Strategic Business Reporting (International) · Share-based payment

Cash-settled Share-based Payment Transactions under IFRS 2

Updated 11 October 2026 · Fact-checked

A cash-settled share-based payment is one where the entity pays cash based on its share price, such as share appreciation rights. You recognise a liability, not equity. You remeasure its fair value at every reporting date until settlement, spreading the cost over the vesting period and taking changes to profit or loss.

Understand Cash-settled Share-based Payment Transactions

In a cash-settled share-based payment, the entity does not issue shares. It pays cash, and the amount depends on the share price. The most common example is share appreciation rights (SARs). Employees receive cash equal to the rise in the share price over a set number of shares.

Because the entity must pay cash, it has a present obligation. So IFRS 2 requires a liability, not an equity credit. The expense is the services received, spread over the vesting period as employees work.

The key difference from equity-settled schemes is measurement. Equity-settled schemes fix the grant-date fair value and never change it. Cash-settled schemes measure the liability at fair value at each reporting date. This continues until the liability is settled. Every change in fair value goes to profit or loss.

The fair value of a SAR is not the same as its intrinsic value. In the exam, you are usually given the fair value per right at each year end. Use it as given.

During vesting, the liability builds up as: number of rights expected to vest × fair value per right × the fraction of the vesting period served. After vesting, the liability equals the full fair value of the outstanding rights. The year's expense is the movement in the liability, plus any cash paid in the year on exercise.

Key rules to remember

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.

How to solve Cash-settled Share-based Payment Transactions questions

Use this method for any SAR or cash-settled question. Build a small table by year.

1Confirm the scheme is cash-settled: the entity pays cash linked to its share price, with no shares issued.
2Note the vesting period, the number of employees and rights granted, and the conditions such as service.
3For each year end, estimate how many rights will vest after allowing for expected leavers.
4Take the fair value per right at that year end, not at grant date.
5Before vesting: calculate rights × fair value × years served ÷ vesting period. After vesting: use all outstanding rights × fair value.
6Find the expense: closing liability less opening liability, plus any cash paid in the year.
7Post Dr Profit or loss and Cr Liability. Show the cash payment as Dr Liability and Cr Cash.
8State the treatment in words and say why a liability, not equity, is used.

Quickest way: Year-by-year liability table

When to use it: Use this when a question gives fair values and leaver estimates for several years and asks for the expense or liability.

Draw columns: Year, rights expected, fair value, time fraction, closing liability.
Fill in each closing liability using the formula.
Subtract the prior year's liability to get the movement.
Add cash paid on exercise to the movement to get the profit or loss charge.
Check that the closing liability equals the last row of your table before writing the answer.

Common mistakes in Cash-settled Share-based Payment Transactions

Using the grant-date fair value every year, as for equity-settled schemes.
Students mix up the two measurement rules.
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.
The journal for equity-settled schemes is memorised without thinking about who settles.
Fix: Ask whether cash leaves the entity. If yes, credit liability.
Forgetting the time proportion during vesting.
Students multiply rights by fair value and stop.
Fix: Multiply by years served ÷ vesting period until vesting is complete.
Ignoring cash paid on exercise when finding the year's expense.
Students take only the movement in the liability.
Fix: Expense = closing liability − opening liability + cash paid. Check by rebuilding the liability account.
Using the original estimate of leavers.
Students carry over last year's figure.
Fix: Update the leaver estimate at every year end. Rights already exercised are no longer outstanding.
Stopping remeasurement once vesting ends.
Students think vesting finishes the accounting.
Fix: Keep remeasuring at fair value until all rights are settled. Changes go to profit or loss.

Worked examples

Example 1

On 1 April 20X1, Ravi Ltd grants 200 employees 500 SARs each, vesting after three years of service. At 31 March 20X2, 20X3 and 20X4, the fair value per SAR is $12, $14 and $15. The estimate of leavers over the three years is 15% at 20X2 and 12% at 20X3. At 20X4, 160 employees remain. Calculate the liability and the expense for each year.

Show the solution

Year 1: expected employees = 200 × 85% = 170. Rights = 170 × 500 = 85,000.
Liability = 85,000 × $12 × 1/3 = $340,000. Expense = $340,000.
Year 2: expected employees = 200 × 88% = 176. Rights = 176 × 500 = 88,000.
Liability = 88,000 × $14 × 2/3 = $821,333. Expense = 821,333 − 340,000 = $481,333.
Year 3: actual employees = 160. Rights = 160 × 500 = 80,000.
Liability = 80,000 × $15 = $1,200,000. Expense = 1,200,000 − 821,333 = $378,667.

Answer: Liabilities are $340,000, $821,333 and $1,200,000. Expenses are $340,000, $481,333 and $378,667. Total expense is $1,200,000.

Example 2

At 31 December 20X5, Meru plc has a SAR liability of $600,000 for 50,000 vested rights. During 20X6, employees exercise 20,000 rights and are paid $16 each in cash. At 31 December 20X6, 30,000 rights remain and the fair value per right is $18. Calculate the 20X6 profit or loss charge.

Show the solution

Cash paid = 20,000 × $16 = $320,000.
Closing liability = 30,000 × $18 = $540,000.
Opening liability = $600,000.
Expense = closing − opening + cash paid = 540,000 − 600,000 + 320,000 = $260,000.
Check: liability account opens at 600,000, cash payment reduces it by 320,000 to 280,000, charge of 260,000 brings it to 540,000.

Answer: The 20X6 charge to profit or loss is $260,000 and the closing liability is $540,000.

Exam tips

Show a clear table by year. Markers can follow your workings and award method marks even if a number is wrong.
State why it is a liability: the entity settles in cash. This earns the explanation marks.
Contrast with equity-settled schemes in one line: fixed grant-date value versus remeasured fair value.
Check whether the question gives fair values or asks you to estimate. In SBR you are normally given them.
Link the answer to the scenario, such as volatile profit when the share price moves, to earn professional skills marks.

Practice questions from Share-based payment

Cash-settled Share-based Payment Transactions in other exams

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

Cash-settled Share-based Payment Transactions: frequently asked questions

What is the difference between equity-settled and cash-settled IFRS 2 measurement?

Equity-settled schemes are measured at grant-date fair value, which is not updated. Cash-settled schemes are measured at fair value at each reporting date until settlement. Changes go to profit or loss.

How do you account for share appreciation rights under IFRS 2?

Recognise a liability and an employee cost over the vesting period. Remeasure the liability at each year end. After vesting, keep remeasuring until the rights are exercised or lapse.

Where do the changes in fair value of the liability go?

They go to profit or loss. They do not go to other comprehensive income or equity.

Do I use time apportionment after vesting?

No. Once vesting is complete, the liability is all outstanding rights multiplied by the current fair value per right.