ACCA Strategic Professional · Strategic Business Reporting (International)

Share-based Payment (IFRS 2) for ACCA SBR

Share-based payment is covered by IFRS 2. An entity receives goods or services and pays with shares, share options or cash linked to its share price. You recognise an expense over the vesting period. Equity-settled awards use grant-date fair value; cash-settled awards are remeasured to fair value at each reporting date.

What this chapter covers

This chapter covers IFRS 2 Share-based Payment. It deals with what happens when a company pays employees or suppliers with its own shares, share options, or cash amounts based on its share price. You must decide when to recognise the cost, how much to recognise, and where the other side of the entry goes.

The chapter splits into a few clear models. Equity-settled awards are measured once, at grant date, and credited to equity. Cash-settled awards create a liability that you remeasure at every reporting date until it is settled. Then come the harder areas: changes to terms, cancellations, settlements, awards where the choice of settlement exists, and group schemes where the parent grants awards to a subsidiary's employees.

In SBR this links to several other areas. The expense hits profit or loss, so it affects earnings per share and performance analysis. Deferred tax on share-based payment is a common add-on. In group questions it appears in the consolidation workings and in the parent's and subsidiary's own accounts. It can also appear in the reporting and ethics question, where management may design schemes to influence reported profit. Since every SBR question is written, you must explain the treatment as well as calculate it.

Share-based payment is a favourite SBR topic because the calculations are short but the judgement is real. A typical question mixes a vesting-condition estimate, a change in employee numbers and a modification, then asks you to explain the accounting. Marks come from correct numbers, from stating the IFRS 2 principle, and from applying it to the scenario. If you learn the models cleanly, you can pick up marks quickly on a topic that often appears inside a larger question, including the group accounting question and the ethics question.

Share-based payment: topics in the order to study them

1IFRS 2 Scope and Types of Share-based PaymentStart here to learn the definitions, the three types of transaction and the vesting terms that every later topic relies on.
2Equity-settled Share-based Payment TransactionsThis is the core model. Grant-date fair value and spreading over the vesting period must be secure before anything else.
3Cash-settled Share-based Payment TransactionsLearn it next so you can contrast it with equity-settled: a liability, remeasured each year-end, instead of an equity credit fixed at grant date.
4Modifications, Cancellations and SettlementsThese change an existing equity-settled award, so you need the basic model first before handling the effects of the changes.
5Share-based Payments with Choice of Settlement and Group SchemesThis is the most complex area. It combines the earlier models with the question of who has the choice and which entity receives the services.

How to prepare Share-based payment

Build this chapter in layers. First the basic models, then the exceptions. Practise each step on paper, because the exam is written and you must show workings and explain them.

Learn the key definitions: grant date, vesting date, vesting period, service condition, performance condition, market and non-market conditions.
Master a standard equity-settled example. Compute the cumulative expense each year, then subtract what you recognised earlier to get the annual charge.
Do the same for cash-settled awards. Work out the liability at each year-end and the movement through profit or loss. Note that fair value is updated at every reporting date.
Practise modifications and cancellations. Write one sentence on the principle for each case, such as a repricing that benefits employees or a cancellation treated as acceleration of vesting.
Study choice-of-settlement and group schemes with a simple decision approach: first identify who holds the choice, then pick the model. For group schemes, identify which entity receives the services and which settles.
Answer past-style questions in full. Give the numbers, then a short explanation tied to the scenario, and a brief note on the effect on profit and EPS.
Finish by writing a one-page summary of the models and test yourself from memory a day later.

Common mistakes in Share-based payment

Remeasuring equity-settled awards to the fair value at each year-end.
Fix: Fix equity-settled fair value at grant date. Only the number of awards expected to vest is updated each year. Reserve remeasurement of fair value for cash-settled awards.
Charging the full cumulative expense in the year instead of the annual movement.
Fix: Always show cumulative expense to date, then subtract the amount recognised previously. Label both lines in your answer.
Treating market conditions and non-market conditions the same way.
Fix: Remember that market conditions are reflected in fair value and do not change the number expected to vest, while non-market conditions adjust the number of awards expected to vest.
Reversing the expense when options lapse out of the money or the share price falls.
Fix: For equity-settled awards, once the service and non-market conditions are met, the expense stays even if the options are never exercised. Equity may be transferred within equity, but the expense is not reversed.
Giving numbers with no explanation.
Fix: For each figure, add a sentence stating the IFRS 2 principle and linking it to the scenario. Add a point on the effect on profit or EPS when the question asks.
Getting the group scheme entries into the wrong entity.
Fix: Start every group question by naming the receiving entity and the settling entity. Then write the entries for each entity's own accounts and for the consolidated accounts.

Last-day revision: Share-based payment

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.

Share-based payment practice questions

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.

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. You measure it at grant-date fair value and credit equity. In a cash-settled award, the entity pays cash based on its share price. You record a liability and remeasure it to fair value at each reporting date.

How do I calculate the annual expense for an equity-settled award?

Take the grant-date fair value, multiply by the number of awards expected to vest, then by the fraction of the vesting period that has passed. That gives the cumulative expense. Subtract the expense recognised in earlier years to find this year's charge.

Is share-based payment tested in the SBR exam as a full question?

It usually appears as part of a larger question, such as a group accounting or reporting question, though it can be tested on its own. You should be ready to calculate and explain it. Because the exam is fully written, expect to justify the treatment.

What happens if the terms of an award are modified?

If the change increases the fair value of the award, you recognise the extra value over the remaining vesting period. If the change reduces fair value, you still recognise at least the original grant-date cost. A cancellation is usually treated as acceleration of vesting.