = ₹1,64,000.
  5. Year to 31 March 20X4: 85 × 200 = 17,000 options. 17,000 × ₹30 = ₹5,10,000. Cumulative = ₹5,10,000. Charge = ₹5,10,000 − ₹3,44,000 = ₹1,66,000.
  6. Journal for the year to 31 March 20X3: Dr Employee expense ₹1,64,000; Cr Equity ₹1,64,000. Equity at that date is ₹3,44,000.

Answer: Expense: 20X2 ₹1,80,000; 20X3 ₹1,64,000; 20X4 ₹1,66,000. Total ₹5,10,000, which equals the fair value of the 17,000 options that vested. For 20X3, Dr Expense ₹1,64,000, Cr Equity ₹1,64,000.

Example 2

On 1 January 20X1, Kaveri Ltd grants 1,000 share appreciation rights (SARs) to each of 10 directors. The SARs are paid in cash on 31 December 20X2, if the director is still employed, and vest after two years. Fair value of each SAR: ₹40 at 31 December 20X1 and ₹55 at 31 December 20X2. All 10 directors stay. All SARs are exercised on 31 December 20X2. Calculate the expense for each year and explain the treatment.

Show the solution
  1. This is a cash-settled award. The liability is remeasured to fair value at each reporting date.
  2. Total SARs = 10 × 1,000 = 10,000.
  3. At 31 December 20X1: liability = 10,000 × ₹40 × 1/2 = ₹2,00,000. Expense = ₹2,00,000. Journal: Dr Expense ₹2,00,000, Cr Liability ₹2,00,000.
  4. At 31 December 20X2: liability before payment = 10,000 × ₹55 × 2/2 = ₹5,50,000. Charge = ₹5,50,000 − ₹2,00,000 = ₹3,50,000.
  5. Journal: Dr Expense ₹3,50,000, Cr Liability ₹3,50,000. The liability is now ₹5,50,000.
  6. On settlement the company pays ₹5,50,000 in cash. Dr Liability ₹5,50,000, Cr Cash ₹5,50,000. The liability is nil.

Answer: Expense: 20X1 ₹2,00,000; 20X2 ₹3,50,000. Total ₹5,50,000, which equals the cash paid. The liability is remeasured each year, so changes in share price affect profit or loss.

Exam tips

  • Start by stating the type of award and the measurement basis in one sentence. This earns easy marks and keeps your calculation on track.
  • Classify each vesting condition explicitly. Say whether it affects fair value or the number of awards expected to vest.
  • Show a clear cumulative table. Markers can award method marks even if one input is wrong.
  • In the scenario, look for changes in the number of leavers, changes in targets or share price movements. These are the hooks for your discussion.
  • For professional skills marks, comment on the judgement involved in estimating leavers and whether management might be tempted to manipulate estimates.

Practice questions from Other reporting issues

IFRS 2 Share-based Payment in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

IFRS 2 Share-based Payment: frequently asked questions

What is the difference between equity-settled and cash-settled share-based payment?

In an equity-settled award, the entity gives shares or options and credits equity. Fair value is measured once at grant date. In a cash-settled award, the entity pays cash linked to its share price and credits a liability. That liability is remeasured to fair value at each reporting date.

How do you calculate the IFRS 2 expense over the vesting period?

Multiply the number of awards expected to vest by the fair value per award, then by the fraction of the vesting period that has elapsed. This gives the cumulative expense. Subtract the amount already recognised to get the charge for the year.

What is the difference between market and non-market vesting conditions?

A market condition depends on the share price, such as reaching a target price. It is included in the fair value of the award. A non-market condition, such as a profit target or a service period, is not in fair value. It changes the number of awards expected to vest.

What happens if employees do not meet a market condition?

If the employee meets the service condition, the expense is not reversed. The market condition is already reflected in the grant-date fair value. The expense is only reversed if the service or non-market conditions are not met.